TOMI ENVIRONMENTAL SOLUTIONS, INC.
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2018
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to
Commission
File Number 000-09908
TOMI ENVIRONMENTAL SOLUTIONS, INC.
(Exact name of registrant as specified in its
charter)
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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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9454 Wilshire Blvd., R-1,
Beverly Hills, California
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90212
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (800)
525-1698
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
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Common Stock, $0.01
par
value per share
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(Title of class)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
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 and posted
on its corporate Web site, if any, 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 and post such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or 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 Act). Yes ☐ No ☒
As of
June 30, 2018, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates of the registrant
was approximately $7,980,134, based upon the closing price of the
registrant’s common stock as reported on the OTCQX
Marketplace on such date.
As of March
15, 2019, the registrant had
124,690,418 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TOMI ENVIRONMENTAL SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
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Item
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Page
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PART I
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1.
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Business
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1
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1A.
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Risk
Factors
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10
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1B.
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Unresolved Staff
Comments
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15
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2.
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Properties
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15
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3.
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Legal
Proceedings
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16
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4.
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Mine
Safety Disclosures
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16
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PART II
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5.
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Market
for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
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17
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6.
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Selected Financial
Data
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17
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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7A.
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Quantitative and
Qualitative Disclosures About Market Risk
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31
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8.
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Financial
Statements and Supplementary Data
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31
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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31
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9A.
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Controls and
Procedures
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31
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9B.
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Other
Information
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32
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PART III
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10.
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Directors,
Executive Officers and Corporate Governance
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33
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11.
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Executive
Compensation
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36
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12.
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Security Ownership
of Certain Beneficial Owners and Management and Related Shareholder
Matters
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40
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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14.
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Principal
Accounting Fees and Services
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42
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PART IV
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15.
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Exhibits, Financial
Statement Schedules
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43
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Signatures
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44
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Exhibit
Index
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45
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Financial
Statements
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F-1
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FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and we intend that such
forward-looking statements be subject to the safe harbors created
thereby. For this purpose, any statements contained in this Annual
Report on Form 10-K, except for historical information, may be
deemed to be forward-looking statements. You can generally identify
forward-looking statements as statements containing the words
“will,” “would,” “believe,”
“expect,” “estimate,”
“anticipate,” “intend,”
“estimate,” “assume,” “can,”
“could,” “plan,” “predict,”
“should” or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to projections
of our future financial performance, trends in our businesses, or
other characterizations of future events or circumstances are
forward-looking statements.
The
forward-looking statements included herein are based on current
expectations of our management based on available information and
involve a number of risks and uncertainties, all of which are
difficult or impossible to predict accurately and many of which are
beyond our control. As such, our actual results could differ
materially and adversely from those expressed in any
forward-looking statements as a result of various factors, some of
which are listed under the section “Risk Factors,”
Item 1A of this 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
Item 1.
BUSINESS
Overview
TOMI
Environmental Solutions, Inc. (“TOMI”, the
“Company”, “we”, “our” and
“us”) is a global company that specializes in
disinfection and decontamination essentials using its premier
Binary Ionization Technology
®
(
“
BIT™
”
)
platform
through the manufacturing, licensing, servicing, and selling of its
SteraMist
®
brand of
products. SteraMist is a hydrogen peroxide-based mist/fog
registered with the U.S. Environmental Protection Agency
(“EPA”) as a hospital-healthcare and effective
broad-spectrum
surface
disinfectant. Our operating structure consists of four divisions:
Hospital-HealthCare, Life Sciences, TOMI Service Network
(
“
TSN®
”
)
and Food Safety. We provide environmental solutions for indoor and
outdoor surface and air decontamination. Our mission is to help
create a healthier world through the implementation and integration
of our state-of-the-art product line and set of services, remaining
committed to our motto, Innovating for a Safer World
®
.
TOMI introduced
SteraMist
®
to the commercial market in June 2013.
In June 2015, we successfully registered
SteraMist
®
BIT
™
as a hospital-healthcare
disinfectant for use as a misting/fogging agent, at which time it
became the first EPA-registered hospital-healthcare and general
disinfectant registered solution and technology disinfection system
on the market.
We have
expanded our SteraMist
®
BIT
™
Technology
beyond the initial chemical and biological warfare applications to
the killing of problem and resistant microorganisms, including
spores, in a wide variety of commercial settings.
SteraMist
®
BIT
™
is designed to
provide fast-acting biological six-log kill (a 99.9999% kill) in
even the hardest-to-reach areas, while leaving no residue or
noxious fumes.
We
currently disinfect and decontaminate a variety of large and small
indoor spaces threatened and thought to be threatened by biological
pathogens and chemical agents for our domestic and international
target markets. SteraMist
®
is used in the
control of the spread of microorganisms and infectious diseases in
a variety of use sites under our four (4) divisions, including
hospitals, healthcare facilities (acute & chronic care),
bio-safety labs of all levels including the most stringent BSL-3
and BSL-4, pharmaceutical (compounding and manufacturing),
biodefense, isolation and transfer chambers, bio-safety cabinets
(BSCs), food safety and other commercial and residential
settings.
We
believe we have the potential to become the industry standard in
the prevention of transference and the overall solution for the
concern regarding the level of healthcare acquired infections
around the world, the impact of increased regulatory inspection of
cleaning and validation processes for both pharmaceutical and food
processing facilities, and the increased concern of bacterial,
viral and mold infections that affects our industries,
functionality, and communities’ everyday living.
