UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2020
 
or
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____
 
Commission File Number: 000-09908
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
(Exact name of registrant as specified in its charter)
 
Florida
59-1947988
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
8430 Spires Way, Suite N Frederick, Maryland 21701
(Address of principal executive offices) (Zip Code)
 
(800) 525-1698
(Registrant’s telephone number, including area code)
 
9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
TOMZ
 
Nasdaq Capital Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
Accelerated filer                   ☐
Non-accelerated filer   ☒
Smaller reporting company ☒
 
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of November 9, 2020, the registrant had 16,761,013 shares of common stock outstanding.
 

 
 
 
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
3
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
Financial Statements.
4
 
 
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
33
 
 
 
Item 3
Quantitative and Qualitative Disclosures About Market Risk.
51
 
 
 
Item 4
Controls and Procedures.
51
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1
Legal Proceedings.
53
 
 
 
Item 1A
Risk Factors.
53
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds.
65
 
 
 
Item 3
Defaults Upon Senior Securities.
65
 
 
 
Item 4
Mine Safety Disclosures.
65
 
 
 
Item 5
Other Information.
65
 
 
 
Item 6
Exhibits.
65
 
 
 
SIGNATURES
66
 
 
EXHIBIT INDEX
67
 
 
 
 
2
 
 
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Form 10-Q, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we intend that such forward looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed forward-looking statements. You can generally identify forward-looking statements as statements containing the words “will,” “would,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “assume,” “can,” “could,” “plan,” “predict,” “should” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.
 
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” in our most recent Annual Report on Form 10-K as updated in this Form 10-Q. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
 
 
 
 
 
 
3
 
 
PART I: FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
September 30,
2020
(Unaudited)(1)
 
 
December 31,
2019(1)
 
 Cash and Cash Equivalents
 $5,885,383 
 $897,223 
Accounts Receivable - net
  3,504,284 
  1,494,658 
Other Receivables  
    157,487 
  - 
Inventories (Note 3)
  4,374,500 
  2,315,214 
Vendor Deposits (Note 4)
  333,212 
  141,052 
Prepaid Expenses
  376,758 
  187,664 
       Total Current Assets
  14,631,624 
  5,035,811 
 
    
    
Property and Equipment – net (Note 5)
  1,111,342 
  1,367,864 
 
    
    
Other Assets:
    
    
Intangible Assets – net (Note 6)
  658,969 
  939,010 
Operating Lease - Right of Use Asset (Note - 7)
  642,738 
  674,471 
Capitalized Software Development Costs - net (Note 8)
  62,852 
  94,278 
Other Assets
  469,024 
  114,033 
     Total Other Assets
  1,833,583 
  1,821,792 
Total Assets
 $17,576,549 
 $8,225,467 
LIABILITIES AND SHAREHOLDERS’ EQUITY
    
    
Current Liabilities:
    
    
  Accounts Payable
 $2,149,988 
 $713,222 
  Accrued Expenses and Other Current Liabilities (Note 14)
  671,381 
  450,112 
  Accrued Officers Compensation
  40,050 
  - 
  Accrued Interest (Note 10)
  - 
  66,667 
  Current Portion of Long-Term Operating Lease
  78,723 
  71,510 
  Convertible Notes Payable, net of discount of $0
    
    
     at December 31, 2019 (Note 10)
  - 
  5,000,000 
     Total Current Liabilities
  2,940,142 
  6,301,511 
 
    
    
Long-Term Liabilities:
    
    
  Loan Payable (Note 16)
  410,700 
  - 
  Long-Term Operating Lease, Net of Current Portion (Note 7)
  974,311 
  1,034,413 
     Total Long-Term Liabilities
  1,385,011 
  1,034,413 
     Total Liabilities
  4,325,153 
  7,335,924 
 
    
    
 Commitments and Contingencies
  - 
  - 
 
    
    
 Shareholders’ Equity:
    
    
      Cumulative Convertible Series A Preferred Stock;
    
    
 par value $0.01 per share, 1,000,000 shares authorized; 63,750 shares issued
    
        and outstanding at September 30, 2020 and December 31, 2019
  638 
  638 
 Cumulative Convertible Series B Preferred Stock; $1,000 stated value;
    
 7.5% Cumulative dividend; 4,000 shares authorized; none issued
    
        and outstanding at September 30, 2020 and December 31, 2019
  - 
  - 
 Common stock; par value $0.01 per share, 250,000,000 shares authorized;
    
