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 March 31, 2021
 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 incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
8430 Spires Way, Frederick, Maryland 21701
(Address of principal executive offices) (Zip Code)
 
 
(800) 525-1698
(Registrant’s telephone number, including area code)
 
 
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 May 6, 2021, the registrant had 16,811,513 shares of common stock outstanding.
 
 

 
 

 
 
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
Page
 
4
 
 
 
PART I
FINANCIAL INFORMATION

 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
 
PART II
OTHER INFORMATION

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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. 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.
 
 
 
 
 
4
 
 
PART I: FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 

 
 
 
 
 
 
Current Assets:
 
March 31,
2021
(Unaudited)
 
 
December 31,
2020
 
 Cash and Cash Equivalents
 $3,945,658 
 $5,198,842 
Accounts Receivable - net
  3,743,430 
  3,716,701 
Other Receivables
  - 
  198,951 
Inventories (Note 3)
  4,765,455 
  3,781,515 
Vendor Deposits (Note 4)
  146,130 
  388,712 
Prepaid Expenses
  316,439 
  421,305 
       Total Current Assets
  12,917,114 
  13,706,027 
 
    
    
Property and Equipment – net (Note 5)
  1,235,483 
  1,298,103 
 
    
    
Other Assets:
    
    
Intangible Assets – net (Note 6)
  720,494 
  722,916 
Operating Lease - Right of Use Asset (Note - 7)
  619,989 
  631,527 
Capitalized Software Development Costs - net (Note 8)
  41,902 
  52,377 
Other Assets
  516,230 
  358,935 
     Total Other Assets
  1,898,614 
  1,765,755 
Total Assets
 $16,051,211 
 $16,769,885 
 
    
    
  LIABILITIES AND SHAREHOLDERS’ EQUITY
    
    
   
    
    
Current Liabilities:
    
    
  Accounts Payable
 $2,046,667 
 $1,501,469 
  Accrued Expenses and Other Current Liabilities (Note 13)
  629,797 
  501,849 
  Customer Deposits
  28,949 
  118,880 
  Current Portion of Long-Term Operating Lease
  83,768 
  81,223 
     Total Current Liabilities
  2,789,181 
  2,203,421 
 
    
    
Long-Term Liabilities:
    
    
  Loan Payable (Note 15)
  410,700 
  410,700 
  Long-Term Operating Lease, Net of Current Portion (Note 7)
  931,697 
  953,190 
     Total Long-Term Liabilities
  1,342,397 
  1,363,890 
     Total Liabilities
  4,131,577 
  3,567,311 
 
    
    
 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 March 31, 2021 and December 31, 2020
  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 March 31, 2021 and December 31, 2020
  - 
  - 
 
 Common stock; par value $0.01 per share, 250,000,000 shares authorized;
 
    
 
 16,811,513 and 16,761,513 shares issued and outstanding
 
    
        at March 31, 2021 and December 31, 2020, respectively.
  168,115 
  167,615 
     Additional Paid-In Capital
  52,369,899 
  52,142,399 
     Accumulated Deficit
  (40,619,018)
  (39,108,078)
     Total Shareholders’ Equity
  11,919,634 
  13,202,574 
Total Liabilities and Shareholders’ Equity
 $16,051,211 
 $16,769,885 
 
    
    
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
 
 
 
5
 
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
For The Three Months Ended
 
 
 
March 31,
 
 
 
2021
 
 
2020 (1)
 
 
 
 
 
 
 
 
   Sales, net
 $2,073,455 
 $7,053,418 
   Cost of Sales
  838,297 
  2,565,410 
   Gross Profit
  1,235,158 
  4,488,008 
 
    
    
Operating Expenses:
    
    
   Professional Fees
  173,493 
  136,125 
   Depreciation and Amortization
  83,449 
  171,909 
   Selling Expenses
  474,389 
  378,645 
   Research and Development
  195,620 
  59,458 
   Equity Compensation Expense (Note 10)
  - 
  182,772 
   Consulting Fees
  106,174 
  81,545 
   General and Administrative
  1,712,366 
  818,145 
Total Operating Expenses
  2,745,491 
  1,828,599 
Income (loss) from Operations
  (1,510,333)
  2,659,409 
 
    
    
Other Income (Expense):
    
    
   Interest Income
  427 
  542 
   Interest Expense
  (1,035)
  (40,689)
Total Other Income (Expense)
  (608)
  (40,147)
 
    
    
Income (loss) before income taxes
  (1,510,940)
  2,619,261 
Provision for Income Taxes (Note 16)
  - 
  - 
Net Income (loss)
 $(1,510,940)
 $2,619,261 
 
    
    
Net income (loss) Per Common Share
    
    
    Basic
 $(0.09)
 $0.17 
   Diluted
 $(0.09)
 $0.14 
 
    
    
Basic Weighted Average Common Shares Outstanding
  16,805,402 
  15,850,352 
Diluted Weighted Average Common Shares Outstanding
  16,805,402 
  18,117,710 
 
    
    


 
    
    

(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 10—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 March 31, 2021
 
 
 
Series A Preferred
 
 
Common Stock
 



 




 
Additional Paid
 
 
Accumulated
 
 
Total Shareholders’
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
in Capital
 
 
Deficit
 
 
Equity
 
 
 
 
Balance at December 31, 2020
  63,750 
 $638 
  16,761,514 
 $167,614 
 $52,142,400 
 $(39,108,078)
 $13,202,574 
 
    
    
    
    
    
    
    
Common Stock Issued for Services Provided
    
    
  50,000 
  500 
  227,500 
    
  228,000 
Net (Loss) for the three months ended March 31, 2021
    
    
    
    
    
  (1,510,940)
  (1,510,940)
Balance at March 31, 2021
  63,750 
 $638 
  16,811,514 
 $168,114 
 $52,369,900 
 $(40,619,018)
 $11,919,633 
 
 
 
For the Three Months Ended March 31, 2020
 
 
 
 
Series A Preferred
 
 
Common Stock
 



 




 
Additional Paid
 
 
Accumulated
 
 
Total Shareholders’
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
in Capital
 
 
Deficit
 
 
Equity
 
Balance at December 31, 2019 (1)
  63,750 
 $638 
  15,587,552 
 $155,876 
 $44,232,274 
 $(43,499,244)
 $889,543 
 
    
    
    
    
    
    
    
Equity Compensation
    
    
    
    
  209,961 
    
  209,961 
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
    
    
  10,417 
  104 
  57,396 
    
  57,500 
Net Income for the three months ended March 31, 2020
    
    
    
    
    
  2,619,261 
  2,619,261 
Balance at March 31, 2020 (1)
  63,750 
 $638 
  16,689,634 
 $166,897 
 $49,036,715 
 $(40,879,983)
 $8,324,265 
 
(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 10—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 Three Months Ended March 31,
 
 
 
2021
 
 
2020
 
Cash Flow From Operating Activities:
 
 
 
 
 
 
  Net Income (Loss)
 $(1,510,940)
 $2,619,261 
  Adjustments to Reconcile Net Income (Loss) to
    
    
     Net Cash Provided by (Used) In Operating Activities:
    
    
      Depreciation and Amortization
  83,449 
  171,909 
       Amortization of Right of Use Asset
  39,329 
  39,329 
       Amortization of Software Costs
  10,475 
  10,475 
      Equity Compensation Expense
  - 
  182,772 
      Value of Equity Issued for Services
  228,000 
  48,000 
       Reserve for Bad Debt
  115,000 
  25,000 
       Inventory Reserve
  - 
  (100,000)
 
