TOMI Environmental Solutions, Inc. - Quarter Report: 2019 March (Form 10-Q)

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, 2019

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 000-09908

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Florida	59-1947988
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212
(Address of principal executive offices) (Zip Code)
(800) 525-1698
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

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 9, 2019, the registrant had 124,700,418 shares of common stock outstanding.

 

 

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019
TABLE OF CONTENTS

 

		Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		2
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements.	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk.	38
Item 4	Controls and Procedures.	38
PART II	OTHER INFORMATION
Item 1	Legal Proceedings.	39
Item 1A	Risk Factors.	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds.	39
Item 3	Defaults Upon Senior Securities.	39
Item 4	Mine Safety Disclosures.	39
Item 5	Other Information.	39
Item 6	Exhibits.	39
SIGNATURES		40
EXHIBIT INDEX		41

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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,” “estimate,” “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.

 

 

 

 

 

 

 

 

 

 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

ASSETS
Current Assets:	March 31, 2019 (Unaudited)	December 31, 2018
Cash and Cash Equivalents	$1,195,938	$2,004,938
Accounts Receivable - net	2,027,700	2,145,622
Inventories (Note 3)	2,393,188	2,682,014
Deposits	188,716	109,441
Prepaid Expenses	259,140	301,797
Total Current Assets	6,064,682	7,243,812
Property and Equipment – net (Note 4)	1,528,907	1,588,591
Other Assets:
Intangible Assets – net (Note 5)	1,143,439	1,235,816
Operating Lease - Right of Use Asset (Note 6)	703,823	-
Capitalized Software Development Costs (Note 7)	125,704	-
Other Assets	76,309	11,395
Total Other Assets	2,049,275	1,247,211
Total Assets	$9,642,863	$10,079,614
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$657,798	$1,133,649
Accrued Expenses and Other Current Liabilities (Note 12)	580,426	415,199
Accrued Officers Compensation	29,792	70,000
Accrued Interest (Note 8)	16,667	66,667
Customer Deposits	-	1,486
Current Portion of Long-Term Operating Lease	23,436	-
Deferred Rent	-	13,215
Total Current Liabilities	1,308,119	1,700,216
Long-Term Liabilities:
Long-Term Operating Lease, Net of Current Portion (Note 6)	1,089,316	-
Deferred Rent and Tenant Improvement Allowances	-	401,734
Convertible Notes Payable, net of discount of $0 and $17,534
at March 31, 2019 and December 31, 2018, respectively (Note 8)	5,000,000	4,982,466
Total Long-Term Liabilities	6,089,316	5,384,200
Total Liabilities	7,397,435	7,084,416
Commitments and Contingencies	-	-
Shareholders’ Equity:
Cumulative Convertible Series A Preferred Stock;
par value $0.01 per share share, 1,000,000 shares authorized; 510,000 shares issued
and outstanding at March 31, 2019 and December 31, 2018	5,100	5,100
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, 2019 and December 31, 2018	-	-
Common stock; par value $0.01 per share, 200,000,000 shares authorized;
124,690,418 and 124,290,418 shares issued and outstanding
at March 31, 2019 and December 31, 2018, respectively.	1,246,904	1,242,904
Additional Paid-In Capital	43,129,467	42,948,705
Accumulated Deficit	(42,136,043)	(41,201,511)
Total Shareholders’ Equity	2,245,428	2,995,198
Total Liabilities and Shareholders’ Equity	$9,642,863	$10,079,614

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

	For The Three Months Ended
	March 31,
	2019	2018
Sales, net	$1,252,658	$1,312,466
Cost of Sales	493,310	491,659
Gross Profit	759,348	820,807
Operating Expenses:
Professional Fees	105,481	106,458
Depreciation and Amortization	176,845	162,738
Selling Expenses	441,670	204,005
Research and Development	92,577	132,487
Equity Compensation Expense (Note 9)	80,917	12,685
Consulting Fees	35,006	35,026
General and Administrative	694,880	663,887
Total Operating Expenses	1,627,376	1,317,287
Loss from Operations	(868,028)	(496,480)
Other Income (Expense):
Amortization of Debt Discounts	(17,534)	(8,037)
Interest Income	1,030	1,198
Interest Expense	(50,000)	(60,000)
Total Other Income (Expense)	(66,504)	(66,839)
Net Loss	$(934,532)	$(563,319)
Loss Per Common Share
Basic and Diluted	$(0.01)	$(0.00)
Basic and Diluted Weighted Average Common Shares Outstanding	124,659,307	122,229,959

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(UNAUDITED)

 

	Series A Preferred		Common Stock
	Shares	Amount	Shares	Amount	Additional Paid in Capital	Accumulated Deficit	Total Shareholders’ Equity
Balance at December 31, 2018	510,000	$5,100	124,290,418	$1,242,904	$42,948,705	$(41,201,511)	$2,995,198
Equity Compensation					140,762		140,762
Common Stock Issued for Services Provided			400,000	4,000	40,000		44,000
Net Loss for the three months ended March 31, 2019						(934,532)	(934,532)
Balance at March 31, 2019	510,000	$5,100	124,690,418	$1,246,904	$43,129,467	$(42,136,043)	$2,245,428