 16,748,513 and 15,587,552 shares issued and outstanding
    
        at September 30, 2020 and December 31, 2019, respectively.
  167,485 
  155,875 
     Additional Paid-In Capital
  49,287,039 
  44,232,274 
     Accumulated Deficit
  (36,203,766)
  (43,499,244)
     Total Shareholders’ Equity
  13,251,396 
  889,543 
Total Liabilities and Shareholders’ Equity
 $17,576,549 
 $8,225,467 
 
(1)  Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 11—Equity for further information.
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
4
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
 
 
For the Three Months Ended
 
 
For the Nine Months Ended
 
 
 
September 30,(1)
 
 
September 30,(1)
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Sales, net
 $4,291,589 
 $1,600,387 
 $21,373,504 
 $4,491,719 
   Cost of Sales
  1,455,568 
  460,008 
  8,484,580 
  1,616,680 
   Gross Profit
  2,836,021 
  1,140,379 
  12,888,924 
  2,875,039 
 
    
    
    
    
Operating Expenses:
    
    
    
    
   Professional Fees
  227,560 
  82,945 
  418,516 
  297,349 
   Depreciation and Amortization
  177,279 
  182,689 
  521,486 
  539,070 
   Selling Expenses
  212,624 
  314,110 
  980,096 
  1,274,326 
   Research and Development
  44,862 
  88,137 
  245,443 
  249,373 
   Equity Compensation Expense (Note 11)
  10,621 
  - 
  307,686 
  87,033 
   Consulting Fees
  75,204 
  31,799 
  226,454 
  87,066 
   General and Administrative
  991,543 
  628,285 
  2,776,846 
  1,931,770 
Total Operating Expenses
  1,739,693 
  1,327,965 
  5,476,527 
  4,465,987 
Income (loss) from Operations
  1,096,328 
  (187,586)
  7,412,397 
  (1,590,948)
 
    
    
    
    
Other Income (Expense):
    
    
    
    
   Amortization of Debt Discounts
  - 
  - 
  - 
  (17,534)
   Interest Income
  762 
  773 
  2,347 
  2,432 
   Interest Expense
  (790)
  (50,000)
  (42,266)
  (150,000)
Total Other Income (Expense)
  (28)
  (49,227)
  (39,919)
  (165,102)
 
    
    
    
    
Income (loss) before income taxes
  1,096,300 
  (236,813)
  7,372,478 
  (1,756,050)
Provision for Income Taxes (Note 17)
  77,000 
  - 
  77,000 
  - 
Net Income (loss)
 $1,019,300 
 $(236,813)
 $7,295,478 
 $(1,756,050)
 
    
    
    
    
Net income (loss) Per Common Share
    
    
    
    
    Basic
 $0.06 
 $(0.02)
 $0.44 
 $(0.11)
   Diluted
 $0.05 
 $(0.02)
 $0.40 
 $(0.11)
 
    
    
    
    
Basic Weighted Average Common Shares Outstanding
  16,741,622 
  15,588,680 
  16,429,360 
  15,585,822 
Diluted Weighted Average Common Shares Outstanding
  18,593,255 
  15,588,680 
  18,280,993 
  15,585,822 
 
(1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 11—Equity for further information.
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
5
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
 
 
For the Nine Months Ended September 30, 2020(1)
 
 
 
Series A Preferred
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid
in Capital
 
 
Accumulated
Deficit
 
 
Total Shareholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
  63,750 
 $638 
  15,587,552 
 $155,876 
 $44,232,274 
 $(43,499,244)
 $889,543 
 
    
    
    
    
    
    
    
Equity Compensation
    
    
    
    
  334,875 
    
  334,875 
Common Stock Issued for Services Provided
    
    
  50,000 
  500 
  47,500 
    
  48,000 
Conversion of Notes Payable into Common Stock
    
    
  1,041,667 
  10,417 
  4,489,584 
    
  4,500,000 
Warrants and Options Exercised
    
    
  66,796 
  668 
  182,832 
    
  183,500 
Other
    
    
  2,499 
  25 
  (25)
    
  - 
Net Income for the nine months ended September 30, 2020
    
    
    
    
    
  7,295,478 
  7,295,478 
Balance at September 30, 2020
  63,750 
 $638 
  16,748,513 
 $167,485 
 $49,287,039 
 $(36,203,766)
 $13,251,396 
 
 
 
 
For the Nine Months Ended September 30, 2019(1)
 
 
 
Series A Preferred
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid
in Capital
 