    
    
 Changes in Operating Assets and Liabilities:
    
    
      Decrease (Increase) in:
    
    
         Accounts Receivable
  (141,729)
  (1,676,539)
         Inventory
  (983,941)
  1,815,942 
         Prepaid Expenses
  104,866 
  16,807 
         Vendor Deposits
  242,582 
  (1,125,508)
         Other Receivables
  198,951 
  - 
         Other Assets
  (157,295)
  (8,924)
      Increase (Decrease) in:
    
    
         Accounts Payable
  545,198 
  118,955 
         Accrued Expenses
  127,948 
  263,196 
         Accrued Interest
  - 
  (66,667)
         Customer Deposits
  (89,932)
  1,017,533 
         Lease Liability
  (36,941)
  (35,865)
 
    
    
 Net Cash Provided (Used) in Operating Activities
  (1,224,978)
  3,315,678 
 
    
    
 Cash Flow From Investing Activities:
    
    
   Purchase of Property and Equipment
  (28,205)
  (14,585)
 Net Cash (Used) in Investing Activities
  (28,205)
  (14,585)
 
    
    
 
 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 Three Months Ended March 31,
 
 
 
2021
 
 
2020
 
 Cash Flow From Financing Activities:
 
 
 
 
 
 
  Proceeds from Exercise of Warrants
  - 
  57,500 
  Repayment of Principal Balance on Convertible Note
  - 
  (500,000)
 Net Cash (Used)in Financing Activities:
  - 
  (442,500)
 Increase (Decrease) In Cash and Cash Equivalents
  (1,253,184)
  2,858,593 
 Cash and Cash Equivalents - Beginning
  5,198,842 
  897,223 
 Cash and Cash Equivalents – Ending
 $3,945,658 
 $3,755,816 
 
    
    
 Supplemental Cash Flow Information:
    
    
   Cash Paid For Income Taxes
 $- 
 $- 
   Cash Paid For Interest
 $- 
 $107,356 
 Non-Cash Investing and Financing Activities:
    
    
    Accrued Equity Compensation
 $- 
 $27,189 
    Conversion of Note Payable into Common Stock
 $- 
 $4,500,000 
    Equipment, net Transferred to Inventory
 $- 
 $36,256 
 
    
    
 
  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, 2020 and notes thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on March 30, 2021. 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.
 
 
10
 
 
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 months ended March 31, 2021 and 2020 was $115,000 and $25,000, respectively.
 
At March 31, 2021 and December 31, 2020, the allowance for doubtful accounts was $505,000 and $390,000, 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 as of March 31, 2021 and December 31, 2020, 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 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 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 March 31, 2021 and December 31, 2020.
 
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 amortization of capitalized software development costs will be included in cost of sales. Amortization expense for the three months ended March 31, 2021 and 2020, was $10,475, respectively.
 
 
12
 
 
Accounts Payable
 
As of March 31, 2021, one vendor accounted for approximately 60% of accounts payable. As of December 31, 2020, two vendors accounted for approximately 32% of accounts payable.
 
For the three months ended March 31, 2021, two vendors accounted for 64% of cost of sales. For the three months ended March 31, 2020, one vendor accounted for 89% of cost of sales.
 
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 March 31, 2021, and December 31, 2020, our warranty reserve was $68,000. (See Note 14).
 
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 March 31, 2021 and December 31, 2020. 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 our 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 March 31, 2021 consisted of 1,880,383 shares of common stock issuable upon exercise of outstanding warrants, 132,500 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”).
 
Potentially dilutive securities as of March 31, 2020 consisted of 2,099,857 shares of common stock issuable upon exercise of outstanding warrants, 103,750 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 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, and preferred stock of approximately 2.1 million and 2.2 million shares of common stock were outstanding at March 31, 2021 and December 31, 2020, respectively, but were excluded from the computation of diluted net loss per share at March 31, 2021 due to the anti-dilutive effect on net loss per share.
 
 
 
13
 
  
 
 
 
For the Three Months Ended March 31,
(Unaudited)
 
 
 
2021
 
 
2020
 
Net Income (Loss)
 $(1,510,940)
 $2,619,261 
Adjustments for convertible debt - as converted
    
    
Interest on convertible debt
  - 
  40,689 
Net income (loss) attributable to common shareholders
 $(1,510,940)
 $2,659,950 
Weighted average number of shares of common stock outstanding:
    
    
Basic
  16,805,402 
  15,850,352 
Diluted
  16,805,402 
  18,117,709 
Net income (loss) attributable to common shareholders per share:
    
    
Basic
 $(0.09)
 $0.17 
Diluted
 $(0.09)
 $0.15 
 
    
    
 
 
 
14
 
 
The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented:
 
 
 
For the Three Months Ended March 31,
(Unaudited)
 
 
 
2021
 
 
2020
 
Numerator:
 
 
 
 
 
 
  Net Income (Loss)
 $(1,510,940)
 $2,619,261 
 
Denominator:
    
    
  Basic weighted-average shares
  16,805,402 
  15,850,352 
Effect of dilutive securities
    
    
  Warrants
  - 
  2,099,857 
  Convertible Debt
  - 
  - 
  Options
  - 
  103,750 
  Preferred Stock
  - 
  63,750 
Diluted Weighted Average Shares
  16,805,402 
  18,117,709 
 
    
    
Net Income (Loss) Per Common Share:
    
    
Basic
 $(0.09)
 $0.17 
Diluted
 $(0.09)
 $0.14 
 
    
    
 
Note: Warrants, options and preferred stock for the three months ended March 31, 2021 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
 $(1,510,333)
 $2,659,409 
 
    
    
Basic and Diluted Weighted Average Shares
    
    
Basic
  16,805,402 
  15,850,352 
Diluted
  16,805,402 
  18,117,709 
Basic and Diluted Income (loss) Per Common Share
    
    
Basic
 $(0.09)
 $0.17 
Diluted
 $(0.09)
 $0.15 
 
 
15
 
 
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 March 31,
(Unaudited)
 
 
 
2021
 
 
2020
 
SteraMist Product
 $1,661,000 
 $6,638,000 
Service and Training
  412,000 
  415,000 
 Total
 $2,073,000 
 $7,053,000 
 
Revenue by Geographic Region
 
 
For the three months ended March 31,
(Unaudited)
 
 
 
2021
 
 
2020
 
United States
 $1,804,000 
 $3,569,000 
International
  269,000 
  3,484,000 
 Total
 $2,073,000 
 $7,053,000 
 
 
 
16
 
 
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 March 31, 2021, and December 31, 2020 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 2,000,000 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, and awards under the 2016 Plan are expressly conditioned upon such agreements. For the three months ended March 31, 2021 and 2020, we issued 50,000 shares of fully vested common stock, respectively, out of the 2016 Plan to our directors.
 
 
17
 
 
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 months ended March 31, 2021 and 2020.
 
Advertising and Promotional Expenses
 
We expense advertising costs in the period in which they are incurred. Advertising and promotional expenses for the three months ended March 31, 2021 and 2020 were approximately $266,000 and $46,000, respectively.
 
Research and Development Expenses
 
We expense research and development expenses in the period in which they are incurred. For the three months ended March 31, 2021 and 2020, research and development expenses were approximately $196,000 and $59,000, 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 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 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 guidance did not have a material impact on our condensed Consolidated Financial Statements.
 