1
Our Technology
BIT
™
was developed
in response to Amerithrax, the weaponized anthrax spore attacks
that occurred in Washington, D.C. shortly after the September 11,
2001 U.S. terrorist attacks. BIT
™
is a patented
process that aerosolizes and activates a low concentration hydrogen
peroxide solution, producing a fine aqueous mist (0.5-3 um in
diameter) that contains a high concentration of Reactive Oxidative
Species (“ROS”), mostly hydroxyl radicals
(“
.
OH”). ROS cause
damage to pathogenic and resistant organisms, such as bacteria,
bacteria spores, viruses, mold spores, other fungi and yeast, via
oxidation of proteins carbohydrates, lipids and rendering the
building blocks of nature- amino acids, DNA and RNA inactive -
leading to cellular death, disruption and/or
dysfunction.
Testing
detailed by the Defense Advanced Research Projects Agency (DARPA)
of the U.S. Department of Defense demonstrates these hydroxyl
radicals, aggressively break the double bonds and other bonds in
bacterial spores, biological and chemical warfare agents and
neutralize their threat while producing nontoxic by-products. The
unique alteration of the chemistry of our solution occurs after our
EPA-registered solution passes through a high-energy-atmospheric
cold plasma arc, which causes the breaking of the double bond of a
hydrogen peroxide molecule, the net result - our
.
OH
hydroxyl radical. This hydroxyl radical is known as Ionized
Hydrogen Peroxide (“iHP
™
”). This
patented process allows these hydroxyl radicals to exist in high
concentrations without rapidly recombining and losing their
reactivity, while seeking to attach with any and all surfaces
within the proximity of TOMI’s mist.
The
sole active ingredient of BIT
™
is a low
percentage (7.8%) Hydrogen Peroxide and is represented by the
TOMI
™
SteraMist
®
brand of products. Our technology produces a germ-killing aerosol
that moves throughout a space like a gas. Our technology is able to
efficiently and effectively kill pathogenic and resistant organisms
in the air and on the surfaces without damaging
delicate equipment or computers, and the only
by-product is oxygen and water in the form of humidity
.
SteraMist
®
is designed to be easily incorporated into any industry’s
current cleaning procedures; is economical, non-corrosive and easy
to apply; leaves behind no residues; and requires no manual
wiping.
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 pesticides. 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
C. diff
spores and MRSA, as well as the
influenza virus h1n1, which
we believe has better positioned us to
penetrate all industries including the bio-defense 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).
Currently, our EPA-registered label in all
fifty (50) U.S. states as well as many
other countries.
SteraMist
®
is being used throughout the world and has been demonstrated to
reduce certain problem organisms, such as bacterial spores,
Vancomycin-resistant Enterococcus (“VRE”), Clostridium
difficile
spores (“C.
diff”), Middle East Respiratory Syndrome (“MERS”)
and Ebola Virus Disease (“Ebola”). In U.S. hospitals
where SteraMist
®
is being used for terminal cleaning, evidence has demonstrated a
reduction of
C. diff
spore
rates. SteraMist
®
has reduced outbreaks of nosocomial MDRO’s (Klebsiella
pneumoniae,
AB, pseudomonas
aeruginosa
) at large
hospital to small clinics and has contributed to the control of
MERS and Ebola throughout the world.
Our
technology passed a sanctioned test showing six-log reduction
against Geobacillus
stearothermophilus
. Geobacillus
stearothermophilus
is the laboratory testing gold
standard and is commonly used as a challenge organism for
sterilization
validation studies and periodic check of
sterilization cycles.
In May 2015, the United States Agency
for International Development (USAID) awarded us a grant in the
amount of $559,000 for the development of SteraMist
™
Mobile
Decontamination Chambers to fight Ebola. In May 2016, upon the
decontamination and decommissioning of an Ebola treatment center in
West Africa, we fully achieved the milestones upon which the grant
was conditioned. Additionally, BIT
™
has also been
shown to effectively decontaminate weaponized biological agents,
including anthrax, chemical agents such as VX (an extremely toxic
organophosphate) and sulfur mustard (otherwise known as mustard
gas) when applied using properly developed international
protocols.
All our
SteraMist
®
products are fully validated to
comply with good manufacturing practice standards, have received
Conformité Européene (“CE”) marks in the
European Economic Area (“EEA”) and are
approved
by Underwriters Laboratory
(“UL”). Our solution is manufactured at an
EPA-registered solution blender and our product performance is
supported by good laboratory practice efficacy data for
Staphylococcus
aureus
,
Pseudomonas
aeruginosa
,
Salmonella, Norovirus, mold spores, MRSA, h1n1, Geobacillus
stearothermophilus
and C.
diff spores.
2
Our Products and Services
SteraMist Surface Unit
|
Our SteraMist Surface Unit is a fully portable,
handheld, point and spray disinfection/decontamination system
intended to provide quick turnover of any affected space. The
single applicator unit enables disinfection of all surfaces,
including high touch, sensitive equipment and electronics. An
application time of only five seconds per square foot and
seven-minute contact time allows for safe re-entering of the space
within minutes after applying the iHP
mist.
Our
SteraMist Surface Unit is lightweight, easy to transport and
capable of achieving reliable disinfection/decontamination results,
as it is easily incorporated into existing cleaning procedures and
protocols. It can be used as a standalone hospital terminal clean
product or as an adjunct to ultraviolet disinfection and is a
perfect solution to exit and entry barrier points of a facility.
The SteraMist Surface Unit does not require heating, ventilation or
air conditioning systems to be shut down. Further, its touchless
application (no wipe, no rinse) reduces risk of cross-contamination
between treated surfaces.
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SteraMist Environment
System
Our
SteraMist Environment System is a transportable,
remotely-controlled (robotic) system that provides complete room
disinfection/decontamination of a sealed space up to 103.8
m
3
(3,663
ft
3
) in
just over 75 minutes (application, contact, and aeration time).
