NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
TOMI
Environmental Solutions, Inc., a Florida corporation
(“TOMI”, the “Company”, “we”,
“our” and “us”) is a global provider of
disinfection and decontamination essentials through our premier
Binary Ionization Technology®
(BIT™)
platform, under which we manufacture, license, service and sell our
SteraMist® brand of
products, including SteraMist® BIT™, a
hydrogen peroxide-based mist and fog. Our business is organized
into five divisions: Healthcare, Life Sciences, TOMI Service
Network, Food Safety and Commercial.
Invented under a defense grant in association with
the Defense Advanced Research Projects Agency (DARPA) of the U.S.
Department of Defense, BIT™ is
registered with the U.S. Environmental Protection Agency (EPA) and
uses a low percentage hydrogen
peroxide as its only active ingredient to produce a fog composed
mostly of a hydroxyl radical (.OH
ion), known as ionized Hydrogen Peroxide (iHP™).
Represented by the SteraMist® brand of products, iHP™
produces a germ-killing aerosol that
works like a visual non-caustic gas.
Our
products are designed to service a broad spectrum of commercial
structures, including, but not limited to, hospitals and medical
facilities, bio-safety labs, pharmaceutical facilities, meat and
produce processing facilities, universities and research
facilities, vivarium labs, all service industries including cruise
ships, office buildings, hotel and motel rooms, schools,
restaurants, military barracks, police and fire departments,
prisons, and athletic facilities. Our products are also used in
single-family homes and multi-unit residences. Additionally, our
products have been listed on the EPA’s List N as products
that help combat COVID-19, and are actively being used for this
purpose.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
interim unaudited condensed consolidated financial statements
included herein, presented in accordance with generally accepted
accounting principles utilized in the United States of America
(“GAAP”), and stated in U.S. dollars, have been
prepared by us, without an audit, pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate
to make the information presented not misleading.
These
financial statements reflect all adjustments, consisting of normal
recurring adjustments, which, in the opinion of management, are
necessary for fair presentation of the information contained
therein. These unaudited condensed consolidated financial
statements should be read in conjunction with our audited financial
statements for the year ended December 31, 2019 and notes thereto
which are included in the Annual Report on Form 10-K previously
filed with the SEC on March 30, 2020. We follow the same accounting
policies in the preparation of interim reports. The results of
operations for the interim periods covered by this Form 10-Q may
not necessarily be indicative of results of operations for the full
fiscal year or any other interim period.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of TOMI and its wholly owned subsidiary, TOMI
Environmental Solutions, Inc., a Nevada corporation. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassification of Accounts
Certain
reclassifications have been made to prior-year comparative
financial statements to conform to the current year presentation.
These reclassifications had no effect on previously reported
results of operations or financial position.
Use of Estimates
The
preparation of the condensed consolidated financial statements in
conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported and disclosed in the
accompanying condensed consolidated financial statements and the
accompanying notes. Actual results could differ materially from
these estimates. On an ongoing basis, we evaluate our estimates,
including those related to accounts receivable, inventory, fair
values of financial instruments, intangible assets, useful lives of
intangible assets and property and equipment, fair values of
stock-based awards, income taxes, and contingent liabilities, among
others. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable, the
results of which form the basis for making judgments about the
carrying values of our assets and liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
|
Level
1:
|
Quoted
prices in active markets for identical assets or
liabilities.
|
|
Level
2:
|
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
|
Level
3:
|
Unobservable
inputs that are supported by little or no market activity and that
are significant to the value of the assets or
liabilities.
|
Our
financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. All these items
were determined to be Level 1 fair value measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash
and cash equivalents includes cash on hand, held at financial
institutions and other liquid investments with original maturities
of three months or less. At times, these deposits may be in excess
of insured limits.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of their status and maintain allowances for potential
credit losses as deemed necessary. We have a policy of reserving
for doubtful accounts based on our best estimate of the amount of
potential credit losses in existing accounts receivable. We
periodically review our accounts receivable to determine whether an
allowance is necessary based on an analysis of past due accounts
and other factors that may indicate that the realization of an
account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. Bad debt expense for the three and nine months
ended September 30, 2020 was approximately $153,000 and $226,000,
respectively. Bad debt expense for the three and nine months ended
September 30, 2019 was approximately $1,000 and $33,000,
respectively.
At
September 30, 2020 and December 31, 2019, the allowance for
doubtful accounts was $315,000 and $110,000,
respectively.
Inventories
Inventories are
valued at the lower of cost or market using the first-in, first-out
(FIFO) method. Inventories consist primarily of finished
goods.
We
expense costs to maintain certification to cost of goods sold as
incurred.
We review
inventory on an ongoing basis, considering factors such as
deterioration and obsolescence. We record an allowance for
estimated losses when the facts and circumstances indicate that
particular inventories may not be usable. Our reserve for obsolete
inventory was $0 and $100,000 as of September 30, 2020 and December
31, 2019, respectively.
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Leases
In
February 2016, the FASB issued ASU No. 2016-02 (ASC 842),
Leases, to require lessees
to recognize all leases, with certain exceptions, on the balance
sheet, while recognition on the statement of operations will remain
similar to current lease accounting. Subsequently, the FASB issued
ASU No. 2018-10, Codification
Improvements to Topic 842, Leases, ASU No. 2018-11,
Targeted Improvements, ASU
No. 2018-20, Narrow-Scope
Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify
and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real
estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual
periods beginning after December 15, 2018, with early adoption
permitted. We adopted ASC 842 as of January 1, 2019 using the
modified retrospective basis with a cumulative effect adjustment as
of that date. In addition, we elected the package of practical
expedients permitted under the transition guidance within the new
standard, which allowed us to carry forward the historical
determination of contracts as leases, lease classification and not
reassess initial direct costs for historical lease arrangements.
Accordingly, previously reported financial statements, including
footnote disclosures, have not been recast to reflect the
application of the new standard to all comparative periods
presented.
Operating lease
assets are included within operating lease right-of-use assets, and
the corresponding operating lease liabilities are recorded as
current portion of long-term operating lease, and within long-term
liabilities as long-term operating lease, net of current portion on
our condensed consolidated balance sheet as of September 30, 2020
and December 31, 2019.
We have
elected not to present short-term leases on the condensed
consolidated balance sheet as these leases have a lease term of 12
months or less at lease inception and do not contain purchase
options or renewal terms that we are reasonably certain to
exercise. All other lease assets and lease liabilities are
recognized based on the present value of lease payments over the
lease term at commencement date. Because most of our leases do not
provide an implicit rate of return, we used our incremental
borrowing rate based on the information available at adoption date
in determining the present value of lease payments.
Capitalized Software Development
Costs
In
accordance with ASC 985-20 regarding the development of software to
be sold, leased, or marketed, we expense such costs as they are
incurred until technological feasibility has been established at
and after which time those costs are capitalized until the product
is available for general release to customers. The periodic expense
for the amtorization of capitalized software development costs will
be included in cost of sales. Amortization expense for the three
and nine months ended September 30, 2020 was $10,475 and $31,425,
respectively. Amortiztion expense for the three and nine months
ended September 30, 2019 was $6,285.