NOTE 3. INVENTORIES
 
Inventories consist of the following at:
 
 
 
March 31,
2021
(Unaudited)
 
 
December 31,
2020
 
             Finished goods
 $4,396,528 
 $3,404,025 
             Raw Materials
  368,927 
  377,490 
 
 $4,765,455 
 $3,781,515 
 
 
 
18
 
 
NOTE 4. VENDOR DEPOSITS
 
At March 31, 2021 and December 31, 2020, we maintained vendor deposits of $146,130 and $388,712, respectively, for open purchase orders for inventory.
 
NOTE 5. PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following at:
 
 
 
March 31,
2021
(Unaudited)
 
 
December 31,
2020
 
Furniture and fixtures
 $357,236 
 $357,236 
Equipment
  1,597,793 
  1,580,743 
Vehicles
  60,703 
  60,703 
Computer and software
  214,860 
  203,704 
Leasehold improvements
  386,120 
  386,120 
Tenant Improvement Allowance
  405,000 
  405,000 
 
  3,021,712 
  2,993,507 
Less: Accumulated depreciation
  1,786,228 
  1,695,404 
 
 $1,235,483 
 $1,298,103 
 
For the three months ended March 31, 2021 and 2020, depreciation was $81,026 and $78,563, respectively. For the three months ended March 31, 2021 and 2020, amortization of tenant improvement allowance was $9,798 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 $2,422 and $93,347 for the three months ended March 31, 2021 and 2020, respectively.
 
 
Definite life intangible assets consist of the following:
 
 
 
March 31,
2021
(Unaudited)
 
 
December 31,
2020
 
Intellectual Property and Patents
 $3,000,012 
 $3,000,012 
Less: Accumulated Amortization
  2,859,413 
  2,856,991 
Intangible Assets, net
 $140,599 
 $143,021 
 
Indefinite life intangible assets consist of the following:
 
Trademarks
  579,895 
  579,895 
Total Intangible Assets, net
 $720,494 
 $722,916 

    
    
 
 
 
19
 
 
Approximate future amortization is as follows:
 
Year Ended
 
 Amount
 
April 1 – December 31, 2021
 $7,000 
December 31, 2022
  10,000 
December 31, 2023 
  10,000 
December 31, 2024 
  10,000 
December 31, 2025 
  10,000 
Thereafter
  94,000 
 
 $141,000 
 
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:
 
March 31, 2021 (Unaudited)
 
 
December 31, 2020
 
Assets:
 
 
 
 
 
 
  Operating lease right-of-use asset
 $619,989 
 $631,527 
 
Liabilities:
    
    
  Current Portion of Long-Term Operating Lease
 $83,768 
 $81,223 
  Long-Term Operating Lease, Net of Current Portion
  931,697 
  953,190 
 
 $1,015,465 
 $1,034,413 
 
The components of lease expense are as follows and are included within general and administrative expense on our condensed consolidated statement of operations:
 
 
 
For the Three Months Ended March 31, 2021
(Unaudited)
 
 
For the Three Months Ended March 31, 2020
(Unaudited)
 
 
 
 
 
 
 
 
  Operating lease expense
 $39,329 
 $39,329 
 
    
    
 
 
20
 
 
Other information related to leases where we are the lessee is as follows:
 
 
March 31, 2021 (Unaudited)
 
December 31, 2020
Weighted-average remaining lease term:
 
 
 
Operating leases
  8.00 years
 
  8.25 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 March 31, 2021
(Unaudited)
 
 
For the Three Months Ended March 31, 2020
(Unaudited)
 
Cash paid for amounts included in the measurement of lease liabilities:
 $36,941 
 $35,865 
 
As of March 31, 2021, the maturities of our operating lease liability are as follows:
 
Year Ended:
 
Operating Lease
 
April 1 – December 31, 2021
 $114,148 
December 31, 2022
  155,621 
December 31, 2023
  160,290 
December 31, 2024
  165,098 
December 31, 2025
  170,051 
Thereafter
  575,131 
Total minimum lease payments
  1,340,340 
Less: Interest
  324,875 
Present value of lease obligations
  1,015,465 
Less: Current portion
  83,768 
Long-term portion of lease obligations
 $931,697 
 
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:
 
 
 
March 31, 2021
 
 
 December 31,
 
 
 
(Unaudited)
 
 
2020
 
Capitalized Software Development Costs
 $125,704 
 $125,704 
Less: Accumulated Amortization
  (83,802)
  (73,327)
 
 $41,902 
 $52,377 
 
Amortization expense for the three months ended March 31, 2021 and 2020 was $10,475, respectively.
 
 
21
 
 
 
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.
 
We have incurred implementation costs of $62,677 in connection with the cloud computing service contract which have been capitalized in prepaid expenses and other assets as of March 31, 2021. In accordance with ASU No. 2018-15, such implementation costs are being amortized over the remaining contract terms beginning January 1, 2021, which was when the cloud-based service contract was placed in service. Amortization expense for the three months ended March 31, 2021 was $3,482.
 
NOTE 10. 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 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 March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, 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 three months ended March 31, 2020, we issued 50,000 shares of fully vested common stock valued at $48,000 to members of our Board (see Note 12). 
 
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.
 
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.
 
During the three months ended March 31, 2021, we issued 50,000 shares of common stock valued at $228,000 to members of our Board (see Note 12). 
 
 
22
 
 
Stock Options
 
               There were no options granted during the first quarter of 2021.
 
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-Scholesmethod 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 March 31, 2021 and December 31, 2020:
 

 
March 31, 2021
 
   
 
 
(Unaudited)
 
 
December 31, 2020
 
 
 
Number of Options
 
 
Weighted Average Exercise Price
 
 
Number of Options
 
 
Weighted Average Exercise Price
 
Outstanding, beginning of period
  132,500 
 $2.72 
  77,500 
 $2.56 
Granted
  - 
  - 
  62,500 
  3.96 
Exercised
  - 
  - 
  (2,500)
  0.40 
Expired
  - 
  - 
  (5,000)
  16.80 
Outstanding, end of period
  132,500 
 $2.72 
  132,500 
 $2.72 
 
Options outstanding and exercisable by price range as of March 31, 2021 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 
  3.85 
  27,500 
 $0.80 
 $0.88 
  31,250 
  2.76 
  31,250 
 $0.88 
 $0.96 
  25,000 
  2.77 
  25,000 
 $0.96 
 $2.16 
  5,000 
  3.76 
  5,000 
 $2.16 
 $4.40 
  12,500 
  4.85 
  12,500 
 $4.40 
 $7.06 
  31,250 
  4.50 
  31,250 
 $7.06 
    
    
    
    
    
    
  132,500 
  3.64 
  132,500 
 $2.72 
 
 
Stock Warrants
 
  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.
 
 
23
 
 
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.
 