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

	For the Three Months Ended
	March 31,
	2019	2018
Cash Flow from Operating Activities:
Net Loss	$(934,532)	$(563,319)
Adjustments to Reconcile Net Loss to
Net Cash Used In Operating Activities:
Depreciation and Amortization	176,845	162,738
Lease Expense	39,644	-
Amortization of Debt Discount	17,534	8,037
Equity Compensation Expense	80,917	13,590
Value of Equity Issued for Services	44,000	30,000
Reserve for Bad Debt	(105,000)	-
Changes in Operating Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable	222,922	(394,453)
Inventory	288,827	245,271
Prepaid Expenses	6,792	(6,266)
Deposits	(79,275)	(15,714)
Other Assets	(64,914)	-
Increase (Decrease) in:
Accounts Payable	(475,851)	(116,927)
Accrued Expenses	225,072	20,725
Accrued Interest	(50,000)	(64,000)
Accrued Officer Compensation	(40,208)	-
Deferred Rent	-	(781)
Customer Deposits	(1,486)	(1,484)
Net Cash Used in Operating Activities	(648,714)	(682,583)
Cash Flow From Investing Activities:
Capitalized Software Costs	(125,704)	-
Purchase of Property and Equipment	(34,582)	-
Net Cash Used in Investing Activities	(160,286)	-

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

CONDENDSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED

 (UNAUDITED)

 

 

	For the Three Months Ended March 31,
	2019	2018
Cash Flow From Financing Activities:	-	-
(Decrease) In Cash and Cash Equivalents	(809,000)	(682,583)
Cash and Cash Equivalents - Beginning	2,004,938	4,550,003
Cash and Cash Equivalents – Ending	$1,195,938	$3,867,420
Supplemental Cash Flow Information:
Cash Paid For Interest	$100,000	$124,000
Cash Paid for Income Taxes	$800	$800
Non-Cash Investing and Financing Activities:
Right of Use Asset Arising from Adoption of ASC 842	$714,421	$-
Warrants and Options as Consideration for Accrued Expenses	$59,845	$-

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

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 its premier Binary Ionization Technology® (BIT™) platform, under which it manufactures, licenses, services and sells its SteraMist™ brand of products, including SteraMist™ BIT™, a hydrogen peroxide-based mist and fog.

 

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.

 

TOMI’s 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, and athletic facilities. TOMI products are also used in single-family homes and multi-unit residences.

 

TOMI’s mission is to help its customers create a healthier world through its product line in its divisions (Healthcare, Life Sciences, TOMI Service Network and Food Safety).

 

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 the Company, 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 the Company believes 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 the audited financial statements of the Company for the year ended December 31, 2018 and notes thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on April 1, 2019. The Company follows 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 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:

 

 

Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and convertible debt. All these items were determined to be Level 1 fair value measurements.

 

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. The recorded value of convertible debt approximates its fair value as the terms and rates approximate market rates (See Note 8).

 

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 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 them 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, 2019 and 2018 was $58,490 and $0, respectively.

 

At March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was $195,000 and $300,000, respectively. 

 

 

As of March 31, 2019 and December 31, 2018, two customers accounted for 41% and 37% of accounts receivable, respectively.

 

Two customers accounted for 45% of net revenue for the three months ended March 31, 2019 and three customers accounted for 33% of net revenue for the three months ended March 31, 2018.

 

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 $100,000 as of March 31, 2019 and December 31, 2018.

 

Property and Equipment

 

We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter.

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASC 842”), Leases, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASC 842 as of January 1, 2019 using the modified retrospective basis with a cumulative effect adjustment as of that date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the new standard to all comparative periods presented.

 

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of March 31, 2019.

 

We have elected not to present short-term leases on the 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.

 

Adoption of the new lease standard on January 1, 2019 had a material impact on our interim unaudited condensed consolidated financial statements. The most significant impacts related to the recognition of right-of-use ("ROU") asset of $714,421 and lease liability of $678,556 for our operating lease on the consolidated balance sheet. We also reclassified prepaid expenses of $35,865 and deferred rent balance, including tenant improvement allowances, and other liability balances of $414,949 relating to our existing lease arrangements as of December 31, 2018, into the ROU asset balance as of January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The standard did not materially impact our consolidated statement of operations and consolidated statement of cash flows.

 

 

The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:

 

	Balances at December 31, 2018	Effect of Adoption of New Lease Standard	Balances at January 1, 2019
Assets
Prepaid Expenses	$301,797	$(35,865)	$265,932
Operating Lease Right of Use Asset	$-	$714,421	$714,421
Liabilities
Deferred Rent	$13,215	$(13,215)	$-
Current Portion of Long-Term Operating Lease	-	-	-
Deferred Rent and Tenant Improvement Allowances	$401,734	$(401,734)	$-
Long-Term Operating Lease, Net of Current Portion	-	$1,093,505	$1,093,505
Shareholders' Equity
Accumulated Deficit	$(41,201,511)	$-	$(41,201,511)

 

Capitalized Software Development Costs

 

In accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed, the Company expenses 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.

