NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
TOMI is
a leading provider of infection prevention and decontamination
products and services, focused primarily on life sciences including
healthcare, bio-safety, pharmaceutical, clean-room and research.
Our mission is to help our customers create a healthier world thru
TOMI’s product line. TOMI’s motto is “innovating
for a safer world” for healthcare and life.
As a
global decontamination and infectious disease control company, TOMI
provides environmental solutions for indoor and outdoor surface
decontamination through the sale of equipment, services and
licensing of our SteraMist
TM
Binary Ionization
Technology® (“BIT
TM
”) which is a
hydrogen peroxide based mist and fog registered with the
Environmental Protection Agency (“EPA”).
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, 2015 and
notes thereto which are included in the Form 10-K previously filed
with the SEC on March 30, 2016. The Company follows the same
accounting policies in the preparation of interim
reports.
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. The
Company’s 55% owned subsidiary, TOMI Environmental-China, has
been dormant since its formation in April 2011. 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 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 unaudited 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 the accounts receivable, 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 or 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.
|
The
Company’s financial instruments include cash and equivalents,
accounts receivable, and 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,
and 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.
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 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 and nine months
ended September 30, 2016 was $50,084 and $155,080, respectively.
Bad debt expense for the three and nine months ended September 30,
2015 was $0 and $24,082, respectively.
At
September 30, 2016 and December 31, 2015, the allowance for
doubtful accounts was $200,000 and $45,000,
respectively.
As
of September 30, 2016, one customer accounted for 12% of accounts
receivable. Three customers accounted for 32% of net revenues for
the three months ended September 30, 2016 and two customers
accounted for 26% of net revenues for the nine months ended
September 30, 2016.
As
of December 31, 2015 three customers accounted for 42% of accounts
receivable. Two customers accounted for 30% and 23% of net revenues
for the three and nine months ended September 30, 2015,
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 and raw materials
. At
September 30, 2016 and December 31, 2015, we did not have a reserve
for slow-moving or obsolete inventory.
Deposits on Merchandise
Deposits
on merchandise primarily consist of amounts incurred or paid in
advance of the receipt of inventory. (See note 11)
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.
Deferred Financing Costs
The
Company follows authoritative guidance for accounting for financing
costs as it relates to convertible debt issuance cost. These costs
are deferred and amortized over the term of the debt period or
until redemption of the convertible debentures. Amortization of
deferred financing costs amounted to approximately $0 and $0 for
the three and nine months ended September 30, 2016. Amortization of
deferred financing costs amounted to approximately $0 and $200,000
for the three and nine months ended September 30,
2015.
Accounts Payable
As
of September 30, 2016 and December 31, 2015, one vendor accounted
for approximately 57% and 72% of total accounts payable,
respectively.
For
the three and nine months ended September 30, 2016, one vendor
accounted for 63% and 76% of cost of goods sold, respectively. For
the three and nine months ended September 30, 2015, one vendor
accounted for 72% and 80% of cost of goods sold,
respectively.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We make an
estimate of expected costs that will be incurred by us during the
warranty period and charge that expense to the consolidated
statement of operations at the date of sale. Our manufacturer
assumes warranty against product defects for one year which we
extend to our customers. We assume responsibility for product
reliability and results. As of September 30, 2016 and December 31,
2015, the Company did not establish a warranty
reserve.
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, which are, on a more
likely than not basis, not expected to be realized; in accordance
with ASC guidance for income taxes. Net deferred tax benefits have
been fully reserved at September 30, 2016 and December 31, 2015.
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.
Loss Per Share
Basic
loss per share is computed by dividing the Company’s net loss
by the weighted average number of common shares outstanding during
the period presented. Diluted loss per share is based on the
treasury stock method and includes the effect from potential
issuance of common stock such as shares issuable pursuant to the
exercise of warrants and conversions of debentures.
Potentially
dilutive securities as of September 30, 2016, consisted of
36,826,413 shares of common stock from outstanding warrants,
200,000 shares of common stock from options and 510,000 shares of
common stock from 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 September 30, 2015, consisted of
35,601,413 common shares from outstanding warrants, 100,000 common
shares from options and 510,000 common shares from convertible
Series A preferred stock. Diluted and basic weighted average shares
are the same, as potentially dilutive shares are
anti-dilutive.
Revenue Recognition
For
revenue from services and product sales, the Company recognizes
revenue in accordance with Staff Accounting Bulletin No. 104,
“Revenue Recognition” (SAB No. 104), which superseded
Staff Accounting Bulletin No. 101, “Revenue Recognition in
Financial Statements” (SAB No. 101). SAB No. 104 requires
that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2)
service has been rendered or delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectability is
reasonably assured. Determination of criteria (3) and (4) are based
on management’s judgment regarding the fixed nature of the
selling prices of the services rendered or products delivered and
the collectability of those amounts. Provisions for discounts to
customers, and allowance, and other adjustments will be provided
for in the same period the related sales are recorded.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with
Financial Accounting Standards Board (“FASB”), ASC 718,
Compensation- “Stock Compensation.” Under the
provisions of FASB ASC 718, stock-based compensation cost is
estimated at the grant date based on the award’s fair value
and is recognized as expense over the requisite service period.
During the nine months ended September 30, 2015, the Company had
one active stock-based compensation plan, the TOMI Environmental
Solutions, Inc. Stock Option and Restricted Stock Plan (the
“2008 Plan”). The 2008 Plan calls for the Company,
through a committee of its board of directors, to issue up to
2,500,000 shares of restricted common stock or stock options. The
Company generally issues grants to its employees, consultants, and
board members. Stock options are granted with an exercise price
equal to the closing price of its common stock on the date of the
grant with a term no greater than 10 years. Generally, stock
options vest over two to four years. Incentive stock options
granted to shareholders who own 10% or more of the Company’s
outstanding equity securities are granted at an exercise price that
may not be less than 110% of the closing price of the
Company’s common stock on the date of grant and have a term
no greater than five years. On the date of a grant, the Company
determines the fair value of the stock option award and recognizes
compensation expense over the requisite service period, which is
generally the vesting period of the award. The fair value of the
stock option award is calculated using the Black-Scholes
option-pricing model. On August 25, 2015, the 2008 Plan was
terminated.