On February 11, 2021, we agreed to amend (the “Warrant Amendment”) the warrant to purchase 125,000 shares of TOMI common stock, par value $0.01 (the “Common Stock”), issued by TOMI to Dr. Halden S. Shane, TOMI’s Chief Executive Officer and a director on TOMI’s board of directors, on February 11, 2014 (the “Warrant”), to provide TOMI an option to repurchase the Warrant from Dr. Shane at a negotiated price. In connection with the Warrant Amendment, TOMI repurchased the warrant from Dr. Shane (the “Repurchase”) for an aggregate cash consideration of $314,500, representing a 15% discount of the net exercise cash value of the Warrant, which was calculated using the closing price of the Common Stock on the Nasdaq on February 11, 2021 of $5.36, less the exercise price of the warrants in the amount of $2.40. On the same date, the Warrant Amendment and the Repurchase was considered, approved and adopted by a disinterested majority of TOMI’s board of directors.  The $314,500 charge in connection with the warrant amendment has been included in General and Administrative expenses for the three months ended March 31, 2021.
 
The following table summarizes the outstanding common stock warrants as of March 31, 2021 and December 31, 2020:
 
 
March 31, 2021
(Unaudited)
 
 
December 31, 2020
 
 
 
Number of Warrants
 
 
Weighted Average Exercise Price
 
 
Number of Warrants
 
 
Weighted Average Exercise Price
 
Outstanding, beginning of period
  2,049,133 
 $2.55 
  2,155,065 
 $3.12 
Granted
  - 
  - 
  585,447 
  4.97 
Exercised
  - 
  - 
  (76,796)
  (2.77)
Expired
  (168,750)
  (2.84)
  (614,583)
  (6.40)
Outstanding, end of period
  1,880,383 
 $2.66 
  2,049,133 
 $2.55 
 
 
 
Warrants outstanding and exercisable by price range as of March 31, 2021 were as follows: 
 
 
Outstanding Warrants
 
 
 
 
 
Exercisable Warrants
 
 
Exercise Price
 
 
Number
 
 
Average Weighted
Remaining Contractual
Life in Years
 
 
Number
 
 
Weighted Average
Exercise Price
 
 $0.64 
  31,250 
  2.65 
  31,250 
 $0.64 
 $0.80 
  158,125 
  2.51 
  158,125 
 $0.80 
 $0.96 
  473,958 
  1.69 
  473,958 
 $0.96 
 $1.12 
  6,250 
  3.05 
  6,250 
 $1.12 
 $1.20 
  175,000 
  3.63 
  175,000 
 $1.20 
 $1.36 
  1,250 
  1.57 
  1,250 
 $1.36 
 $2.16 
  31,250 
  0.75 
  31,250 
 $2.16 
 $2.32 
  523,061 
  0.91 
  523,061 
 $2.32 
 $2.40 
  12,500 
  0.50 
  12,500 
 $2.40 
 $2.56 
  31,250 
  0.50 
  31,250 
 $2.56 
 $3.36 
  31,250 
  0.25 
  31,250 
 $3.36 
 $4.00 
  28,750 
  4.35 
  28,750 
 $4.00 
 $6.95 
  375,000 
  9.50 
  375,000 
 $6.95 
 $8.40 
  1,488 
  2.38 
  1,488 
 $8.40 
    
  1,880,383 
  3.35 
  1,880,383 
 $2.66 
    
    
    
    
    
There were no unvested warrants outstanding as of March 31, 2021.
  
 
24
 

NOTE 11. 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 March 31, 2021 and December 31, 2020, 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. 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 12. CONTRACTS AND AGREEMENTS
 
Executive Agreements
 
Halden S. Shane
 
On September 22, 2020, we entered into a three year employment agreement with Dr. Shane, effective October 1, 2020. The agreement provides for a base annual salary of $500,000. The agreement also provides for a signing bonus of 375,000 warrants. Dr. Shane is also entitled to a cash performance bonus and an annual issuance of an option to purchase 31,250 shares of common stock from the 2016 Plan at the discretion of the Board. The agreement also provides that we will reimburse Dr. Shane for the expenses associated with the use of an automobile up to $750 a month. The term of the agreement is three years.
 
In the event Dr. Shane is terminated as CEO as a result of a change in control, Dr. Shane will be entitled to a lump sum payment of two years’ salary at the time of such termination.
 
The Board may terminate Dr. Shane for cause by written notification to Dr. Shane; provided, however, that no termination for cause will be effective unless Dr. Shane has been provided with prior written notice and opportunity for remedial action and fails to remedy within 30 days thereof, in the event of a termination by the Company (i) by reason of willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company, (ii) by reason of material breach of his employment agreement and (iii) by reason of gross negligence or intentional misconduct with respect to the performance of duties under the agreement. Upon termination for cause, Dr. Shane will be immediately paid an amount equal to his gross salary. The Board may terminate Dr. Shane other than for cause at any time upon giving notice to Dr. Shane. Upon such termination, Dr. Shane will be immediately paid an amount equal to his gross salary.
 
Elissa J. Shane
 
On October 1, 2020, we entered into an employment agreement with Elissa J. Shane, effective October 1, 2020. Pursuant to her employment agreement, Ms. Shane will receive an annual base salary of at least $270,000, subject to annual review and discretionary increase by the Compensation Committee of the Board. Ms. Shane is eligible to receive an annual cash bonus and other annual incentive compensation. The agreement originally provided for a grant of 93,750 warrants. Additionally, in connection with the execution of her employment agreement, on October 1, 2020, we issued Ms. Shane a warrant to purchase 93,750 shares of Common Stock at an exercise price of $6.17 per share. These provisions were subsequently amended to provide for the issuance to Ms. Shane of 31,250 options from the 2016 Equity Plan at the closing price of $7.06 on the date of grant in lieu of the warrant grant and the 93,750 warrants were cancelled. Ms. Shane acknowledged that the 31,250 options were in full consideration of the amount she was entitled to under the agreement. Her employment agreement also provides that we will reimburse Ms. Shane for reasonable and necessary business and entertainment expenses that she incurs in performing her duties. During the term of her employment, Ms. Shane will also be entitled to up to four weeks of paid vacation time annually, which will accrue up to six weeks, and to participate in our benefit plans and programs, including but not limited to all group health, life, disability and retirement plans. Ms. Shane is also entitled to the sum of $1,000 per month as a vehicle allowance. The initial term of her employment agreement is three years, which may be automatically extended for successive one-year terms, unless either party provides the other with 120 days’ prior written notice of its intent to terminate the agreement.
 
In the event Ms. Shane is terminated as COO as a result of a change in control, Ms. Shane will be entitled to a lump sum payment of one and a half years’ salary at the time of such termination.

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 three months ended March 31, 2020, we issued an aggregate of 50,000 shares of common stock that were valued at $48,000 to members of our Board.
 
For the three months ended March 31, 2021, we issued an aggregate of 50,000 shares of common stock that were valued at $228,000 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
 
 Amount
 
April 1 – December 31, 2021
 $18,000 
December 31, 2022
  30,000 
December 31, 2023   
  30,000 
December 31, 2024   
  30,000 
December 31, 2025   
  15,000 

 $123,000 
 

 
25
 
 
Other Agreements
 
TOMI Service Network (“TSN”) is a national service network composed of existing full-service restoration industry specialists that have entered initially into licensing agreements with us to become Primary Service Providers (“PSPs”). The licensing agreements originally granted 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 March 31, 2021, we have 199 network companies in TSN. 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. There is no exclusivity in our TSN network.
 
NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
 
  Accrued expenses and other current liabilities consisted of the following at:
 
 
 
 
 
 
 
 
 
 
March 31, 2021
(Unaudited)
 
 
December 31, 2020
 
Commissions
 $158,076 
 $151,709 
Payroll and related costs
  208,511 
  84,000 
Director fees
  41,250 
  41,250 
Sales Tax Payable
  7,009 
  9,784 
Income Taxes Payable (Note 16)
  77,000 
  77,000 
Accrued warranty (Note 14)
  68,000 
  68,000 
Other accrued expenses
  69,951 
  70,106 
Total
 $629,797 
 $501,849 
 
 
NOTE 14. ACCRUED WARRANTY
 
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. 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:
 
 
 
March 31, 2021
(Unaudited)
 
 
December 31, 2020
 
Beginning accrued warranty costs
 $68,000 
 $30,000 
Provision for warranty expense
  1,292 
  101,041 
Settlement of warranty claims
  (1,292)
  (63,041)
Ending accrued warranty costs
 $68,000 
 $68,000 
 
 
NOTE 15. 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 months ended March 31, 2021 was $1,035.
 
 
26
 
 
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.
 
In March of 2021, the loan forgiveness application was filed with our bank and was pending approval as of March 31, 2021.

 
NOTE 16. INCOME TAXES
 
For the three months ended March 31, 2021 and 2020, our provision for income tax was $0. 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 March 31, 2021 and December 31, 2020, we recorded a valuation allowance of $3,953,000 and $3,530,000, respectively for the portion of the deferred tax assets that we do not expect to be realized. 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 17. CUSTOMER CONCENTRATION
 
We had no customers/distributor whose revenue individually represented 10% or more of our total revenue for the three months ended March 31, 2021. One customer/distributor accounted for 31% of net revenue for the three months ended March 31, 2020. We had three customers/distributors that accounted for 38% of accounts receivable as of March 31, 2021. Three customers/distributors accounted for 36% of accounts receivable as of December 31, 2020.
 
NOTE 18. SUBSEQUENT EVENTS
 
The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the SEC. There were no reportable subsequent events.
 
 
27
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guaranteeing future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
 
Unless otherwise stated, all information presented herein is based on the Company’s fiscal calendar, and references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in December and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “TOMI” as used herein refers collectively to TOMI Environmental Solutions, Inc. unless otherwise stated.
 
The following discussion should be read in conjunction with the 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.
 
Available Information
 
The Company periodically provides certain information for investors on its corporate website, www.tomimist.com, and its investor relations page of its website, www.investor.tomimist.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites and referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.
 
Quarterly Highlights
 
Business Update
 
As we exited 2020 and began 2021, the Company is re-focusing on its core customers and markets. COVID saw an increase and introduction to a new set of customers, which was beneficial to the Company as it brought awareness to product, offerings and opened the door to a customer base at a very rapid pace. These customers were initially looking for products that would aid in their ability to keep their businesses open. As the quarantines continued and more businesses were closed the Company saw a slowdown in demand for products from these new customers. In addition, our existing life sciences customers closed early in COVID and remained closed into 2021. We expect the quarantines to remain into the first half of 2021. As our core customers in Life Sciences, Commercial and Healthcare are slowly re-opening, we expect to see increased demand for our products and services in the latter half of 2021. Our focus in 2021 will be on working with our customers as they return to work.
 
Due to the business quarantine shut downs, our first quarter 2021 revenues are down from the early pandemic high of 2020. To address the return to work with our customers, the Company is building its sales team. We believe it will take time to get the new team trained and fully operational.
 
In addition to building the team, the Company is addressing the needs of our customers for a more mobile and lighter weight product by introducing the SteraPak. Many of our customers are waiting for the release instead of purchasing our existing products. New product and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company’s net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction domestically and internationally. Despite lower revenues for the quarter, the Company and its divisions remain resilient and currently expect to meet the targeted 2021 annual revenue goals.
 
 
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COVID-19 Update
 
The COVID-19 pandemic has prompted governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. This has significantly curtailed global economic activities and has impacted our operations, particularly international sales.
 
During the first quarter of 2021, aspects of the Company’s business continued to be affected significantly by the COVID-19 pandemic. Some of the Company’s major customers in the Hospital/healthcare, Life Science and channel partners temporarily closed at various times, while the vast majority of our old and new pipeline clients’ employees have transitioned to working remotely. The closure and/or such customers working remotely placed a halt on many of our ongoing long-term projects that were set to close in late 2020 and early 2021. These projects and the addition of new projects at very early stages have resumed during the second quarter with a few planned to be completed by end of 2021. These divisions have or are starting to reopen during the first part of the second quarter. Further, we have recently experienced an increase in capital equipment sales in the Life Sciences during the second quarter of 2021 as pharmaceuticals, research universities, vivariums, and government agencies are gradually returning to work and interested in purchasing our equipment.
 
Travel restrictions and the transition to our newly formed sales operation and sales team has further affected our domestic and international sales in the short term. Due to the nature of our technology, industry knowledge, and the amount of time required for onboarding new sales teams, including new Independent Manufacturing Representatives (IMRs), it takes time to build a pipeline and become fully operational in the sales role. We expect a more positive impact from these efforts on our financial results by the second half of 2021.
 
Prior to the pandemic, in 2019, the Company had revenues of approximately $6,000,000, and our 2020 business plan anticipated substantial growth in 2020. While we exceeded our budget, the pandemic did not allow us to implement our initiatives to generate the sustained growth beyond the pandemic. As our historical consistent verticals return to work, we are reinstating live and in-person demonstrations of our products for these verticals/industries, in addition to resuming long-term ongoing profitable projects, which we believe will have a positive impact on our efforts to generate new sales. With the anticipated launch of our new product lines (SteraPak, SteraBox, SteraBot), we expect the rate of revenue growth will accelerate in the second half of 2021. These new products were designed and will be launched based on the feedback of our customers for alternative delivery systems and commercial uses for the SteraMist products.
 
The second half of 2020 showed us that the world remained interested in the disinfection process. The potential customers who did not want to take the time to learn of proper disinfection protocols and the importance of SteraMist competitive advantages but made their purchasing decisions primarily based on price resulted in potential customers selecting a less expensive disinfection technology including electrostatic sprayers (ESS).
 
TOMI rapidly transformed its R&D department to produce a backpack, the SteraPak, with 6-log kill in seconds based on our proprietary BIT technology platform. Our SteraMist SteraPak is expected to hit the markets shortly. We are already taking and receiving pre-orders, and the interest is high across all markets.
 
The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for consumer products. Refer to Part I, Item 1A of the 2020 Form 10-K under the heading “Risk Factors,” for more information.
 
Overview
 
TOMI Environmental Solutions, Inc. (“TOMI”, “we” and “our”) is a global bacteria decontamination and infectious disease control company, providing environmental solutions for indoor surface decontamination through the manufacturing, sales, service and licensing of our SteraMist® brand of products, including SteraMist® BIT, a low percentage (7.8%) hydrogen peroxide-based fog or mist that uses Binary Ionization Technology (BIT).
 
 
29
 
 
Our SteraMist® is a patented technology that produces ionized Hydrogen Peroxide (iHP) using cold plasma science created under a grant by the United States Defense Advanced Research Projects Agency (DARPA). Our EPA registered BIT Solution is composed of a low concentration of hydrogen peroxide converted to iHP after passing the trade secret blended solution including its sole active ingredient of 7.8% hydrogen peroxide through an atmospheric cold plasma arc. The newly formed iHP fog and mist consists of submicron’s to 3-micron radical particles that are carried throughout the treatment area in a fog or mist moving with the same velocity and characteristics of a gas. This allows the ionized hydrogen peroxide fog or mist to affect all surfaces and air space throughout the targeted treatment area, over, above and beyond the ability of a manual cleaning processes. iHP damages pathogenic organisms through the oxidation of proteins, carbohydrates, and lipids. SteraMist® no-touch disinfection and or decontamination treat areas mechanically, causing cellular disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and greater kill or inactivation of all pathogens in the treatment area.
 