Individually, each remote applicator can be used to treat a space
of approximately 34.6 m
3
(1,221
ft
3
).
Injection times are based on individual room size and number of
applicators. Multiple SteraMist Environment Systems can be used
simultaneously to accommodate larger or multiple spaces with fast
application and minimal down time. Our hybrid technology
applicators can be used in both manual and/or fogging
modes.
Our
SteraMist Environment System features additional programmable and
printable features in PDF format. Other key features include lot #
of BIT Solution, location identifier, injection/dwell/aeration
times, and error notifications.
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3
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The E-Z SteraMist Disinfection Cart
The E-Z
Cart was designed by request of multiple public healthcare
facilities EVS (Environmental Service) teams using our equipment
for the SHIELD study that TOMI is participating in. The cart houses
our Surface Unit, a portable H
2
O
2
monitor, Carbon
Air Scrubber, MaxAir Helmet Respiratory Protection System with
positive pressure air flow, storage hooks, and a sign notifying the
room is being treated. Included with the E-Z Cart is a custom ICU
45-minute terminal cleaning protocol.
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SteraMist Select Surface Unit
Our
Select Unit was designed to meet the needs of our customers who
have smaller enclosures in need of decontamination. This unit is
lightweight and easy to transport with the added ability to
function between a lower flow operation and standard operation,
such as the SteraMist Surface Unit. The user can adjust air flow,
adjust pump fluid flow, set the programmable timer for automatic
runs, modify spray/dwell times and number of cycles, and is
equipped with start and stop buttons.
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Stainless Steel 90 Degree Applicator
TOMI’s
standard applicator was converted to a 90 degree and manufactured
using 316 stainless steel, the ideal applicator to accompany the
Select Surface Unit, affording many 90-degree build-in
opportunities. This applicator can be purchased with a flange for
ease of installation either permanently or
semi-permanently.
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4
SteraMist Permanent iHP Complete Disinfection Room
The SteraMist Permanent iHP Disinfection Room is
an automated system that is plumbed utilizing the facilities’
existing HVAC system. This involves permanently installing
SteraMist applicators within the designated space to achieve
maximum results. The generator and Programmable Logic Control (PLC)
are housed in a National Electrical Manufacturers
Association
(
NEMA) enclosure
in a central remote location. The entire system can be developed
for multiple rooms and various specifications, controlled remotely
through the NEMA interface. The status of the decontamination cycle
is monitored with indicators and can be integrated into a
Supervisory Control And Data Acquisition (SCADA) monitoring
board.
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iHP Plasma Decontamination Chamber
With
prior approval our patented cold plasma technology can be
integrated with a chamber or cage washer by competitive
manufacturers. Current examples are Lynx and BetterBuilt. The photo
demonstrates our IHP Decontamination Chamber built into a lab at
the University of Houston. Our custom generator/chamber is built
into a stainless-steel single door panel and is permanently mounted
next to the chamber or washer, while a SteraMist applicator is
permanently or semi-permanently mounted in the enclosure. This
SteraMist product line includes but is not limited to an internally
mounted air compressor, regulator for air pressure adjustment,
E-stop button, lever power switch, data logging functions, and
multiple dry contract outputs determined by the needs of the
customer.
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5
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iHP Service Decontamination
TOMI
offers full room, equipment, facility, and emergency
disinfection/decontamination services. Our goal is to reduce
bioburden and eliminate the potential for costly microbial
contamination preventing laboratory outbreaks. If a lab is dealing
with a current outbreak TOMI’s iHP service will contain and
prevent future outbreaks. Single and routine services are provided
to TOMI customers to coincide with maintenance, mandatory facility
shut downs, or to control a specific threat.
●
The
SteraMist systems are versatile and easy to maintain with
relatively low upkeep. In fact, preventive maintenance is not
required to be performed by a service engineer and remote guidance
can be provided upon request.
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Industries & Market Segments
We
believe that our technology, service, and product offerings provide
a significant opportunity to help reduce the spread of Community
Associated and Healthcare-Acquired Infections
(“HAI’s”).
SteraMist
®
and TOMI’s related service platforms are currently being used
in a broad spectrum of industries, including but not limited
to:
●
Pharmaceutical
companies
●
Clean
rooms
●
Hospitals &
medical facilities
●
Bio-safety
labs
●
Tissue
labs
●
Vivariums
●
Research
Universities
●
Military &
Government Agencies;
●
Office
buildings
●
Hospitality
●
Schools
●
Transportation;
●
Athletic
facilities;
●
Single-family homes
and multi-unit residences;
●
Cannabis
processing, manufacturing, and testing labs;
●
Patient Medical
Transport Airline;
●
Cruise
Ships;
●
Entertainment
establishments;
6
Life Sciences.
Our
SteraMist
®
line of
products is a decontamination solution to use sites in this
industry, specifically pharmaceutical (compounding and
manufacturing), vivariums, research universities, BSLs of any
level, BSC’s, chambers, isolators, cage washers, and
cleanrooms. With proper implementation SteraMist
®
can reduce the
risk of infectious as well as potentially infectious agents and/or
materials, facilities such as these handle on a routine
basis.
There
are many requirements and restrictions on the type of
decontamination agents our Life Sciences customers may use to
prevent these risks and remediate adverse incidents. In light of
these regulations, our rapid deployment of our effective ionized
hydrogen peroxide aerosolized mist is the solution to lower risks,
reduce damage to expensive laboratory equipment and furniture,
eliminate other labor intense procedures, and perform
decontamination clean-up in these spaces quickly, less caustically,
requiring no wipe and with no residue.