Accounts Payable
As of September 30, 2020, three vendors accounted for approximately
56% of accounts payable. As of December 31, 2019, one vendor
accounted for approximately 40% of accounts payable.
For
the three and nine months ended September 30, 2020, two vendors
accounted for 66% and 77% of cost of sales, respectively. For the
three and nine months ended September 30, 2019, one vendor
accounted for 54% and 68% of cost of sales,
respectively.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We estimate
the expected costs to be incurred during the warranty period and
record the expense to the condensed consolidated statement of
operations at the date of sale. Our manufacturers assume the
warranty against product defects from date of sale, which we extend
to our customers upon sale of the product. We assume responsibility
for product reliability and results. As of September 30, 2020, and
December 31, 2019, our warranty reserve was $105,000 and $30,000,
respectively (See Note 15).
Income Taxes
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits that are, on a more
likely than not basis, not expected to be realized in accordance
with Accounting Standards Codification (“ASC”) guidance
for income taxes. Net deferred tax benefits have been fully
reserved at September 30, 2020 and December 31, 2019. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are
enacted.
Net Income (Loss) Per Share
Basic
net income or (loss) per share is computed by dividing the
Company’s net income or (loss) by the weighted average number
of shares of common stock outstanding during the period presented.
Diluted income or (loss) per share is based on the treasury stock
method and includes the effect from potential issuance of shares of
common stock, such as shares issuable pursuant to the exercise of
options and warrants and conversions of preferred stock or
debentures.
Potentially
dilutive securities as of September 30, 2020 consisted of 1,686,633
shares of common stock issuable upon exercise of outstanding
warrants, 101,250 shares of common stock issuable upon outstanding
options and 63,750 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”).
Potentially
dilutive securities as of September 30, 2019 consisted of 1,157,407
shares of common stock from convertible debentures, 2,667,565
shares of common stock issuable upon exercise of outstanding
warrants, 77,500 shares of common stock issuable upon outstanding
options and 63,750 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”). Diluted and basic weighted
average shares are the same, as potentially dilutive shares are
anti-dilutive.
Diluted
net income or (loss) per share is computed similarly to basic net
income or (loss) per share except that the denominator is increased
to include the number of additional shares of common stock that
would have been outstanding if the potential shares of common stock
had been issued and if such additional shares were dilutive.
Options, warrants, preferred stock and shares associated with the
conversion of debt to purchase approximately 1.9 million and 3.5
million shares of common stock were outstanding at September 30,
2020 and December 31, 2019, respectively, but were excluded from
the computation of diluted net loss per share at December 31, 2019
due to the anti-dilutive effect on net loss per share.
|
|
For the Three Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
Net
Income (Loss)
|
$1,019,300
|
$(236,813)
|
|
Adjustments
for convertible debt - as converted
|
|
|
|
Interest
on convertible debt
|
-
|
50,000
|
|
Amortization
of debt discount on convertible debt
|
-
|
-
|
|
Net
income (loss) attributable to common shareholders
|
$1,019,300
|
$(186,813)
|
|
Weighted
average number of shares of common stock outstanding:
|
|
|
|
Basic
|
16,741,622
|
15,588,680
|
|
Diluted
|
18,593,255
|
15,588,680
|
|
Net
income (loss) attributable to common shareholders per
share:
|
|
|
|
Basic
|
$0.06
|
$(0.01)
|
|
Diluted
|
$0.05
|
$(0.01)
|
The following provides a reconciliation of the shares used in
calculating the per share amounts for the periods
presented:
|
|
For the Three Months Ended
September 30
(Unaudited)
|
|
|
|
|
|
Numerator:
|
|
|
|
Net
Income (Loss)
|
$1,019,300
|
$(236,813)
|
|
|
|
|
|
Denominator:
|
|
|
|
Basic
weighted-average shares
|
16,741,622
|
15,588,680
|
|
Effect
of dilutive securities
|
|
|
|
Warrants
|
1,686,633
|
-
|
|
Convertible
Debt
|
-
|
-
|
|
Options
|
101,250
|
-
|
|
Preferred
Stock
|
63,750
|
-
|
|
Diluted
Weighted Average Shares
|
18,593,255
|
15,588,680
|
|
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
|
|
Basic
|
$0.06
|
$(0.02)
|
|
Diluted
|
$0.05
|
$(0.02)
|
Note: Warrants, options and preferred stock for the three months
ended September 30, 2019 are not included in the computation of
diluted weighted average shares as such inclusion would be
anti-dilutive.
|
Income (loss) from Operations Data:
|
|
|
|
|
|
|
|
Income
(Loss) from Operations
|
$1,096,328
|
$(187,586)
|
|
|
|
|
|
Basic
and Diluted Weighted Average Shares
|
|
|
|
Basic
|
16,741,922
|
15,588,680
|
|
Diluted
|
18,593,255
|
15,588,680
|
|
Basic
and Diluted Income (loss) Per Common Share
|
|
|
|
Basic
|
$0.07
|
$(0.01)
|
|
Diluted
|
$0.06
|
$(0.01)
|
|
|
For the Nine Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$7,295,478
|
$(1,756,050)
|
|
Adjustments
for convertible debt - as converted
|
|
|
|
Interest
on convertible debt
|
40,689
|
150,000
|
|
Amortization
of debt discount on convertible debt
|
-
|
17,534
|
|
Net
income (loss) attributable to common shareholders
|
$7,336,167
|
$(1,588,516)
|
|
Weighted
average number of shares of common stock outstanding:
|
|
|
|
Basic
|
16,429,360
|
15,585,822
|
|
Diluted
|
18,280,993
|
15,585,822
|
|
Net
income (loss) attributable to common shareholders per
share:
|
|
|
|
Basic
|
$0.45
|
$(0.10)
|
|
Diluted
|
$0.40
|
$(0.10)
|
The following provides a reconciliation of the shares used in
calculating the per share amounts for the periods
presented:
|
|
For the Nine Months
Ended September 30
(Unaudited)
|
|
|
|
|
|
Numerator:
|
|
|
|
Net
Income (Loss)
|
$7,295,478
|
$(1,756,050)
|
|
|
|
|
|
Denominator:
|
|
|
|
Basic
weighted-average shares
|
16,429,360
|
15,585,822
|
|
Effect
of dilutive securities
|
|
|
|
Warrants
|
1,686,633
|
-
|
|
Convertible
Debt
|
-
|
-
|
|
Options
|
101,250
|
-
|
|
Preferred
Stock
|
63,750
|
-
|
|
Diluted
Weighted Average Shares
|
18,280,993
|
15,585,822
|
|
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
|
|
Basic
|
$0.44
|
$(0.11)
|
|
Diluted
|
$0.40
|
$(0.11)
|
Note: Warrants, options and preferred stock for the nine months
ended September 30, 2019 are not included in the computation of
diluted weighted average shares as such inclusion would be
anti-dilutive.