 

Accounts Payable 

As of March 31, 2019, two vendors accounted for approximately 40% of accounts payable. As of December 31, 2018, three vendors accounted for approximately 63% of accounts payable

One vendor accounted for approximately 67% and 70% of cost of sales for the three months ended March 31, 2019 and 2018, respectively.

Accrued Warranties

 

Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturer assumes the warranty against product defects for one year 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, 2019 and December 31, 2018, our warranty reserve was $30,000 (See Note 13).

 

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, 2019 and December 31, 2018. 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 Loss Per Share

 

Basic net loss per share is computed by dividing the Company’s net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted 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, 2019 consisted of 9,259,250 shares of common stock from convertible debentures, 26,800,611 shares of common stock issuable upon exercise of outstanding warrants, 620,000 shares of common stock issuable upon outstanding options and 510,000 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

 

Potentially dilutive securities as of March 31, 2018 consisted of 11,111,100 shares of common stock from convertible debentures, 35,251,411 shares of common stock issuable upon exercise of outstanding warrants, 320,000 shares of common stock issuable upon outstanding options and 510,000 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

 

Diluted net loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if such additional shares were dilutive. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 37.2 million and 36.6 million shares of common stock were outstanding at March 31, 2019 and December 31, 2018, respectively, but were excluded from the computation of diluted net loss per share due to the anti-dilutive effect on net loss per share.

 

	For the Three Months Ended March 31, (Unaudited)
	2019	2018
Net loss	$(934,532)	$(563,319)
Adjustments for convertible debt - as converted
Interest on convertible debt	50,000	60,000
Amortization of debt discount on convertible debt	17,534	8,037
Net loss attributable to common shareholders	$(866,998)	$(495,282)
Weighted average number of shares of common stock outstanding:
Basic and diluted	124,659,307	122,229,959
Net loss attributable to common shareholders per share:
Basic and diluted	$(0.01)	$(0.00)

 

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), when there is persuasive evidence that an arrangement exists, title and risk of loss have passed, delivery has occurred, or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.  Title and risk of loss generally pass to our customers upon shipment.

 

 

Disaggregation of Revenue

 

The following table presents our revenues disaggregated by revenue source.

 

Net Revenue

 

Product and Service Revenue

 

	For the three months ended March 31, (Unaudited)
	2019	2018
SteraMist Product	$1,029,000	$1,092,000
Service and Training	224,000	220,000
Total	$1,253,000	$1,312,000

 

Revenue by Geographic Region

 

	For the three months ended March 31, (Unaudited)
	2019	2018
United States	$1,136,000	$945,000
International	117,000	367,000
Total	$1,253,000	$1,312,000

 

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 or services.

 

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. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

 

Contract Balances

 

As of March 31, 2019, and December 31, 2018 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 using the Black Scholes model in accordance with FASB ASC 718, “Compensation—Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense cost 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 (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 5,000,000 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 the Company at the time of the award; awards under the 2016 Plan are expressly conditioned upon such agreements. For the three months ended March 31, 2019 and 2018, we issued 400,000 and 300,000 shares of common stock, respectively, out of the 2016 Plan.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $250,000 at times during the year.

 

Long-Lived Assets Including Acquired Intangible Assets

 

We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three months ended March 31, 2019 and 2018.

 

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, 2019 and 2018 were approximately $40,000 and $54,000, 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, 2019 and 2018, research and development expenses were approximately $93,000 and $132,000, respectively.

 

 

Shipping and Handling Costs

 

We include shipping and handling costs relating to the delivery of products directly from vendors to the Company in cost of sales. Other shipping and handling costs, including third-party delivery costs relating to the delivery of products to customers, are classified as a general and administrative expense. Shipping and handling costs included in general and administrative expense were approximately $39,000 and $51,000 for the three months ended March 31, 2019 and 2018, 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 January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, to simplify the test for goodwill impairment by removing Step 2. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of ASU No. 2017-04 is prospective.

 

NOTE 3. INVENTORIES

 

Inventories consist of the following at:

 

	March 31, 2019 (Unaudited)	December 31, 2018
Finished goods	$2,493,188	$2,782,014
Inventory Reserve	(100,000)	(100,000)
	$2,393,188	$2,682,014

 

NOTE 4. PROPERTY AND EQUIPMENT

 

    Property and equipment consist of the following at:

 

	March 31, 2019 (Unaudited)	December 31, 2018
Furniture and fixtures	$280,042	$277,976
Equipment	1,322,910	1,300,139
Vehicles	60,703	60,703
Computer and software	153,324	143,579
Leasehold improvements	355,898	355,898
Tenant Improvement Allowance	405,000	405,000
	2,577,877	2,543,295
Less: Accumulated depreciation	1,048,970	954,704
	$1,528,907	$1,588,591

 

 

For the three months ended March 31, 2019 and 2018, depreciation was $84,468 and $70,361, respectively. For the three months ended March 31, 2019, amortization of tenant improvement allowance in the amount of $9,798 was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations.