 
Accumulated
Deficit
 
 
Total Shareholders’
Equity
 
Balance at December 31, 2018
  63,750 
 $638 
  15,536,302 
 $155,363 
 $44,040,708 
 $(41,201,511)
 $2,995,198 
 
    
    
    
    
    
    
    
Equity Compensation
    
    
    
    
  146,878 
    
  146,878 
Common Stock Issued for Services Provided
    
    
  51,250 
  513 
  44,688 
    
  45,201 
Net Loss for the nine months ended September 30, 2019
    
    
    
    
    
  (1,756,049)
  (1,756,049)
Balance at September 30, 2019
  63,750 
 $638 
  15,587,552 
 $155,876 
 $44,232,273 
 $(42,957,560)
 $1,431,227 
 
(1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse thereof, which was effected as of the close of business on September 10, 2020. Refer to Note 11—Equity for further information.
 
The accompanying notes are an integral part of the condensed consolidated financial statements. 
 
 
6
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
 
 
 
For the Three Months Ended September 30, 2020(1)
 
 
 
Series A Preferred
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid
in Capital
 
 
Accumulated
Deficit
 
 
Total Shareholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2020
  63,750 
 $638 
  16,719,075 
 $167,191 
 $49,214,210 
 $(37,223,065)
 $12,158,974 
 
    
    
    
    
    
    
    
Equity Compensation
    
    
    
    
  10,621 
    
  10,621 
Warrants and Options Exercised
    
    
  26,940 
  269 
  62,230 
    
  62,499 
Other 
    
    
  2,499 
  25 
  (25
  - 
  - 
Net Income for the three months ended September 30, 2020
    
    
    
    
    
  1,019,300 
  1,019,300 
Balance at September 30, 2020
  63,750 
 $638 
  16,748,514 
 $167,485 
 $49,287,039 
 $(36,203,765)
 $13,251,396 
 
 
 
 
For the Three Months Ended September 30, 2019(1)
 
 
 
Series A Preferred
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid
in Capital
 
 
Accumulated
Deficit
 
 
Total Shareholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
  63,750 
 $638 
  15,587,552 
 $155,876 
 $44,232,273 
 $(42,720,747)
 $1,668,040 
 
    
    
    
    
    
    
    
Net Loss for the three months ended September 30, 2019
    
    
    
    
    
  (236,813)
  (236,813)
Balance at September 30, 2019
  63,750 
 $638 
  15,587,552 
 $155,876 
 $44,232,273 
 $(42,957,560)
 $1,431,227 
 
 
(1) Share amounts with respect to the common stock and Convertible Series A Preferred Stock have been retroactively restated to reflect the reverse split thereof , which was effected as of the close of business on September 10, 2020. Refer to Note 11—Equity for further information
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
7
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED )
 
 
 
 
For the Nine Months Ended
September 30,
 
 
 
2020
 
 
2019
 
Cash Flow From Operating Activities:
 
 
 
 
 
 
  Net Income (Loss)
 $7,295,478 
 $(1,756,049)
  Adjustments to Reconcile Net Income (Loss) to
    
    
     Net Cash Provided by (Used) In Operating Activities:
    
    
     Depreciation and Amortization
  521,486 
  539,070 
     Amortization of Lease Liability
  117,986 
  117,986 
     Amortization of Debt Discount
  - 
  17,534 
     Amortization of Software Costs
  31,425 
  6,285 
     Equity Compensation Expense
  307,686 
  87,033 
     Value of Equity Issued for Services
  48,000 
  45,200 
     Reserve for Bad Debt
  205,000 
  (190,000)
     Inventory Reserve
  (100,000)
  - 
 
    
    
 Changes in Operating Assets and Liabilities:
    
    
     Decrease (Increase) in:
    
    
         Accounts Receivable
  (2,214,625)
  1,161,434 
         Inventory
  (1,923,030)
  276,438 
         Other Receivables
  (157,487)
  - 
         Prepaid Expenses
  (189,095)
  (20,217)
         Vendor Deposits
  (192,160)
  (109,689)
         Other Assets
  (354,991)
  (130,692)
      Increase (Decrease) in:
    
    
         Accounts Payable
  1,436,766 
  (704,675)
         Accrued Expenses
  248,458 
  91,204 
         Accrued Interest
  (66,667)
  (50,000)
         Accrued Officer Compensation
  40,050 
  (39,833)
         Customer Deposits
  - 
  116,327 
         Lease Liability
  (109,747)
  (29,888)
 