|
Income (loss) from Operations Data:
|
|
|
|
|
|
|
|
Income
(Loss) from Operations
|
$7,412,397
|
$(1,590,948)
|
|
|
|
|
|
Basic
and Diluted Weighted Average Shares
|
|
|
|
Basic
|
16,429,360
|
15,585,822
|
|
Diluted
|
18,280,993
|
15,585,822
|
|
Basic
and Diluted Income (loss) Per Common Share
|
|
|
|
Basic
|
$0.45
|
$(0.10)
|
|
Diluted
|
$0.41
|
$(0.10)
|
Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers (Topic 606). We recognize revenue
when we transfer promised goods or services to customers in an
amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. To determine
revenue recognition for contracts with customers we perform the
following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligation(s) in the contract; (iii)
determine the transaction price; (iv) allocate the transaction
price to the performance obligation(s) in the contract; and (v)
recognize revenue when (or as) we satisfy the performance
obligation(s). At contract inception, we assess the goods or
services promised within each contract, assess whether each
promised good or service is distinct and identify those that are
performance obligations.
We
must use judgment to determine: a) the number of performance
obligations based on the determination under step (ii) above and
whether those performance obligations are distinct from other
performance obligations in the contract; b) the transaction price
under step (iii) above; and c) the stand-alone selling price for
each performance obligation identified in the contract for the
allocation of transaction price in step (iv) above.
Title
and risk of loss generally pass to our customers upon shipment. Our
Customers include end users as well as dealers and distributors who
market and sell our products. Our revenue is not contingent upon
resale by the dealer or distributor, and we have no further
obligations related to bringing about resale. Shipping and handling
costs charged to customers are included in Product Revenues. The
associated expenses are treated as fulfillment costs and are
included in Cost of Revenues. Revenues are reported net of sales
taxes collected from Customers.
Disaggregation of Revenue
The
following table presents our revenues disaggregated by revenue
source.
Product and Service Revenue
|
|
For the Three Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
SteraMist
Product
|
$3,677,000
|
$928,000
|
|
Service
and Training
|
615,000
|
672,000
|
|
Total
|
$4,292,000
|
$1,600,000
|
|
|
For the Nine Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
SteraMist
Product
|
$19,557,000
|
$3,461,000
|
|
Service
and Training
|
1,817,000
|
1,031,000
|
|
Total
|
$21,374,000
|
$4,492,000
|
Revenue by Geographic Region
|
|
For the Three Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
United
States
|
$3,446,000
|
$1,288,000
|
|
International
|
846,000
|
312,000
|
|
Total
|
$4,292,000
|
$1,600,000
|
|
|
For the Nine Months Ended
September 30,
(Unaudited)
|
|
|
|
|
|
United
States
|
$15,437,000
|
$3,852,000
|
|
International
|
5,937,000
|
640,000
|
|
Total
|
$21,374,000
|
$4,492,000
|
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As of
September 30, 2020, and December 31, 2019 we did not have any
unsatisfied performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for
which we recognize revenue at the amount to which we have the right
to invoice for services performed.
Arrangements with Multiple Performance Obligations
Our
contracts with customers may include multiple performance
obligations. We enter into contracts that can include various
combinations of products and services, which are primarily distinct
and accounted for as separate performance obligations.
Significant Judgments
Our
contracts with customers for products and services often dictate
the terms and conditions of when the control of the promised
products or services is transferred to the customer and the amount
of consideration to be received in exchange for the products and
services.
Equity Compensation Expense
We
account for equity compensation expense in accordance with FASB ASC
718, “Compensation—Stock Compensation.” Under the
provisions of FASB ASC 718, equity compensation expense is
estimated at the grant date based on the award’s fair
value.
On July
7, 2017, our shareholders approved the 2016 Equity Incentive Plan,
or the 2016 Plan. The 2016 Plan authorizes the grant of stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance units/shares. Up to 625,000 shares of
common stock are authorized for issuance under the 2016 Plan.
Shares issued under the 2016 Plan may be either authorized but
unissued shares, treasury shares, or any combination thereof.
Provisions in the 2016 Plan permit the reuse or reissuance by the
2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash. Equity
compensation expense will typically be awarded in consideration for
the future performance of services to us. All recipients of awards
under the 2016 Plan are required to enter into award agreements
with us at the time of the award; awards under the 2016 Plan are
expressly conditioned upon such agreements. For the nine months ended September 30, 2020 and
2019, we issued 50,000 and 50,000 shares of common stock,
respectively, out of the 2016 Plan.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and cash
equivalents. We maintain cash balances at financial institutions
which exceed the current Federal Deposit Insurance Corporation
limit of $250,000 at times during the year.
Long-Lived Assets Including Acquired Intangible Assets
We
assess long-lived assets for potential impairments at the end of
each year, or during the year if an event or other circumstance
indicates that we may not be able to recover the carrying amount of
the asset. In evaluating long-lived assets for impairment, we
measure recoverability of these assets by comparing the carrying
amounts to the future undiscounted cash flows the assets are
expected to generate. If our long-lived assets are considered to be
impaired, the impairment to be recognized equals the amount by
which the carrying value of the asset exceeds its fair market
value. We base the calculations of the estimated fair value of our
long-lived assets on the income approach. For the income approach,
we use an internally developed discounted cash flow model that
includes, among others, the following assumptions: projections of
revenues and expenses and related cash flows based on assumed
long-term growth rates and demand trends; expected future
investments to grow new units; and estimated discount rates. We
base these assumptions on our historical data and experience,
industry projections, micro and macro general economic condition
projections, and our expectations. We
had no long-lived asset impairment charges for the three and nine
months ended September 30, 2020 and 2019.
Advertising and Promotional Expenses
We
expense advertising costs in the period in which they are incurred.
Advertising and promotional expenses
included in selling expenses for the three and nine months ended
September 30, 2020 were approximately $56,000 and $156,000,
respectively. Advertising and promotional expenses included in
selling expenses for the three and nine months ended September 30,
2019 were approximately $29,000 and $94,000,
respectively.
Research and Development Expenses
We expense research and
development expenses in the period in which they are
incurred. For the three and
nine months ended September 30, 2020, research and development
expenses were approximately $45,000 and $245,000, respectively. For
the three and nine months ended September 30, 2019, research and
development expenses were approximately $88,000 and $249,000,
respectively.
Business Segments
We
currently have one reportable business segment due to the fact that
we derive our revenue primarily from one product. A breakdown of
revenue is presented in “Revenue Recognition” in Note 2
above.
Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU No. 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Topic
350): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract.”
This new guidance aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software. This new guidance is effective on a prospective or
retrospective basis beginning on January 1, 2020, with early
adoption permitted. We elected to adopt this guidance early, in
2020 on a prospective basis. The new guidance did not have a
material impact on our Condensed Consolidated Financial
Statements.
