UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
For the quarterly period ended March 31, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission
File Number: 000-09908
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TOMI
ENVIRONMENTAL SOLUTIONS, INC.
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(Exact
name of registrant as specified in its charter)
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Florida
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59-1947988
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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8430 Spires Way, Frederick, Maryland 21701
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(Address
of principal executive offices) (Zip Code)
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(800) 525-1698
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which registered
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Common
stock, par value $0.01 per share
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TOMZ
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Nasdaq
Capital Market
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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.
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Large
accelerated filer ☐
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Accelerated
filer
☐
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Non-accelerated
filer ☒
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Smaller
reporting company ☒
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Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
As of
May 6, 2021, the registrant had 16,811,513 shares of common stock
outstanding.
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QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
2021
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TABLE OF CONTENTS
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Page
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PART I
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FINANCIAL INFORMATION
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PART II
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OTHER INFORMATION
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FORWARD-LOOKING
STATEMENTS
This Quarterly Report on Form 10-Q, or this Form
10-Q, contains “forward-looking
statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended,
or the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and we intend that
such forward looking statements be subject to the safe harbors
created thereby. For this purpose, any statements contained in this
Form 10-Q, except for historical information, may be deemed
forward-looking statements. You can
generally identify forward-looking statements as statements
containing the words “will,” “would,”
“believe,” “expect,”
“estimate,” “anticipate,”
“intend,” “assume,” “can,”
“could,” “plan,” “predict,”
“should” or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to projections
of our future financial performance, trends in our businesses, or
other characterizations of future events or circumstances are
forward-looking statements.
The
forward-looking statements included herein are based on current
expectations of our management based on available information and
involve a number of risks and uncertainties, all of which are
difficult or impossible to predict accurately and many of which are
beyond our control. As such, our actual results could differ
materially and adversely from those expressed in any
forward-looking statements as a result of various factors, some of
which are listed under the section “Risk Factors” in
our most recent Annual Report on Form 10-K. Readers should
carefully review these risks, as well as the additional risks
described in other documents we file from time to time with the
Securities and Exchange Commission. In light of the significant
risks and uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that such
results will be achieved, and readers are cautioned not to place
undue reliance on such forward-looking information. Except as
required by law, we undertake no obligation to revise the
forward-looking statements contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I: FINANCIAL INFORMATION
Item 1. Financial
Statements.
(1) Share amounts
with respect to the common stock and Convertible Series A Preferred
Stock have been retroactively restated to reflect the
reverse split thereof, which was effected as of the
close of business on September 10, 2020. Refer to Note
10—Equity for further information.
The accompanying
notes are an integral part of the condensed consolidated financial
statements.
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TOMI ENVIRONMENTAL SOLUTIONS, INC.
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY
(UNAUDITED)
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For the Three Months Ended March 31, 2021
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Series A
Preferred
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Common
Stock
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Additional
Paid
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Accumulated
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Total
Shareholders’
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Shares
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Amount
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Shares
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Amount
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in
Capital
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Deficit
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Equity
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Balance at
December 31, 2020
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63,750
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$638
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16,761,514
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$167,614
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$52,142,400
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$(39,108,078)
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$13,202,574
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Common Stock
Issued for Services Provided
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50,000
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500
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227,500
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228,000
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Net (Loss) for
the three months ended March 31, 2021
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(1,510,940)
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(1,510,940)
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Balance at
March 31, 2021
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63,750
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$638
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16,811,514
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$168,114
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$52,369,900
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$(40,619,018)
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$11,919,633
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For
the Three Months Ended March 31, 2020
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Series A
Preferred
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Common
Stock
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Additional
Paid
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Accumulated
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Total
Shareholders’
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Shares
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Amount
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Shares
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Amount
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in
Capital
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Deficit
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Equity
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Balance at December 31, 2019 (1)
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63,750
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$638
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15,587,552
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$155,876
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$44,232,274
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$(43,499,244)
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$889,543
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Equity
Compensation
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209,961
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209,961
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Common Stock
Issued for Services Provided
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50,000
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500
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47,500
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48,000
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Conversion of
Notes Payable into Common Stock
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1,041,667
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10,417
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4,489,584
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4,500,000
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Warrants and
Options Exercised
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10,417
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104
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57,396
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57,500
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Net Income for
the three months ended March 31, 2020
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2,619,261
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2,619,261
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Balance at March 31, 2020 (1)
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63,750
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$638
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16,689,634
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$166,897
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$49,036,715
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$(40,879,983)
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$8,324,265
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(1) Share amounts with respect to the common stock and Convertible
Series A Preferred Stock have been retroactively restated to
reflect the
reverse split thereof,
which was effected as of the close of business on September 10,
2020. Refer to Note 10—Equity for further
information.
The accompanying notes are an integral part of the condensed
consolidated financial
statements.
TOMI ENVIRONMENTAL SOLUTIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
TOMI Environmental Solutions, Inc., a Florida
corporation (“TOMI”, the “Company”,
“we”, “our” and “us”) is a
global provider of disinfection and decontamination essentials
through our premier Binary Ionization Technology® (BIT™) platform, under which we manufacture, license,
service and sell our SteraMist® brand of products, including
SteraMist® BIT™, a hydrogen peroxide-based mist
and fog. Our business is organized into five divisions: Healthcare,
Life Sciences, TOMI Service Network, Food Safety and
Commercial.
Invented under a defense grant in association with
the Defense Advanced Research Projects Agency (DARPA) of the U.S.
Department of Defense, BIT™ is registered with the U.S.
Environmental Protection Agency (EPA) and uses a low
percentage hydrogen peroxide as its only active ingredient to
produce a fog composed mostly of a hydroxyl radical
(.OH
ion), known as ionized Hydrogen Peroxide (iHP™). Represented by the SteraMist® brand of products, iHP™ produces a germ-killing aerosol that works
like a visual non-caustic gas.
Our
products are designed to service a broad spectrum of commercial
structures, including, but not limited to, hospitals and medical
facilities, bio-safety labs, pharmaceutical facilities, meat and
produce processing facilities, universities and research
facilities, vivarium labs, all service industries including cruise
ships, office buildings, hotel and motel rooms, schools,
restaurants, military barracks, police and fire departments,
prisons, and athletic facilities. Our products are also used in
single-family homes and multi-unit residences. Additionally, our
products have been listed on the EPA’s List N as products
that help combat COVID-19 and are actively being used for this
purpose.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The
interim unaudited condensed consolidated financial statements
included herein, presented in accordance with generally accepted
accounting principles utilized in the United States of America
(“GAAP”), and stated in U.S. dollars, have been
prepared by us, without an audit, pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and
regulations, although we believe that the disclosures are adequate
to make the information presented not misleading.
These
financial statements reflect all adjustments, consisting of normal
recurring adjustments, which, in the opinion of management, are
necessary for fair presentation of the information contained
therein. These unaudited condensed consolidated financial
statements should be read in conjunction with our audited financial
statements for the year ended December 31, 2020 and notes thereto
which are included in the Annual Report on Form 10-K previously
filed with the SEC on March 30, 2021. We follow the same accounting
policies in the preparation of interim reports. The results of
operations for the interim periods covered by this Form 10-Q may
not necessarily be indicative of results of operations for the full
fiscal year or any other interim period.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of TOMI and its wholly owned subsidiary, TOMI
Environmental Solutions, Inc., a Nevada corporation. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassification of Accounts
Certain
reclassifications have been made to prior-year comparative
financial statements to conform to the current year presentation.
These reclassifications had no effect on previously reported
results of operations or financial position.
Use of Estimates
The
preparation of the condensed consolidated financial statements in
conformity with U.S. GAAP requires us to make estimates and
assumptions that affect the amounts reported and disclosed in the
accompanying condensed consolidated financial statements and the
accompanying notes. Actual results could differ materially from
these estimates. On an ongoing basis, we evaluate our estimates,
including those related to accounts receivable, inventory, fair
values of financial instruments, intangible assets, useful lives of
intangible assets and property and equipment, fair values of
stock-based awards, income taxes, and contingent liabilities, among
others. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable, the
results of which form the basis for making judgments about the
carrying values of our assets and liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
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Level 1:
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Quoted prices in active markets for identical assets or
liabilities.
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Level 2:
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Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data for substantially the full term of the assets or
liabilities.
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Level 3:
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Unobservable inputs that are supported by little or no market
activity and that are significant to the value of the assets or
liabilities.
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Our
financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. All these items
were determined to be Level 1 fair value measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For purposes of the statement of
cash flows, cash and cash equivalents includes cash on hand, held
at financial institutions and other liquid investments with
original maturities of three months or less. At times, these
deposits may be in excess of insured limits.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of their status and maintain allowances for potential
credit losses as deemed necessary. We have a policy of reserving
for doubtful accounts based on our best estimate of the amount of
potential credit losses in existing accounts receivable. We
periodically review our accounts receivable to determine whether an
allowance is necessary based on an analysis of past due accounts
and other factors that may indicate that the realization of an
account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. Bad debt expense for the three months ended
March 31, 2021 and 2020 was $115,000 and $25,000,
respectively.
At
March 31, 2021 and December 31, 2020, the allowance for doubtful
accounts was $505,000 and $390,000, respectively.
Inventories
Inventories
are valued at the lower of cost or market using the first-in,
first-out (FIFO) method. Inventories consist primarily of finished
goods.
We
expense costs to maintain certification to cost of goods sold as
incurred.
We
review inventory on an ongoing basis, considering factors such as
deterioration and obsolescence. We record an allowance for
estimated losses when the facts and circumstances indicate that
particular inventories may not be usable. Our reserve for obsolete
inventory was $0 as of March 31, 2021 and December 31, 2020,
respectively.
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Leases
In February 2016, the FASB issued ASU No. 2016-02
(ASC 842), Leases, to require lessees to recognize all leases, with
certain exceptions, on the balance sheet, while recognition on the
statement of operations will remain similar to current lease
accounting. Subsequently, the FASB issued ASU No. 2018-10,
Codification
Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted
Improvements, ASU No.
2018-20, Narrow-Scope Improvements for
Lessors, and ASU
2019-01, Codification
Improvements, to clarify and
amend the guidance in ASU No. 2016-02. ASC 842 eliminates real
estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual
periods beginning after December 15, 2018, with early adoption
permitted. We adopted ASC 842 as of January 1, 2019 using the
modified retrospective basis with a cumulative effect adjustment as
of that date. In addition, we elected the package of practical
expedients permitted under the transition guidance within the
standard, which allowed us to carry forward the historical
determination of contracts as leases, lease classification and not
reassess initial direct costs for historical lease arrangements.
Accordingly, previously reported financial statements, including
footnote disclosures, have not been recast to reflect the
application of the standard to all comparative periods
presented.
Operating
lease assets are included within operating lease right-of-use
assets, and the corresponding operating lease liabilities are
recorded as current portion of long-term operating lease, and
within long-term liabilities as long-term operating lease, net of
current portion on our condensed consolidated balance sheet as of
March 31, 2021 and December 31, 2020.
We
have elected not to present short-term leases on the condensed
consolidated balance sheet as these leases have a lease term of 12
months or less at lease inception and do not contain purchase
options or renewal terms that we are reasonably certain to
exercise. All other lease assets and lease liabilities are
recognized based on the present value of lease payments over the
lease term at commencement date. Because most of our leases do not
provide an implicit rate of return, we used our incremental
borrowing rate based on the information available at adoption date
in determining the present value of lease payments.
Capitalized Software Development Costs
In
accordance with ASC 985-20 regarding the development of software to
be sold, leased, or marketed, we expense such costs as they are
incurred until technological feasibility has been established, at
and after which time those costs are capitalized until the product
is available for general release to customers. The periodic expense
for the amortization of capitalized software development costs will
be included in cost of sales. Amortization expense for the three
months ended March 31, 2021 and 2020, was $10,475,
respectively.
Accounts Payable
As of March 31, 2021, one vendor accounted for approximately 60% of
accounts payable. As of December 31, 2020, two vendors accounted
for approximately 32% of accounts payable.