Under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), we are required to register with the EPA and certain state regulatory authorities as a seller of disinfectants. In June 2015, SteraMist® BIT was registered with the EPA as a hospital-healthcare disinfectant and general broad-spectrum surface disinfectant for use as a misting/fogging agent. SteraMist® BIT now holds EPA registrations (# 90150-2) for mold control, and air and surface remediation (# 90150-1). In February 2016, we expanded our label with the EPA to include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus h1n1, which we believe has better positioned us to penetrate all industries including the biodefense and healthcare industry. In August 2017, our EPA label was further expanded to include efficacy against Salmonella and Norovirus. As of January 27, 2017, our technology is one of 53 of the EPA’s “Registered Antimicrobial Products Effective against Clostridium difficile Spores”, as published on the EPA’s K List. Further, in December 2017, SteraMist® was included in the EPA’s list G (Norovirus), L (Ebola) and M (Avian Flu). In March 2020, our EPA label was further amended to include Emerging Viral Pathogens claims, thus meeting the criteria against Enveloped viruses and Large Non-enveloped viruses and included on List N (Emerging Viral Pathogens including SARS-CoV-2).
 
SteraMist® BIT brings to the world a mechanical and automated method of cleaning using a game-changing technology and EPA registered Hospital-HealthCare disinfectant providing an upgrade to existing disinfecting and cleaning protocols while limiting liability in a facility when it comes to resistant infectious pathogens. We maintain this registration in all fifty (50) states, Canada, and approximately thirty-five (35) other countries.
 
Markets
 
Our SteraMist® products are designed to address a wide spectrum of industries using iHP. Our operations consist of five main divisions based on our current target industries: Hospital-HealthCare, Life Sciences, TOMI Service Network (TSN), Food Safety and Commercial.
 
We continue to offer our customers a wide range of innovative mobile products designed to be easily incorporated into their existing disinfection and decontamination procedures and protocols. Our newly soon to be released SteraPak will allow us to progress further into market share, specifically for our Hospital-HealthCare, TSN, and Commercial divisions. Additionally, we offer integrated facility equipment installations known as Custom Engineered Systems (CES), routine & emergency iHP Corporate Service, essential training packages, validations and qualifications, and onsite performance maintenance requests, which are all profitable for our Life Sciences and expect to soon be profitable in our Food Safety division.
 
Each of these are structured to address the unique disinfection and decontamination needs of our customers worldwide regardless of industry requiring or requesting SteraMist® disinfection decontamination.
 
Divisions
 
Hospital-Healthcare
 
Our SteraMist® line of products, specifically the SteraMist® Surface Unit and SteraMist® Total Disinfection Cart are our main solutions to aid our Hospital-HealthCare customers in providing the quality of care and safety they provide to their patients by disinfecting patient and operating rooms, pharmacies, ambulances, and emergency environments in a hospital or healthcare facility. TOMI’s latest product, the SteraPak, further assists healthcare communities with an easy-to-use, cordless disinfection solution, creating a quicker turnaround time.
 
 
30
 
 
In the first quarter of 2021, we experienced an increase in sales to health system clients, including the expansion to our third Mercy hospital in Ohio, with a fourth Mercy facility seeking to implement SteraMist soon. We also received multiple purchase orders from Zimmer, a medical device company.
 
Our team of technicians and representatives train, maintain, and troubleshoot capital equipment throughout the world for our Hospital-HealthCare customers. As our Training and Implementation department expands, we expect continued growth in our Hospital-HealthCare division. The protocol development and onboarding for implementation in this division is critical. During 2020 the use of our SteraMist® in such campuses increased due to our comprehensive training for their day and night shift maintenance and housekeeping departments. By late 2021, we anticipate annual comparison case studies from many of these facilities who were onboarded in 2020, which may show lower transmission infection rates in COVID, Clostridium difficile Spores and overall, HAI cases.
 
Life Sciences
 
Our SteraMist® Environment System, Custom Engineered Systems (CES), the SteraMist® Select Surface Unit, custom iHP implementation to decontamination chambers and cage washers, and our iHP Corporate Service Division, are designed to be tailored to provide a complete room solution to address the regulatory inspections of disinfecting/decontaminating and Installation Qualification (IQ)-Operational Qualification (OQ)–Performance Qualification (PQ) validation processes within the life sciences industry.
 
The pandemic halted capital equipment and service sales in our Life Sciences division and its verticals. As operations reconvene for these verticals, we expect to see increased demand from this vertical. Long term ongoing projects and validations have resumed, along with proposals and interest for our CES permanent decontamination room. We will work with our customers to respond to their inquiries regarding CES. These are longer lead-time sales that can take months to design, build and implement. We expect these installations to have impact to our results in late 2021 and into 2022.
 
Further, post COVID pandemic has brought some attention to the SteraMist product line as our CES in Pfizer Missouri was recently showcased in a New York Times article as they featured their COVID vaccine processes. In addition, our iHP Corporate Service team treated one of four fill lines in a North Carolina pharmaceutical company that manufacturers one of the COVID vaccines, with the remaining three lines set to be decontaminated in the future with SteraMist.
 
TOMI developed a new product which acts as a passthrough or small decontamination chamber, the SteraBox, to sterilize small instruments quickly and efficiently.
 
TOMI Service Network
 
The TOMI Service Network, or TSN, is an expansive network consisting of third-party professionals specializing in a wide array of disciplines who are exclusively licensed and trained to use the SteraMist® products. We sell, train, and service a wide array of professional remediation companies in the use of SteraMist® through the TSN division. This allows for increased accessibility and brand awareness of iHP® services to facilities in need of local routine and emergency disinfection and decontamination.
 
The TOMI Service Network (TSN) division experienced greater impact from the COVID-19 pandemic quarter over quarter than any other division. As stated above, the urgency of becoming an essential business prompted an increase of demand for SteraMist disinfection by our customers who wished to remain in operation in the first half of 2020, and TSN members acquired and accumulated BIT Solution in anticipation of supply shortage. We believe that cleaning protocols have changed permanently due to the COVID-19 pandemic, and our network will play a significant role in facilitating and maintaining these protocols throughout the United States and Canada. The urgency for emergency disinfection services may have declined, but the education and support of such services provided to our members by TOMI personnel provides us with an advantage to maintaining strong business relationships with these companies and their thousands of happy SteraMist customers as the world returns to the new normal.
 
As of March 31, 2021, we have 199 network companies in TSN.  We expect our TSN division to onboard approximately 6 to 8 new TSN members per quarter. We also expect our SteraPak release to be an important factor for this market that will increase the new member onboarding number quarter over quarter moving forward.
 
 
31
 
 
Food Safety
 
Food Safety presents significant potential as an opportunity for substantial growth with continued product research and compliance testing. With the food safety industry in North America coming under closer scrutiny with the implementation and enforcement of new and established guidelines, our consultants have submitted a request to expand our current labels to include a 1% acceptable concentration of hydrogen peroxide. This concentration has previously been approved by the USDA and FDA for direct food and crop application and will allow SteraMist® to expand use sites beyond food processing machinery, restaurants, and food contact areas to assist in compliance with the newly established Food Safety Modernization Act guidelines set in place by the FDA, as well as the Safe Food for Canadians Act and Safe Food for Canadians Regulations in Canada.
 