NOTE
3. INVENTORIES
Inventories consist
of the following at:
|
|
September
30,
2020
(Unaudited)
|
|
|
Finished
goods
|
$4,052,532
|
$2,364,786
|
|
Raw
Materials
|
321,968
|
50,428
|
|
Inventory
Reserve
|
-
|
(100,000)
|
|
|
$4,374,500
|
$2,315,214
|
NOTE 4. VENDOR DEPOSITS
At
September 30, 2020 and December 31, 2019, we maintained vendor
deposits of $333,212 and $141,052, respectively, for open purchase
orders for inventory.
NOTE 5. PROPERTY AND EQUIPMENT
Property and
equipment consist of the following at:
|
|
September 30,
2020
(Unaudited)
|
|
|
Furniture
and fixtures
|
$357,236
|
$357,236
|
|
Equipment
|
1,292,860
|
1,355,014
|
|
Vehicles
|
60,703
|
60,703
|
|
Computer
and software
|
193,950
|
166,598
|
|
Leasehold
improvements
|
386,120
|
362,898
|
|
Tenant
Improvement Allowance
|
405,000
|
405,000
|
|
|
2,695,870
|
2,707,449
|
|
Less:
Accumulated depreciation
|
1,584,528
|
1,339,585
|
|
|
$1,111,342
|
$1,367,864
|
For
the three and nine months ended September 30, 2020, depreciation
was $83,932 and $241,445, respectively. For the three and nine
months ended September 30, 2019, depreciation was $90,312 and
$261,939, respectively. For the three and nine months ended
September 30, 2020 and 2019, amortization of tenant improvement
allowance was $9,798 and $29,395, respectively and was recorded as
lease expense and included within general and administrative
expense on the consolidated statement of operations.
NOTE 6. INTANGIBLE ASSETS
Intangible assets
consist of patents and trademarks related to our Binary Ionization
Technology. We amortize the patents over the estimated remaining
lives of the related patents. The trademarks have an indefinite
life. Amortization expense was $93,347
and $280,041 for the three and nine months ended September 30,
2020. Amortization expense was $92,377 and $277,131 for the three
and nine months ended September 30, 2019.
Definite life
intangible assets consist of the following:
|
|
September
30,
2020
(Unaudited)
|
|
|
Intellectual
Property and Patents
|
$2,906,507
|
$2,906,507
|
|
Less: Accumulated
Amortization
|
2,759,795
|
2,479,754
|
|
Intangible Assets,
net
|
$146,712
|
$426,753
|
Indefinite life
intangible assets consist of the following:
|
Trademarks
|
$512,257
|
$512,257
|
|
|
|
|
|
Total Intangible
Assets, net
|
$658,969
|
$939,010
|
Approximate future
amortization is as follows:
|
Year Ended:
|
|
|
|
|
|
October
1 – December 31, 2020
|
$93,000
|
|
December
31, 2021
|
3,000
|
|
December
31, 2022
|
3,000
|
|
December
31, 2023
|
3,000
|
|
December
31, 2024
|
3,000
|
|
Thereafter
|
42,000
|
|
|
$147,000
|
NOTE 7. LEASES
In
April 2018, we entered into a 10-year lease agreement for a new
9,000-square-foot facility that contains office, warehouse, lab and
research and development space in Frederick, Maryland. The lease
agreement was scheduled to commence on December 1, 2018 or when the
property was ready for occupancy. The agreement provided for annual
rent of $143,460, an escalation clause that increases the rent 3%
year over year, a landlord tenant improvement allowance of $405,000
and additional landlord work as discussed in the lease agreement.
We took occupancy of the property on December 17, 2018 and the
lease was amended in March 2019 to provide for a 4-month rent
holiday and a commencement date of April 1, 2019. Lease expense for
operating lease payments is recognized on a straight-line basis
over the lease term.
The
balances for our operating lease where we are the lessee are
presented as follows within our condensed consolidated balance
sheet:
|
Operating leases:
|
September 30,
2020
(Unaudited)
|
|
|
Assets:
|
|
|
|
Operating
lease right-of-use asset
|
$642,738
|
$674,471
|
|
Liabilities:
|
|
|
|
Current
Portion of Long-Term Operating Lease
|
$78,723
|
$71,510
|
|
Long-Term
Operating Lease, Net of Current Portion
|
974,311
|
1,034,413
|
|
|
$1,053,034
|
$1,105,923
|
The
components of lease expense are as follows within our condensed
consolidated statement of operations:
|
|
For the Three Months Ended September 30,
2020
(Unaudited)
|
For the Three Months Ended September 30,
2019
(Unaudited)
|
|
|
|
|
|
Operating
lease expense
|
$39,329
|
$39,329
|
|
|
For the Nine Months Ended September 30,
2020
(Unaudited)
|
For the Nine Months Ended September 30,
2019
(Unaudited)
|
|
|
|
|
|
Operating
lease expense
|
$117,986
|
$117,986
|
Other
information related to leases where we are the lessee is as
follows:
|
|
September 30,
2020
(Unaudited)
|
|
December 31,
2019
|
|
|
Weighted-average remaining lease term:
|
|
|
|
|
|
Operating leases
|
8.50 years
|
|
9.25 years
|
|
|
|
|
|
|
|
|
Discount rate:
|
|
|
|
|
|
Operating leases
|
7.00%
|
|
7.00%
|
|
Supplemental cash
flow information related to leases where we are the lessee is as
follows:
|
|
For the Three Months Ended September 30,
2020
(Unaudited)
|
For the Three Months Ended September 30,
2019
(Unaudited)
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$36,940
|
$29,888
|
|
|
For the Nine Months Ended September 30, 2020
(Unaudited)
|
For the Nine Months Ended September 30, 2019
(Unaudited)
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$109,747
|
$29,888
|
As of
September 30, 2020, the maturities of our operating lease liability
are as follows:
|
Year Ended:
|
|
|
October 1 –
December 31, 2020
|
$36,941
|
|
December
31, 2021
|
151,088
|
|
December
31, 2022
|
155,621
|
|
December
31, 2023
|
160,290
|
|
December
31, 2024
|
165,098
|
|
Thereafter
|
745,183
|
|
Total
minimum lease payments
|
1,414,221
|
|
Less:
Interest
|
361,187
|
|
Present
value of lease obligations
|
1,053,034
|
|
Less:
Current portion
|
78,723
|
|
Long-term
portion of lease obligations
|
$974,311
|
NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In
accordance with ASC 985-20 we capitalized certain software
development costs associated with updating our continuing line of
product offerings. Capitalized software development costs consist
of the following at:
|
|
|
|
|
|
|
|
|
Capitalized
Software Development Costs
|
$125,704
|
$125,704
|
|
Less:
Accumulated Amortization
|
(62,852)
|
(31,426)
|
|
|
$62,852
|
$94,278
|
Amortization
expense for the three and nine months ended September 30, 2020 was
$10,475 and $31,425, respectively. Amortization expense for the three and nine months
ended September 30, 2019 was $6,285.