On
January 29, 2016, the board of directors adopted the 2016 Equity
Compensation Plan (the “2016 Plan”) subject to its
approval by stockholders.
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. Stock-based compensation will
typically be awarded in consideration for the future performance of
services to the Company. 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 nine months ended
September 30, 2016, there were 100,000 stock options issued out of
the plan.
Concentrations of Credit Risk
Financial
instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents. The Company maintains cash balances at financial
institutions which exceed the current Federal Deposit Insurance
Corporation (“FDIC”) limit of $250,000 at times during
the year.
Long-Lived Assets Including Acquired Intangible Assets
The
Company assesses 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, the Company measures recoverability of these assets by
comparing the carrying amounts to the future undiscounted cash
flows the assets are expected to generate. If the Company’s
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. The Company bases its
calculations of the estimated fair value of its long-lived assets
on the income approach. For the income approach, the Company uses
an internally developed discounted cash flow model that include,
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 have had no long-lived asset impairment charges
for the nine months ended September 30, 2016 and 2015.
Advertising and Promotional Expenses
The
Company expenses advertising costs in the period in which they are
incurred. Advertising and promotional expenses for the three and
nine months ended September 30, 2016, were approximately $22,000
and 109,000, respectively. Advertising and promotional expenses for
the three and nine months ended September 30, 2015, were
approximately $18,000 and 25,000, respectively.
Research and Development Expenses
The
Company expenses research and development expenses in the period in
which they are incurred. For the three and nine months ended
September 30, 2016, research and development expenses were
approximately $93,000 and $120,000, respectively. For the three and
nine months ended September 30, 2015, research and development
expenses were approximately $33,000 and $75,000,
respectively.
Shipping and Handling Costs
The
Company includes shipping and handling costs relating to the
delivery of products directly from vendors to the Company in cost
of sales. Shipping and handling costs, which include third-party
delivery costs relating to the delivery of products from the
Company to customers, are classified as a general and
administrative expense. Shipping and handling costs included in
general and administrative expense were $33,000 and $105,000 for
the three and nine months ended September, 30, 2016, respectively.
Shipping and handling costs included in general and administrative
expense were $3,000 and $22,000 for the three and nine months ended
September, 30, 2015, respectively.
Business Segments
The
Company currently only has one reportable business segment due to
the fact that the Company derives its revenue primarily from one
product. The revenue from domestic sales and international sales
are shown below:
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
746,801
|
$
479,953
|
International
|
345,531
|
537,177
|
|
|
|
Total
|
$
1,092,332
|
$
1,017,130
|
|
For the
nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
Domestic
|
$
3,010,335
|
$
1,597,667
|
International
|
1,517,505
|
835,783
|
|
|
|
Total
|
$
4,527,840
|
$
2,433,450
|
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU
2014-09) “Revenue from Contracts with Customers.” ASU
2014-09 supersedes the revenue recognition requirements in
“Revenue Recognition (Topic 605)”, and requires
entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflect the consideration
to which the entity expects to be entitled to in exchange for those
goods or services. ASU 2014-09 is effective for annual reporting
periods beginning after December 15, 2016, including interim
periods within that reporting period. Early adoption is not
permitted. We are currently in the process of evaluating the impact
of the adoption of ASU 2014-09 on our consolidated financial
statements.
In
November 2015, the FASB issued Accounting Standards Update No.
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes (ASU 2015-17), which simplifies the presentation of
deferred income taxes by requiring that deferred tax assets and
liabilities be classified as non-current. We retrospectively
adopted this standard as of December 31, 2015. As a result, there
was no impact to the Company’s results of
operations.
In February 2016, the FASB issued Accounting Standards Update No.
2016-02 (ASU 2016-02) “Leases.” ASU 2016-02
provides new lease accounting guidance. ASU 2016-02 is
effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that
reporting period. Early adoption is permitted. We are
currently in the process of evaluating the impact of the adoption
of ASU 2016-02 on our consolidated financial
statements.
In March 2016, the FASB issued Accounting Standards Update No.
2016-09 (ASU 2016-09) “Compensation – Stock
Compensation (Topic 718).” ASU 2016-09 provides
improvements to employee share-based payment accounting. ASU
2016-09 is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within that
reporting period. We are currently in the process of evaluating the
impact of the adoption of ASU 2016-09 on our consolidated financial
statements.
Inventories consist
of the following:
|
|
|
|
|
|
|
|
Raw
materials
|
$
19,725
|
$
13,024
|
Finished
goods
|
4,538,221
|
1,382,151
|
|
$
4,557,946
|
$
1,395,175
|
NOTE
4. PROPERTY AND EQUIPMENT
Property and
equipment consists of the following:
|
|
|
|
|
|
Furniture and
fixtures
|
$
91,216
|
$
79,743
|
Equipment
|
817,595
|
421,442
|
Vehicles
|
47,914
|
44,344
|
Software
|
40,000
|
34,999
|
|
15,554
|
15,554
|
|
1,012,279
|
596,082
|
Less: Accumulated
depreciation
|
451,720
|
345,818
|
|
$
560,558
|
$
250,264
|
For the
three and nine months ended September 30, 2016 and, depreciation
was $56,000 and $150,000, respectively. For the three and nine
months ended September 30, 2015 depreciation was $29,000 and
$94,000, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets
consist of patents and trademarks related to our Binary Ionization
Technology. All of these assets were pledged as collateral for the
convertible notes as described below in Note 6. The patents are
being amortized over the estimated remaining lives of the related
patents. The trademarks have an indefinite life. Amortization
expense was $92,000 and $277,000 for the three and nine months
ended September 30, 2016. Amortization expense was $92,000 and
$277,000 for the three and nine months ended September 30,
2015.