For
the three months ended March 31, 2021, two vendors accounted for
64% of cost of sales. For the three months ended March 31, 2020,
one vendor accounted for 89% of cost of sales.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We estimate
the expected costs to be incurred during the warranty period and
record the expense to the condensed consolidated statement of
operations at the date of sale. Our manufacturers assume the
warranty against product defects from date of sale, which we extend
to our customers upon sale of the product. We assume responsibility
for product reliability and results. As of March 31, 2021, and
December 31, 2020, our warranty reserve was $68,000. (See Note
14).
Income Taxes
Deferred
income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws in effect when the differences are expected to
reverse. The measurement of deferred income tax assets is reduced,
if necessary, by a valuation allowance for any tax benefits that
are, on a more likely than not basis, not expected to be realized
in accordance with Accounting Standards Codification (ASC) guidance
for income taxes. Net deferred tax benefits have been fully
reserved at March 31, 2021 and December 31, 2020. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are
enacted.
Net Income (Loss) Per Share
Basic
net income or (loss) per share is computed by dividing our net
income or (loss) by the weighted average number of shares of common
stock outstanding during the period presented. Diluted income or
(loss) per share is based on the treasury stock method and includes
the effect from potential issuance of shares of common stock, such
as shares issuable pursuant to the exercise of options and warrants
and conversions of preferred stock or debentures.
Potentially
dilutive securities as of March 31, 2021 consisted of 1,880,383
shares of common stock issuable upon exercise of outstanding
warrants, 132,500 shares of common stock issuable upon outstanding
options and 63,750 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”).
Potentially
dilutive securities as of March 31, 2020 consisted of 2,099,857
shares of common stock issuable upon exercise of outstanding
warrants, 103,750 shares of common stock issuable upon outstanding
options and 63,750 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”)
Diluted
net income or (loss) per share is computed similarly to basic net
income or (loss) per share except that the denominator is increased
to include the number of additional shares of common stock that
would have been outstanding if the potential shares of common stock
had been issued and if such additional shares were dilutive.
Options, warrants, and preferred stock of approximately 2.1 million
and 2.2 million shares of common stock were outstanding at March
31, 2021 and December 31, 2020, respectively, but were excluded
from the computation of diluted net loss per share at March 31,
2021 due to the anti-dilutive effect on net loss per
share.
The following provides a reconciliation of the shares used in
calculating the per share amounts for the periods
presented:
Note:
Warrants, options and preferred stock for the three months ended
March 31, 2021 are not included in the computation of diluted
weighted average shares as such inclusion would be
anti-dilutive.
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Income (loss) from Operations Data:
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Income
(Loss) from Operations
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$(1,510,333)
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$2,659,409
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Basic
and Diluted Weighted Average Shares
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Basic
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16,805,402
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15,850,352
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Diluted
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16,805,402
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18,117,709
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Basic
and Diluted Income (loss) Per Common Share
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Basic
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$(0.09)
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$0.17
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Diluted
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$(0.09)
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$0.15
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Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers (Topic 606). We recognize revenue
when we transfer promised goods or services to customers in an
amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. To determine
revenue recognition for contracts with customers we perform the
following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligation(s) in the contract; (iii)
determine the transaction price; (iv) allocate the transaction
price to the performance obligation(s) in the contract; and (v)
recognize revenue when (or as) we satisfy the performance
obligation(s). At contract inception, we assess the goods or
services promised within each contract, assess whether each
promised good or service is distinct and identify those that are
performance obligations.
We
must use judgment to determine: a) the number of performance
obligations based on the determination under step (ii) above and
whether those performance obligations are distinct from other
performance obligations in the contract; b) the transaction price
under step (iii) above; and c) the stand-alone selling price for
each performance obligation identified in the contract for the
allocation of transaction price in step (iv) above.
Title
and risk of loss generally pass to our customers upon shipment. Our
Customers include end users as well as dealers and distributors who
market and sell our products. Our revenue is not contingent upon
resale by the dealer or distributor, and we have no further
obligations related to bringing about resale. Shipping and handling
costs charged to customers are included in Product Revenues. The
associated expenses are treated as fulfillment costs and are
included in Cost of Revenues. Revenues are reported net of sales
taxes collected from Customers.
Disaggregation of Revenue
The
following table presents our revenues disaggregated by revenue
source.
Product and Service Revenue
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For the three months ended March 31,
(Unaudited)
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2021
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2020
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SteraMist
Product
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$1,661,000
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$6,638,000
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Service
and Training
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412,000
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415,000
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Total
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$2,073,000
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$7,053,000
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Revenue by Geographic Region
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For the three months ended March 31,
(Unaudited)
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2021
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2020
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United
States
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$1,804,000
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$3,569,000
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International
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269,000
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3,484,000
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Total
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$2,073,000
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$7,053,000
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Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As
of March 31, 2021, and December 31, 2020 we did not have any
unsatisfied performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for
which we recognize revenue at the amount to which we have the right
to invoice for services performed.
Arrangements with Multiple Performance Obligations
Our
contracts with customers may include multiple performance
obligations. We enter into contracts that can include various
combinations of products and services, which are primarily distinct
and accounted for as separate performance obligations.
Significant Judgments
Our
contracts with customers for products and services often dictate
the terms and conditions of when the control of the promised
products or services is transferred to the customer and the amount
of consideration to be received in exchange for the products and
services.
Equity Compensation Expense
We
account for equity compensation expense in accordance with FASB ASC
718, “Compensation—Stock Compensation.” Under the
provisions of FASB ASC 718, equity compensation expense is
estimated at the grant date based on the award’s fair
value.
On
July 7, 2017, our shareholders approved the 2016 Equity Incentive
Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance units/shares. Up to 2,000,000 shares of
common stock are authorized for issuance under the 2016 Plan.
Shares issued under the 2016 Plan may be either authorized but
unissued shares, treasury shares, or any combination thereof.
Provisions in the 2016 Plan permit the reuse or reissuance by the
2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash. Equity
compensation expense will typically be awarded in consideration for
the future performance of services to us. All recipients of awards
under the 2016 Plan are required to enter into award agreements
with us at the time of the award, and awards under the 2016 Plan
are expressly conditioned upon such agreements. For the three
months ended March 31, 2021 and 2020, we issued 50,000 shares of
fully vested common stock, respectively, out of the 2016 Plan to
our directors.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and cash
equivalents. We maintain cash balances at financial institutions
which exceed the current Federal Deposit Insurance Corporation
limit of $250,000 at times during the year.
Long-Lived Assets Including Acquired Intangible Assets
We
assess long-lived assets for potential impairments at the end of
each year, or during the year if an event or other circumstance
indicates that we may not be able to recover the carrying amount of
the asset. In evaluating long-lived assets for impairment, we
measure recoverability of these assets by comparing the carrying
amounts to the future undiscounted cash flows the assets are
expected to generate. If our long-lived assets are considered to be
impaired, the impairment to be recognized equals the amount by
which the carrying value of the asset exceeds its fair market
value. We base the calculations of the estimated fair value of our
long-lived assets on the income approach. For the income approach,
we use an internally developed discounted cash flow model that
includes, among others, the following assumptions: projections of
revenues and expenses and related cash flows based on assumed
long-term growth rates and demand trends; expected future
investments to grow new units; and estimated discount rates. We
base these assumptions on our historical data and experience,
industry projections, micro and macro general economic condition
projections, and our expectations. We had no long-lived asset
impairment charges for the three months ended March 31, 2021 and
2020.
Advertising and Promotional Expenses
We
expense advertising costs in the period in which they are
incurred. Advertising and promotional expenses for the three
months ended March 31, 2021 and 2020 were approximately $266,000
and $46,000, respectively.
Research and Development Expenses
We expense research and development expenses in the period in which
they are incurred. For the three months ended March 31, 2021 and
2020, research and development expenses were approximately $196,000
and $59,000, respectively.
Business Segments
We
currently have one reportable business segment due to the fact that
we derive our revenue primarily from one product. A breakdown of
revenue is presented in “Revenue Recognition” in Note 2
above.
Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU No. 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Topic
350): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract.”
This guidance aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software. This guidance is effective on a prospective or
retrospective basis beginning on January 1, 2020, with early
adoption permitted. We elected to adopt this guidance early, in
2020 on a prospective basis. The guidance did not have a material
impact on our condensed Consolidated Financial
Statements.
NOTE
3. INVENTORIES
Inventories consist
of the following at:
|
|
March
31,
2021
(Unaudited)
|
December
31,
2020
|
|
Finished
goods
|
$4,396,528
|
$3,404,025
|
|
Raw
Materials
|
368,927
|
377,490
|
|
|
$4,765,455
|
$3,781,515
|
NOTE 4. VENDOR DEPOSITS
At
March 31, 2021 and December 31, 2020, we maintained vendor deposits
of $146,130 and $388,712,
respectively, for open purchase orders for inventory.
NOTE 5. PROPERTY AND EQUIPMENT
Property and
equipment consist of the following at:
|
|
March
31,
2021
(Unaudited)
|
December
31,
2020
|
|
Furniture
and fixtures
|
$357,236
|
$357,236
|
|
Equipment
|
1,597,793
|
1,580,743
|
|
Vehicles
|
60,703
|
60,703
|
|
Computer
and software
|
214,860
|
203,704
|
|
Leasehold
improvements
|
386,120
|
386,120
|
|
Tenant
Improvement Allowance
|
405,000
|
405,000
|
|
|
3,021,712
|
2,993,507
|
|
Less:
Accumulated depreciation
|
1,786,228
|
1,695,404
|
|
|
$1,235,483
|
$1,298,103
|
For
the three months ended March 31, 2021 and 2020, depreciation was
$81,026 and $78,563, respectively. For the three months ended March
31, 2021 and 2020, amortization of tenant improvement allowance was
$9,798 and was recorded as lease expense and included within
general and administrative expense on the consolidated statement of
operations.
NOTE 6. INTANGIBLE ASSETS
Intangible
assets consist of patents and trademarks related to our Binary
Ionization Technology. We amortize the patents over the estimated
remaining lives of the related patents. The trademarks have an
indefinite life. Amortization expense was $2,422 and $93,347
for the three months ended March 31, 2021 and 2020,
respectively.
Definite life
intangible assets consist of the following:
|
|
March
31,
2021
(Unaudited)
|
December
31,
2020
|
|
Intellectual
Property and Patents
|
$3,000,012
|
$3,000,012
|
|
Less: Accumulated
Amortization
|
2,859,413
|
2,856,991
|
|
Intangible Assets,
net
|
$140,599
|
$143,021
|
Indefinite life
intangible assets consist of the following:
|
Trademarks
|
579,895
|
579,895
|
|
Total Intangible
Assets, net
|
$720,494
|
$722,916
|
|
|
|
|
Approximate future
amortization is as follows:
|
Year
Ended
|
Amount
|
|
April 1 –
December 31, 2021
|
$7,000
|
|
December 31,
2022
|
10,000
|
|
December
31, 2023
|
10,000
|
|
December
31, 2024
|
10,000
|
|
December
31, 2025
|
10,000
|
|
Thereafter
|
94,000
|
|
|
$141,000
|
NOTE 7. LEASES
In
April 2018, we entered into a 10-year lease agreement for a new
9,000-square-foot facility that contains office, warehouse, lab and
research and development space in Frederick, Maryland. The lease
agreement was scheduled to commence on December 1, 2018 or when the
property was ready for occupancy. The agreement provided for annual
rent of $143,460, an escalation clause that increases the rent 3%
year over year, a landlord tenant improvement allowance of $405,000
and additional landlord work as discussed in the lease agreement.
We took occupancy of the property on December 17, 2018 and the
lease was amended in March 2019 to provide for a 4-month rent
holiday and a commencement date of April 1, 2019. Lease expense for
operating lease payments is recognized on a straight-line basis
over the lease term.