NOTE 9. CLOUD COMPUTING SERVICE
CONTRACT
In May 2020 we entered into a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. The annual contract payments are capitalized
as a prepaid expense and amortized over a twelve-month period.
Amortization expense for the three and nine months ended September
30, 2020 was $7,602 and $10,143, respectively.
We have incurred
implementation costs of $37,573 in connection with the cloud
computing service contract which have been capitalized in prepaid
expenses as of September 30, 2020. In accordance with ASU
No. 2018-15, such implementation
costs will be amortized once the cloud-based service contract is
placed in service.
NOTE 10. CONVERTIBLE DEBT
In
March and May 2017, we closed a private placement transaction in
which we issued to certain accredited investors unregistered senior
callable convertible promissory notes, or the Notes, and three-year
warrants to purchase an aggregate of 125,000 shares of common stock
at an exercise price of $5.52 per share in exchange for aggregate
gross proceeds of $6,000,000. The Notes bear interest at a rate of
4% per annum. $5,300,000 in principal was originally scheduled to
mature on August 31, 2018 and $700,000 in principal was originally
scheduled to mature on November 8, 2018, unless earlier redeemed,
repurchased or converted. The Notes are convertible at the option
of the holder into common stock at a conversion price of $4.32 per
share. Subsequent to September 1, 2017, we may redeem the Notes
that are scheduled to mature on August 31, 2018 at any time prior
to maturity at a price equal to 100% of the outstanding principal
amount of the Notes to be redeemed, plus accrued and unpaid
interest as of the redemption date. Prior to November 8, 2018,
we may redeem the Notes that are scheduled to mature on such date
at any time prior to maturity at a price equal to 100% of the
outstanding principal amount of the Notes to be redeemed, plus
accrued and unpaid interest as of the redemption date. Interest on
the Notes is payable semi-annually in cash on February 28 and
August 31 of each year, beginning on August 31, 2017. Interest expense related to the Notes for
the three and nine months ended September 30, 2020 was $0 and
$40,689, respectively. Interest expense related to the Notes for
the three and nine months ended September 30, 2019 was $50,000 and
$150,000, respectively.
The
warrants were valued at $62,559 using the Black-Scholes pricing
model with the following assumptions: expected volatility: 104.06%
–111.54%; expected dividend: $0; expected term: 3 years; and
risk-free rate: 1.49%–1.59%. We recorded the warrants’
relative fair value of $61,904 as an increase to additional paid-in
capital and a discount against the related Notes.
The
debt discount was amortized over the life of the Notes using the
effective interest method. Amortization expense for the three and nine months
ended September 30, 2019, was $0 and $17,534,
respectively.
In February and March 2018, we extended the
maturity date of the Notes— we
extended the maturity date to April 1, 2019 for $5,300,000 of
principal on the Notes and to June 8, 2019 for the remaining
$700,000 Note. No additional consideration was paid or accrued by
us. The stated rate of the Notes was unchanged, and the estimated
fair value of the new debt approximates its carrying amount
(principal plus accrued interest at the date of the modification).
We determined that the modification of these Notes is not a
substantial modification in accordance with ASC 470-50,
“Modifications and
Extinguishments”.
In May 2018, we offered
a noteholder the option to convert its Note at a reduced
conversion price of $3.68. The
noteholder accepted and converted at such price. Pursuant to the terms
of the conversion offer, an aggregate of $700,000 of
principal
and $5,212 of accrued interest outstanding under the
Note were converted into 234,745 shares of common
stock. We recognized an induced conversion cost of
$57,201 related to the conversion.
In December 2018, a
noteholder redeemed a note with a principal balance of $300,000 in
exchange for $150,000 in cash. We recognized a gain on redemption of convertible
note income in the amount of $150,000 as a result of the
transaction.
On
March 30, 2019, the two remaining noteholders agreed to extend the
maturity dates of their notes totaling $5,000,000 to April 3, 2020.
As part of the extensions, we agreed that if we do not make payment
on or before the new maturity dates, after five (5) days written
notice, the holders will have the right, but not the obligation, to
convert the notes into our common shares at a conversion price of
$0.88 per share or a total of 5,681,818 shares. All other
provisions of the notes remain unchanged. We determined that the
modification of these Notes is not a substantial modification in
accordance with ASC 470-50, “Modifications and
Extinguishments”.
In March 2020, convertible notes with a principal
balance of $4,500,000 were converted into 1,041,667 shares
of our common stock at a conversion
price of $4.32 per share and the remaining outstanding balance of
$500,000 was repaid in the form of cash. With respect to the
125,000 warrants issued as part of the convertible note
transaction, 100,000 warrants expired in March 2020. In March 2020,
10,417, warrants were exercised, and 14,583 warrants expired in May
2020.
Convertible notes
consist of the following at:
|
|
September 30,
2020
(Unaudited)
|
|
|
|
|
|
|
Convertible
notes
|
$-
|
$5,000,000
|
|
Initial
discount
|
-
|
(53,873)
|
|
Accumulated
amortization
|
-
|
53,873
|
|
Convertible
notes, net
|
$-
|
$5,000,000
|
NOTE 11. SHAREHOLDERS’ EQUITY
Our
Board of Directors (the “Board”) may, without further
action by our shareholders, from time to time, direct the issuance
of any authorized but unissued or unreserved shares of preferred
stock in series and at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of such
preferred stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up by us
before any payment is made to the holders of our common stock.
Furthermore, the Board could issue preferred stock with voting and
other rights that could adversely affect the voting power of the
holders of our common stock.
Reverse Stock Split
On
September 9, 2020, the Board approved a reverse stock split of our
common stock and our Convertible Series A Preferred Stock, in each
case, at a ratio of 1-for-8 and without any change to the
respective par value thereof (the “Reverse Stock
Split”), and, on September 10, 2020, we filed an Articles of
Amendment to our Articles of Incorporation with the Department of
State of the State of Florida to effect the Reverse Stock Split.
The Reverse Stock Split became effective as of 5:00 p.m.,
Eastern time, on September 10, 2020 (the “Effective
Time”). All per-share and share amounts have been
retroactively restated in this Quarterly Report on Form 10-Q for
all periods presented to reflect the reverse stock
split.
Convertible Series A Preferred Stock
Our
authorized Convertible Series A Preferred Stock, $0.01 par value,
consists of 1,000,000 shares. At September 30, 2020 and December
31, 2019, there were 63,750 shares issued and outstanding. The
Convertible Series A Preferred Stock is convertible at the rate of
one share of common stock for one share of Convertible Series A
Preferred Stock.