Definite life
intangible assets consist of the
following:
|
September
30,
2016
(Unaudited)
|
|
|
|
|
Intellectual
Property and Patents
|
$
2,848,300
|
$
2,848,300
|
Less: Accumulated
Amortization
|
1,277,883
|
1,000,752
|
Intangible Assets,
net
|
$
1,570,417
|
$
1,847,548
|
|
|
|
|
|
|
Trademarks
|
$
440,000
|
$
440,000
|
|
|
|
Total
Intangible Assets, net
|
$
2,010,417
|
$
2,287,548
|
Approximate
amortization over the next five years is as follows:
Twelve Month
Period Ending September
30,
|
|
2017
|
$
370,000
|
2018
|
370,000
|
2019
|
370,000
|
2020
|
370,000
|
2021
|
90,000
|
|
$
1,570,000
|
NOTE 6. CONVERTIBLE DEBT
In
November 2012, the Company initiated a private placement offering a
maximum of 240 Units (as defined below) of the Company’s
securities at a price of $25,000 per Unit or $6,000,000.
The initial
closing of the offering occurred in April 2013 as the bulk of the
net proceeds of the offering were to be allocated for the asset
purchase from L-3 Applied Technologies, Inc., which was
finalized April 2013.
Each Unit consisted of $25,000 par
amount of a 10% Senior Secured Callable Convertible Promissory Note
due and payable on July 31, 2015 (the “Notes”) and
37,500 warrants each of which allows the investor to purchase one
share of common stock and expires on July 31, 2018. Interest was
payable on the Notes at a rate of 10% per annum, and payable on
July 31
st
and January 31
st
.
The Notes were secured by the
Company’s intellectual property such as the patents,
royalties, receivables of the Company and all equipment except for
the new equipment acquired with the proceeds from any future
financing that is initially secured by this new equipment. The
Notes called for the establishment of a sinking fund. Within 45
days of each calendar quarter 15% of the Company’s reported
revenue was required to be deposited into the Company’s
escrowed sinking fund account.
The
Company sold 202.96 Units for gross proceeds of $5,074,000 and
issued warrants to purchase up to 7,611,000 shares of common stock
in connection with the Units. Net proceeds amounted to $4,462,693
after expenses of offering totaling $611,307. In addition, the
placement agent received warrants to purchase up to 1,014,800
shares of common stock valued at $165,180.
The
Notes were convertible, at the option of the note holder, into
shares of our common stock at an initial conversion price of $.29
(which conversion price is subject to adjustment upon the
occurrence of events specified in the Notes, including stock
dividends, stock splits, certain fundamental corporate
transactions, and certain issuances of common stock by the
Company).
The
warrants are exercisable into shares of common stock (the
“Warrant Shares”) at an initial exercise price of $0.30
(which may be subject to certain adjustments as set forth in the
warrants).
The
Company evaluated the warrants under ASC 815-40-15 due to the
exercise price being adjustable upon certain events occurring. The
Company determined that the warrants are considered indexed to the
Company’s own common stock and thus meet the scope exception
under FASB ASC 815-10-15-74 and are therefore not considered a
derivative. The estimated fair value of the warrants, which contain
reset provisions, were calculated using the Monte Carlo valuation
model. The Company recorded the warrants’ relative fair value
of $956,712 as an increase to additional paid in capital and a
discount against the related debt.
The
Notes contained a provision whereby the conversion price is
adjustable upon the occurrence of certain events, including the
issuance of common stock or common stock equivalents at a price
which is lower than the current conversion price. Under FASB ASC
815-40-15-5, the embedded conversion feature was not considered
indexed to the Company’s own common stock and, therefore, did
not meet the scope exception in FASB ASC 815-10-15 and thus needed
to be accounted for as a derivative liability. The initial fair
value of the embedded conversion feature was estimated at
$7,316,092 and recorded as a derivative liability, resulting in an
additional discount of $4,117,288 to the Notes and a finance charge
of $3,198,804 included in the statement of operations for the year
ended December 31, 2013. The fair value of the embedded conversion
feature was estimated at the end of each quarterly reporting period
using the Monte Carlo model.
Inherent in the
Monte Carlo Valuation model are assumptions related to expected
volatility, remaining life, risk-free rate and expected dividend
yield. For the Notes using a Monte Carlo model, we estimate the
probability and timing of potential future financing and
fundamental transactions as applicable. The Company applied various
assumptions into the Monte Carlo Valuation models to determine the
change in the fair value of the derivative liability as of the
retirement dates of the Notes.
The
debt discount was amortized over the life of the convertible note
using the effective interest method and was fully amortized upon
the retirement of the convertible notes during the quarter ended
June 30, 2015.
In June
2015, the Company offered the noteholders options to convert to
cash or at a reduced conversion price on the Notes from $.29 per
share provided the conversion feature was exercised prior to June
30, 2015.
If the noteholder agreed to
lock up the converted shares for six (6) months or an uplist to a
market on the NYSE or NASDAQ Stock Market, LLC, whichever is
shorter, the conversion price was reduced to $.26 per share. Absent
the lock up, the noteholder could convert at $.275 per share. All
noteholders except two converted at $.26.
Pursuant to the
terms of the conversion offer, an aggregate of $3,774,000 of the
Notes and $124,000 of accrued interest were converted into
14,913,968 shares of the Company’s common stock. The Company
recognized an induced conversion cost of $930,383 related to all
conversions and retirements.
In
addition, during the quarter ended June 30, 2015, an aggregate of
$1,300,000 of the Notes and $87,500 in accrued interest were repaid
in the form of cash.
Convertible
Notes
The
assumptions used in the Monte Carlo Models are as
follows:
|
|
|
|
|
|
Closing
stock price
|
$
0.55-.64
|
$
0.13-0.55
|
Conversion
price
|
$
0.29
|
$
0.29
|
Expected
volatility
|
125
%
|
185
%-190%
|
Remaining
term (years)
|
0.09 - 0.11
|
2.30-2.07
|
Risk-free
rate
|
0.00
%
|
.25
%-.43%
|
Expected
dividend yield
|
0
%
|
0
%
|
Warrants
|
|
Closing
stock price
|
$
0.13-0.55
|
Conversion
price
|
$
0.30
|
Expected
volatility
|
250
%
|
Remaining
term (years)
|
5.30-5.09
|
Risk-free
rate
|
|
Expected
dividend yield
|
0
%
|
NOTE
7. FAIR VALUE
Level 3 financial instruments consist of certain embedded
conversion features. The fair value of these embedded conversion
features that have exercise reset features are estimated using a
Monte Carlo valuation model. The Company adopted the disclosure
requirements of ASU 2011-04,
“Fair Value Measurements.”