 

NOTE 5. 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 $92,377 and $92,377 for the three months ended March 31, 2019 and 2018, respectively.

 

Definite life intangible assets consist of the following:

 

	March 31, 2019 (Unaudited)	December 31, 2018
Intellectual Property and Patents	$2,848,300	$2,848,300
Less: Accumulated Amortization	2,201,653	2,109,276
Intangible Assets, net	$646,647	$739,024

 

Indefinite life intangible assets consist of the following:

 

Trademarks	$496,792	$496,792
Total Intangible Assets, net	$1,143,439	$1,235,816

 

Approximate amortization over the next five years is as follows:

 

Year Ended:	Amount
April 1 – December 31, 2019	$277,000
December 31, 2020	370,000
December 31, 2021	-
December 31, 2022	-
December 31, 2023	-
	$647,000

 

NOTE 6. 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, 2019 (Unaudited)
Assets:
Operating lease right-of-use asset	$703,823
Liabilities:
Current Portion of Long-Term Operating Lease	$23,436
Long-Term Operating Lease, Net of Current Portion	1,089,316
	$1,112,752

 

The components of lease expense are as follows within our condensed consolidated statement of operations:

 

General and Administrative Expenses:	Three Months Ended March 31, 2019 (Unaudited)
Operating lease expense	$39,644

 

Other information related to leases where we are the lessee is as follows:

 

		March 31, 2019 (Unaudited)
Weighted-average remaining lease term:
Operating leases		10.00 years
Discount rate:
Operating leases		7.00%

 

Supplemental cash flow information related to leases where we are the lessee is as follows:

 

	Three Months Ended March 31, 2019 (Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:	$-

 

 

As of March 31, 2019, the maturities of our operating lease liability are as follows:

 

Year Ended:	Operating Lease
April 1 - December 31, 2019	$65,753
December 31, 2020	146,688
December 31, 2021	151,088
December 31, 2022	155,621
December 31, 2023	160,290
Thereafter	910,280
Total minimum lease payments	1,589,720
Less: Interest	476,968
Present value of lease obligations	1,112,752
Less: Current portion	23,436
Long-term portion of lease obligations	$1,089,316

 

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:

 

Year Ended:	Operating Lease
December 31, 2019	$102,000
December 31, 2020	147,000
December 31, 2021	151,000
December 31, 2022	156,000
December 31, 2023	160,000
Thereafter	923,000
	$1,639,000

 

NOTE 7. 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. As of March 31, 2019, a total of $125,704, of development costs are reported on our condensed consolidated balance sheet.

 

NOTE 8. CONVERTIBLE DEBT

 

In March and May 2017, we closed a private placement transaction in which we issued to certain accredited investors unregistered senior callable convertible promissory notes (the “Notes”) and three-year warrants to purchase an aggregate of 999,998 shares of common stock at an exercise price of $0.69 per share in exchange for aggregate gross proceeds of $6,000,000. The Notes bear interest at a rate of 4% per annum. $5,300,000 in principal was originally scheduled to mature on August 31, 2018 and $700,000 in principal was originally scheduled to mature on November 8, 2018, unless earlier redeemed, repurchased or converted. The Notes are convertible at the option of the holder into common stock at a conversion price of $0.54 per share. Subsequent to September 1, 2017, we may redeem the Notes that are scheduled to mature on August 31, 2018 at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date.  Prior to November 8, 2018, we may redeem the Notes that are scheduled to mature on such date at any time prior to maturity at a price equal to 100% of the outstanding principal amount of the Notes to be redeemed, plus accrued and unpaid interest as of the redemption date. Interest on the Notes is payable semi-annually in cash on February 28 and August 31 of each year, beginning on August 31, 2017. Interest expense related to the Notes for the three months ended March 31, 2019 and 2018 was $50,000 and $60,000, respectively.

 

 

The warrants were valued at $62,559 using the Black-Scholes pricing model with the following assumptions: expected volatility: 104.06% –111.54%; expected dividend: $0; expected term: 3 years; and risk-free rate: 1.49%–1.59%. We recorded the warrants’ relative fair value of $61,904 as an increase to additional paid-in capital and a discount against the related Notes.

 

The debt discount was amortized over the life of the Notes using the effective interest method. Amortization expense for the three months ended March 31, 2019 and 2018, was $17,534 and $8,037, respectively.

 

In February and March 2018, we extended the maturity date of the Notes— we extended the maturity date to April 1, 2019 for $5,300,000 of principal on the Notes and to June 8, 2019 for the remaining $700,000 Note. No additional consideration was paid or accrued by us. The stated rate of the Notes was unchanged, and the estimated fair value of the new debt approximates its carrying amount (principal plus accrued interest at the date of the modification). We determined that the modification of these Notes is not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments”.

 

In May 2018, we offered a noteholder the option to convert its Note at a reduced conversion price of $0.46. The noteholder accepted and converted at such price. Pursuant to the terms of the conversion offer, an aggregate of $700,000 of principal and $5,212 of accrued interest outstanding under the Note were converted into 1,877,960 shares of common stock.  We recognized an induced conversion cost of $57,201 related to the conversion.