The
balances for our operating lease where we are the lessee are
presented as follows within our condensed consolidated balance
sheet:
|
Operating leases:
|
March 31, 2021 (Unaudited)
|
December 31, 2020
|
|
Assets:
|
|
|
|
Operating
lease right-of-use asset
|
$619,989
|
$631,527
|
|
Liabilities:
|
|
|
|
Current
Portion of Long-Term Operating Lease
|
$83,768
|
$81,223
|
|
Long-Term
Operating Lease, Net of Current Portion
|
931,697
|
953,190
|
|
|
$1,015,465
|
$1,034,413
|
The
components of lease expense are as follows and are included within
general and administrative expense on our condensed consolidated
statement of operations:
|
|
For the Three Months Ended March 31, 2021
(Unaudited)
|
For the Three Months Ended March 31, 2020
(Unaudited)
|
|
|
|
|
|
Operating
lease expense
|
$39,329
|
$39,329
|
|
|
|
|
Other
information related to leases where we are the lessee is as
follows:
|
|
March 31, 2021 (Unaudited)
|
|
December 31, 2020
|
|
Weighted-average remaining lease term:
|
|
|
|
|
Operating leases
|
8.00
years
|
|
8.25
years
|
|
|
|
|
|
|
Discount rate:
|
|
|
|
|
Operating leases
|
7.00%
|
|
7.00%
|
Supplemental cash
flow information related to leases where we are the lessee is as
follows:
|
|
For the Three Months Ended March 31, 2021
(Unaudited)
|
For the Three Months Ended March 31, 2020
(Unaudited)
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
$36,941
|
$35,865
|
As of
March 31, 2021, the maturities of our operating lease liability are
as follows:
|
Year Ended:
|
Operating Lease
|
|
April 1 –
December 31, 2021
|
$114,148
|
|
December
31, 2022
|
155,621
|
|
December
31, 2023
|
160,290
|
|
December
31, 2024
|
165,098
|
|
December
31, 2025
|
170,051
|
|
Thereafter
|
575,131
|
|
Total
minimum lease payments
|
1,340,340
|
|
Less:
Interest
|
324,875
|
|
Present
value of lease obligations
|
1,015,465
|
|
Less:
Current portion
|
83,768
|
|
Long-term
portion of lease obligations
|
$931,697
|
NOTE 8. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In
accordance with ASC 985-20 we capitalized certain software
development costs associated with updating our continuing line of
product offerings. Capitalized software development costs consist
of the following at:
|
|
March 31, 2021
|
December
31,
|
|
|
(Unaudited)
|
2020
|
|
Capitalized
Software Development Costs
|
$125,704
|
$125,704
|
|
Less:
Accumulated Amortization
|
(83,802)
|
(73,327)
|
|
|
$41,902
|
$52,377
|
Amortization
expense for the three months ended March 31, 2021 and 2020 was
$10,475, respectively.
NOTE 9. CLOUD COMPUTING SERVICE
CONTRACT
In May 2020 we entered into a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. The annual contract payments are capitalized
as a prepaid expense and amortized over a twelve-month
period.
We have incurred
implementation costs of $62,677 in connection with the cloud
computing service contract which have been capitalized in prepaid
expenses and other assets as of March 31, 2021. In accordance
with ASU No. 2018-15, such implementation
costs are being amortized over the remaining contract terms
beginning January 1, 2021, which was when the cloud-based service
contract was placed in service. Amortization expense for the three
months ended March 31, 2021 was $3,482.
NOTE 10. SHAREHOLDERS’ EQUITY
Our
Board of Directors (the “Board”) may, without further
action by our shareholders, from time to time, direct the issuance
of any authorized but unissued or unreserved shares of preferred
stock in series and at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of such
preferred stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up by us
before any payment is made to the holders of our common stock.
Furthermore, the Board could issue preferred stock with voting and
other rights that could adversely affect the voting power of the
holders of our common stock.
Reverse Stock Split
On
September 9, 2020, the Board approved a reverse stock split of our
common stock and our Convertible Series A Preferred Stock, in each
case, at a ratio of 1-for-8 and without any change to the
respective par value thereof (the “Reverse Stock
Split”), and, on September 10, 2020, we filed an Articles of
Amendment to our Articles of Incorporation with the Department of
State of the State of Florida to effect the Reverse Stock Split.
The Reverse Stock Split became effective as of September 10, 2020
(the “Effective Time”). All per-share and share
amounts have been retroactively restated in this Quarterly Report
on Form 10-Q for all periods presented to reflect the reverse stock
split.
Convertible Series A Preferred Stock
Our
authorized Convertible Series A Preferred Stock, $0.01 par value,
consists of 1,000,000 shares. At March 31, 2021 and December 31,
2020, there were 63,750 shares issued and outstanding. The
Convertible Series A Preferred Stock is convertible at the rate of
one share of common stock for one share of Convertible Series A
Preferred Stock.
Convertible Series B Preferred Stock
Our
authorized Convertible Series B Preferred Stock, $1,000 stated
value, 7.5% cumulative dividend, consists of 4,000 shares. At March
31, 2021 and December 31, 2020, there were no shares issued and
outstanding, respectively. Each share of Convertible Series B
Preferred Stock may be converted (at the holder’s election)
into two hundred shares of our common stock.
Common Stock
During
the three months ended March 31, 2020, we issued 50,000 shares of
fully vested common stock valued at $48,000 to members of our Board
(see Note 12).
In
March 2020, 1,041,667 shares of common stock were issued in
connection with the conversion of convertible notes payable
aggregating $4,500,000.
In
March 2020, 10,417 shares of common stock were issued in connection
with the exercise of warrants for which we received proceeds of
$57,500.
During
the three months ended March 31, 2021, we issued 50,000 shares of
common stock valued at $228,000 to members of our Board (see Note
12).
Stock Options
There
were no options granted during the first quarter of
2021.
In
January 2020 we issued two options to purchase an aggregate of
31,250 shares of common stock to our Chief Operating Officer at an
exercise price of $0.80 and $0.96 per share pursuant to her
employment agreement with us. The options were valued at a total of
$23,595 and have a term of 5 years. We utilized the
Black-Scholesmethod to fair value the options received by the COO
with the following assumptions: volatility, 135%; expected dividend
yield, 0%; risk free interest rate, 1.64%; and a life of 5 years.
The grant date fair value of each share of common stock underlying
the options was $0.72 and $0.80. The value of the stock option was
included in accrued expenses at December 31,
2019
The
following table summarizes stock options outstanding as of March
31, 2021 and December 31, 2020:
Options
outstanding and exercisable by price range as of March 31, 2021
were as follows:
|
Outstanding Options
|
Average
Weighted
|
Exercisable Options
|
||
|
Range
|
Number
|
Remaining
Contractual
Life in Years
|
Number
|
Weighted
Average
Exercise Price
|
|
$0.80
|
27,500
|
3.85
|
27,500
|
$0.80
|
|
$0.88
|
31,250
|
2.76
|
31,250
|
$0.88
|
|
$0.96
|
25,000
|
2.77
|
25,000
|
$0.96
|
|
$2.16
|
5,000
|
3.76
|
5,000
|
$2.16
|
|
$4.40
|
12,500
|
4.85
|
12,500
|
$4.40
|
|
$7.06
|
31,250
|
4.50
|
31,250
|
$7.06
|
|
|
|
|
|
|
|
|
132,500
|
3.64
|
132,500
|
$2.72
|
Stock Warrants
In
January 2020 we issued a warrant to purchase 156,250 shares of
common stock to our Chief Executive Officer at an exercise price of
$1.20 per share pursuant to an employment agreement. The warrant
was valued at $164,201 and has a term of 5 years. We utilized the
Black-Scholes model to fair value the warrant received by our Chief
Executive Officer with the following assumptions: volatility, 136%;
expected dividend yield, 0%; risk free interest rate, 1.64%; and a
life of 5 years. The grant date fair value of each share of common
stock underlying the warrant was $1.04.
In
January 2020 we issued a warrant to purchase 5,208 shares of common
stock to an employee at an exercise price of $0.96 per share. The
warrant was valued at $3,594 and has a term of 5 years. We utilized
the Black-Scholes model to fair value the warrant received by the
employee with the following assumptions: volatility, 135%; expected
dividend yield, 0%; risk free interest rate, 1.58%; and a life of 5
years. The grant date fair value of each share of common stock
underlying the warrant was $0.72. The value of the warrants was
expensed in the fourth quarter of 2019 and included in accrued
expenses at December 31, 2019.
In
February 2020 we issued a warrant to purchase 18,750 shares of
common stock to an employee at an exercise price of $1.20 per
share. The warrant was valued at $18,571 and has a term of 3 years.
We utilized the Black-Scholes model to fair value the warrant
received by the employee with the following assumptions:
volatility, 155%; expected dividend yield, 0%; risk free interest
rate, 1.64%; and a life of 3 years. The grant date fair value of
each share of common stock underlying the warrant was
$0.96.
On February 11, 2021, we agreed to amend (the “Warrant
Amendment”) the warrant to purchase 125,000 shares of TOMI
common stock, par value $0.01 (the “Common Stock”),
issued by TOMI to Dr. Halden S. Shane, TOMI’s Chief Executive
Officer and a director on TOMI’s board of directors, on
February 11, 2014 (the “Warrant”), to provide TOMI an
option to repurchase the Warrant from Dr. Shane at a negotiated
price. In connection with the Warrant Amendment, TOMI repurchased
the warrant from Dr. Shane (the “Repurchase”) for an
aggregate cash consideration of $314,500, representing a 15%
discount of the net exercise cash value of the Warrant, which was
calculated using the closing price of the Common Stock on the
Nasdaq on February 11, 2021 of $5.36, less the exercise price of
the warrants in the amount of $2.40. On the same date, the Warrant
Amendment and the Repurchase was considered, approved and adopted
by a disinterested majority of TOMI’s board of
directors. The $314,500 charge in connection with the warrant
amendment has been included in General and Administrative expenses
for the three months ended March 31, 2021.
The
following table summarizes the outstanding common stock warrants as
of March 31, 2021 and December 31, 2020:
|
|
March 31, 2021
(Unaudited)
|
December 31, 2020
|
||
|
|
Number of Warrants
|
Weighted Average Exercise Price
|
Number of Warrants
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
2,049,133
|
$2.55
|
2,155,065
|
$3.12
|
|
Granted
|
-
|
-
|
585,447
|
4.97
|
|
Exercised
|
-
|
-
|
(76,796)
|
(2.77)
|
|
Expired
|
(168,750)
|
(2.84)
|
(614,583)
|
(6.40)
|
|
Outstanding,
end of period
|
1,880,383
|
$2.66
|
2,049,133
|
$2.55
|
Warrants
outstanding and exercisable by price range as of March 31, 2021
were as follows:
|
Outstanding Warrants
|
|
Exercisable Warrants
|
||
|
Exercise Price
|
Number
|
Average Weighted
Remaining Contractual
Life in Years
|
Number
|
Weighted Average
Exercise Price
|
|
$0.64
|
31,250
|
2.65
|
31,250
|
$0.64
|
|
$0.80
|
158,125
|
2.51
|
158,125
|
$0.80
|
|
$0.96
|
473,958
|
1.69
|
473,958
|
$0.96
|
|
$1.12
|
6,250
|
3.05
|
6,250
|
$1.12
|
|
$1.20
|
175,000
|
3.63
|
175,000
|
$1.20
|
|
$1.36
|
1,250
|
1.57
|
1,250
|
$1.36
|
|
$2.16
|
31,250
|
0.75
|
31,250
|
$2.16
|
|
$2.32
|
523,061
|
0.91
|
523,061
|
$2.32
|
|
$2.40
|
12,500
|
0.50
|
12,500
|
$2.40
|
|
$2.56
|
31,250
|
0.50
|
31,250
|
$2.56
|
|
$3.36
|
31,250
|
0.25
|
31,250
|
$3.36
|
|
$4.00
|
28,750
|
4.35
|
28,750
|
$4.00
|
|
$6.95
|
375,000
|
9.50
|
375,000
|
$6.95
|
|
$8.40
|
1,488
|
2.38
|
1,488
|
$8.40
|
|
|
1,880,383
|
3.35
|
1,880,383
|
$2.66
|
|
|
|
|
|
|
There
were no unvested warrants outstanding as of March 31,
2021.
Legal Contingencies
We
may become a party to litigation in the normal course of
business. In the opinion of management, there are no legal
matters involving us that would have a material adverse effect upon
our financial condition, results of operations or cash flows. In
addition, from time to time, we may have to file claims against
parties that infringe on our intellectual property.