(See note 6) The unobservable input used by the Company was the
estimation of the likelihood of a reset occurring on the embedded
conversion feature of the Convertible Notes. These estimates of the
likelihood of completing an equity raise that would meet the
criteria to trigger the reset provisions are based on numerous
factors, including the remaining term of the financial instruments
and the Company’s overall financial condition.
The
following table summarizes the changes in fair value of the
Company’s Level 3 financial instruments for the period ended
September 30, 2016 and December 31, 2015. Upon the retirement of
the Notes in June 2015, the fair value of the derivative liability
was $0.
|
|
|
|
|
|
Beginning
Balance
|
$
-
|
$
1,728,883
|
Change
in fair value
|
-
|
3,810,955
|
Reclassification
to additional paid in capital due to retirement of convertible
notes
|
-
|
(5,539,838
)
|
Ending
Balance
|
$
-
|
$
-
|
Changes
in the unobservable input values would likely cause material
changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable input used in the fair
value measurement is the estimation of the likelihood of the
occurrence of a change to the conversion price based on the
contractual terms of the financial instruments. A significant
increase (decrease) in this likelihood would result in a higher
(lower) fair value measurement. As of September 30, 2016 and
December 31, 2015, the balance of derivative liability was $0 as
the Notes were retired during the second quarter of
2015.
NOTE 8. STOCKHOLDERS’ EQUITY
The
Company’s board of directors may, without further action by
the Company’s stockholders, 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 of directors 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
The
Company has authorized 1,000,000 shares of Convertible Series A
Preferred Stock, $0.01 par value. At September 30, 2016 and
December 31, 2015, there were 510,000 shares issued and
outstanding, respectively. 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
The
Company has authorized 4,000 shares of Convertible Series B
Preferred Stock, $1,000 stated value, 7.5% Cumulative dividend. At
September 30, 2016 and December 31, 2015, there were no shares
issued and outstanding, respectively.
Common Stock
During
the nine months ended September 30, 2015, the Company issued
1,062,930 shares of common stock valued at approximately $441,841
for services rendered (Note 11). In addition, the Company issued
225,000 shares of common stock valued at $101,250 to Harold Paul,
Director, as payment for legal services rendered.
During
the nine months ended September 30, 2015, the Company’s Board
of Directors approved the issuance of 225,000 shares of common
stock from the 2008 Plan valued at $101,250 as a bonus to Halden
Shane, CEO, in August of 2015.
During
the nine months ended September 30, 2015, the Company issued 50,146
shares of common stock valued at $18,000 to Nick Jennings, CFO, as
part of his annual compensation from the Company. In addition, the
Company’s Board of Directors approved the issuance of 62,000
shares of common stock under the Company’s 2008 plan valued
at $27,900 as a bonus in August of 2015 (Note 11).
During
the nine months ended September 30, 2015, the Company’s Board
of Directors approved the issuance of 100,000 shares of common
stock from the 2008 Plan valued at $45,000 as a bonus to Norris
Gearhart, COO, in August of 2015 (Note 11).
During
the nine months ended September 30, 2015, the Company sold,
1,760,002 equity units. Each unit consisted of 1 share of common
stock and 2.5 warrants. The warrants have an exercise price of $.29
per share and a term of seven years. Gross proceeds to the Company
amounted to $510,213. In connection with the sale, the Company
incurred a cash finder’s fee in the amount of $51,000 in
addition to a finder’s fee to be paid in common stock of
52,800 shares valued at $15,312.
During
the nine months ended September 30, 2015, the Company issued
14,913,968 shares of common stock in connection with the conversion
of the convertible notes and the related accrued interest (Note
6).
During
the nine months ended September 30, 2015, the Company directly
sold, 17,986,111 shares of common stock. Gross proceeds to the
Company in connection with the shares sold amounted to
$8,225,000.
During
the nine months ended September 30, 2016, the Company issued
761,954 shares of common stock valued at $369,654 for professional
services rendered.
Stock Options
The
Company issued 40,000 options valued at $10,798 to two directors in
January 2015. The options have an exercise price of $0.27 per
share. The options expire in January 2025. The options were valued
using the Black-Scholes model using the following assumptions:
volatility: 237%; dividend yield: 0%; zero coupon rate: 1.61%; and
a life of 10 years.
The
Company issued 100,000 options valued at $54,980 to four directors
in February 2016. The options have an exercise price of $0.55 per
share. The options expire in February 2026. The options were valued
using the Black-Scholes model using the following assumptions:
volatility: 224%; dividend yield: 0%; zero coupon rate: 1.47%; and
a life of 10 years.
The
following table summarizes stock options outstanding as of
September 30, 2016 and December 31, 2015:
|
September 30,
2016 (Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
100,000
|
$
0.96
|
60,000
|
$
1.42
|
Granted
|
100,000
|
0.55
|
40,000
|
0.27
|
Exercised
|
-
|
-
|
-
|
-
|
Outstanding,
end of period
|
200,000
|
$
0.76
|
100,000
|
$
0.96
|
Options
outstanding and exercisable by price range as of September 30, 2016
were as follows:
|
|
|
|
|
Remaining
Contractual
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
$
2.10
|
40,000
|
3.26
|
40,000
|
$
2.10
|
$
0.05
|
20,000
|
4.27
|
20,000
|
$
0.05
|
$
0.27
|
40,000
|
8.27
|
40,000
|
$
0.27
|
$
0.55
|
100,000
|
9.35
|
100,000
|
$
0.55
|
|
200,000
|
7.41
|
200,000
|
$
0.76
|
Stock Warrants
For the
nine months ended September 30, 2015, the Company recognized equity
based compensation of approximately $237,000 on the warrants issued
to the CEO in connection with his employment agreement. In
addition, the Company recognized approximately $10,800 for director
options (See Note 8-Stock Options), $1,350,000 to consultants (Note
11), and $22,000 on the vesting of warrants issued to the CFO on
October 1, 2014 (Note 9).