Our
team of technicians and representatives train, maintain, and
troubleshoot capital equipment globally for our Life Sciences
customers. Further, our iHP
™
service
decontamination team provides routine, emergency, and/or
commissioning or decommissioning of facilities equipment or full
complete space decontamination for its customer base.
Hospital-HealthCare.
Our SteraMist
®
line of
products, specifically the SteraMist
®
Surface Unit
and EZ SteraMist Disinfection Cart are 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. Our team of technicians and
representatives train, maintain, and troubleshoot capital equipment
throughout the world for our Hospital-HealthCare
customers.
We
continue to penetrate
the
hospital-healthcare market segment, and under the United States
Patient Protection and Affordable Care Act’s (also known as
the Affordable Care Act or ACA) Hospital Readmissions Reduction
Program, hospitals that have high rates of infections and HAIs are
facing significant financial penalties. Our SteraMist
®
BIT
™
technology has
proven to reduce the transference spread of infections leading to
an overall reduction in the number of patients being infected as a
result of the prior poor manual cleaning of these patient rooms,
infectious disease rooms and operatory suites, with a corresponding
return on investment to the hospital of up to 20-to-1 in the first
year. At this time, we cannot predict the effect of any potential
healthcare reform legislation, including the potential repeal of
the Patient Protection and Affordable Care Act, on such
penalties.
The TOMI Service
Network
.
The TSN, has allowed
us to enhance our corporate service division by creating a
multi-nation-wide network composed of existing, full-service
specialists. Since the launch of TSN, we have recruited and entered
into eighty-eight (88) licensing agreements across the United
States and Canada. These are professional leaders and first
responders that specialize within the mold remediation and
mitigation fields, bio-safety and biohazard specialists including
forensic restoration specialists. These servicing specialists focus
their businesses in the commercial and residential space.
Our team of TSN Business Managers and SteraMist
®
technicians
train, maintain and troubleshoot capital equipment for these
individuals with the goal of implementing servicing procedures and
protocols throughout the United States and Canada for our TSN
network members.
In September 2018, we partnered with the
Global BioRisk Advisory Council (“GBAC”) to use
SteraMist
®
as
one of the training technologies used in their certification
classes. This also allows for the decontamination of everyday
crises as well as forensic restoration and bio-hazard scenes as
needed. TOMI also launched the Forensic Restoration Service Team
(or “FRST”), a U.S. based TOMI-certified forensic
restoration and crime clean network. This network is comprised of
service providers who specialize in forensic restoration such as
mass casualty, crime scene, suicide and unattended death cleanup.
Also included within this field are hoarding and bio-recovery
services. Participating FRST members will receive specialized
training and certifications by GBAC. We have four (4) certified
FRST
members
to date.
Food Safety
Industry.
SteraMist
™
is an
effective decontaminant in the food safety industry. According to
the CDC, 80 million people per year in the United States contract,
and 5,000 people die from, food poisoning or other food-related
illnesses. Current food safety cleaning techniques involve time
intensive processes, which can reduce food manufacturers’
profit. Our iHP
™
degrades into
only harmless water and oxygen. After we obtain approval by the
United States Food and Drug Administration (the “FDA”)
and the United States Department of Agriculture (the
“USDA”), we anticipate that our solution can be applied
directly to all foods. Currently we use SteraMist on all food
packing and storage equipment as SteraMist
®
is safe for use
on electronics and kitchenware, along with high touch surfaces
where most pathogens are found (such as phones, computers and
kitchen appliances). We believe that SteraMist
®
could be useful
for decontamination at all phases of food production, from the
farm, slaughterhouse, packaging and canning facilities,
food storage locations to the transportation of food and to the
restaurants and grocery stores.
Medical
Cannabis.
TOMI
is looking to enter the global medical and recreational cannabis
market. Currently we are researching how the BIT Solution and the
iHP process can be used to rid the cannabis plant of the
following:
-
Powdery Mildew (odium, white mold)
-
Spider Mites, Thrips, Root Aphids & Fungus
Gnats
-
Bud Rot (Botrytis cinerea)
- Load counts on coliform, microbes,
bacteria, e.
coli
and other molds.
-
Direct plant application, soil application and whole room
application
-
Residuals left on the plant
7
All tests will also include whether or not the process affects the
THC and Cannabinoid levels of the plant.
SteraMist
®
can be used in cannabis facilities
globally upping the industry standard of disinfecting areas between
grows. For example, the cannabis drying/curing/cloning/grow rooms,
manufacturing/packaging areas, on-site laboratories, storage rooms,
and employee restrooms and locker rooms. According to the Canadian
Imperial Bank of Commerce analysts forecast the projected 2019 sale
of both medical and recreational cannabis in North America is
currently being estimated to reach $7 billion in Canada and $4.5
billion in the United States, with the expectation of the U.S.
market doubling the Canadian market in sales if a full federal
legalization is passed by 2020.
Homeland Defense and Border
Protection.
Countries around the world, including the United
States, need to protect their borders and cities against a
potential terrorist attack. Our SteraMist
®
line of
products will give governmental bodies an added tool in their
arsenal to mitigate the risk of a weaponized biological attack. In
addition, SteraMist
®
could assist in
mitigating the spread of emerging pandemic viruses, including
strains of Ebola, MERS, MLAV, h1n1, h5n1, h7n9 and h10n8. Our
SteraMist
®
line of
products may assist border patrol agents in controlling the spread
of infectious disease introduced by foreign individuals by
decontaminating interview rooms, containment rooms, holding cells
and quarantine areas after a potential infected carrier’s
condition either improves or the carrier dies.
INFORMATION WITH RESPECT TO OUR BUSINESS IN GENERAL
Manufacturing
We
outsource the manufacturing and blending of our
SteraMist
®
line of
equipment and BIT
™
Solution. Our
SteraMist
®
equipment
manufacturer is an ISO9001 registered company with facilities in
Pennsylvania, New York and New Jersey.