Product Liability
As
of March 31, 2021 and December 31, 2020, there were no claims
against us for product liability.
SARS CoV-2 coronavirus
On
March 11, 2020 the World Health Organization declared the SARS
CoV-2 coronavirus a global pandemic and recommended
containment and mitigation measures worldwide. We have been
identified as an essential disinfectant and decontamination vendor
by various agencies and countries. Our operations being essential
have been materially affected by the coronavirus outbreak to date.
The uncertain nature of its spread globally may or may not impact
our business operations resulting from quarantines of employees,
customers and suppliers as well as potential travel restrictions in
areas affected or may be affected in the future.
NOTE 12. CONTRACTS AND AGREEMENTS
Executive Agreements
Halden S. Shane
On September 22, 2020,
we entered into a three year employment
agreement with Dr. Shane, effective October 1, 2020. The
agreement provides for a base annual salary of $500,000. The
agreement also provides for a signing bonus of 375,000 warrants.
Dr. Shane is also entitled to a cash performance bonus and an
annual issuance of an option to purchase 31,250 shares of common
stock from the 2016 Plan at the discretion of the Board. The
agreement also provides that we will reimburse Dr. Shane for the
expenses associated with the use of an automobile up to $750 a
month. The term of the agreement is three
years.
In the event Dr. Shane is terminated as CEO as a result of a change
in control, Dr. Shane will be entitled to a lump sum payment of two
years’ salary at the time of such termination.
The Board may terminate Dr. Shane for cause by written notification
to Dr. Shane; provided, however, that no termination for cause will
be effective unless Dr. Shane has been provided with prior written
notice and opportunity for remedial action and fails to remedy
within 30 days thereof, in the event of a termination by the
Company (i) by reason of willful dishonesty towards, fraud upon, or
deliberate injury or attempted injury to, the Company, (ii) by
reason of material breach of his employment agreement and (iii) by
reason of gross negligence or intentional misconduct with respect
to the performance of duties under the agreement. Upon termination
for cause, Dr. Shane will be immediately paid an amount equal to
his gross salary. The Board may terminate Dr. Shane other than for
cause at any time upon giving notice to Dr. Shane. Upon such
termination, Dr. Shane will be immediately paid an amount equal to
his gross salary.
Elissa J. Shane
On
October 1, 2020, we entered into an employment agreement with
Elissa J. Shane, effective October 1, 2020. Pursuant to her
employment agreement, Ms. Shane will receive an annual base salary
of at least $270,000, subject to annual review and discretionary
increase by the Compensation Committee of the Board. Ms. Shane is
eligible to receive an annual cash bonus and other annual incentive
compensation. The agreement originally provided for a grant of
93,750 warrants. Additionally, in connection with the execution
of her employment agreement, on October 1, 2020, we issued Ms.
Shane a warrant to purchase 93,750 shares of Common Stock at
an exercise price of $6.17 per share. These provisions were
subsequently amended to provide for the issuance to Ms. Shane of
31,250 options from the 2016 Equity Plan at the closing price of
$7.06 on the date of grant in lieu of the warrant grant and the
93,750 warrants were cancelled. Ms. Shane acknowledged that the
31,250 options were in full consideration of the amount she was
entitled to under the agreement. Her employment agreement also
provides that we will reimburse Ms. Shane for reasonable and
necessary business and entertainment expenses that she incurs in
performing her duties. During the term of her employment, Ms. Shane
will also be entitled to up to four weeks of paid vacation time
annually, which will accrue up to six weeks, and to participate
in our benefit plans and programs, including but not limited
to all group health, life, disability and retirement plans. Ms.
Shane is also entitled to the sum of $1,000 per month as a vehicle
allowance. The initial term of her employment agreement is
three years, which may be automatically extended for successive
one-year terms, unless either party provides the other with 120
days’ prior written notice of its intent to terminate
the agreement.
In
the event Ms. Shane is terminated as COO as a result of a change in
control, Ms. Shane will be entitled to a lump sum payment of one
and a half years’ salary at the time of such
termination.
Agreements with Directors
In
December 2017, we increased the annual fee to the members of our
Board to $40,000, to be paid in cash on a quarterly basis, with the
exception of the audit committee chairperson, whose annual fee we
increased to $45,000, also to be paid in cash on a quarterly basis.
Director compensation also includes the annual issuance of our
common stock.
For
the three months ended March 31, 2020, we issued an aggregate of
50,000 shares of common stock that were valued at $48,000 to
members of our Board.
For
the three months ended March 31, 2021, we issued an aggregate of
50,000 shares of common stock that were valued at $228,000 to
members of our Board.
Manufacturing Agreement
In June 2020 we entered into a manufacturing agreement with Planet
Innovation Products, Pty Ltd (“PI”). The agreement does
not provide for any minimum purchase commitments and is for a term
of three years. The agreement also provides for a warranty against
product defects.
Cloud Computing Service Contract
In May 2020 we entered
into an agreement for a cloud computing service contract. The
contract provides for annual payments in the amount of $30,409 and
has a term of 5 years. Approximate minimum payments under the contract
are as follows:
|
Year
Ended
|
Amount
|
|
April 1 – December 31,
2021
|
$18,000
|
|
December 31,
2022
|
30,000
|
|
December 31, 2023
|
30,000
|
|
December 31, 2024
|
30,000
|
|
December 31, 2025
|
15,000
|
|
|
$123,000
|
Other Agreements
TOMI Service Network (“TSN”) is a
national service network composed of existing full-service
restoration industry specialists that have entered initially into
licensing agreements with us to become Primary Service Providers
(“PSPs”). The licensing agreements originally granted
protected territories to PSPs to perform services using our
SteraMist®
platform of products and also provide
for potential job referrals to PSPs whereby we are entitled to
referral fees. Additionally, the agreement provides for commissions
due to PSPs for equipment and solution sales they facilitate to
other service providers in their respective territories. As part of
these agreements, we are obligated to provide to the PSPs various
training, ongoing support and facilitate a referral network call
center. As of March 31, 2021, we have 199 network companies in TSN.
The nature and terms of our TSN agreements may represent multiple
deliverable arrangements. Each of the deliverables in these
arrangements typically represent a separate unit of accounting.
There is no exclusivity in our TSN network.
NOTE 13. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
|
Accrued
expenses and other current liabilities consisted of the following
at:
|
||
|
|
|
|
|
|
March 31, 2021
(Unaudited)
|
December 31, 2020
|
|
Commissions
|
$158,076
|
$151,709
|
|
Payroll
and related costs
|
208,511
|
84,000
|
|
Director
fees
|
41,250
|
41,250
|
|
Sales
Tax Payable
|
7,009
|
9,784
|
|
Income
Taxes Payable (Note 16)
|
77,000
|
77,000
|
|
Accrued
warranty (Note 14)
|
68,000
|
68,000
|
|
Other
accrued expenses
|
69,951
|
70,106
|
|
Total
|
$629,797
|
$501,849
|
NOTE 14. ACCRUED WARRANTY
Our
manufacturers assume the warranty against product defects from date
of sale, which we extend to our customers upon sale of the product.
We assume responsibility for product reliability and results. The
warranty is generally limited to a refund of the original purchase
price of the product or a replacement part. We estimate warranty
costs based on historical warranty claim experience.
The
following table presents warranty reserve activities
at:
|
|
March 31, 2021
(Unaudited)
|
December 31, 2020
|
|
Beginning
accrued warranty costs
|
$68,000
|
$30,000
|
|
Provision for
warranty expense
|
1,292
|
101,041
|
|
Settlement of
warranty claims
|
(1,292)
|
(63,041)
|
|
Ending
accrued warranty costs
|
$68,000
|
$68,000
|
NOTE 15. LOAN PAYABLE
On
April 21, 2020, we received $410,700 in loan funding from the
Paycheck Protection Program (the "PPP") established pursuant to the
recently enacted Coronavirus Aid, Relief, and Economic Security Act
of 2020 (the "CARES Act") and administered by the U.S. Small
Business Administration ("SBA"). The unsecured loan (the "PPP
Loan") is evidenced by a promissory note of the Company, dated
April 21, 2020 (the "Note") in the principal amount of $410,700
with City National Bank (the "Bank"), the lender. Interest expense
for the three months ended March 31, 2021 was $1,035.
Under
the terms of the Note and the PPP Loan, interest accrues on the
outstanding principal at the rate of 1.0% per annum. The term of
the Note is two years, though it may be payable sooner in
connection with an event of default under the Note.
In
March of 2021, the loan forgiveness application was filed with our
bank and was pending approval as of March 31, 2021.
NOTE 16. INCOME TAXES
For the three months ended March 31, 2021 and 2020, our provision
for income tax was $0. Deferred income tax assets and liabilities
are determined based on differences between the financial statement
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax
assets is reduced, if necessary, by a valuation allowance for any
tax benefits, which are, on a more likely than not basis, not
expected to be realized in accordance with ASC guidance for income
taxes. As of March 31, 2021 and December 31, 2020, we recorded a
valuation allowance of $3,953,000 and $3,530,000, respectively for
the portion of the deferred tax assets that we do not expect to be
realized. Management believes that based on the available
information, it is more likely than not that the remaining U.S.
deferred tax assets will not be realized, such that a valuation
allowance is required against U.S. deferred tax assets. The effect
on deferred income tax assets and liabilities of a change in tax
rates is recognized in the period that such tax rate changes are
enacted.
NOTE 17. CUSTOMER CONCENTRATION
We had no customers/distributor whose revenue individually
represented 10% or more of our total revenue for the three
months ended March 31, 2021. One customer/distributor accounted for
31% of net revenue for the three months ended March 31,
2020. We had three customers/distributors that accounted for
38% of accounts receivable as of March 31, 2021. Three
customers/distributors accounted for 36% of accounts receivable as
of December 31, 2020.
NOTE 18. SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date the
financial statements were issued and up to the time of filing of
the financial statements with the SEC. There were no reportable
subsequent events.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
This section and other parts of this Quarterly Report on Form 10-Q
(“Form 10-Q”) contain forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. Forward-looking
statements provide current expectations of future events based on
certain assumptions and include any statement that does not
directly relate to any historical or current fact. For example,
statements in this Form 10-Q regarding the potential future impact
of the COVID-19 pandemic on the Company’s business and
results of operations are forward-looking statements.
Forward-looking statements can also be identified by words such as
“future,” “anticipates,”
“believes,” “estimates,”
“expects,” “intends,” “plans,”
“predicts,” “will,” “would,”
“could,” “can,” “may,” and
similar terms. Forward-looking statements are not guaranteeing
future performance and the Company’s actual results may
differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in
Part I, Item 1A of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2020 (the “2020 Form
10-K”) under the heading “Risk Factors.” The
Company assumes no obligation to revise or update any
forward-looking statements for any reason, except as required by
law.
Unless otherwise stated, all information presented herein is based
on the Company’s fiscal calendar, and references to
particular years, quarters, months or periods refer to the
Company’s fiscal years ended in December and the associated
quarters, months and periods of those fiscal years. Each of the
terms the “Company” and “TOMI” as used
herein refers collectively to TOMI Environmental Solutions, Inc.
unless otherwise stated.
The following discussion should be read in conjunction with the
2020 Form 10-K filed with the U.S. Securities and Exchange
Commission (the “SEC”) and the condensed consolidated
financial statements and accompanying notes included in Part I,
Item 1 of this Form 10-Q.
Available Information
The
Company periodically provides certain information for investors on
its corporate website, www.tomimist.com,
and its investor relations page of its website, www.investor.tomimist.com.
This includes press releases and other information about financial
performance, information on corporate governance and details
related to the Company’s annual meeting of shareholders. The
information contained on the websites and referenced in this Form
10-Q is not incorporated by reference into this filing. Further,
the Company’s references to website URLs are intended to be
inactive textual references only.