During
the nine months ended September 30, 2015, the Company issued
4,400,005 warrants in connection with the equity units sold to
investors. See note 8 (common stock) for additional details. In
addition, the Company issued 3,150,000 warrants to two consultants
during the 9 months ended September 30, 2015. See note 11
(contracts and agreements) for additional details.
For the
nine months ended September 30, 2016, the Company recognized total
equity based compensation of approximately $333,000 on warrants
issued to the CEO in connection with his current and previous
employment agreements (Note 9). For the nine months ended September
30, 2016, the Company recognized $39,000 in stock compensation
expense for the warrants issued to the CEO in February 2014 that
vested in February 2016. In addition, on March 31, 2016, the
Company issued warrants to purchase up to 250,000 shares of common
stock to the CEO with a term of five years that vest upon issuance
and have an exercise price of $.50 per share. The Company utilized
the Black-Scholes method to fair value the warrants to purchase up
to 250,000 shares of common stock received by the CEO totaling
approximately $129,000 with the following assumptions: volatility,
162%; expected dividend yield, 0%; risk free interest rate, 1.47%;
and a life of 5 years. The grant date fair value of each warrant
was $0.51. On June 30, 2016, , the Company issued warrants to
purchase up to 250,000 shares of common stock to the CEO with a
term of five years that vest upon issuance and have an exercise
price of $.42 per share. The Company utilized the Black-Scholes
method to fair value the warrants to purchase up to 250,000 shares
of common stock received by the CEO totaling approximately $99,000
with the following assumptions: volatility, 157%; expected dividend
yield, 0%; risk free interest rate, 1.17%; and a life of 5 years.
The grant date fair value of each warrant was $0.40. On September
30, 2016, , the Company issued warrants to purchase up to 250,000
shares of common stock to the CEO with a term of five years that
vest upon issuance and have an exercise price of $.32 per share.
The Company utilized the Black-Scholes method to fair value the
warrants to purchase up to 250,000 shares of common stock received
by the CEO totaling approximately $66,000 with the following
assumptions: volatility, 155%; expected dividend yield, 0%; risk
free interest rate, 1.27%; and a life of 5 years. The grant date
fair value of each warrant was $0.27. (See note 11 for additional
details)
For the
nine months ended September 30, 2016, the Company recognized total
equity based compensation of approximately $73,000 on warrants
issued to the CFO in connection with his current and previous
employment agreements (Note 11). For the nine months ended
September 30, 2016, the Company recognized $22,000 in stock
compensation expense for the accrued but not vested portion of the
warrants issued to the CFO under his previous agreement with the
Company. In addition, on January 26, 2016, the Company issued
warrants to purchase up to 100,000 shares of common stock to the
CFO with a term of five years that vest upon issuance and have an
exercise price of $.55 per share. The Company utilized the
Black-Scholes method to fair value the warrants to purchase up to
100,000 shares of common stock received by the CFO totaling
approximately $51,000 with the following assumptions: volatility,
164%; expected dividend yield, 0%; risk free interest rate, 1.47%;
and a life of 5 years. The grant date fair value of each warrant
was $0.51. (See note 11 for additional details)
For the
nine months ended September 30, 2016, the Company recognized equity
compensation expense of approximately $81,000 related to the vested
and accrual of unvested warrants contracted to an employee pursuant
to his employment agreement with the Company that were issued in
April of 2016. The Company utilized the Black-Scholes method to
fair value the 300,000 warrants received by the employee totaling
approximately $139,000 with the following assumptions: volatility,
159%; expected dividend yield, 0%; risk free interest rate, 1.47%;
and a life of 5 years. The grant date fair value of each warrant
was $0.46.
The
following table summarizes the outstanding common stock warrants as
of September 30, 2016 and December 31, 2015:
|
September 30, 2016
(Unaudited)
|
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Exercise Price
|
Outstanding,
beginning of period
|
35,676,413
|
$
0.30
|
28,051,408
|
$
0.23
|
Granted
|
1,150,000
|
0.45
|
7,625,005
|
0.58
|
Outstanding,
end of period
|
36,826,413
|
$
0.31
|
35,676,413
|
$
0.30
|
Warrants
outstanding and exercisable by price range as of September 30, 2016
were as follows:
|
|
|
|
|
Remaining
Contractual
Life in
Years
|
|
Weighted
Average
Exercise Price
|
$
0.01
|
1,575,000
|
0.78
|
1,575,000
|
$
0.01
|
$
0.05
|
975,000
|
0.87
|
975,000
|
$
0.05
|
$
0.15
|
7,750,000
|
1.05
|
7,750,000
|
$
0.15
|
$
0.26
|
100,000
|
1.74
|
100,000
|
$
0.26
|
$
0.29
|
10,125,613
|
4.06
|
10,125,613
|
$
0.29
|
$
0.30
|
11,925,800
|
2.00
|
11,825,800
|
$
0.30
|
$
0.32
|
250,000
|
5.00
|
250,000
|
$
0.32
|
$
0.33
|
75,000
|
2.00
|
75,000
|
$
0.33
|
$
0.42
|
250,000
|
4.75
|
250,000
|
$
0.42
|
$
0.50
|
625,000
|
4.18
|
425,000
|
$
0.50
|
$
0.55
|
100,000
|
4.33
|
100,000
|
$
0.55
|
$
0.62
|
75,000
|
1.80
|
75,000
|
$
0.62
|
$
1.00
|
3,000,000
|
3.59
|
3,000,000
|
$
1.00
|
|
36,826,413
|
2.18
|
36,526,413
|
$
0.31
|
Unvested warrants
outstanding as of September 30, 2016 were as follows:
|
|
Weighted
Average
Exercise
Price
|
|
Average
Weighted
Remaining
Contractual
Life in
Years
|
$
0.30
|
100,000
|
5.00
|
$
0.50
|
200,000
|
5.00
|
$
0.43
|
300,000
|
5.00
|
NOTE 9. RELATED PARTY TRANSACTIONS
As of
September 30, 2016 and December 31, 2015, the Company had accounts
receivable balances from three entities under common control and
owned by an employee of $123,786 and $210,686, respectively. For
the three and nine months ended September 30, 2016, there were
sales made to these three entities in the amounts of $0 and $3,385,
respectively. For the three and nine months ended September 30,
2015, there were sales made to these three entities in the amounts
of $0 and $250,000, respectively. The individual was a consultant
for TOMI in 2015 and became an employee in 2016.