Our
solution is blended by an EPA approved blender; our blend includes
as the only active ingredients 7.8% Hydrogen Peroxide.
TOMI
maintains sole source distribution of all the SteraMist
®
product lines,
including our BIT
™
Solution.
Neither our manufacturer or chemical blender may make modifications
to the manufacturing or blending of our products without our
request or consent in written format. TOMI maintains all creative
control throughout the design and manufacturing process, which
includes research & development through final product
fabrication.
Intellectual Property
Our
success depends in part upon our ability to obtain and maintain
proprietary protection for our products and technologies. We
protect our technology and products by, among other means,
obtaining United States and foreign patents. There can be no
assurance, however, that any patent will provide adequate
protection for the technology, system, product, service or process
it covers. In addition, the process of obtaining and protecting
patents can be long and expensive. We also rely upon trade secrets,
technical know-how, and continuing technological innovation to
develop and maintain our competitive position.
As part of our intellectual property protection
strategy, we have registered our BIT
™
solution with the Environmental
Protection Agency (“EPA”), all fifty (50) states in the
United States, and multiple countries worldwide. We
have
received Conformité Européene (“CE”) marks in
the European Economic Area (“EEA”) and are
approved
by Underwriters Laboratory
(“UL”).
We
currently hold thirty-four (34) Utility patents across the globe
and have submitted for four (4) additional utility patents to the
USPTO and a PCT with the International Authorities. Further, we
were granted twenty-one (21) design patents, with two (2)
additional ones pending approval. Our patents (utility and design)
are in countries which include but are not limited to Canada,
China, Korea, Singapore, Taiwan, Belgium, Italy, and Spain. Patents
for individual products extend for varying periods according to the
date of filing or grant and legal term of patents in various
countries where a patent is obtained. The actual protection a
patent provides, which can vary from country to country, depends
upon the type of patent, the scope of its coverage, and the
availability of legal remedies in each country.
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 December 31, 2018,
we had a total of seven (7) trademark registrations in the United
States across as many of seven (7) separate classes, many of which
are registered in multiple classes, and we have three (3)
additional trademark submissions in review with the USPTO. In
addition, we hold three (3) of these trademark registrations in
various foreign countries in as many as five (5) separate classes,
many of which are registered in multiple classes.
8
Marketing and Distribution
Through
our brand awareness, marketing, and sales, our business growth
objective is to be a global leader in disinfection and
decontamination products, services, and manufacturing. We intend to
continue to expand and support research and development on other
decontamination and remediation solutions (including hydroxyl
radicals and other ROS), and to form more business alliances with
strategic partners.
We
continue to perform decontamination services within cleanrooms,
bio-safety labs, tissue and blood labs, pharmaceutical labs,
universities and we continue to secure additional license
agreements with major remediation, construction and bio-safety
servicing companies. Both of these strategies assist in the brand
awareness and use of our suite of products.
We sell
our products domestically through our internal sales force, as well
as independent sales and manufacturing representatives.
Internationally, our products are sold through exclusive and
non-exclusive sales representatives and distributors. We have
shipped our equipment and solution into twenty (20) countries
worldwide.
Competition
The
decontamination and environmental infectious disease control
industry is extremely competitive and highly regulated. Competition
is intense in all four (4) of our divisions and includes many large
and small competitors.
Our
competitors include companies that market other hydrogen
peroxide-based products, such as Steris Corporation
(“Steris”), Bioquell, Inc. (“Bioquell”) and
The Clorox Company (“Clorox”), various ultraviolet
companies and quad ammonia-chemical companies.
We believe our SteraMist suite of products have a
competitive advantage in that they have a quicker and less caustic
kill time, provide a six log kill to a wide variety of pathogens
and
leave no residue or
unpleasant odor. However,
these competitors may have longer
operating histories, greater name recognition, larger installed
customer bases and substantially greater financial and marketing
resources than us.
We
believe that the principal factors affecting competition in our
markets include name recognition and the ability to receive
referrals based on client confidence in the service. There are no
significant barriers of entry that could keep potential competitors
from opening similar facilities. Our ability to compete
successfully in the industry will depend, in large part, upon our
ability to market and sell our indoor decontamination and
infectious disease control products and services. There can be no
assurance that we will be able to compete successfully in this
industry, or that future competition will not have a material
adverse effect on our business, operating results and financial
condition.
We
believe that our growth in these industries as a leading global
disinfection/decontamination company depends on our abilities to
discover, develop, market, and innovate, disruptive cost-effective
products and services.
Competitive Advantages
We believe
the SteraMist
®
technology has
many competitive advantages over its competition. Our technology
can turn over a space to an end-user far faster than its
competition. Our technology requires limited preparation to an area
compared to our competitors and does not rely on fans to move
throughout a space. Our “
.
OH” is a small
0.5 to 3-micron particle that receives a charge and can move around
an area like a gas, going above, below, and beyond the hardest to
reach areas.
SteraMist
®
offers the following competitive advantages:
●
Provides a 99.9999%
or six-log kill and above kill (i.e. the statistical destruction of
all microorganisms and their spores) on all challenged pathogens,
on multiple surfaces including
Bacillus atrophaeus
spores,
Bacillus subtilis
spores
and
Geobacillus
stearothermophilus
, the spore that is considered a gold
standard for validation of sterilization versus
household/industrial cleaners that offer a 99.9% (sanitizing) or
three-log, kill to 99.99%,(disinfection) or four-log,
kill.
●
Easy to
use.
●
Does not require
mixing of materials
●
No Wipe, No
Rinse
●
Does not include
silver ions or peracetic acid.