Quarterly Highlights
Business Update
As we
exited 2020 and began 2021, the Company is re-focusing on its core
customers and markets. COVID saw an increase and introduction to a
new set of customers, which was beneficial to the Company as it
brought awareness to product, offerings and opened the door to a
customer base at a very rapid pace. These customers were initially
looking for products that would aid in their ability to keep their
businesses open. As the quarantines continued and more businesses
were closed the Company saw a slowdown in demand for products from
these new customers. In addition, our existing life sciences
customers closed early in COVID and remained closed into 2021. We
expect the quarantines to remain into the first half of 2021. As
our core customers in Life Sciences, Commercial and Healthcare are
slowly re-opening, we expect to see increased demand for our
products and services in the latter half of 2021. Our focus in 2021
will be on working with our customers as they return to
work.
Due to
the business quarantine shut downs, our first quarter 2021 revenues
are down from the early pandemic high of 2020. To address the
return to work with our customers, the Company is building its
sales team. We believe it will take time to get the new team
trained and fully operational.
In
addition to building the team, the Company is addressing the needs
of our customers for a more mobile and lighter weight product by
introducing the SteraPak. Many of our customers are waiting for the
release instead of purchasing our existing products. New product
and service introductions can significantly impact net sales, cost
of sales and operating expenses. The timing of product
introductions can also impact the Company’s net sales to its
indirect distribution channels as these channels are filled with
new inventory following a product launch, and channel inventory of
an older product often declines as the launch of a newer product
approaches. Net sales can also be affected when consumers and
distributors anticipate a product introduction domestically and
internationally. Despite lower revenues for the quarter, the
Company and its divisions remain resilient and currently expect to
meet the targeted 2021 annual revenue goals.
COVID-19 Update
The
COVID-19 pandemic has prompted governments and businesses to take
unprecedented measures, such as restrictions on travel and business
operations, temporary closures of businesses, and quarantines and
shelter-in-place orders. This has significantly curtailed global
economic activities and has impacted our operations, particularly
international sales.
During
the first quarter of 2021, aspects of the Company’s business
continued to be affected significantly by the COVID-19 pandemic.
Some of the Company’s major customers in the
Hospital/healthcare, Life Science and channel partners temporarily
closed at various times, while the vast majority of our old and new
pipeline clients’ employees have transitioned to working
remotely. The closure and/or such customers working remotely placed
a halt on many of our ongoing long-term projects that were set to
close in late 2020 and early 2021. These projects and the addition
of new projects at very early stages have resumed during the second
quarter with a few planned to be completed by end of 2021. These
divisions have or are starting to reopen during the first part of
the second quarter. Further, we have recently experienced an
increase in capital equipment sales in the Life Sciences during the
second quarter of 2021 as pharmaceuticals, research universities,
vivariums, and government agencies are gradually returning to work
and interested in purchasing our equipment.
Travel
restrictions and the transition to our newly formed sales operation
and sales team has further affected our domestic and international
sales in the short term. Due to the nature of our technology,
industry knowledge, and the amount of time required for onboarding
new sales teams, including new Independent Manufacturing
Representatives (IMRs), it takes time to build a pipeline and
become fully operational in the sales role. We expect a more
positive impact from these efforts on our financial results by the
second half of 2021.
Prior to the pandemic, in 2019, the Company had
revenues of approximately $6,000,000, and our 2020 business plan
anticipated substantial growth in 2020. While we exceeded our
budget, the pandemic did not allow us to implement our initiatives
to generate the sustained growth beyond the pandemic. As our
historical consistent verticals return to work, we are reinstating
live and in-person demonstrations of our products for these
verticals/industries, in addition to resuming long-term ongoing
profitable projects, which we believe will have a positive impact
on our efforts to generate new sales. With the anticipated launch
of our new product lines (SteraPak, SteraBox, SteraBot), we expect
the rate of revenue growth will accelerate in the second half of
2021. These new products were designed and will be launched based
on the feedback of our customers for alternative delivery systems
and commercial uses for the SteraMist products.
The
second half of 2020 showed us that the world remained interested in
the disinfection process. The potential customers who did not want
to take the time to learn of proper disinfection protocols and the
importance of SteraMist competitive advantages but made their
purchasing decisions primarily based on price resulted in potential
customers selecting a less expensive disinfection technology
including electrostatic sprayers (ESS).
TOMI
rapidly transformed its R&D department to produce a backpack,
the SteraPak, with 6-log kill in seconds based on our proprietary
BIT technology platform. Our SteraMist SteraPak is expected to hit
the markets shortly. We are already taking and receiving
pre-orders, and the interest is high across all
markets.
The
full extent of the future impact of the COVID-19 pandemic on the
Company’s operational and financial performance is currently
uncertain and will depend on many factors outside the
Company’s control, including, without limitation, the timing,
extent, trajectory and duration of the pandemic; the availability,
distribution and effectiveness of vaccines; the imposition of
protective public safety measures; and the impact of the pandemic
on the global economy and demand for consumer products. Refer to
Part I, Item 1A of the 2020 Form 10-K under the heading “Risk
Factors,” for more information.
Overview
TOMI Environmental Solutions, Inc.
(“TOMI”, “we” and “our”) is a
global bacteria decontamination and infectious disease control
company, providing environmental solutions for indoor surface
decontamination through the manufacturing, sales, service and
licensing of our SteraMist®
brand of products, including
SteraMist®
BIT™,
a low percentage (7.8%) hydrogen peroxide-based fog or mist that
uses Binary Ionization Technology (BIT™).
Our SteraMist®
is a patented technology that produces
ionized Hydrogen Peroxide (iHP™)
using cold plasma science created under a grant by
the United
States Defense Advanced Research Projects Agency
(DARPA). Our EPA registered
BIT™
Solution is composed of a low
concentration of hydrogen peroxide converted to
iHP™
after passing the trade secret blended
solution including its sole active ingredient of 7.8% hydrogen
peroxide through an atmospheric cold plasma arc. The newly formed
iHP™
fog and mist consists of
submicron’s to 3-micron radical particles that are carried
throughout the treatment area in a fog or mist moving with the same
velocity and characteristics of a gas. This allows the ionized
hydrogen peroxide fog or mist to affect all surfaces and air space
throughout the targeted treatment area, over, above and beyond the
ability of a manual cleaning processes. iHP™
damages pathogenic organisms through
the oxidation of proteins, carbohydrates, and
lipids. SteraMist®
no-touch disinfection and or
decontamination treat areas mechanically, causing cellular
disruptions and/or dysfunctions resulting in a 6-log (99.9999%) and
greater kill or inactivation of all pathogens in the treatment
area.
Under the Federal Insecticide, Fungicide, and
Rodenticide Act (“FIFRA”), we are required to register
with the EPA and certain state regulatory authorities as a seller
of disinfectants. In June 2015, SteraMist®
BIT™
was registered with the EPA as a
hospital-healthcare disinfectant and general broad-spectrum surface
disinfectant for use as a misting/fogging agent.
SteraMist®
BIT™
now holds EPA registrations (#
90150-2) for mold control, and air and surface remediation (#
90150-1). In February 2016, we expanded our label with the EPA to
include Clostridium difficile Spores and MRSA, as well as the influenza (Avian) virus
h1n1, which we believe has better positioned us to penetrate all
industries including the biodefense and healthcare industry. In
August 2017, our EPA label was further expanded to include efficacy
against Salmonella and Norovirus. As of January 27, 2017, our
technology is one of 53 of the EPA’s “Registered
Antimicrobial Products Effective against Clostridium
difficile
Spores”, as published on the
EPA’s K List. Further, in December 2017,
SteraMist®
was included in the EPA’s list G
(Norovirus), L (Ebola) and M (Avian Flu). In March 2020, our EPA
label was further amended to include Emerging Viral Pathogens
claims, thus meeting the criteria against Enveloped viruses and
Large Non-enveloped viruses and included on List N (Emerging Viral
Pathogens including SARS-CoV-2).
SteraMist®
BIT™
brings to the world a mechanical and
automated method of cleaning using a game-changing technology and
EPA registered Hospital-HealthCare disinfectant providing an
upgrade to existing disinfecting and cleaning protocols while
limiting liability in a facility when it comes to resistant
infectious pathogens. We maintain this
registration in all fifty (50) states, Canada, and approximately
thirty-five (35) other countries.
Markets
Our SteraMist®
products are designed to address a
wide spectrum of industries using iHP™.
Our operations consist of five main divisions based on our current
target industries: Hospital-HealthCare, Life Sciences, TOMI Service
Network (TSN), Food Safety and Commercial.
We
continue to offer our customers a wide range of innovative mobile
products designed to be easily incorporated into their existing
disinfection and decontamination procedures and protocols. Our
newly soon to be released SteraPak will allow us to progress
further into market share, specifically for our
Hospital-HealthCare, TSN, and Commercial divisions. Additionally,
we offer integrated facility equipment installations known as
Custom Engineered Systems (CES), routine & emergency iHP
Corporate Service, essential training packages, validations and
qualifications, and onsite performance maintenance requests, which
are all profitable for our Life Sciences and expect to soon be
profitable in our Food Safety division.
Each of these are structured to address the unique
disinfection and decontamination needs of our customers worldwide
regardless of industry requiring or requesting
SteraMist®
disinfection
decontamination.
Divisions
Hospital-Healthcare
Our
SteraMist® line of
products, specifically the SteraMist® Surface Unit
and SteraMist®
Total Disinfection Cart are our main solutions to aid our
Hospital-HealthCare customers in providing the quality of care and
safety they provide to their patients by disinfecting patient and
operating rooms, pharmacies, ambulances, and emergency environments
in a hospital or healthcare facility. TOMI’s latest product,
the SteraPak, further assists healthcare communities with an
easy-to-use, cordless disinfection solution, creating a quicker
turnaround time.
In the
first quarter of 2021, we experienced an increase in sales to
health system clients, including the expansion to our third Mercy
hospital in Ohio, with a fourth Mercy facility seeking to implement
SteraMist soon. We also received multiple purchase orders from
Zimmer, a medical device company.
Our
team of technicians and representatives train, maintain, and
troubleshoot capital equipment throughout the world for our
Hospital-HealthCare customers. As our
Training and Implementation department expands, we expect continued
growth in our Hospital-HealthCare division. The protocol
development and onboarding for implementation in this division is
critical. During 2020 the use of our SteraMist®
in such campuses increased due to our
comprehensive training for their day and night shift maintenance
and housekeeping departments. By late 2021, we anticipate annual
comparison case studies from many of these facilities who were
onboarded in 2020, which may show lower transmission infection
rates in COVID, Clostridium difficile Spores and overall, HAI cases.
Life Sciences
Our SteraMist®
Environment System, Custom Engineered
Systems (CES), the SteraMist®
Select Surface Unit, custom
iHP™
implementation to decontamination
chambers and cage washers, and our iHP™
Corporate Service Division, are
designed to be tailored to provide a complete room solution to
address the regulatory inspections of disinfecting/decontaminating
and Installation Qualification (IQ)-Operational Qualification
(OQ)–Performance Qualification (PQ) validation processes
within the life sciences industry.
The
pandemic halted capital equipment and service sales in our Life
Sciences division and its verticals. As operations reconvene for
these verticals, we expect to see increased demand from this
vertical. Long term ongoing projects and validations have resumed,
along with proposals and interest for our CES permanent
decontamination room. We will work with our customers to respond to
their inquiries regarding CES. These are longer lead-time sales
that can take months to design, build and implement. We expect
these installations to have impact to our results in late 2021 and
into 2022.
Further,
post COVID pandemic has brought some attention to the SteraMist
product line as our CES in Pfizer Missouri was recently showcased
in a New York Times article as they featured their COVID vaccine
processes. In addition, our iHP Corporate Service team treated one
of four fill lines in a North Carolina pharmaceutical company that
manufacturers one of the COVID vaccines, with the remaining three
lines set to be decontaminated in the future with
SteraMist.
TOMI
developed a new product which acts as a passthrough or small
decontamination chamber, the SteraBox, to sterilize small
instruments quickly and efficiently.
TOMI Service Network
The TOMI Service Network, or TSN, is an expansive
network consisting of third-party professionals specializing in a
wide array of disciplines who are exclusively licensed and trained
to use the SteraMist®
products. We sell, train, and service
a wide array of professional remediation companies in the use of
SteraMist®
through the TSN division. This allows
for increased accessibility and brand awareness of
iHP®
services to facilities in need of
local routine and emergency disinfection and
decontamination.