 

In December 2018, a noteholder redeemed a note with a principal balance of $300,000 in exchange for $150,000 in cash. We recognized a gain on redemption of convertible note income in the amount of $150,000 as a result of the transaction.

 

On March 30, 2019, the two-remaining noteholders agreed to extend the maturity dates of their notes totaling $5,000,000 to April 3, 2020. As part of the extensions, we agreed that if we do not make payment on or before the new maturity dates, after five (5) days written notice, the holders will have the right, but not the obligation, to convert the notes into our common shares at a conversion price of $0.11 per share or a total of 45,454,545 shares. All other provisions of the notes remain unchanged. We determined that the modification of these Notes is not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments”.

 

Convertible notes consist of the following at:

 

	March 31, 2019 (Unaudited)	December 31, 2018
Convertible notes	$5,000,000	$5,000,000
Initial discount	(53,873)	(53,873)
Accumulated amortization	53,873	36,339
Convertible notes, net	$5,000,000	$4,982,466

 

NOTE 9. 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 of the Company 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.

 

 

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, 2019 and December 31, 2018, there were 510,000 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, 2019 and December 31, 2018, 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, 2018, we issued 300,000 shares of common stock valued at $30,000 to members of our board of directors (see Note 11). 

 

During the three months ended March 31, 2019, we issued 400,000 shares of common stock valued at $44,000 to members of our board of directors (see Note 11). 

 

Stock Options

 

In January 2018, we issued options to purchase an aggregate of 100,000 shares of common stock to our Chief Operating Officer, valued at $11,780. The options have an exercise price of $0.12 per share and expire in January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: 146%; dividend yield: 0%; zero coupon rate: 2.27%; and a life of 5 years.

 

In January 2018, we issued options to purchase an aggregate of 20,000 shares of common stock to our Scientific Advisory Board members, valued at $1,810 in total. The options have an exercise price of $0.10 per share and expire in January 2028. The options were valued using the Black-Scholes model using the following assumptions: volatility: 147%; dividend yield: 0%; zero coupon rate: 2.41%; and a life of 10 years.

 

In January 2019, pursuant to an employment agreement, we issued options to purchase an aggregate of 250,000 shares of common stock to our Chief Operating Officer, valued at $24,694. The options have an exercise price of $0.11 per share and expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 144%; dividend yield: 0%; zero coupon rate: 2.47%; and a life of 5 years. The value of the options was expensed in the fourth quarter of 2018 and included in accrued expenses at December 31, 2018.

 

In January 2019, we issued options to purchase an aggregate of 50,000 shares of common stock to our Chief Financial Officer, valued at $4,483. The options have an exercise price of $0.10 per share and expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 143%; dividend yield: 0%; zero coupon rate: 2.58%; and a life of 5 years.

 

 

The following table summarizes stock options outstanding as of March 31, 2019 and December 31, 2018:

 

	March 31, 2019 (Unaudited)		December 31, 2018
	Number of Options	Weighted Average Exercise Price	Number of Options	Weighted Average Exercise Price
Outstanding, beginning of period	320,000	$0.52	200,000	$0.76
Granted	300,000	$0.11	120,000	$0.12
Exercised	—	—	—	—
Outstanding, end of period	620,000	$0.32	320,000	$0.52

 

Options outstanding and exercisable by price range as of March 31, 2019 were as follows:

 

Outstanding Options		Average Weighted	Exercisable Options
Range	Number	Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$0.05	20,000	1.78	20,000	$0.05
$0.10	70,000	5.97	70,000	$0.10
$0.11	250,000	4.76	250,000	$0.11
$0.12	100,000	3.78	100,000	$0.12
$0.27	40,000	5.76	40,000	$0.27
$0.55	100,000	6.85	100,000	$0.55
$2.10	40,000	0.76	40,000	$2.10
	620,000	4.79	620,000	$0.32

 

Stock Warrants

 

We did not issue any warrants during the three months ended March 31, 2018.

 

               In January 2019 we issued a warrant to purchase 1,000,000 shares of common stock to the CEO at an exercise price of $0.10 per share pursuant to an employment agreement. The warrant was valued at $89,654 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by the CEO with the following assumptions: volatility, 143%; expected dividend yield, 0%; risk free interest rate, 2.58%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.09.

 

               In January 2019 we issued a warrant to purchase 250,000 shares of common stock to an employee at an exercise price of $0.12 per share. The warrant was valued at $21,931 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 148%; expected dividend yield, 0%; risk free interest rate, 2.55%; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $0.09. The value of the warrants was expensed in the fourth quarter of 2018 and included in accrued expenses at December 31, 2018.