●
Leaves no
residue.
●
Not affected by
humidity or temperature.
●
Non-corrosive.
●
Does not damage
medical or electronic equipment.
●
By-products
converts to humidity.
9
Research & Development
We are
generating and supporting research on improving, extending and
applying our patents in the field of mechanical cleaning and
decontamination. Research and development expenses for the years
ended December 31, 2018 and 2017, were approximately $916,000 and
$454,000, respectively.
Government Regulation
Our
business is subject to various degrees of governmental regulation
in the countries in which we operate. In the United States, the
EPA, the FDA and other governmental authorities regulate the
development, manufacture, sale, and distribution of our products
and services. Our international operations also are subject to a
significant amount of government regulation, including
country-specific rules and regulations and U.S. regulations
applicable to our international operations. Government regulations
include detailed inspection of, and controls over, research and
development, product approvals and manufacturing, marketing and
promotion, sampling, distribution, record-keeping, storage, and
disposal practices. We believe that we are currently compliant in
all material respects with applicable regulatory
requirements.
Employees
As of
March, 15, 2019, we have nineteen (19) full-time executive,
operational and administrative employees working within the United
States and one (1) consultant. Most of our sales are conducted by
global exclusive distribution agreements or domestically by
independent manufacturing representatives.
Item 1A. RISK FACTORS.
Our business routinely encounters and attempts
to address risks, some of which will cause our future results to
differ, sometimes materially, from those originally anticipated.
Below, we have described our present view of certain important
risks. The risk factors set forth below are not the only risks that
we may face or that could adversely affect us. If any of the risks
discussed in this Annual Report on Form 10-K actually occur, our
business, financial condition and results of operations could be
materially adversely affected. If this were to occur, the trading
price of our securities could decline significantly.
In assessing these risks,
investors should also refer to the other information contained or
incorporated by reference in our other filings with the
SEC.
Risk Related to Our Company and Business
We have experienced losses historically, may be required to obtain
additional financing and may never achieve and sustain
profitability.
We
incurred net losses of approximately $3.2 million and $3.6 million
for the years ended December 31, 2018 and 2017, respectively. We
may continue to incur net losses for the foreseeable future as we
continue to develop our products and seek customers and
distribution for our products. Even if we achieve profitability, we
may be unable to sustain or increase profitability on a quarterly
or annual basis.
Further,
to finance our product development and grow our business, we may
seek funds through borrowings or through additional rounds of
financing, including private or public equity or debt offerings. We
may be unable to raise funds on commercially reasonable terms or at
all. In addition, the sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders.
If we borrow additional funds or issue debt securities, these
securities could have rights superior to holders of our common
stock and could contain covenants that will restrict our
operations. If we do not obtain additional resources or achieve and
sustain profitability, our ability to capitalize on business
opportunities will be limited, the growth of our business will be
harmed, our business may fail, and investors may lose all of their
investment.
Our operations are subject to environmental laws and regulations
that may increase costs of operations and impact or limit our
business plans.
We are subject to environmental laws and regulations affecting
many aspects of our present and potential future operations,
including a wide variety of EPA labeling and other state regulatory
agency requirements. Compliance with these laws and regulations may
result in increased costs and delays as a result of administrative
proceedings and certain reporting obligations. Public officials and
entities may seek injunctive relief or other remedies to enforce
applicable environmental laws and regulations. We cannot predict
the outcome of any administrative proceedings that may
arise.
10
We are subject to risks related to our international operations and
failure to manage these risks may adversely affect our operating
results and financial condition.
A
portion of our sales are made to customers outside the United
States. As such, we may be denied access to our customers as a
result of a closing of the borders of the countries in which we
sell our products due to economic, legislative, political and
military conditions in such countries. International operations are
subject to a number of other inherent risks, and our future results
could be adversely affected by a number of factors,
including:
●
unfavorable
political or economic environments;
●
requirements or
preferences for domestic products or solutions, which could reduce
demand for our products;
●
differing existing
or future regulatory and certification requirements;
●
unexpected legal or
regulatory changes;
●
greater difficulty
in collecting accounts receivable and longer collection
periods;
●
difficulties in
enforcing contracts;
●
an inability to
effectively protect intellectual property;
●
tariffs
and trade barriers, export regulations and other regulatory and
contractual limitations on our ability to sell our products;
and
●
potentially adverse
tax consequences, including multiple and possibly overlapping tax
structures.
If we
are unable to manage the risks inherent in our international
activities, our ability to obtain future revenues may suffer and,
consequently, our business, financial condition and results of
operations could be materially and adversely affected.
Our success depends upon third party contractors, suppliers and
manufacturers, the disruption of which could negatively impact our
business.
We rely
upon third parties to supply us with components for our products.
We outsource the manufacturing of our SteraMist
™
line of
equipment to a manufacturing company and use contract manufacturers
to build our BIT
™
-based systems,
as we do not maintain our own manufacturing facilities. If we fail
to maintain relationships with our current suppliers, we may not be
able to effectively commercialize and market our products, which
would have a material and adverse effect on our business. Further,
any disruption in the manufacturing process could have a material
adverse effect on our business, financial condition and results of
operations. We cannot ensure that alternative production capacity
would be available in the event of a disruption, or if it would be
available, it could be obtained on favorable terms.
The introduction of new products is often accompanied by design and
production delays, as well as significant cost, which could prevent
us from introducing new products to the market in a timely and
cost-effective manner.
The
development and initial production and enhancement of the
decontamination systems we produce is often accompanied by design
and production delays and related costs. Often, we cannot predict
the time and expense required to overcome such problems. If we are
unable to introduce new products on our anticipated timeframe, our
business, financial condition and results of operations may
suffer.