TOMI continues to work with premium companies in testing and validating SteraMist® technology in the Food Safety and seed industries. In the first quarter of 2021, we have made progress in enhancing brand awareness and promoting and marketing in this division, as a majority of the Independent Marketing Representatives we onboarded recently belong to this division.
 
Commercial
 
Our Commercial division, which includes but is not limited to use sites such as aircraft, airports, police and fire, manufacturing companies, automobile, military, cruise ships, shipping ports, preschool education, primary and secondary schools, colleges including dormitories, all modes of public and private transportation, regulatory consulting agencies, retail, housing and recreation, and of course emergency preparedness for counties and cities to use SteraMist® throughout their community.
 
Quarter 1 of 2021 continued to bring interest to the marketplace for these industries and interest in SteraMist disinfection as a solution remains high. We expect the SteraPak to be a game changer in growth for this division.
 
Business Highlights and Recent Events
 
Customers:
 
Globally, we have added approximately thirteen (13) new customers for the three months ended March 31, 2021. In the short term, we expect to see healthy demand for the SteraMist® products and services. While the initial outbreak caused a surge in demand for the SteraMist®, we expect that such demand for our products and services will continue and we are building a team to address the post COVID-19 pandemic market opportunities.
 
Revenues:
 
We experienced a decline in our revenue for the three months ended March 31, 2021 when compared to the same quarter in the prior year due to a significant increase of demand caused by the onset of the COVID-19 pandemic in March 2020. We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity which led to substantial revenue growth in the first and second quarter of 2020. However, during of the second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce or suspend their business operations. The markets that were negatively affected were our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore reduced substantially their elective surgical and clinical related services, resulting in limited non-essential onsite personnel. These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies. In addition, our customers have limited budgets for newer technologies. We anticipate that the availability of significant federal funds to our customers for pandemic preparedness should assist them in purchasing our products.
 
As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, we are moving ahead with many new products in development. In 2021, we intend to spend more on capital expenditures (CapEx) and operating expenditures (OpEx) including development of new products, services and process technologies to sharpen our competitive advantage. In addition, we will expand our commercial service location to meet the expanding needs of our customers.
 
 
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                We believe that we possess the best technologies in the world in the disinfection and decontamination space. This pandemic has provided us with the confidence to develop a clear strategy to manufacture what may be our best product portfolio to date. In addition, we continue to move our BIT technology closer to becoming the standard in disinfection and decontamination globally. This should lead to a greater market share, increased profitability and capability strength.
 
The second half of 2020 showed us that our customers wanted a lower cost disinfection device like electrostatic sprayers (ESS), even if it provides the end-user with less efficacy and the potential of causing damage to its personal property and delicate equipment which were dangerous and causing explosions with many resulting in fires.
 
              To respond to our customer demands of a lower cost and more versatile product, we developed a Backpack unit that will possess our award winning 6-log and above kill technology and speed without the damage to space and materials. We expect our backpack to be competitively priced and open SteraMist to the largest cleaning market in the world-members of ISSA (International Sanitary Supply Association) and its divisions IEHA (Integrated Environment and Health Assessment) and EMEA (Europe, Middle East & Africa). These organizations have historically been price conscious and were resistant early on to our SteraMist pricing of our professional decontamination equipment (SteraMist Surface and Environment Unit). We plan on introducing our new innovative backpack globally in the second or early third quarter 2021.
 
                We believe that disinfection will be a line item on all companies’ budgets going forward whether private, public or government. Dangerous pathogens still exist “Disease X” and will exist long after we recover from this pandemic. While the United States and most of the world is currently recovering from the SARS CoV-2 coronavirus outbreak there are many pathogens which are respiratory in nature that are still a looming threat, these cases are occurring globally to this day. SteraMist can mitigate and reduce the impact of the next pandemic as it has already proven during the outbreaks of Ebola, MERS and recently with SARS CoV-2 pandemic. The need for a speedy comprehensive mechanical disinfectant like SteraMist cannot be stressed enough and should be included as the new norm of cleaning. With all the unknown viruses and their variants in the world, preparedness is the most important measure to ensure your family and business survives.
 
Total revenue for the three months ended March 31, 2021 and 2020, was $2,073,000 and $7,053,000, respectively, representing a decrease of $4,980,000, or 71% compared to the same prior year period.
 
SteraMist® product-based revenues for the three months ended March 31, 2021 and 2020, were $1,661,000 and $6,638,000, representing a decrease of $4,977,000 or 75% when compared to the same prior year period.
 
Our service-based revenue for the three months ended March 31, 2021 and 2020, was $412,000 and $415,000, respectively, representing a year over year decrease of 1%.
 
Our domestic revenue for the three months ended March 31, 2021 and 2020, was $1,804,000 and $3,569,000, respectively, a decrease of $1,765,000, or 49% when compared to the same prior year period.
 
                Internationally, our revenue for the three months ended March 31, 2021 and 2020, was approximately $269,000 and $3,484,000, respectively, representing a decrease of $3,215,000 or 92%.
 
2021 Events:
 
During the first quarter of 2021, we hired one Vice President of Sales, each of whom, along with a Vice President of Sales, hired in the fourth quarter of 2020, attended a week-long sales seminar hosted by TOMI at the end of February 2021. The sales seminar was intended to educate each sales professional about disinfection decontamination competition in their respective divisions and the advantages of SteraMist technology and products.
 
 
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On January 15, 2021, Dr. Halden Shane presented at the Needham Virtual Growth Conference while continuing to pursue and enhance SteraMist media presence across many platforms. Dr. Shane will be returning on May 18, 2021 (12:45pm – 1:25pm Eastern) as he presents at the 16th annual Needham virtual technology and media conference.
 
As conferences and tradeshows are reopening in the second half of 2021 for companies to exhibit live, TOMI will be attending multiple shows across the country with our new Vice Presidents of Sales in attendance. It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors. TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions.
 
Research Studies:
 
Due to the pandemic, there have been significant delays by U.S. regulatory agencies in approving new submissions, including TOMI's new 1% registration focusing on direct food and agricultural applications. The 1% label has been delayed by EPA due to the reallocation of staff resources responding to an influx of product submissions to deal with COVID-19 (TOMI successfully added Emerging Pathogen claims and was added to EPA list in March 2020.), significantly delaying all other PRIA actions, well documented delays caused by staffing vacancies, and the continuing prohibition of in person meetings.
 
We continue to work with our German aircraft partner and Boeing in a third-party test required for the aviation industry. We will incur no costs for this work as both testing partners are clients. We anticipate the testing will be completed in the second quarter of 2021.
 
TOMI has engaged HYGCEN Germany GmbH to perform a quantitative test of germ carriers for airborne room disinfection and testing of the effectiveness of a method for disinfecting room air to meet the new EU norm (standard) EN 17272. Certification that Binary Ionization Technology meets the new standard will continue to position iHP as the premier decontamination/disinfection technology available on the market today.
 