    
    
 Net Cash Provided (Used) in Operating Activities
  4,944,535 
  (572,533)
 
    
    
 Cash Flow From Investing Activities:
    
    
   Capitalized Software Costs
  - 
  (125,704)
   Capitalized Patent Costs
  - 
  (21,980)
   Purchase of Property and Equipment
  (50,574)
  (140,647)
 Net Cash Used in Investing Activities
  (50,574)
  (288,331)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
8
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
(UNAUDITED)
 
 
 
 
For the Nine Months Ended
September 30,
 
 
 
2020
 
 
2019
 
 Cash Flow From Financing Activities:
 
 
 
  Proceeds from Exercise of Warrants and Options
 $183,500 
  - 
  Proceeds from Loan Payable
  410,700 
  - 
  Repayment of Principal Balance on Convertible Note
  (500,000)
  - 
 Net Cash Provided by Financing Activities:
  94,200 
  - 
 Increase (Decrease) In Cash and Cash Equivalents
  4,988,160 
  (860,864)
 Cash and Cash Equivalents - Beginning
  897,223 
  2,004,938 
 Cash and Cash Equivalents – Ending
 $5,885,383 
 $1,144,075 
 
    
    
 Supplemental Cash Flow Information:
    
    
   Cash Paid For Interest
 $107,356 
 $200,000 
   Cash Paid for Income Taxes
 $800 
 $800 
 
 Non-Cash Investing and Financing Activities:
 
    
    Accrued Equity Compensation
 $27,189 
 $59,845 
    Conversion of Note Payable into Common Stock
 $4,500,000 
 $- 
    Equipment, net Transferred to Inventory
 $36,256 
 $- 
   Capitalization of patent costs reclassified from Other Assets
 $- 
 $36,227 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
9
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
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.
 
 
10
 
 
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.
 
 
11
 
 
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.
 
 
12
 
 
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.
 
 
13
 
 
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)
 
 
 
2020
 
 
2019
 
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)
 
 
 
2020
 
 
2019
 
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)
 
 
14
 
 
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)
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
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)
 
 
15
 
 
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)
 
 
 
2020
 
 
2019
 
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.
 
 
16
 
 
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)
 
 
 
2020
 
 
2019
 
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)
 
 
 
2020
 
 
2019
 
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)
 
 
 
2020
 
 
2019
 
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)
 
 
 
2020
 
 
2019
 
United States
 $15,437,000 
 $3,852,000 
International
  5,937,000 
  640,000 
 Total
 $21,374,000 
 $4,492,000 
 
 
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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.
 
 
18
 
 
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.
 
 
19
 
 
NOTE 3. INVENTORIES
 
Inventories consist of the following at:
 
 
 
September 30,
2020
(Unaudited)
 
 
December 31,
2019
 
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)
 
 
December 31,
2019
 
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.
 
 
20
 
 
Definite life intangible assets consist of the following:
 
 
 
September 30,
2020
(Unaudited)
 
 
December 31,
2019
 
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:
 
Amount
 
 
 
 
 
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)
 
 
December 31,
2019
 
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 
  
 
21
 
 
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 
 
 
22
 
 
As of September 30, 2020, the maturities of our operating lease liability are as follows:
 
Year Ended:
 
 Operating Lease
 
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:
 
 
 
September 30,
 
 
 
 
 
 
2020
(Unaudited)
 
 
December 31,
2019
 
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.
 
 
23
 
 
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.
 
 
24
 
 
Convertible notes consist of the following at:
 
 
 
September 30,
2020
(Unaudited)
 
 
December 31,
2019
 
 
 
 
 
 
 
 
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).
 
 
25
 
 
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)
 
 
December 31,
2019
 
 
 
Number of Options
 
 
Weighted Average Exercise Price
 
 
Number of Options
 
 
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 
 
 
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Options outstanding and exercisable by price range as of September 30, 2020 were as follows:
 
 
Outstanding Options
 
 
Average
Weighted
 
 
Exercisable Options
 
 
Range
 
 
Number
 
 
Remaining
Contractual
Life in Years
 
 
Number
 
 
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.
 
 
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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.
 
 
 
28
 
 
The following table summarizes the outstanding common stock warrants as of September 30, 2020 and December 31, 2019:
 
 
 
September 30,
2020
(Unaudited)
 
 
December 31,
2019
 
 
 
 Number of Warrants
 
 
 Weighted Average Exercise Price
 
 
 Number of Warrants
 
 
 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