Our success depends on our ability to adequately protect our
intellectual property.
In
April 2013, we acquired certain assets from L-3 Applied
Technologies, Inc. (“L-3”), including patents,
trademarks and trade secrets related to BIT
™
. Our
commercial success depends, in part, on our ability to obtain,
maintain, defend, file new or enforce our existing patents,
trademarks, trade secrets and other intellectual property rights
covering our technologies and products, including, in particular,
the intellectual property rights we acquired from L-3. We may,
however, be unable to adequately preserve such rights due to a
number of reasons, including the following:
●
our rights could be
invalidated, circumvented, challenged, breached or infringed
upon;
●
we may not have
sufficient resources to adequately prosecute or protect our
intellectual property rights;
●
upon expiration of
our patents, certain of our key technology may become widely
available; or
●
third parties may
be able to develop or obtain patents for similar or competing
technology.
Although we devote
resources to the establishment and protection of our patents and
trademarks, we cannot assure you that the actions we have taken or
will take in the future will be adequate to prevent violation of
our patents, trademarks and proprietary rights by others or prevent
others from seeking to block sales of our products as an alleged
violation of their patents, trademarks and proprietary rights. In
the future, litigation may be necessary to enforce our trademarks
or proprietary rights and we may be forced to defend ourselves
against claimed infringement or the rights of others. Any such
litigation could result in adverse determinations that could have a
material adverse effect on our business, financial condition or
results of operations.
11
We may be unable to enforce our intellectual property rights
throughout the world.
The
laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the United States.
Companies have encountered significant problems in protecting and
defending intellectual property rights in certain foreign
jurisdictions. To the extent that we have obtained or are able to
obtain patents or other intellectual property rights in any foreign
jurisdictions, it may be difficult to stop the infringement of our
patents or the misappropriation of other intellectual property
rights. For example, some foreign countries have compulsory
licensing laws under which a patent owner must grant licenses to
third parties. In addition, some countries limit the availability
of certain types of patent rights and enforceability of patents
against third parties, including government agencies or government
contractors. In these countries, patents may provide only limited
benefit or no benefit.
Proceedings to
enforce our patent rights in foreign jurisdictions could result in
substantial costs and divert our efforts and attention from other
aspects of our business. Accordingly, efforts to protect our
intellectual property rights in such countries may be inadequate.
In addition, future changes in the law and legal decisions by
courts in the United States and foreign countries may affect our
ability to obtain adequate protection for our technology and
products and the enforcement of intellectual property.
We may not be able to manage our growth effectively, create
operating efficiencies or achieve or sustain
profitability.
The
ability to manage and operate our business as we execute our growth
strategy will require effective planning. Rapid growth could strain
our internal resources, which could lead to a lower quality of
customer service, reporting problems and delays in meeting
important deadlines, resulting in loss of market share and other
problems that could adversely affect our reputation and financial
performance. Our ability to manage future growth effectively will
also require us to continue to update and improve our operational,
financial and management controls and procedures. If we do not
manage our growth effectively, we could be faced with slower growth
and a failure to achieve or sustain profitability.
We face significant competition in our industry, which could
significantly limit our growth and materially and adversely affect
our financial results.
The
decontamination and environmental infectious disease control
industry is extremely competitive. The competition includes
remediators and disinfection/decontamination companies such as
Steris, Bioquell and Clorox, various ultraviolet companies and quad
ammonia-chemical companies. These competitors may have longer
operating histories, greater name recognition, larger installed
customer bases and substantially greater financial and marketing
resources than us. We believe that the principal factors affecting
competition in our markets include name recognition and the ability
to receive referrals based on client confidence in the service.
There are no significant barriers of entry that could keep
potential competitors from opening similar facilities. Our ability
to compete successfully in the industry will depend, in large part,
upon our ability to market and sell our indoor decontamination and
infectious disease control products and services. There can be no
assurance that we will be able to compete successfully in the
remediation industry, or that future competition will not have a
material adverse effect on our business, operating results and
financial condition.
Our success depends upon broad market acceptance of our technology
that has not yet been achieved.
Our
BIT technology is relatively new, having received EPA registration
in mid-2015. Our sales are dependent upon broad market acceptance
of our technology that replaces long-standing failing manual
cleaning techniques such as quaternary ammonium compounds and
bleach for disinfection, with our mechanical process. The failure
to obtain broad market acceptance inevitably leads to substantially
increased lead times for sales, until our prospective
customers-particularly in the hospital-healthcare market-are
accustomed to the use of newer mechanical technology. The inability
to timely meet our sales goals could adversely affect our financial
condition and results of operations.
We are dependent on our key personnel, the loss of whom could
adversely affect our operations, and if we fail to attract and
retain the talent required for our business, we could be materially
harmed.
Our
success is substantially dependent on the performance of our
executive officers, including our Chairman and Chief Executive
Officer, Dr. Halden S. Shane, the loss of whom would have a
material adverse effect on our business. Given our relatively
recent entry into the decontamination industry, we depend to a
significant degree on our ability to attract, retain and motivate
quality personnel.
Competition for
highly-skilled personnel is often intense in the United States. We
may not be successful in attracting, integrating or retaining
qualified personnel to fulfill our current or future
needs.
12
Our operations, and those of our suppliers, are subject to a
variety of business continuity hazards and risks, any of which
could interrupt production or operations or otherwise adversely
affect our performance and results.
We are
subject to business continuity hazards and other risks, including
natural disasters, utility and other mechanical failures, labor
difficulties, inability to obtain necessary licenses, permits or
registrations, disruption of communications, data security and
preservation, disruption of supply or distribution, safety
regulation and labor difficulties.