 

 

The following table summarizes the outstanding common stock warrants as of March 31, 2019 and December 31, 2018:

 

	March 31, 2019 (Unaudited)		December 31, 2018
	Number of Warrants	Weighted Average Exercise Price	Number of Warrants	Weighted Average Exercise Price
Outstanding, beginning of period	26,550,611	$0.34	35,501,411	$0.33
Granted	1,250,000	0.10	250,000	0.08
Exercised	-	-	-	-
Expired	(1,000,000)	(0.30)	(9,200,800)	(0.30)
Outstanding, end of period	26,800,611	$0.33	26,550,611	$0.34

 

Warrants outstanding and exercisable by price range as of March 31, 2019 were as follows: 

 

Outstanding Warrants			Exercisable Warrants
Exercise Price	Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$0.08	250,000	4.65	250,000	$0.08
$0.10	1,265,000	4.51	1,265,000	$0.10
$0.12	3,750,000	3.67	3,750,000	$0.12
$0.12	4,000,000	0.54	4,000,000	$0.12
$0.17	10,000	3.57	10,000	$0.17
$0.27	250,000	2.75	250,000	$0.27
$0.29	10,125,613	1.55	10,125,613	$0.29
$0.30	2,300,000	1.39	2,300,000	$0.30
$0.32	250,000	2.50	250,000	$0.32
$0.42	250,000	2.25	250,000	$0.42
$0.50	250,000	2.00	250,000	$0.50
$0.55	100,000	1.83	100,000	$0.55
$0.69	999,998	0.97	999,998	$0.69
$1.00	3,000,000	1.09	3,000,000	$1.00
	26,800,611	1.81	26,800,611	$0.33

 

There were no unvested warrants outstanding as of March 31, 2019.

 

NOTE 10. 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, 2019, and December 31, 2018, there were no claims against us for product liability.

 

NOTE 11. CONTRACTS AND AGREEMENTS

 

Agreements with Directors

 

In December 2017, we increased the annual board fee to directors 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, 2018, we issued an aggregate of 300,000 shares of common stock that were valued at $30,000 to members of our board of directors.

 

For the three months ended March 31, 2019, we issued an aggregate of 400,000 shares of common stock that were valued at $44,000 to members of our board of directors.

 

Other Agreements

 

In June 2015, we launched the TOMI Service Network (“TSN”). The TSN is a national service network composed of existing full-service restoration industry specialists that have entered into licensing agreements with us to become Primary Service Providers (“PSPs”). The licensing agreements grant protected territories to PSPs to perform services using our SteraMist™ platform of products and also provide for potential job referrals to PSPs whereby we are entitled to referral fees. Additionally, the agreement provides for commissions due to PSPs for equipment and solution sales they facilitate to other service providers in their respective territories. As part of these agreements, we are obligated to provide to the PSPs various training, ongoing support and facilitate a referral network call center. As of March 31, 2019, we had entered into 89 licensing agreements in connection with the launch of the TSN. The licensing agreements contain fixed price minimum equipment and solution orders based on the population of the territories granted pursuant to the licensing agreements. The nature and terms of our TSN agreements may represent multiple deliverable arrangements. Each of the deliverables in these arrangements typically represent a separate unit of accounting.

 

NOTE 12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following at:

	March 31, 2019 (Unaudited)	December 31, 2018
Commissions	$271,750	$136,631
Payroll and related costs	142,497	144,359
Director fees	41,250	41,250
Sales Tax Payable	30,973	11,296
Accrued warranty (Note 13)	30,000	30,000
Other accrued expenses	63,956	51,663
Total	$580,426	$415,199

 

 

NOTE 13. ACCRUED WARRANTY

 

Our manufacturer assumes warranty against product defects for one year from the sale to customers, 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.

 

 

	March 31, 2019 (Unaudited)	December 31, 2018
Beginning accrued warranty costs	$30,000	$5,000
Provision for warranty expense	1,324	47,454
Settlement of warranty claims	(1,324)	(22,454)
Ending accrued warranty costs	$30,000	$30,000

 

NOTE 14. CUSTOMER CONCENTRATION

 

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s accounts receivable.

 

As of March 31, 2019 and December 31, 2018, two customers accounted for 41% and 37% of accounts receivable, respectively.

 

Two customers accounted for 45% of net revenue for the three months ended March 31, 2019 and three customers accounted for 33% of net revenue for the three months ended March 31, 2018.

 

NOTE 15. 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.

 

In April 2019, TOMI entered into a distribution agreement with an Israeli company, Cleancor Technologies Ltd., an advanced solution company for the industrial cleaning and repair of water and fire damages.

 

In April 2019, we secured product registration for our SteraMist® BIT™ Solution in Israel.

 

In May 2019, we recorded a sale of over $400,000 for the Kansas Department of Health in the United States.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

 

Overview

 

TOMI Environmental Solutions, Inc. (“TOMI”, “we” and “our”) 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/fog.

 

TOMI’s cold plasma technology produces ionized Hydrogen Peroxide (iHP™, a mist/fog consisting of Reactive Oxygen Species, mainly hydroxyl radicals (“.OH”). This technology converts TOMI’s BIT™ solution, which contains only one active ingredient, a low-percentage hydrogen peroxide solution to .OH by passing it through an atmospheric cold plasma arc.