The
TOMI Service Network (TSN) division experienced greater impact from
the COVID-19 pandemic quarter over quarter than any other division.
As stated above, the urgency of becoming an essential business
prompted an increase of demand for SteraMist disinfection by our
customers who wished to remain in operation in the first half of
2020, and TSN members acquired and accumulated BIT Solution in
anticipation of supply shortage. We believe that cleaning protocols
have changed permanently due to the COVID-19 pandemic, and our
network will play a significant role in facilitating and
maintaining these protocols throughout the United States and
Canada. The urgency for emergency disinfection services may have
declined, but the education and support of such services provided
to our members by TOMI personnel provides us with an advantage to
maintaining strong business relationships with these companies and
their thousands of happy SteraMist customers as the world returns
to the new normal.
As of March 31, 2021, we have 199 network
companies in TSN. We
expect our TSN division to onboard approximately 6 to 8 new TSN
members per quarter. We also expect our SteraPak release to be an
important factor for this market that will increase the new member
onboarding number quarter over quarter moving
forward.
Food Safety
Food Safety presents significant potential as an
opportunity for substantial growth with continued product research
and compliance testing. With the food safety industry in North
America coming under closer scrutiny with the implementation and
enforcement of new and established guidelines, our consultants have
submitted a request to expand our current labels to include a 1%
acceptable concentration of hydrogen peroxide. This concentration
has previously been approved by the USDA and FDA for direct food
and crop application and will allow SteraMist®
to expand use sites beyond food
processing machinery, restaurants, and food contact areas to assist
in compliance with the newly established Food Safety Modernization
Act guidelines set in place by the FDA, as well as the Safe Food
for Canadians Act and Safe Food for Canadians Regulations in
Canada.
TOMI continues to work with premium companies in
testing and validating SteraMist®
technology in the Food Safety and seed
industries. In the first quarter of 2021, we have made progress in
enhancing brand awareness and promoting and marketing in this
division, as a majority of the Independent Marketing
Representatives we onboarded recently belong to this
division.
Commercial
Our Commercial division, which includes but is not
limited to use sites such as aircraft, airports, police and fire,
manufacturing companies, automobile, military, cruise ships,
shipping ports, preschool education, primary and secondary schools,
colleges including dormitories, all modes of public and private
transportation, regulatory consulting agencies, retail, housing and
recreation, and of course emergency preparedness for counties and
cities to use SteraMist®
throughout their
community.
Quarter
1 of 2021 continued to bring interest to the marketplace for these
industries and interest in SteraMist disinfection as a solution
remains high. We expect the SteraPak to be a game changer in growth
for this division.
Business Highlights and Recent Events
Customers:
Globally, we have added approximately thirteen
(13) new customers for the three months ended March 31, 2021. In
the short term, we expect to see healthy demand for the
SteraMist®
products and services. While the
initial outbreak caused a surge in demand for the
SteraMist®,
we expect that such demand for our products and services will
continue and we are building a team to address the post COVID-19
pandemic market opportunities.
Revenues:
We experienced a decline in our revenue for the
three months ended March 31, 2021 when compared to the same quarter
in the prior year due to a significant increase of demand caused by
the onset of the COVID-19 pandemic in March 2020. We were
positioned well to respond to the pandemic related spike in demand
due to our inventory levels and increased production capacity which
led to substantial revenue growth in the first and second quarter
of 2020. However, during of the second half of 2020 and early 2021,
many of our established vertical clients were closed or required to
reduce or suspend their business operations. The markets that were
negatively affected were our life sciences clients that were
nonessential, University and privately owned vivarium labs, and
many nonessential pharmaceutical research companies globally. In
addition, the healthcare industry has
shifted virtually all of its focus and resources in response to the
pandemic and therefore reduced substantially their elective
surgical and clinical related services, resulting in limited
non-essential onsite personnel. These trends made it more difficult
for us to demo our equipment and execute our sales and marketing
strategies. In addition, our customers have limited budgets for
newer technologies. We anticipate that the availability of
significant federal funds to our customers for pandemic
preparedness should assist them in purchasing our
products.
As
many industrial companies are reducing R&D and capital
expenditures spending due to the economic impact of the pandemic,
we are moving ahead with many new products in development. In 2021,
we intend to spend more on capital expenditures (CapEx) and
operating expenditures (OpEx) including development of new
products, services and process technologies to sharpen our
competitive advantage. In addition, we will expand our commercial
service location to meet the expanding needs of our
customers.
We
believe that we possess the best technologies in the world in the
disinfection and decontamination space. This pandemic has provided
us with the confidence to develop a clear strategy to manufacture
what may be our best product portfolio to date. In addition, we
continue to move our BIT technology closer to becoming the standard
in disinfection and decontamination globally. This should lead to a
greater market share, increased profitability and capability
strength.
The second half of 2020 showed us that our customers wanted a lower
cost disinfection device like electrostatic sprayers (ESS), even if
it provides the end-user with less efficacy and the potential of
causing damage to its personal property and delicate equipment
which were dangerous and causing explosions with many resulting in
fires.
To
respond to our customer demands of a lower cost and more versatile
product, we developed a Backpack unit that will possess our award
winning 6-log and above kill technology and speed without the
damage to space and materials. We expect our backpack to be
competitively priced and open SteraMist to the largest cleaning
market in the world-members of ISSA (International Sanitary Supply
Association) and its divisions IEHA (Integrated Environment and
Health Assessment) and EMEA (Europe, Middle East & Africa).
These organizations have historically been price conscious and were
resistant early on to our SteraMist pricing of our professional
decontamination equipment (SteraMist Surface and Environment Unit).
We plan on introducing our new innovative backpack globally in the
second or early third quarter 2021.
Total
revenue for the three months ended March 31, 2021 and 2020, was
$2,073,000 and $7,053,000, respectively, representing a decrease of
$4,980,000, or 71% compared to the same prior year
period.
SteraMist®
product-based revenues for the three
months ended March 31, 2021 and 2020, were $1,661,000 and
$6,638,000, representing a decrease of $4,977,000 or 75% when
compared to the same prior year period.
Our
service-based revenue for the three months ended March 31, 2021 and
2020, was $412,000 and $415,000, respectively, representing a year
over year decrease of 1%.
Our
domestic revenue for the three months ended March 31, 2021 and
2020, was $1,804,000 and $3,569,000, respectively, a decrease of
$1,765,000, or 49% when compared to the same prior year
period.
Internationally,
our revenue for the three months ended March 31, 2021 and 2020, was
approximately $269,000 and $3,484,000, respectively, representing a
decrease of $3,215,000 or 92%.
2021 Events:
During
the first quarter of 2021, we hired one Vice President of Sales,
each of whom, along with a Vice President of Sales, hired in the
fourth quarter of 2020, attended a week-long sales seminar hosted
by TOMI at the end of February 2021. The sales seminar was intended
to educate each sales professional about disinfection
decontamination competition in their respective divisions and the
advantages of SteraMist technology and products.
On January 15, 2021, Dr. Halden Shane presented at
the Needham Virtual Growth Conference while continuing to pursue
and enhance SteraMist media presence across many platforms. Dr.
Shane will be returning on May 18, 2021 (12:45pm – 1:25pm
Eastern) as he presents at the 16th
annual Needham virtual technology and
media conference.
As
conferences and tradeshows are reopening in the second half of 2021
for companies to exhibit live, TOMI will be attending multiple
shows across the country with our new Vice Presidents of Sales in
attendance. It is critical for TOMI to perform live demonstrations
to showcase the difference between our SteraMist iHP technology and
our competitors. TOMI looks forward to making a large impact with
live demonstrations of SteraMist disinfection technology throughout
our multiple divisions.
Research Studies:
Due to
the pandemic, there have been significant delays by U.S. regulatory
agencies in approving new submissions, including TOMI's new 1%
registration focusing on direct food and agricultural applications.
The 1% label has been delayed by EPA due to the reallocation of
staff resources responding to an influx of product submissions to
deal with COVID-19 (TOMI successfully added Emerging Pathogen
claims and was added to EPA list in March 2020.), significantly
delaying all other PRIA actions, well documented delays caused by
staffing vacancies, and the continuing prohibition of in person
meetings.
We
continue to work with our German aircraft partner and Boeing in a
third-party test required for the aviation industry. We will incur
no costs for this work as both testing partners are clients. We
anticipate the testing will be completed in the second quarter of
2021.
TOMI
has engaged HYGCEN Germany GmbH to perform a quantitative test of
germ carriers for airborne room disinfection and testing of the
effectiveness of a method for disinfecting room air to meet the new
EU norm (standard) EN 17272. Certification that Binary Ionization
Technology meets the new standard will continue to position iHP as
the premier decontamination/disinfection technology available on
the market today.
We
continue to work with the Virginia State University Agricultural
Research Station and its partner, Arkema on a food safety pilot
study based on novel, nonthermal, and environmentally friendly
technology to control foodborne pathogens on industrial hemp seed
and strawberry as representative model foods. The study will
investigate the efficacy of aerosolized hydrogen peroxide in
inactivating foodborne pathogens – determining the optimum
treatment conditions on microbial and physical quality of the two
model products. We anticipate the pilot to be completed by the
second quarter of 2021.
We
are currently working with University of Virginia on two separate
studies. First, we are working on a study on SteraMist’s
efficacy against SARS-CoV-2, and we have observed preliminary
successful results and are waiting for the final published paper.
Second, we are working on a study against Adenovirus using the
handheld SteraMist Surface Unit and testing spray and contact time
variables, and we are waiting for the results. We anticipate the
testing will be completed by the third quarter of
2021.
TOMI
has partnered with the Department of Chemistry and Biochemistry of
Texas Tech University to conduct a wide range of studies on spray
pattern, deposition, and hydrogen peroxide content in order to
compare our 1% label to other similar products on the
market.
TOMI's
long term relationship with USDA Agricultural Research Service
continues to achieve results. In March 2021, an article entitled
"Hydrogen peroxide residue on tomato, apple, cantaloupe, and
Romaine lettuce after treatments with cold plasma-activated
hydrogen peroxide” was accepted for publication in the
Journal of Food Microbiology. TOMI has also begun discussions with
another ARS facility to evaluate the benefits of iHP on blueberries
to prevent rot and reduce post-harvest losses.
As previously reported for a couple years, we have
participated in a large multi-year federal funded study, known as
the “SHIELD study”, that compares hospital manual
cleans to a SteraMist® mechanical
clean. Preliminary results collected by the current hospitals in
the study is showing a decrease in the transfernce of pathogens
resulting in HAIs and Clostridium difficile infections in the rooms that used
SteraMist® for
their terminal clen, as compared to the rooms that have been
manually cleaned. We are eager to report that enough data has been
collected to complete the study in 2021, and we expect that data to
be provided to the examiners with a published paper to soon
follow.
Registrations & Intellectual Property (IP):
Our
portfolio includes more than twenty (20) Utility
Patent applications worldwide for both method and
system claims on SteraMist® BIT™,
either published or undergoing prosecution. Most
recently, in November 2020, we were granted utility
patents in Australia and Israel for our
SteraMist® BIT™ technology. In
the recent past, we have obtained two related US utility patents
giving us protection of our technology until the year 2038, and we
are pursuing further claims to additional capabilities in on-going
US and worldwide patent applications. In May 2020, we filed a
PCT application for further additional applications of
SteraMist® BIT™ which
were determined to be novel and inventive by the international
search authority.
Further
in 2020, we submitted utility patents in multiple
countries which are all in the national stage for review under
the patent prosecution highway for claims found novel and inventive
by the international search authority. Once these are received, we
will hold international acceptance for the inherited patents and
our newly received patents. During 2020, we were awarded
a design patent on our surface-mounted applicator device in
the United States, China, Japan, Taiwan, and Korea. We have
filed and have been granted or have pending acceptance on
thirty-two (32) separate design patents for our: Decontamination
Chamber(s), Decontamination Applicator, Decontamination Cart,
Applicator, and Surface Mounted Applicator 90-Degree Device.
These patents are published around the world, including but not
limited to United States, China, Hong Kong, Europe, United Kingdom,
Singapore, Taiwan, Vietnam, Canada, South Korea, and
Japan.