We continue to work with the Virginia State University Agricultural Research Station and its partner, Arkema on a food safety pilot study based on novel, nonthermal, and environmentally friendly technology to control foodborne pathogens on industrial hemp seed and strawberry as representative model foods. The study will investigate the efficacy of aerosolized hydrogen peroxide in inactivating foodborne pathogens – determining the optimum treatment conditions on microbial and physical quality of the two model products. We anticipate the pilot to be completed by the second quarter of 2021.
 
We are currently working with University of Virginia on two separate studies. First, we are working on a study on SteraMist’s efficacy against SARS-CoV-2, and we have observed preliminary successful results and are waiting for the final published paper. Second, we are working on a study against Adenovirus using the handheld SteraMist Surface Unit and testing spray and contact time variables, and we are waiting for the results. We anticipate the testing will be completed by the third quarter of 2021.
 
TOMI has partnered with the Department of Chemistry and Biochemistry of Texas Tech University to conduct a wide range of studies on spray pattern, deposition, and hydrogen peroxide content in order to compare our 1% label to other similar products on the market.
 
TOMI's long term relationship with USDA Agricultural Research Service continues to achieve results. In March 2021, an article entitled "Hydrogen peroxide residue on tomato, apple, cantaloupe, and Romaine lettuce after treatments with cold plasma-activated hydrogen peroxide” was accepted for publication in the Journal of Food Microbiology. TOMI has also begun discussions with another ARS facility to evaluate the benefits of iHP on blueberries to prevent rot and reduce post-harvest losses.
 
As previously reported for a couple years, we have participated in a large multi-year federal funded study, known as the “SHIELD study”, that compares hospital manual cleans to a SteraMist® mechanical clean. Preliminary results collected by the current hospitals in the study is showing a decrease in the transfernce of pathogens resulting in HAIs and Clostridium difficile infections in the rooms that used SteraMist® for their terminal clen, as compared to the rooms that have been manually cleaned. We are eager to report that enough data has been collected to complete the study in 2021, and we expect that data to be provided to the examiners with a published paper to soon follow.
 
 
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Registrations & Intellectual Property (IP):
 
          Our portfolio includes more than twenty (20) Utility Patent applications worldwide for both method and system claims on SteraMist® BIT, either published or undergoing prosecution.  Most recently, in November 2020, we were granted utility patents in Australia and Israel for our SteraMist® BIT technology.  In the recent past, we have obtained two related US utility patents giving us protection of our technology until the year 2038, and we are pursuing further claims to additional capabilities in on-going US and worldwide patent applications.  In May 2020, we filed a PCT application for further additional applications of SteraMist® BIT which were determined to be novel and inventive by the international search authority.
 
Further in 2020, we submitted utility patents in multiple countries which are all in the national stage for review under the patent prosecution highway for claims found novel and inventive by the international search authority. Once these are received, we will hold international acceptance for the inherited patents and our newly received patents. During 2020, we were awarded a design patent on our surface-mounted applicator device in the United States, China, Japan, Taiwan, and Korea. We have filed and have been granted or have pending acceptance on thirty-two (32) separate design patents for our: Decontamination Chamber(s), Decontamination Applicator, Decontamination Cart, Applicator, and Surface Mounted Applicator 90-Degree Device.  These patents are published around the world, including but not limited to United States, China, Hong Kong, Europe, United Kingdom, Singapore, Taiwan, Vietnam, Canada, South Korea, and Japan.
 
Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of March 1, 2021, we held a total of one hundred seventy-eight (178) trademarks (word and logo) registered or pending across the globe.  TOMI registers marks in seven (7) classes of specification of goods and services: Class 1 for Chemicals for Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power Operated Spraying Machines, Class 11 for Sterilizers for Medical Use and Air Purification, Class 35 for Business Consultation and Management Services, Class 37 for General Disinfecting Services, and Class 40 for Chemical Decontamination and Manufacturing Services.
 
Financial Operations Overview
 
Our financial position as of March 31, 2021 and December 31, 2020, respectively, was as follows:
 
 
March 31, 2021
 
 
December 31, 2020
 
 
 
Unaudited
 
 
 
 
 
Total shareholders’ equity
 $11,920,000 
 $13,203,000 
Cash and cash equivalents
 $3,946,000 
 $5,199,000 
Accounts receivable, net
 $3,743,000 
 $3,717,000 
Inventories
 $4,765,000 
 $3,782,000 
Prepaid expenses
 $316,000 
 $421,000 
Vendor Deposits
 $146,000 
 $389,000 
Other Receivables
 $- 
 $199,000 
Current liabilities
 $2,789,000 
 $2,203,000 
Long-term liabilities
 $1,342,000 
 $1,364,000 
Working Capital
 $10,128,000 
 $11,503,000 
 
During the quarter ended March 31, 2021, our debt and liquidity positions were affected by the following:
 
Net cash used in operations of $1,225,000.
 
 
 
 
 
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Results of Operations for the Quarter Ended March 31, 2021 Compared to the Quarter Ended March 31, 2020
 
 
 For the three months ended March 31,
 
 
Change
 
 
 
2021
 
 
2020
 
 
$
 
 
%
 
Revenue, Net
 $2,073,000 
 $7,053,000 
 $(4,980,000)
  -71%
Gross Profit
  1,235,000 
  4,488,000 
  (3,253,000)
  -72%
Total Operating Expenses (1)
  2,745,000 
  1,829,000 
  916,000 
  50%
Income (Loss) from Operations
  (1,510,000)
  2,659,000 
  (4,169,000)
 
NM
 
Total Other Income (Expense)
  (1,000)
  (40,000)
  39,000 
  -98%
Net Income (Loss)
 $(1,511,000)
 $2,619,000 
 $(4,130,000)
 
NM
 
Basic Net Income (Loss) per share
 $(0.09)
 $0.17 
 $(0.26)
 
NM
 
Diluted Net Income (Loss) per share
 $(0.09)
 $0.14 
 $(0.23)
 
NM
 
 
(1)
Includes $0 and $183,000 in non-cash equity compensation expense for the three months ended March 31, 2021 and 2020, respectively.
(2)
NM – Not Meaningful
 
Sales
 
During the three months ended March 31, 2021 and 2020, we had net revenue of approximately $2,073,000 and $7,053,000, respectively, representing a decrease in revenue of approximately $4,980,000 or 71%.
 
We experienced a decline in our revenue for the three months ended March 31, 2021 as compared to the same quarter in the prior year primarily due to the significant increase of demand caused by the onset of COVID-19 pandemic in March of 2020. We were positioned well to respond to the pandemic related spike in demand due to our inventory levels and increased production capacity, which led to substantial revenue growth in the first and second quarter of 2020. However, during second half of 2020 and early 2021, many of our established vertical clients were closed or required to reduce operation due to the impact of COVID-19 pandemic on their businesses. The markets that were negatively affected included our life sciences clients that were nonessential, University and privately owned vivarium labs, and many nonessential pharmaceutical research companies globally. In addition, the healthcare industry has shifted virtually all of its focus and resources in response to the pandemic and therefore substantially reduced elective surgical and clinical related services, resulting in limited non-essential onsite personnel. These trends made it more difficult for us to demo our equipment and execute our sales and marketing strategies.
 
As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities.
 
 
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Net Revenue
 
Product and Service Revenue
 
 
 For the three months ended March 31,
 
 
Change
 
 
 
2021
 
 
2020
 
 
$
 
 
%
 
SteraMist Product
 $1,661,000 
 $6,638,000 
 $(4,977,000)
  (75)%
Service and Training
  412,000 
  415,000 
  (3,000)
  (1