 

In response to the 2001 Anthrax spore attacks, the United States Defense Advanced Research Projects Agency (“DARPA”) and a leading defense company, Titan Corporation, developed BIT™ to defend against chemical and biological agents under a DARPA grant. In June 2005, L-3 Communications, Inc. (“L-3 Communications”) a leading defense company, acquired the technology through the acquisition of Titan Corporation. In 2011, TOMI recognized the importance of this disruptive and innovative technology and, after two years of negotiations, won the right to purchase the technology from L-3 Communications. Subsequently, we began the process of registering BIT™ with the Environmental Protection Agency (“EPA”), using good laboratory practice testing. TOMI introduced SteraMist® to the commercial market in June 2013, using our inherited and pre-existing EPA mold label. In June 2015, we successfully registered SteraMist® BIT™ as a hospital-healthcare disinfectant and broad-spectrum general use disinfectant for use as a misting/fogging agent, at which time our technology became the first EPA-registered hospital-healthcare disinfectant solution and equipment on the market. TOMI proudly maintains this registration and we continuously update our label with additional pathogens.

 

Markets

 

TOMI’s SteraMist® products are designed to address a panoply of industries using iHP™. Our operations are organized into four main divisions based on our current target industries: Hospital-Healthcare, Life Sciences, TOMI Service Network and Food Safety.

 

Products

 

We continue to offer our customers a wide range of innovative products designed to be easily incorporated into their existing disinfection and decontamination procedures. In addition, we offer equipment installations, qualifications, and performance maintenance needs all of which are structured to address iHP® service disinfection and decontamination needs globally.

 

 

Divisions

 

Hospital-Healthcare

 

TOMI currently counts 42 hospital-healthcare facilities as customers, with an expanding number each year. In 2018, TOMI launched the E-Z SteraMist® Disinfection Cart, an all-in-one cart that houses our handheld point-and-spray SteraMist® Surface Unit as well as accompanying supplies. This product is designed to make the terminal cleaning process of patient rooms more efficient than traditional manual cleaning methods. We believe that our E-Z SteraMist® Disinfection Cart will allow our customers within the Hospital-Healthcare industry to address the growing concern regarding the increasing high level of transference of pathogens including multiple drug resistant organisms (MDRO’s) leading to HAI’s from hospital and healthcare related environmental surfaces and equipment to patients and healthcare workers.

 

Life Sciences

 

TOMI’s SteraMist®. Environment System, iHP Decontamination Complete Room, SteraMist® Select Surface Unit, iHP™ implementation to decontamination chambers and cage washers, and our iHP® Service Division, are designed to provide a complete room solution to address the regulatory inspections of disinfecting/decontaminating and validation processes within the life sciences industry.

 

TOMI Service Network

 

TSN is our network comprised of outside professionals who are exclusively licensed and trained to use the SteraMist® products. TSN sells, trains and services professional remediation companies in the use of SteraMist®. These companies specialize in mold abatement, water damage (including damage from CAT 1 though 3 water loss) and fire damage, as well as professional specialists that are certified and practice in the area of forensic restoration. Currently, TSN is comprised of companies throughout the United States and Canada. TSN members use SteraMist® as a standalone service as well as incorporating our products into their existing business models. TOMI derives a continuous revenue stream from our TSN customers through recurring purchases of our BIT™ solution.

 

Our TSN network continues to grow and currently the total number of TSN provider contracts fully executed to date is eighty-nine (89), expanding our network membership across thirty-five (35) U.S. States and two (2) Canadian provinces.  Our service providers have over one hundred and fifty (150 ) SteraMist® with BIT technology units in the field allowing for rapid deployment for use in the control of a biological outbreak and border security nationally and internationally.

 

Food Safety

 

Food Safety is becoming one of our largest targeted markets, as we believe it presents a clear potential for substantial growth. This is in light of the implementation and enforcement of new and existing rules in the United States under the FDA Food Safety Modernization Act and in Canada under the Safe Food for Canadians Act and the Safe Food for Canadians Regulations, the latter two of which became effective in January 2019. This is in part due to this increased focus on concerns within the food safety industry in North America and abroad. We have consultants submitting to the EPA and FDA a request to expand our current labels from the treatment of food processing machinery, restaurants and food contact areas, to include direct food and crop applications. This market is rapidly developing for TOMI with the assistance of our co-marketing partner Arkema, a division of Total S.A., a French multinational integrated oil and gas company.

 

We intend to target the following segments, with an initial emphasis on the profitable organic market:

 

 

In each area, our main objective is to prevent and/or minimize food decay without utilizing harsh chemicals that leave toxic residues. This could create an opportunity to supplement, or replace, current pesticides and fungicides currently being used by these industry leaders.

 

 

Business Highlights and Recent Events

 

Research Studies & Product Development

 

We continue to participate in a large study, a “SHIELD study”, that compares hospital manual cleans to a SteraMist® mechanical clean. This study is being conducted at Los Angeles Public Health Hospitals; UCLA Olive View Medical Center, Harbor-UCLA Medical Center. Preliminary results have shown that there has been a significant decrease in the transference of pathogens resulting in HAIs and C. difficile infections in the rooms that used SteraMist® for their terminal clean, as compared to the rooms that have been manually cleaned. Future results will be released as obtained from the study’s lead investigators, which we believe will expand our presence in the hospital healthcare market.