For the
three and nine months ended September 30, 2016, the Company
incurred fees for legal services rendered by Harold Paul in the
amount of $15,000 and $45,000, respectively. For the three and nine
months ended September 30, 2015, the Company incurred legal fees to
Mr. Paul of approximately $116,250 and $146,250. Mr. Paul is also a
director of the Company.
In January, 2016, the Company entered into a distributor agreement
with TOMI Asia to facilitate growth in the Asian region,
specifically including China and Indochina, and excluding
South Korea, Japan, Australia and New Zealand. Wee Ah Kee, a
principal stockholder of TOMI, is the Chief Executive Officer of
SteraMist Asia. The agreement was amended in June and further
amended in August of 2016 and TOMI Asia changed their name to
SteraMist Asia. The new agreement is for an initial three-year term
and provides for revenue targets. No sales were made under the
agreement for the nine months ended September 30,
2016.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In
September of 2014 the Company entered into a lease agreement for
office and warehouse space in Fredrick Maryland. As part of the
lease agreement, the Company received a rent holiday in the first 5
months of the lease. The lease also provides for an escalation
clause where the Company will be subject to an annual rent increase
of 3%, year over year. The lease expires on January 31, 2018. The
Company accounts for the lease using the straight line method and
recorded approximately $11,000 and $34,000 in rent expense for the
three and nine months ended September 30, 2016 and 2015,
respectively. Approximate minimum annual rents under the lease are
as follows:
Twelve Month Period
Ending September 30,
|
|
|
$
53,000
|
2017
|
18,000
|
2018
|
$
71,000
|
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, the Company
may have to file claims against parties that infringe on our
intellectual property.
Product Liability
As
of September 30, 2016 and December 31, 2015, there were no claims
against the Company for product liability.
NOTE 11. CONTRACTS AND AGREEMENTS
Employment Agreements
On
February 11, 2014, the Company entered into an employment agreement
with Halden S. Shane, our Chief Executive Officer
(“CEO”). The term of the employment agreement extended
through December 31, 2016 with automatic renewal for successive
one-year periods unless otherwise terminated by either party
thereunder. Dr. Shane’s annual base salary was $36,000, which
shall increase to $120,000 upon the Company exceeding gross
revenues of $5,000,000 on a calendar year basis and to $175,000
upon the Company exceeding gross revenues of $10,000,000 on a
calendar year basis. Dr. Shane also received a grant of 3,000,000
warrants to purchase shares of the Company’s common stock at
a price of $0.30 per share which have a term of five years and vest
upon the following schedule: 1,000,000 vested upon issuance,
1,000,000 vested on February 11, 2015, and 1,000,000 vested
February 11, 2016. Dr. Shane’s employment agreement includes
restrictive covenants of non-solicitation and confidentiality of
proprietary information. Under the employment agreement, Dr. Shane
assigned any and all of his rights to Company proprietary
information to the Company and agreed that all property created by
him during and in connection with his employment constitutes
“works for hire” as defined in the United States
Copyright Act.
On
January 15, 2016, the Company entered into a new employment
agreement with Dr. Shane. The agreement provides for a
base annual salary of $360,000. The agreement also
provides for the quarterly issuance of 250,000 options to purchase
common stock in 2016 with an exercise price equal to the three day
trailing volume weighted average price of the common
stock. The previous agreement between the Company and
Dr. Shane provided for an annual salary increase in the amount of
$120,000 upon the Company exceeding gross revenues
of $5,000,000 on a calendar year basis and to $175,000 upon
the Company exceeding gross revenues of $10,000,000 on a calendar
year basis, which does not exist in the new agreement. In the event
Dr. Shane is terminated for any reason or becomes disabled or dies,
any options held will become cashless and will be entitled to
piggyback registration and are exercisable immediately. Dr. Shane
is also entitled to performance bonuses, subject to the achievement
of certain objectives, including (i) a minimum semi-annual grant of
stock options to purchase up to 250,000 shares of common stock and
(ii) a cash bonus, in the sole discretion of the board of
directors.
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 and will be
granted 3 million options that are cashless and, when exercised,
will have piggyback registration or demand registration rights, and
if applicable, any and all outstanding stock grants will be
accelerated and be fully vested.
Termination
for cause may be effected by the board of directors by written
notification to Dr. Shane; provided, however, that no termination
for cause will be effective unless he 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 or (iii) by
reason of gross negligence or intentional misconduct with respect
to the performance of duties under this Agreement. Upon termination
for cause, Dr. Shane will be immediately paid an amount equal to
his gross salary.
The
board of directors may effect a termination 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
On
February 8, 2016, the Company entered into an employment agreement
with Robert Wotczak in connection with his role as the
Company’s President. Mr. Wotczak’s annual salary is
$240,000 per annum paid bi-weekly. Additionally, in accordance with
the terms of the agreement, the Company agreed to issue him 150,000
shares of common stock, which was issued in April 2016. Mr. Wotczak
will also be entitled to (i) annual grants of stock options to
purchase up to 250,000 shares of common stock each year under the
2016 Plan, (ii) additional shares of common stock granted on an
annual basis based on achievement of performance objectives, (iii)
an annual raise and/or bonus for meeting or achieving certain
performance objectives, (iv) a vehicle expense up to $750 per month
and (v) health insurance contributions equal to 80% toward the cost
of an individual plan. Mr. Wotczak’s agreement includes
restrictive covenants of non-solicitation and confidentiality of
proprietary information. In the event of a change in control of the
Company, which results in his termination, Mr. Wotczak will be
entitled to a lump sum payment of one year’s salary and all
equity awards will be accelerated and fully vested.
The Company may terminate Mr.