Convertible Series B Preferred Stock
Our
authorized Convertible Series B Preferred Stock, $1,000 stated
value, 7.5% cumulative dividend, consists of 4,000 shares. At
September 30, 2020 and December 31, 2019, there were no shares
issued and outstanding, respectively. Each share of Convertible
Series B Preferred Stock may be converted (at the holder’s
election) into two hundred shares of our common stock.
Common Stock
During
the nine months ended September 30, 2019, we issued 50,000 shares
of common stock valued at $44,000 to members of our Board (see Note
13). During the nine months ended September 30, 2019, we issued
1,250 shares of common stock valued at $1,200 to a
consultant.
During
the nine months ended September 30, 2020, we issued 50,000 shares
of common stock valued at $48,000 to members of our Board (see Note
13).
In
March 2020, 1,041,667 shares of common stock were issued in
connection with the conversion of convertible notes payable
aggregating $4,500,000 (see Note 10).
In
March 2020, 10,417 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$57,500.
In
May 2020, 2,500 shares of common stock were issued in connection
with the exercise of options for which we received proceeds of
$1,000.
In
June 2020, 26,940 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$62,500.
In
July 2020, 26,940 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$62,500.
Stock Options
In
January 2019, pursuant to an employment agreement, we issued
options to purchase an aggregate of 31,250 shares of common stock
to our Chief Operating Officer, valued at $24,694. The options have
an exercise price of $0.88 per share and expire in January 2024.
The options were valued using the Black-Scholes model using the
following assumptions: volatility: 144%; dividend yield: 0%; zero
coupon rate: 2.47%; and a life of 5 years. The value of the options
was expensed in the fourth quarter of 2018 and included in accrued
expenses at December 31, 2018.
In
January 2019, we issued options to purchase an aggregate of 6,250
shares of common stock to our Chief Financial Officer, valued at
$4,483. The options have an exercise price of $0.80 per share and
expire in January 2024. The options were valued using the
Black-Scholes model using the following assumptions: volatility:
143%; dividend yield: 0%; zero coupon rate: 2.58%; and a life of 5
years.
In
January 2020, we issued two options to purchase an aggregate of
31,250 shares of common stock to our Chief Operating Officer at an
exercise price of $0.80 and $0.96 per share pursuant to her
employment agreement with us. The options were valued at a total of
$23,595 and have a term of 5 years. We utilized the Black-Scholes
method to fair value the options received by the COO with the
following assumptions: volatility, 135%; expected dividend yield,
0%; risk free interest rate, 1.64%; and a life of 5 years. The
grant date fair value of each share of common stock underlying the
options was $0.72 and $0.80. The value of the stock option was
included in accrued expenses at December 31, 2019.
The
following table summarizes stock options outstanding as of
September 30, 2020 and December 31, 2019:
|
|
September 30,
2020
(Unaudited)
|
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
77,500
|
$2.56
|
40,000
|
$4.16
|
|
Granted
|
31,250
|
0.88
|
37,500
|
0.88
|
|
Exercised
|
(2,500)
|
0.40
|
-
|
-
|
|
Expired
|
(5,000)
|
16.8
|
-
|
-
|
|
Outstanding,
end of period
|
101,250
|
$1.38
|
77,500
|
$2.56
|
Options
outstanding and exercisable by price range as of September 30, 2020
were as follows:
|
|
|
|
|
|
|
Remaining
Contractual
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$0.80
|
27,500
|
4.35
|
27,500
|
$0.80
|
|
$0.88
|
31,250
|
3.26
|
31,250
|
$0.88
|
|
$0.96
|
25,000
|
3.27
|
25,000
|
$0.96
|
|
$2.16
|
5,000
|
4.26
|
5,000
|
$2.16
|
|
$4.40
|
12,500
|
5.35
|
12,500
|
$4.40
|
|
|
|
|
|
|
|
|
101,250
|
3.87
|
101,250
|
$1.38
|
Stock Warrants
In
January 2019 we issued a warrant to purchase 125,000 shares of
common stock to our Chief Executive Officer at an exercise price of
$0.80 per share pursuant to an employment agreement. The warrant
was valued at $89,654 and has a term of 5 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Executive Officer with the following assumptions: volatility, 143%;
expected dividend yield, 0%; risk free interest rate, 2.58%; and a
life of 5 years. The grant date fair value of each share of common
stock underlying the warrant was $0.72.
In January 2019 we issued a warrant to purchase
31,250 shares of common stock to an employee at an exercise price
of $0.96 per share. The warrant was valued at $21,931 and has a
term of 3 years. We utilized the Black-Scholes model to fair value
the warrant received by the employee with the following
assumptions: volatility, 148%; expected dividend yield, 0%; risk
free interest rate, 2.55%; and a life of 3 years. The grant date
fair value of each share of common stock underlying the warrant was
$0.72. The value of the warrants was expensed in the fourth
quarter of 2018 and included in accrued expenses at December 31,
2018.
In
April 2019 we issued a warrant to purchase 6,250 shares of common
stock to an employee at an exercise price of $1.12 per share. The
warrant was valued at $6,116 and has a term of 5 years. We utilized
the Black-Scholes model to fair value the warrant received by the
employee with the following assumptions: volatility, 134%; expected
dividend yield, 0%; risk free interest rate, 2.32%; and a life of 5
years. The grant date fair value of each share of common stock
underlying the warrant was $0.96.
In
January 2020 we issued a warrant to purchase 156,250 shares of
common stock to our Chief Executive Officer at an exercise price of
$1.20 per share pursuant to an employment agreement. The warrant
was valued at $164,201 and has a term of 5 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Executive Officer with the following assumptions: volatility, 136%;
expected dividend yield, 0%; risk free interest rate, 1.64%; and a
life of 5 years. The grant date fair value of each share of common
stock underlying the warrant was $1.04.
In January 2020 we issued a warrant to purchase
5,208 shares of common stock to an employee at an exercise price of
$0.96 per share. The warrant was valued at $3,594 and has a term of
5 years. We utilized the Black-Scholes model to fair value the
warrant received by the employee with the following assumptions:
volatility, 135%; expected dividend yield, 0%; risk free interest
rate, 1.58%; and a life of 5 years. The grant date fair value of
each share of common stock underlying the warrant was $0.72.
The value of the warrants was expensed in the fourth quarter of
2019 and included in accrued expenses at December 31,
2019.
In
February 2020 we issued a warrant to purchase 18,750 shares of
common stock to an employee at an exercise price of $1.20 per
share. The warrant was valued at $18,571 and has a term of 3 years.
We utilized the Black-Scholes model to fair value the warrant
received by the employee with the following assumptions:
volatility, 155%; expected dividend yield, 0%; risk free interest
rate, 1.64%; and a life of 3 years. The grant date fair value of
each share of common stock underlying the warrant was
$0.96.
In
April 2020 we issued a warrant to purchase 12,500 shares of common
stock to our Chief Executive Officer at an exercise price of $4.00
per share pursuant to an employment agreement. The warrant was
valued at $49,693 and has a term of 10 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Executive Officer with the following assumptions: volatility, 173%;
expected dividend yield, 0%; risk free interest rate, 0.68%; and a
life of 10 years. The grant date fair value of each share of common
stock underlying the warrant was $4.00.