 

In the first quarter of 2019, we also focused on improving our SteraMist Environment System and the development of our own proprietary software that will be integrated into the next generation of the Environment System. The new software will improve communication between our equipment and the end user’s system, provide improved reporting results and simplify the overall usage of the system itself. During the first quarter of 2019, we reached feasibility with the software being developed.

 

We continue to focus on providing resources towards additional efficacy studies, iHP™ applications, and expansion into new use sites and smaller enclosures. In March of 2019, we delivered an iHP Mobile Decontamination Chamber for the Pfizer facility in Sanford, North Carolina. This first model was custom designed to the facility’s specifications and requirements to decontaminate tools and calibration equipment. With the design of this custom unit, TOMI is excited to expand on this design by manufacturing a new product line not only for its Life Sciences, but its Hospital-HealthCare and Food Safety divisions.

 

We continue to evaluate product validation across verticals which include but are not limited to: Life Science -studies on monkeypox and pinworms. Healthcare - studies on resistant TB and C. auris a deadly Japanese fungus plaguing our healthcare system worldwide. We currently are registered by the EPA for treatment of rooms infected with C. auris because of our EPA status on list K and C. diff claim but many international countries want a specific claim for C. auris. TSN - mycotoxins the potential allergen left after treating residential and commercial building for mold. Food safety - approval for direct food use, we are registering a lower percentage hydrogen peroxide product for direct food spray use and continuing our testing in the cannabis industry to control many of the pathogens affecting their industry which is quickly becoming a global industry with plaguing mold issues.

 

Registrations & Intellectual Property (IP):

 

In January 2019, TOMI received a no objection letter from Canada, amending its BIT™ Solution registration to include Salmonella and Norovirus. Our Canadian label now holds similar efficacy claims with our U.S. EPA label.

 

In February 2019, we added our Canadian label to the Organic Materials Review Institute (“OMRI”) certifying that our product meets the Canadian organic standards. 

 

In March 2019, TOMI and its new customer in Brisbane, Australia who services critical environments with iHP® registered with the Australian Therapeutic Goods Association and received a client identification number.

 

TOMI has been actively pursuing registration in mainland China for 24 months. We have now successfully passed the Chinese CDC requirements for registration and have hired a CDC consultant to pass the flame off to and carry the registration flame forward. Also, we have been shoring up our trademarks for SteraMist China and registering all our new patents. We have identified a Chinese customer that we expect will generate revenue upon receipt of the Chinese CDC registration in 2019.

 

TOMI’s technology and its solution through its Israeli partner is registered by the State of Israel, Minister of Health’s Medical Technology, Information and Research Division under the Medical Device Department.

 

 

Operations:

 In January 2019, TOMI and Arkema Inc. a global leader in the hydrogen peroxide industry entered into an exclusive global co-marketing and supply agreement. The agreement provides that the parties will develop the market for TOMI’s technology using our SteraMist brand of products for food safety applications, improving the speed and effectiveness of disinfection solutions to the industry.

 

In February 2019, TOMI entered into a distribution agreement with Ster-Pharma Cleaning BV, a specialized company in Disinfecting & Sterilizing Cleanrooms and Operating Rooms in the Netherlands.

 

In March 2019, we were audited by Pfizer Global Supply Manufacturing and Supplier Quality Assessments and were reported to be “Acceptable”, allowing us to continue expanding SteraMist® implementation into Pfizer facilities. In 2019, management further focused and allocated resources towards expanding quality control procedures and protocols based on recommendations received during the audit.

 

Financial Operations Overview

 

Our financial position as of March 31, 2019 and December 31, 2018 was as follows:

 

	March 31, 2019 (Unaudited)	December 31, 2018
Total shareholders’ equity	$2,245,000	$2,995,000
Cash and cash equivalents	$1,196,000	$2,005,000
Accounts receivable, net	$2,028,000	$2,146,000
Inventories, net	$2,393,000	$2,682,000
Prepaid expenses	$259,000	$302,000
Deposits	$189,000	$109,000
Current liabilities	$1,308,000	$1,700,000
Convertible notes payable, net	$5,000,000	$4,982,000
Long-term liabilities (excluding long-term convertible notes)	$1,089,000	$402,000
Working capital	$4,757,000	$5,544,000

 

During the three months ended March 31, 2019, our liquidity positions were affected by the following:

 

 

Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

 

	Three Months Ended March 31,
	(Unaudited)
	2019	2018
Revenues, Net	$1,253,000	$1,312,000
Gross Profit	$759,000	$821,000
Total Operating Expenses (1)	$1,627,000	$1,317,000
Loss from Operations	$(868,000)	$(496,000)
Total Other Income (Expense)	$(67,000)	$(67,000)
Net Loss	$(935,000)	$(563,000)
Basic Net Loss per Share	$(0.01)	$(0.00)
Diluted Net Loss per Share	$(0.01)	$(0.00)