Our
products are sold around the world under various brand names and
trademarks. We consider our brand names and trademarks to be
valuable in the marketing of our products. As of March 1,
2021, we held a total of one hundred seventy-eight
(178) trademarks (word and logo) registered or pending across
the globe. TOMI registers marks in seven (7) classes of
specification of goods and services: Class 1 for Chemicals for
Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose
for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power
Operated Spraying Machines, Class 11 for Sterilizers for Medical
Use and Air Purification, Class 35 for Business Consultation and
Management Services, Class 37 for General Disinfecting Services,
and Class 40 for Chemical Decontamination and Manufacturing
Services.
Financial Operations Overview
Our
financial position as of March 31, 2021 and December 31, 2020,
respectively, was as follows:
|
|
March 31, 2021
|
December 31, 2020
|
|
|
Unaudited
|
|
|
Total
shareholders’ equity
|
$11,920,000
|
$13,203,000
|
|
Cash
and cash equivalents
|
$3,946,000
|
$5,199,000
|
|
Accounts
receivable, net
|
$3,743,000
|
$3,717,000
|
|
Inventories
|
$4,765,000
|
$3,782,000
|
|
Prepaid
expenses
|
$316,000
|
$421,000
|
|
Vendor
Deposits
|
$146,000
|
$389,000
|
|
Other
Receivables
|
$-
|
$199,000
|
|
Current
liabilities
|
$2,789,000
|
$2,203,000
|
|
Long-term
liabilities
|
$1,342,000
|
$1,364,000
|
|
Working
Capital
|
$10,128,000
|
$11,503,000
|
During
the quarter ended March 31, 2021, our debt and liquidity positions
were affected by the following:
●
Net
cash used in operations of $1,225,000.
Results of Operations for the Quarter Ended March 31, 2021 Compared
to the Quarter Ended March 31, 2020
|
|
For
the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Revenue,
Net
|
$2,073,000
|
$7,053,000
|
$(4,980,000)
|
-71%
|
|
Gross
Profit
|
1,235,000
|
4,488,000
|
(3,253,000)
|
-72%
|
|
Total Operating
Expenses (1)
|
2,745,000
|
1,829,000
|
916,000
|
50%
|
|
Income (Loss) from
Operations
|
(1,510,000)
|
2,659,000
|
(4,169,000)
|
NM
|
|
Total Other Income
(Expense)
|
(1,000)
|
(40,000)
|
39,000
|
-98%
|
|
Net Income
(Loss)
|
$(1,511,000)
|
$2,619,000
|
$(4,130,000)
|
NM
|
|
Basic Net Income
(Loss) per share
|
$(0.09)
|
$0.17
|
$(0.26)
|
NM
|
|
Diluted Net Income
(Loss) per share
|
$(0.09)
|
$0.14
|
$(0.23)
|
NM
|
(1)
Includes
$0 and $183,000 in non-cash equity compensation expense for the
three months ended March 31, 2021 and 2020,
respectively.
(2)
NM
– Not Meaningful
Sales
During the three months ended March 31, 2021 and
2020, we had net revenue of approximately $2,073,000 and
$7,053,000, respectively, representing a decrease in revenue of approximately $4,980,000 or
71%.
We experienced a decline in our revenue for the
three months ended March 31, 2021 as compared to the same quarter
in the prior year primarily due to the significant increase of
demand caused by the onset of COVID-19 pandemic in March of 2020.
We were positioned well to respond to the pandemic related spike in
demand due to our inventory levels and increased production
capacity, which led to substantial revenue growth in the first and
second quarter of 2020. However, during second half of 2020 and
early 2021, many of our established vertical clients were closed or
required to reduce operation due to the impact of COVID-19 pandemic
on their businesses. The markets that were negatively affected
included our life sciences clients that were nonessential,
University and privately owned vivarium labs, and many nonessential
pharmaceutical research companies globally. In addition, the
healthcare industry has shifted
virtually all of its focus and resources in response to the
pandemic and therefore substantially reduced elective surgical and
clinical related services, resulting in limited non-essential
onsite personnel. These trends made it more difficult for us to
demo our equipment and execute our sales and marketing
strategies.
As
customers mature through the product and adoption cycle and our
sales pipeline converts to revenue, we expect to generate more
predictable sales quarter over quarter. Further, as the COVID-19
pandemic subsides, we expect that the demand for our products and
services will continue as we are building a team to address the
post COVID-19 pandemic market opportunities.
Net Revenue
Product and Service Revenue
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
SteraMist
Product
|
$1,661,000
|
$6,638,000
|
$(4,977,000)
|
(75)%
|
|
Service
and Training
|
412,000
|
415,000
|
(3,000)
|
(1)%
|
|
Total
|
$2,073,000
|
$7,053,000
|
$(4,980,000)
|
(71)%
|
Revenue by Geographic Region
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
United
States
|
$1,804,000
|
$3,569,000
|
$(1,765,000)
|
(49)%
|
|
International
|
269,000
|
3,484,000
|
(3,215,000)
|
(92)%
|
|
Total
|
$2,073,000
|
$7,053,000
|
$(4,980,000)
|
(71)%
|
Cost of Sales
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Cost
of Sales
|
$838,000
|
$2,565,000
|
$(1,727,000)
|
(67)%
|
|
|
|
|
|
|
Cost
of sales was $838,000 and $2,565,000 for the three months ended
March 31, 2021 and 2020, respectively, a decrease of $1,727,000, or
67%, compared to the prior year. The primary reason for the decline
in cost of sales is attributable to lower revenue in the current
quarter. Our gross profit as a percentage of sales for the three
months ended March 31, 2021 was 59.6% compared to 63.6% in the same
prior period, respectively. The lower gross profit is attributable
to the product mix in sales. As revenues continue to grow and we
are able to negotiate more favorable pricing from our vendors, we
anticipate that our cost per unit could decrease.
Professional Fees
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Professional
Fees
|
$173,000
|
$136,000
|
$37,000
|
27%
|
|
|
|
|
|
|
Professional
fees are comprised mainly of legal, accounting, and financial
consulting fees.
Professional
fees were $173,000 and $136,000 for the three months ended March
31, 2021 and 2020, respectively, an increase of approximately
$37,000, or 27%, in the current year period. The increase is
attributable to additional professional fees in connection with the
maintenance of our intellectual property.
Depreciation and Amortization
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Depreciation
and Amortization
|
$83,000
|
$172,000
|
$(89,000)
|
(51)%
|
|
|
|
|
|
|
Depreciation
and amortization were approximately $83,000 and $172,000 for the
three months ended March 31, 2021 and 2020, respectively,
representing a decrease of $89,000, or 51%. The decline is due to
intangible assets that became fully amortized in 2020 which has led
to a lower amortization expense in the current year
period.
Selling Expenses
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Selling
Expenses
|
$474,000
|
$379,000
|
$95,000
|
25%
|
|
|
|
|
|
|
Selling expenses for the three months ended March
31, 2021 were approximately $474,000, as compared to
$379,000 for the quarter ended
March 31, 2020, representing an increase of approximately $95,000 or 25%.
The increase in selling expense is attributable to a higher
employee headcount and the related increase in payroll. We continue
to invest and allocate resources into our sales, marketing and
advertising initiatives and have increased efforts in the current
year in order to further develop our brand recognition and grow our
base of customers.
Research and Development
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Research
and Development
|
$196,000
|
$59,000
|
$137,000
|
232%
|
|
|
|
|
|
|
Research and development expenses for the three
months ended March 31, 2021 were approximately $196,000, as
compared to $59,000 for the quarter ended March 31, 2020,
representing an increase of approximately $137,000, or 232%. The increase in
research and development expenses is attributable to new product
development and increased testing.
Equity Compensation Expense
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Equity
Compensation Expense
|
$-
|
$183,000
|
$(183,000)
|
(100)%
|
|
|
|
|
|
|
Equity
compensation expense was $0 and $183,000 for the three months ended
March 31, 2021 and 2020, respectively, representing a decrease of
$183,000. The decrease in equity compensation expense relates to
the timing of warrants and options issued to executives and
consultants in 2020.
Consulting Fees
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
Consulting
Fees
|
$106,000
|
$82,000
|
$24,000
|
29%
|
|
|
|
|
|
|
Consulting
fees were $106,000 and $82,000 for the three months ended March 31,
2021 and 2020, respectively, representing an increase of $24,000,
or 29%, in the current quarter period. The increase is due to the
timing of certain projects that occurred in the current year that
did not occur in the same prior year period.
General and Administrative Expense
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
General
and Administrative
|
$1,712,000
|
$818,000
|
$894,000
|
109%
|
|
|
|
|
|
|
General
and administrative expense includes salaries and payroll taxes,
rent, insurance expense, utilities, office expense and product
registration costs.
General
and administrative expense was $1,712,000 and $818,000 for the
three months ended March 31, 2021 and 2020, respectively, an
increase of $894,000, or 109%, in the current quarter period. The
increase in General and administrative expense is attributable to a
higher employee headcount and higher wages.
Other Income and Expense
|
|
For the three months ended March 31,
|
Change
|
||
|
|
2021
|
2020
|
$
|
%
|
|
|
|
|
|
|
|
Interest
Income
|
-
|
1,000
|
(1,000)
|
NM
|
|
Interest
Expense
|
(1,000)
|
(41,000)
|
40,000
|
(98)%
|
|
Other
Income (Expense)
|
$(1,000)
|
$(40,000)
|
$39,000
|
(98)%
|
Interest
income was approximately $0 and $1,000 for the three months ended
March 31, 2021 and 2020, respectively.
Interest
expense was $1,000 and $41,000 for the three months ended March 31,
2021 and 2020, respectively.
Liquidity and Capital Resources
As
of March 31, 2021, we had cash and cash equivalents of $3,946,000
and working capital of $10,128,000. Our principal capital
requirements are to fund operations, invest in research and
development and capital equipment, and the continued costs of
public company filing requirements. We have historically funded our
operations through funds generated through operations and debt and
equity financings.
For
the three months ended March 31, 2021, we incurred a loss from
operations of ($1,510, 000) and for the three months ended March
31, 2020, we generated income from operations of
$2,659,000. Cash used in operations for the three months ended
March 31, 2021, was ($1,225,000). Cash provided from operations was
$3,316,000 for the three months ended March 31, 2020.
A
breakdown of our statement of cash flows for the three months ended
March 31, 2021 and 2020 is provided below:
Operating Activities
Cash
used in operating activities for the three months ended March 31,
2021 was ($1,225,000), compared to cash provided by operations for
the three months ended March 31, 2020 of $3,316,000. Our cash
provided by operations declined in the current year period as a
result of lower revenue and a net loss.
Investing Activities
Cash
used in investing activities for the three months ended March 31,
2021 and 2020 was $28,000 and $15,000, respectively.
Financing Activities
Cash
used by financing activities for the three months ended March 31,
2021 and 2020 was $0 and $443,000 respectively. The cash used in
financing activities in the prior year period was due to the
repayment of the principal balance of the convertible note of
$500,000 offset by proceeds from the exercise of warrants in the
amount of $58,000.
Liquidity
Our revenues can fluctuate due to the following factors, among
others:
●
ramp
up and expansion of our internal sales force and
manufacturers’ representatives;
●
length
of our sales cycle;
●
global
response to the COVID-19 pandemic and market demand for our
products;
●
expansion
into new territories and markets; and
●
timing
of orders from distributors.
We
could incur operating losses and an increase of costs related to
the continuation of product and technology development, and sales
expense as we continue to grow our sales teams and geographic
presence, tooling capital expenditures as we ramp up and streamline
our production and administrative activities including compliance
with the Sarbanes-Oxley Act of 2002 Section 404.
Management
has taken and will endeavor to continue to take a number of actions
in order to improve our results of operations and the related cash
flows generated from operations in order to strengthen our
financial position, including the following items:
●
expanding
our label with the EPA to further our product registration
internationally;
●
continued
expansion of our internal sales force and manufacturer
representatives in an effort to drive global revenue in all
verticals;
●
Continue
research and development and add new products to our
“Stera” product line
●
source
alternative lower-cost suppliers;
●
expansion
of international distributors; and
●
continued
growth in all of our verticals.