In
April 2020 we issued a warrant to purchase 6,250 shares of common
stock to our Chief Operating Officer at an exercise price of $4.00
per share pursuant to an employment agreement. The warrant was
valued at $24,846 and has a term of 10 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Operating Officer with the following assumptions: volatility, 173%;
expected dividend yield, 0%; risk free interest rate, 0.68%; and a
life of 10 years. The grant date fair value of each share of common
stock underlying the warrant was $4.00.
In
April 2020 we issued a warrant to purchase 6,250 shares of common
stock to our Chief Financial Officer at an exercise price of $4.00
per share pursuant to an employment agreement. The warrant was
valued at $24,846 and has a term of 10 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Financial Officer with the following assumptions: volatility, 173%;
expected dividend yield, 0%; risk free interest rate, 0.68%; and a
life of 10 years. The grant date fair value of each share of common
stock underlying the warrant was $4.00.
In
April 2020 we issued a warrant to purchase 3,750 shares of common
stock to a consultant at an exercise price of $4.00 per share. The
warrant was valued at $14,908 and has a term of 10 years. We
utilized the Black-Scholes model to fair value the warrant received
by the consultant with the following assumptions: volatility, 173%;
expected dividend yield, 0%; risk free interest rate, 0.68%; and a
life of 10 years. The grant date fair value of each share of common
stock underlying the warrant was $4.00.
In
August 2020 we issued a warrant to purchase 893 shares of common
stock to a consultant at an exercise price of $8.40 per share. The
warrant was valued at $6,372 and has a term of 3 years. We utilized
the Black-Scholes model to fair value the warrant received by the
consultant with the following assumptions: volatility, 166%;
expected dividend yield, 0%; risk free interest rate, 0.13%; and a
life of 3 years. The grant date fair value of each share of common
stock underlying the warrant was $7.13.
In
August 2020 we issued a warrant to purchase 595 shares of common
stock to a consultant at an exercise price of $8.40 per share. The
warrant was valued at $4,249 and has a term of 3 years. We utilized
the Black-Scholes model to fair value the warrant received by the
consultant with the following assumptions: volatility, 166%;
expected dividend yield, 0%; risk free interest rate, 0.13%; and a
life of 3 years. The grant date fair value of each share of common
stock underlying the warrant was $7.14.
The
following table summarizes the outstanding common stock warrants as
of September 30, 2020 and December 31, 2019:
|
|
September 30,
2020
(Unaudited)
|
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
2,155,065
|
$3.12
|
3,318,826
|
$2.72
|
|
Granted
|
210,447
|
1.36
|
162,500
|
0.88
|
|
Exercised
|
(64,296)
|
(2.84)
|
-
|
-
|
|
Expired
|
(614,583)
|
(6.40)
|
(1,326,261)
|
(1.84)
|
|
Outstanding,
end of period
|
1,686,633
|
$1.73
|
2,155,065
|
$3.12
|
Warrants
outstanding and exercisable by price range as of September 30, 2020
were as follows:
|
|
|
|
|
|
|
Average Weighted
Remaining Contractual
Life in Years
|
|
Weighted Average
Exercise Price
|
|
$0.64
|
31,250
|
3.15
|
31,250
|
$0.64
|
|
$0.80
|
158,125
|
3.01
|
158,125
|
$0.80
|
|
$0.96
|
473,958
|
2.19
|
473,958
|
$0.96
|
|
$1.12
|
6,250
|
3.55
|
6,250
|
$1.12
|
|
$1.20
|
175,000
|
4.13
|
175,000
|
$1.20
|
|
$1.36
|
1,250
|
2.07
|
1,250
|
$1.36
|
|
$2.16
|
31,250
|
1.25
|
31,250
|
$2.16
|
|
$2.32
|
523,061
|
1.41
|
523,061
|
$2.32
|
|
$2.40
|
150,000
|
0.39
|
150,000
|
$2.40
|
|
$2.56
|
31,250
|
1.00
|
31,250
|
$2.56
|
|
$3.36
|
31,250
|
0.75
|
31,250
|
$3,36
|
|
$4.00
|
60,000
|
4.85
|
60,000
|
$4.00
|
|
$4.40
|
12,500
|
0.33
|
12,500
|
$4.40
|
|
$8.40
|
1,488
|
2.88
|
1,488
|
$8.40
|
|
|
1,686,633
|
2.11
|
1,686,633
|
$1.73
|
There
were no unvested warrants outstanding as of September 30,
2020.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
We may become a party to litigation in the normal
course of business. In the opinion of management, there
are no legal matters involving us that would have a material
adverse effect upon our financial condition, results of operations
or cash flows. In addition, from time to time, we may have
to file claims against parties that infringe on our intellectual
property.
Product Liability
As
of September 30, 2020, and December 31, 2019, there were no claims
against us for product liability.
SARS CoV-2 coronavirus
On
March 11, 2020 the World Health Organization declared the SARS
CoV-2 coronavirus a global pandemic and recommended
containment and mitigation measures worldwide. We have been
identified as an essential disinfectant and decontamination vendor
by various agencies and countries. Our operations being essential
have been materially affected by the coronavirus outbreak to date,
as demand for our product and services is increasing. The uncertain
nature of its spread globally may or may not impact our business
operations resulting from quarantines of employees, customers and
suppliers as well as potential travel restrictions in areas
affected or may be affected in the future.
NOTE 13. CONTRACTS AND AGREEMENTS
Agreements with Directors
In
December 2017, we increased the annual fee to the members of our
Board to $40,000, to be paid in cash on a quarterly basis, with the
exception of the audit committee chairperson, whose annual fee we
increased to $45,000, also to be paid in cash on a quarterly basis.
Director compensation also includes the annual issuance of our
common stock.
For
the nine months ended September 30, 2019, we issued an aggregate of
50,000 shares of common stock that were valued at $44,000 to
members of our Board.
For
the nine months ended September 30, 2020, we issued an aggregate of
50,000 shares of common stock that were valued at $48,000 to
members of our Board.
Manufacturing Agreement
In June 2020 we entered into a manufacturing agreement with Planet
Innovation Products, Pty Ltd (“PI”). The agreement does
not provide for any minimum purchase commitments and is for a term
of three years. The agreement also provides for a warranty against
product defects.