Wotczak’s employment at any time; provided, however, that the
Company must provide fourteen days’ notice if any of the
following events occur: (a) the sale of substantially all of the
Company’s assets, (b) sale, exchange, or other disposition in
one transaction of the majority of the Company’s outstanding
capital stock, (c) the Company’s decision to terminate its
business and liquidate its assets, (d) the merger or consolidation
of the Company with another company, or (e) bankruptcy or chapter
11 reorganization.
On
September 30, 2014, the Company entered into an employment
agreement with Nick Jennings, our Chief Financial Officer
(“CFO”) to provide part-time services. The term of the
employment agreement was through December 31, 2014 with a review of
employment in January 2015. Mr. Jennings’ salary was $5,000
per month in cash and $2,000 in common stock per month, paid
quarterly. Mr. Jennings also received a 5 year warrant to purchase
up to 300,000 shares of common stock at a price per share equal to
$0.30 and vests upon the following schedule: 100,000 vested upon
issuance, 100,000 vested on October 1, 2015, and 100,000 will vest
as of October 1, 2016. In connection with the employment agreement,
Mr. Jennings entered into agreements that included restrictive
covenants of non-solicitation and confidentiality of proprietary
information.
On
September 2, 2015, we entered into a new employment agreement with
Mr. Jennings, which superseded his prior agreement, pursuant to
which he will continue to serve as our CFO. Mr. Jennings’
annual salary is $132,000 which is reviewed each year. Mr. Jennings
also received a 5 year warrant to purchase up to 100,000 shares of
common stock at an exercise price per share equal to the fair value
at the date of grant which fully vested at the time of issuance,
which was on January 26, 2016. Mr. Jennings is also entitled to
additional equity compensation based upon superior performance of
his responsibilities, as determined by the board of directors, in
its sole discretion. In the event of a change in control of the
Company, which results in his termination, Mr. Jennings will be
entitled to a lump sum payment of one year’s salary, all
equity awards will be accelerated and fully vested. In the event
his employment is terminated other than for cause, Mr. Jennings
will receive an amount equal to his annual salary as of such
terminate date after the second employment
anniversary.
On
October 16, 2014, we entered into an employment agreement with
Norris Gearhart pursuant to which he agreed to serve as the
Company’s Chief Operating Officer (“COO”). Mr.
Gearhart’s salary was $126,000 per annum paid bi-monthly.
Additionally, Mr. Gearhart received 100,000 shares of Common Stock
upon signing his agreement, a monthly transportation expense up to
$500 towards a vehicle and the ability to receive an additional
cash or equity bonus upon the achievement of pre-agreed performance
objectives.
On
September 2, 2015, we entered into a new employment agreement with
Mr. Gearhart, which superseded his prior agreement, pursuant to
which he will continue to serve as our COO. Mr.
Gearhart’s’ annual salary is $145,000 which is reviewed
at the end of the second anniversary. Mr. Gearhart will receive
annual grants of stock options to purchase up to 250,000 shares of
Common Stock at an exercise price equal to the volume weighted
average price of the five-day period prior to the close of the year
only if meeting performance objectives. Mr. Gearhart is also
entitled to additional equity compensation based upon superior
performance of his responsibilities, as determined by the board of
directors, in its sole discretion. In the event of a change in
control of the Company, which results in his termination, Mr.
Gearhart will be entitled to a lump sum payment of one year’s
salary and all equity awards will be accelerated and fully vested.
In the event his employment is termination other than for cause,
Mr. Gearhart will receive an amount equal to his annual salary as
of such terminate date after the second employment
anniversary.
Sales and Distribution Agreement
In
September 2014, the Company entered into a Sales and Distribution
Agreement, superseding previous agreements, with TOMI Panama S.A.
(“TOMI Panama”) covering Panama. TOMI Panama is the
exclusive distributor of the Company’s products and services
within the country of Panama. For the three and nine months ended
September 30, 2016, the Company made sales and provided services to
TOMI Panama for approximately $18,000 and $54,000, respectively.
For the three and nine months ended September 30, 2015, the Company
made sales and provided services to TOMI Panama for approximately
$45,000 and $100,000, respectively.
In January, 2016, the Company entered into a distributor agreement
with TOMI Asia to facilitate growth in the Asian region,
specifically including China and Indochina, and excluding
South Korea, Japan, Australia and New Zealand. Wee Ah Kee, a
principal stockholder of TOMI, is the Chief Executive Officer of
SteraMist Asia. The agreement was amended in June and further
amended in August of 2016 and TOMI Asia changed their name to
SteraMist Asia. The new agreement is for an initial
three-year term and provides for revenue targets. No sales
were made under the agreement for the nine months ended September
30, 2016.
Distribution and Licensing Agreement
On
March 21, 2014, the Company entered into a distribution and
licensing agreement with Plascencia Universal, S. de R.L. de C.V.
(“Plascencia Universal”), a Mexican company that will
act as the exclusive distributor of TOMI’s products and
services in Mexico. The term of the agreement is for three years
with options for renewal and contains annual minimum purchase
requirements that are subject to a 20% annual increase up until the
year 2024. The principal of Plascencia Universal is also the broker
for the Company’s insurance policies and was appointed a
director of the Company. In April of 2015, the Company modified its
agreement with Plascencia Universal with respect to the license fee
included in the original agreement. In December of 2015, the
principal of Plascencia Universal resigned from the board of
directors. For the three and nine months ended September 30, 2016,
sales to Plascencia Universal were approximately $0 and $655,000,
respectively. For the three and nine months ended September 30,
2015, there were no sales to Plascencia Universal.
Manufacturing Agreement
In November 2016 the Company entered into a new manufacturing and
development agreement with RG Group Inc. See Exhibit 10.1 attached
hereto.
As of September 30, 2016 and December 31, 2015,
balances due to RG Group, Inc. accounted for approximately 57% and
72% of total accounts payable,
respectively.
At
September 30, 2016 and December 31, 2015, the Company maintained
required deposits with RG Group, Inc. in the amounts of $168,729
and $442,358, respectively.
For the three and nine months ended September 30,
2016, RG Group, Inc. accounted for 63% and 76% of cost of goods
sold, respectively. For the three and nine months ended September
30, 2015, RG Group, Inc. accounted for 72% and 80% of cost of goods
sold, respectively.