We expect that the cash we generate from our core operations will
generally be sufficient to cover our future capital expenditures
and to pay down our near-term debt obligations, although we may
choose to seek alternative financing sources.
We
believe that our existing balance of cash and cash equivalents and
amounts expected to be provided by operations will provide us with
sufficient financial resources to meet our cash requirements for
operations, working capital and capital expenditures over the next
twelve months.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets
and liabilities. The estimation process requires assumptions to be
made about future events and conditions, and as such, is inherently
subjective and uncertain. Actual results could differ materially
from our estimates.
The
SEC defines critical accounting policies as those that are, in
management’s view, most important to the portrayal of our
financial condition and results of operations and most demanding of
our judgment. We consider the following policies to be critical to
an understanding of our condensed consolidated financial statements
and the uncertainties associated with the complex judgments made by
us that could impact our results of operations, financial position
and cash flows.
Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards
Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers (Topic 606). We recognize revenue
when we transfer promised goods or services to customers in an
amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. To determine
revenue recognition for contracts with customers we perform the
following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligation(s) in the contract; (iii)
determine the transaction price; (iv) allocate the transaction
price to the performance obligation(s) in the contract; and (v)
recognize revenue when (or as) we satisfy the performance
obligation(s). At contract inception, we assess the goods or
services promised within each contract, assess whether each
promised good or service is distinct and identify those that are
performance obligations.
We
must use judgment to determine: a) the number of performance
obligations based on the determination under step (ii) above and
whether those performance obligations are distinct from other
performance obligations in the contract; b) the transaction price
under step (iii) above; and c) the stand-alone selling price for
each performance obligation identified in the contract for the
allocation of transaction price in step (iv) above.
Title
and risk of loss generally pass to our customers upon shipment. Our
Customers include end users as well as dealers and distributors who
market and sell our products. Our revenue is not contingent upon
resale by the dealer or distributor, and we have no further
obligations related to bringing about resale. Shipping and handling
costs charged to customers are included in Product Revenues. The
associated expenses are treated as fulfillment costs and are
included in Cost of Revenues. Revenues are reported net of sales
taxes collected from Customers.
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within selling
expenses.
Contract Balances
As
of March 31, 2021, and December 31, 2020 we did not have any
unsatisfied performance obligations for (i) contracts with an
original expected length of one year or less and (ii) contracts for
which we recognize revenue at the amount to which we have the right
to invoice for services performed.
Arrangements with Multiple Performance Obligations
Our
contracts with customers may include multiple performance
obligations. We enter into contracts that can include various
combinations of products and services, which are primarily distinct
and accounted for as separate performance obligations.
Significant
Judgments
Our
contracts with customers for products and services often dictate
the terms and conditions of when the control of the promised
products or services is transferred to the customer and the amount
of consideration to be received in exchange for the products and
services.
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 condensed consolidated financial statements and the
accompanying notes. Actual results could differ materially from
these estimates. On an ongoing basis, we evaluate our estimates,
including those related to accounts receivable, inventory, fair
values of financial instruments, intangible assets, useful lives of
intangible assets and property and equipment, fair values of
stock-based awards, income taxes, and contingent liabilities, among
others. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable, the
results of which form the basis for making judgments about the
carrying values of our assets and liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
|
Level 1:
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Quoted prices in active markets for identical assets or
liabilities.
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Level 2:
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Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data for substantially the full term of the assets or
liabilities.
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Level 3:
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Unobservable inputs that are supported by little or no market
activity and that are significant to the value of the assets or
liabilities.
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Our
financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses. All these items
were determined to be Level 1 fair value measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For
purposes of the statement of cash flows, cash and cash equivalents
includes cash on hand, held at financial institutions and other
liquid investments with original maturities of three months or
less. At times, these deposits may be in excess of insured
limits.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of 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.
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.
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, 2021 and December 31, 2020.
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.
Capitalized Software Development Costs
In
accordance with ASC 985-20 regarding the development of software to
be sold, leased, or marketed we expense such costs as they are
incurred until technological feasibility has been established, at
and after which time those costs are capitalized until the product
is available for general release to customers. The periodic expense
for the amortization of capitalized software development costs will
be included in cost of sales.
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 manufacturers assume the warranty against
product defects which we extend to our customers upon sale of the
product. We assume responsibility for product reliability and
results.
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 Income (Loss) Per Share
Basic
net income or (loss) per share is computed by dividing our net
income or (loss) by the weighted average number of shares of common
stock outstanding during the period presented. Diluted income or
(loss) per share is based on the treasury stock method and includes
the effect from potential issuance of shares of common stock, such
as shares issuable pursuant to the exercise of options and warrants
and conversions of preferred stock or debentures.
Equity Compensation Expense
We
account for equity compensation expense in accordance with FASB ASC
718, “Compensation—Stock Compensation.” Under the
provisions of FASB ASC 718, equity compensation expense is
estimated at the grant date based on the award’s fair value
and is recognized as expense over the requisite service
period.
On
July 7, 2017, our shareholders approved the 2016 Equity Incentive
Plan, or the 2016 Plan. The 2016 Plan authorizes the grant of stock
options, stock appreciation rights, restricted stock, restricted
stock units and performance units/shares. Up to 625,000 shares of
common stock are authorized for issuance under the 2016 Plan.
Shares issued under the 2016 Plan may be either authorized but
unissued shares, treasury shares, or any combination thereof.
Provisions in the 2016 Plan permit the reuse or reissuance by the
2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash. Equity
compensation expense will typically be awarded in consideration for
the future performance of services to us. All recipients of awards
under the 2016 Plan are required to enter into award agreements
with us at the time of the award; awards under the 2016 Plan are
expressly conditioned upon such agreements.
On
December 30, 2020, we received shareholder approval to restate and
amend the 2016 Equity Incentive Plan to increase the maximum number
of shares of common stock authorized from issuance by 1,375,000,
from 625,000 shares to 2,000,000.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and cash
equivalents. We maintain cash balances at financial institutions
which exceed the current Federal Deposit Insurance Corporation
limit of $250,000 at times during the year.
Long-Lived Assets Including Acquired Intangible Assets
We
assess long-lived assets for potential impairments at the end of
each year, or during the year if an event or other circumstance
indicates that we may not be able to recover the carrying amount of
the asset. In evaluating long-lived assets for impairment, we
measure recoverability of these assets by comparing the carrying
amounts to the future undiscounted cash flows the assets are
expected to generate. If our long-lived assets are considered to be
impaired, the impairment to be recognized equals the amount by
which the carrying value of the asset exceeds its fair market
value. We base the calculations of the estimated fair value of our
long-lived assets on the income approach. For the income approach,
we use an internally developed discounted cash flow model that
includes, among others, the following assumptions: projections of
revenues and expenses and related cash flows based on assumed
long-term growth rates and demand trends; expected future
investments to grow new units; and estimated discount rates. We
base these assumptions on our historical data and experience,
industry projections, micro and macro general economic condition
projections, and our expectations. We had no long-lived asset
impairment charges for the three months ended March 31, 2021 and
2020.
Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU No. 2018-15,
“Intangibles-Goodwill and Other-Internal-Use Software (Topic
350): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That is a Service Contract.”
This guidance aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use
software. This guidance is effective on a prospective or
retrospective basis beginning on January 1, 2020, with early
adoption permitted. We elected to adopt this guidance early, in
2020 on a prospective basis. The guidance did not have a material
impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
See
Note 2 to the Condensed Consolidated Financial Statements contained
in Item 1 above.
Off-Balance Sheet Arrangements
We do
not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet
arrangements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Not
Applicable
Item 4. Controls and
Procedures.
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Principal Executive
Officer and Principal Financial Officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures (as is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of the end of the period covered by this quarterly report on Form
10-Q. Based on that
evaluation, our Principal Executive Officer and Principal Financial
Officer concluded that our disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
identified in management’s evaluation pursuant to Rules
13a-15(d) or 15d-15(d) under the Exchange Act during the period
covered by this Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Limitations on Effectiveness of Controls and
Procedures
In
designing and evaluating the disclosure controls and procedures and
internal control over financial reporting, management recognizes
that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of disclosure
controls and procedures and internal control over financial
reporting must reflect the fact that there are resource constraints
and that management is required to apply judgment in evaluating the
benefits of possible controls and procedures relative to their
costs.
PART II: OTHER INFORMATION
Item 1. Legal
Proceedings.
From
time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We
currently are not a party to any legal proceedings, the adverse
outcome of which, in management’s opinion, individually or in
the aggregate, would have a material adverse effect on our results
of operations, financial position or cash flows. Regardless of the
outcome, any litigation could have an adverse impact on us due to
defense and settlement costs, diversion of management resources and
other factors.
Item 1A. Risk Factors.
You
should carefully consider the information described in the
“Risk Factors” section of our Annual Report on Form
10-K for the fiscal year ended December 31, 2020, as filed with the
SEC on March 30, 2021. Except as noted below, there have been no
material changes to the risk factors we previously disclosed in our
filings with the SEC, including the Form 10-K. Our operations could
also be affected by additional factors that are not presently known
to us or by factors that we currently consider immaterial to our
business.
The COVID-19 pandemic has increased the global demand for
disinfection products and services that help prevent the spread and
transmission of COVID-19 virus. Similarly, we have experienced a
substantial increase in demand for our products and services in
2020 due to the pandemic, causing us to generate significant
revenues and making us profitable for the first time in 2020.
However, there is no guarantee that such pace of demand for our
products and services will continue or grow in 2021 or
beyond. During the first quarter of 2021, we experienced a
reduction of demand due to various factors, including the closure
of our major customers’ business operations due to the
pandemic, which resulted in the suspension of many of our ongoing
long-term projects. It is difficult to predict how COVID-19
pandemic will affect our financial performance in the remainder of
2021, as the global economy gradually reopens, our customers adjust
and change their operations, and we implement new marketing and
sales strategies in response. While we believe that certain
trends may positively affect our sales, including our ability to
onboard and expand our marketing program and provide in-person demo
and additional federal funding for some of our customers for
disinfection expenditures, we cannot be sure that such trends will
continue, or such strategies will be successful. Moreover,
various other factors, including those beyond our control, may
cause a reduction in demand for our products. In particular,
our existing and potential new customers may decide to adopt new
disinfection protocols in response to improving COVID-19 conditions
or allocate more resources to other aspects of their business, or
search for other competitive products to meet their needs, any of
which may reduce demand for our products and adversely affect our
financial performance.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Mine Safety
Disclosures.
Not
applicable.
Item 5. Other
Information.
None.
Item 6. Exhibits.
The
documents listed in the Exhibit Index of this Form 10-Q are
incorporated herein by reference.
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOMI
ENVIRONMENTAL SOLUTIONS, INC.
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TOMI
ENVIRONMENTAL SOLUTIONS, INC.
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Date: May 17,
2021
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By:
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/s/
Halden
S. Shane
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Halden S.
Shane
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Chief Executive
Officer
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(Principal
Executive Officer)
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Date: May 17,
2021
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By:
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/s/ Nick
Jennings
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Nick
Jennings
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Chief Financial
Officer
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(Principal
Financial Officer and Principal Accounting
Officer)
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EXHIBIT INDEX
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Incorporated by Reference
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Filed
Herewith
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Exhibit Number
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Exhibit Description
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Form
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File No.
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Exhibit
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Filing
Date
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Form of
Warrant to Purchase Common Stock
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X
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Form of
Non-Qualified Stock Option Agreement
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X
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Certification
of Halden S. Shane, Chief Executive Officer, pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Nick Jennings, Chief Financial Officer, pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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X
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Certification
of Halden S. Shane, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Nick Jennings, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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X
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101.INS
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XBRL
Instance Document.
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X
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101.SCH
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XBRL
Taxonomy Extension Schema Document.
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X
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase Document.
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X
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document.
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X
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101.LAB
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XBRL
Taxonomy Extension Labels Linkbase Document.
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X
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document.
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X
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+ Indicates a management contract or compensatory
plan.
# This certification is deemed not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, or otherwise subject to the liability of that
section, nor shall it be deemed incorporated by reference into any
filing under the Securities Act of 1933, or the Exchange
Act.
48