Cloud Computing Service Contract
In May 2020 we entered
into an agreement for a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. Approximate minimum payments under the contract
are as follows:
|
Year Ended:
|
|
|
|
|
|
December
31, 2021
|
$18,000
|
|
December
31, 2022
|
30,000
|
|
December
31, 2023
|
30,000
|
|
December
31, 2024
|
30,000
|
|
Thereafter
|
15,000
|
|
|
$123,000
|
Other Agreements
In June
2015, we launched the TOMI Service Network (“TSN”). The
TSN is a national service network composed of existing full-service
restoration industry specialists that have entered into licensing
agreements with us to become Primary Service Providers
(“PSPs”). The licensing agreements grant protected
territories to PSPs to perform services using our
SteraMist® platform of
products and also provide for potential job referrals to PSPs
whereby we are entitled to referral fees. Additionally, the
agreement provides for commissions due to PSPs for equipment and
solution sales they facilitate to other service providers in their
respective territories. As part of these agreements, we are
obligated to provide to the PSPs various training, ongoing support
and facilitate a referral network call center. As of September 30,
2020, we had entered into 175 agreements in connection with the
launch of the TSN. The licensing agreements contain fixed price
minimum equipment and solution orders based on the population of
the territories granted pursuant to the licensing agreements. The
nature and terms of our TSN agreements may represent multiple
deliverable arrangements. Each of the deliverables in these
arrangements typically represent a separate unit of accounting. As
of January 1, 2020, we have removed the exclusivity portion of our
service partner company agreements
NOTE 14. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the following
at:
|
|
September 30,
2020
(Unaudited)
|
|
|
Commissions
|
$217,364
|
$112,102
|
|
Payroll
and related costs
|
136,095
|
167,689
|
|
Director
fees
|
41,250
|
41,250
|
|
Sales
Tax Payable
|
14,415
|
21,814
|
|
Income
Taxes Payable (Note 17)
|
77,000
|
-
|
|
Accrued
warranty (Note 15)
|
105,000
|
30,000
|
|
Other
accrued expenses
|
80,257
|
77,257
|
|
Total
|
$671,381
|
$450,112
|
NOTE 15. ACCRUED WARRANTY
Our
manufacturers assume warranty against product defects, which we
extend to our customers upon sale of the product. We assume
responsibility for product reliability and results. The warranty is
generally limited to a refund of the original purchase price of the
product or a replacement part. We estimate warranty costs based on
historical warranty claim experience.
The
following table presents warranty reserve activities
at:
|
|
September 30,
2020
(Unaudited)
|
|
|
Beginning
accrued warranty costs
|
$30,000
|
$30,000
|
|
Provision for
warranty expense
|
79,545
|
2,609
|
|
Settlement of
warranty claims
|
(4,545)
|
(2,609)
|
|
Ending
accrued warranty costs
|
$105,000
|
$30,000
|
NOTE 16. LOAN PAYABLE
On
April 21, 2020, we received $410,700 in loan funding from the
Paycheck Protection Program (the "PPP") established pursuant to the
recently enacted Coronavirus Aid, Relief, and Economic Security Act
of 2020 (the "CARES Act") and administered by the U.S. Small
Business Administration ("SBA"). The unsecured loan (the "PPP
Loan") is evidenced by a promissory note of the Company, dated
April 21, 2020 (the "Note") in the principal amount of $410,700
with City National Bank (the "Bank"), the lender. Interest expense
for the three and nine months ended September 30, 2020 was $789 and
$1,576, respectively.
Under
the terms of the Note and the PPP Loan, interest accrues on the
outstanding principal at the rate of 1.0% per annum. The term of
the Note is two years, though it may be payable sooner in
connection with an event of default under the Note. To the extent
the loan amount is not forgiven under the PPP, we will be obligated
to make equal monthly payments of principal and interest beginning
on the date that is seven months from the date of the Note, until
the maturity date.
NOTE 17. INCOME TAXES
For the three and nine-months September 30, 2020 and 2019, our
provision for income tax was $77,000 and $0, respectively. Deferred
income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws in effect when the differences are expected to
reverse. The measurement of deferred income tax assets is reduced,
if necessary, by a valuation allowance for any tax benefits, which
are, on a more likely than not basis, not expected to be realized
in accordance with ASC guidance for income taxes. As of September
30, 2020, and December 31, 2019, we recorded a valuation allowance
of $3,429,000 and $5,580,000, respectively for the portion of the
deferred tax assets that we do not expect to be realized. The
valuation allowance on our net deferred taxes decreased by
$2,151,000 during the nine months ended September 30, 2020,
primarily due to the utilization of deferred tax assets. Management
believes that based on the available information, it is more likely
than not that the remaining U.S. deferred tax assets will not be
realized, such that a valuation allowance is required against U.S.
deferred tax assets. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
NOTE 18. CUSTOMER CONCENTRATION
We
had certain customers whose revenue individually represented 10% or
more of our total revenue, or whose accounts receivable balances
individually represented 10% or more of our accounts
receivable.
As of December 31, 2019, three customers accounted for 37% of
accounts receivable.
As of September 30, 2020, two customers accounted for 23% of
accounts receivable.
For the three months
ended September 30, 2019, one customer accounted for 12% of net
revenue.
For
the nine months ended September 20, 2020, one customer accounted
for 11% of net revenue. For the nine months ended September 20,
2019, one customer accounted for 10% of net revenue.
NOTE 19. SUBSEQUENT EVENTS
On
September 22, 2020, we entered into an employment agreement with
Halden S. Shane, or the CEO Employment Agreement, pursuant to which
Mr. Shane will continue to serve as our Chief Executive Officer for
an additional three-year term. The CEO Employment Agreement,
effective October 1, 2020, replaces Mr. Shane’s previous
employment agreement, which expired by its terms on December 31,
2020. Under the Employment Agreement, Mr. Shane is entitled to an
annual base salary of $500,000, a signing bonus of 375,000 warrants
at a strike price equal to the VWAP for the three-day period prior
to the date of issuance and having a ten-year term, an annual bonus
of 31,250 stock options to be granted pursuant to the 2016 Plan and
a performance-based bonus at the discretion of our Board.
In
connection with the CEO Employment Agreement, on October 1, 2020 we
issued 375,000 warrants to Mr. Shane, with such warrants being
exercisable at $6.17 per share.
On
October 1, 2020, our stock commenced trading on the NASDAQ Capital
Market.
On October 1, 2020,
we entered into an employment agreement with Elissa J. Shane, or
the COO Employment Agreement, pursuant to which Ms. Shane will
continue to serve as our Chief Operating Officer for an additional
three-year term effective as of the
date of the agreement. The COO Employment Agreement replaces
Ms. Shane’s previous employment agreement, which expired by
its terms on December 31, 2020. Under the Employment Agreement, Ms.
Shane is entitled to an annual base salary of $270,000, a signing
bonus of 93,750 warrants at a strike price equal to the VWAP for
the three-day period prior to the date of issuance and having a
ten-year term and a performance based bonus at the discretion of
our Board. In connection with the
COO Employment Agreement, on October 1, 2020 we issued 93,750
warrants to Ms. Shane, with such warrants being exercisable at
$6.17 per share.
In
October 2020, 12,500 shares of common stock were issued to Nick
Jennings, our Chief Financial Officer, in connection with the
exercise of warrants for which we received proceeds of
$30,000.