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.
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.
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.
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.
|
For the Three Months Ended March 31,
(Unaudited)
|
|
|
|
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
|
|
|
|
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)
|
|
|
|
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
|
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)
|
|
|
|
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)
|
|
|
|
United
States
|
$1,804,000
|
$3,569,000
|
International
|
269,000
|
3,484,000
|
Total
|
$2,073,000
|
$7,053,000
|
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As
of 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.
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)
|
|
Finished
goods
|
$4,396,528
|
$3,404,025
|
Raw
Materials
|
368,927
|
377,490
|
|
$4,765,455
|
$3,781,515
|
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)
|
|
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)
|
|
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
|
|
|
|
Approximate future
amortization is as follows:
Year
Ended
|
|
April 1 –
December 31, 2021
|
$7,000
|
December 31,
2022
|
10,000
|
|
10,000
|
|
10,000
|
|
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)
|
|
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
|
|
|
|
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:
|
|
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:
|
|
|
|
|
|
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.
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).
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:
|
|
|
|
|
|
|
|
Weighted Average Exercise Price
|
|
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:
|
|
|
|
|
Remaining
Contractual
Life in Years
|
|
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.
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)
|
|
|
|
Weighted Average Exercise Price
|
|
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:
|
|
|
|
|
Average Weighted
Remaining Contractual
Life in Years
|
|
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.
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
|
|
April 1 – December 31,
2021
|
$18,000
|
December 31,
2022
|
30,000
|
|
30,000
|
|
30,000
|
|
15,000
|
|
$123,000
|
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)
|
|
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)
|
|
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.
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.