Consulting Agreement
In January 2015, the Company entered into a consulting agreement
which has since been terminated that provided for a fee based on
revenue received from existing and prospective clients assigned and
revenue from sales related to customers the consultant finds for
the Company. The agreement also provided for the issuance of
100,000 shares of the Company’s common stock that were issued
in February 2015 and valued at $25,000. In addition, the
agreement provided for the issuance of 75,000 common stock warrants
on a quarterly basis that vest upon issuance with a strike price
equal to the volume weighted average price for the 5 day period
prior to the close of the quarter with a term of 3 years. The
exercise price for the warrants issued was $0.50, $0.62 and $0.33.
During the year ended December 31, 2015, the Company utilized
the Black-Scholes method to fair value the warrants to purchase up
to 225,000 shares of common stock with the following range of
assumptions: volatility, 157%-174%; expected dividend yield, 0%;
risk free interest rate, 1.01%-1.42%; and a life of 3 years. The
grant date fair value of the warrants issued was $0.37, $0.54 and
$0.30. For the nine months ended September 30, 2015, the Company
recognized approximately $68,000 in equity based compensation on
the issuance of the warrants. This consulting agreement was
terminated October 1, 2015 when the consultant accepted a full time
employment position with the Company.
In May
of 2015, the Company entered into a consulting agreement that
provides for the issuance of 600,000 shares of restricted common
stock which was issued in July of 2015 and valued at $264,000. In
addition, the agreement provides for the issuance of 3,000,000
common stock warrants that vest upon issuance with an exercise
price of $1.00 and have a term of 5 years. The Company utilized the
Black-Scholes method to fair value the 3,000,000 warrants with the
following assumptions: volatility, 191%; expected dividend yield,
0%; risk free interest rate, 1.49%; and a life of 5 years. The
grant date fair value of each warrant was $0.42. For the nine
months ended September 30, 2015, the Company recognized
approximately $1,259,000 in equity based compensation on the
warrants issued. The agreement was terminated in January of
2016.
Agreements with Directors
The Company appointed Mr. Walter C. Johnsen as a
director on January 29, 2016.
The term of his agreement as
director commenced on February 1, 2016 and is for 2 years and until
a successor is elected, or resignation or removal. The agreement
between the Company and Mr. Johnsen provides for an annual fee in
the amount of $25,000 paid on a quarterly basis and an annual grant
of options to purchase up to 25,000 shares of the Company’s
common stock. The Company issued the options to Mr. Johnsen in
February 2016. (See note 8 - Stock Options)
The Company appointed Ms. Kelly J. Anderson as a
director on January 29, 2016. Ms. Anderson will serve as the chair
of the Company’s audit committee.
The term of her
agreement as director commenced on February 1, 2016 and is for 2
years and until a successor is elected, or resignation or removal.
The agreement between the Company and Ms. Anderson provides for an
annual fee in the amount of $26,000 paid on a quarterly basis and
an annual grant of options to purchase up to 25,000 shares of the
Company’s common stock. The Company issued the options to Ms.
Anderson in February 2016. (See note 8 - Stock
Options)
The Company appointed Mr. Edward J. Fred as a
Director on January 29, 2016.
The term of his agreement as
director commenced on February 1, 2016 and is for 1 year and until
a successor is elected, or resignation or removal. The agreement
between the Company and Mr. Fred provides for an annual fee in the
amount of $25,000 paid on a quarterly basis and an annual grant of
options to purchase up to 25,000 shares of the Company’s
common stock. The Company issued the options to Mr. Fred in
February of 2016. (See note 8 - Stock Options)
The
Company issued 25,000 options to Harold Paul in February 2016. Mr.
Paul is a director of the Company. (See note 8 - Stock
Options)
Other Agreements
In May
2015, the Company was awarded a grant by the United States Agency
for International Development (“USAID”) in the amount
of $559,000 for the development of SteraMist
TM
Mobile
Decontamination Chambers to fight the Ebola epidemic. The grant is
based on milestones set forth in the agreement between the Company
and USAID. In May 2016, the Company completed the USAID Grant by
completing the sixth and final milestone and received gross
proceeds in the amount of $559,003 during the period of the
agreement. The Company incurred costs in connection with the grant
through September 30, 2016 in the amount of $356,552. The proceeds
received as part of the grant in excess of the costs incurred has
been presented on the Company’s statement of operations in
the amount of $202,451 for the nine months ended September 30,
2016.
In June
2015, the Company 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 the Company to become
Primary Service Providers (“PSP’s”). The
licensing agreements grant protected territories to PSP’s to
perform services using the Company’s SteraMist
TM
platform of
products and also provide for potential job referrals to
PSP’s where the Company is entitled to referral fees.
Additionally, the agreement provides for commissions due to
PSP’s for equipment and solution sales they facilitate to
other service providers in their respective territories. As part of
these agreements, the Company is obligated to provide to the
PSP’s various training, ongoing support and facilitate a
referral network call center. As of September 30, 2016, the Company
had entered into 55 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.
NOTE 12. COMMON STOCK TO BE ISSUED
As
of December 31, 2015, the Company was obligated to issue 202,000
shares of common stock valued at approximately $53,000 primarily to
certain vendors and consultants.
As
of September 30, 2016, the Company was obligated to issue 188,174
shares of common stock valued at approximately $45,000 primarily to
certain vendors and consultants.
NOTE 13. CUSTOMER CONCENTRATION
The
Company had certain customers whose revenue individually
represented 10% of more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% of
more of the Company’s accounts receivable.
Three
customers accounted for 32% of net revenues for the three months
ended September 30, 2016 and two customers accounted for 26% of net
revenues for the nine months ended September 30, 2016.
Two
customers accounted for 30% and 23% of net revenues for the three
and nine months ended September 30, 2015,
respectively.
NOTE 14. 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 Securities and Exchange
Commission.
On November 10, 2016,
the Company entered into a restated manufacturing and development
agreement with RG Group, Inc. The agreement does not provide
for any minimum purchase commitments and is for a term of 2 years
with provisions to extend. The agreement also provides for a
warranty against product defects for one year.
(See Note
11.)