The
occurrence of any of these or other events might disrupt or shut
down operations, or otherwise adversely impact the production or
profitability of a particular facility, or our operations as a
whole. We may also be subject to certain liability claims in the
event of an injury or loss of life, or damage to property and
equipment, resulting from such events. Although we maintain
property and casualty insurance, as well as other forms of
insurance that we believe are customary for our industries, our
insurance policies include limits and, as such, our coverage may be
insufficient to protect against all potential hazards and risks
incident to our business. Should any such hazards or risks occur,
or should our insurance coverage be inadequate or unavailable, our
business, prospects, financial condition and results of operations
might be adversely affected.
Our products are subject to potential product liability claims
which, if successful, could have a material adverse effect on our
business, financial condition and results of
operations.
Certain
of our products may be hazardous if
not deployed properly. We are exposed to significant risks for
product liability claims if death, personal injury or property
damage results from the use of our products. While we currently
maintain insurance against product liability claims, we may
experience material product liability losses in the future. Our
insurance coverage may not continue to be available on terms that
we accept, if at all, and our insurance coverage also may not
adequately cover liabilities that we incur. A successful claim
against us that exceeds our insurance coverage level or that is not
covered by insurance, or any product recall, could have a material
adverse effect on our business, financial condition and results of
operations. In addition, product liability and other claims can
divert the attention of management and other personnel for
significant periods of time, regardless of the ultimate outcome.
Further, claims of this nature may cause our customers to lose
confidence in our products and us. As a result, an unsuccessful
defense of a product liability or other claim could have a material
adverse effect on our financial condition, results of operations
and cash flows.
The requirements of being a public company may strain our
resources, divert management’s attention and affect our
ability to attract and retain executive management and qualified
board members.
We have
and likely will continue to incur significant legal, accounting and
other expenses as a public company subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002
(“SOX”), the Dodd–Frank Wall Street Reform and
Consumer Protection Act and other applicable rules and regulations.
Our management and other personnel devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and
regulations have increased our legal and financial compliance costs
and will make some activities more time-consuming and costly. For
example, applicable rules and regulations could make it more
difficult for us to attract and retain qualified persons to serve
on our Board of Directors (the “Board”) or as executive
officers.
In
addition, SOX requires, among other things, that we maintain
effective internal control over financial reporting and disclosure
controls and procedures. Our testing, or the potential subsequent
testing by our independent registered public accounting firm in
future periods, may reveal deficiencies in our internal control
over financial reporting that are deemed to be material weaknesses.
Our compliance with Section 404 of SOX may require that we incur
substantial expense and expend significant management time on
compliance-related issues. Moreover, if our independent registered
public accounting firm identifies deficiencies in our internal
control over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we
could be subject to sanctions or investigations by regulatory
authorities, which would require additional financial and
management resources.
As a
result of disclosure of information in this Annual Report on Form
10-K and in filings required of a public company, our business and
financial condition are more visible, which we believe may result
in threatened or actual litigation, including by competitors and
other third parties. If such claims are successful, our business
and operating results could be adversely affected. Even if the
claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them,
could divert the resources of our management and adversely affect
our business and operating results.
13
Risk Related to Our Securities
Our stock price is volatile and there is a limited market for our
shares.
The
stock markets generally have experienced, and will probably
continue to experience, extreme price and volume fluctuations that
have affected the market price of the shares of many small-cap
companies. These fluctuations have often been unrelated to the
operating results of such companies. Factors that may affect the
volatility of our stock price include the following:
●
our success, or
lack of success, in developing and marketing our products and
services;
●
our ability to
raise the required capital to fund our business;
●
the announcement of
new products, services, or technological innovations by us or our
competitors;
●
changes in our
executive leadership;
●
quarterly
fluctuations of our operating results;
●
changes in revenue
or earnings; and
●
competition.
Moreover, the OTCQX
Best Marketplace (“OTCQX”) is a trading platform, and
trading of securities quoted on the OTCQX is often more sporadic
than the trading of securities listed on a national securities
exchange like The NASDAQ Stock Market or the New York Stock
Exchange. Even if we were to seek to list our securities on a
national securities exchange, there is no assurance we will be able
to do so, and if we do so, many of these same forces and
limitations may still impact our trading volumes and market price
in the near term. Additionally, the sale or attempted sale of a
large amount of common stock into the market may also have a
significant impact on the trading price of our common
stock.
We do not intend to pay dividends for the foreseeable
future.
We have not paid dividends on our common stock
since inception.
The continued operation and expansion of
our business will require substantial funding. Accordingly, we
currently
intend
to retain earnings, if any, for use in the
business and
we do
not
anticipate
that we will pay
any
cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our Board and
will depend upon results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law
and other factors our Board deems relevant. Investors seeking cash
dividends should not purchase our common stock. Accordingly,
realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never
occur.
Our common stock is subject to the “penny stock” rules
of the SEC, and trading in our securities is very limited, which
makes transactions in our common stock cumbersome and may reduce
the value of an investment in our securities.
The SEC has adopted regulations which generally
define a “penny stock” to be any equity security that
is not listed on a qualified national securities exchange and that
has a market price of less than $5.00 per share, or with an
exercise price of less than $5.00 per share, subject to certain
exceptions. Historically, shares of our common stock have traded on
the OTCQX
at a price of less
than $5.00 per share and, as a result, our common stock is
considered a “penny stock” by the SEC and subject to
rules adopted by the SEC regulating broker-dealer practices in
connection with transactions in “penny stocks.” Our
securities are covered by the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell
to persons other than established customers and accredited
investors. For any transaction involving a penny stock, unless
exempt, Rule 15g-9 under the Exchange Act requires that a
broker-dealer must:
●
approve
a person’s account for transactions in penny stocks;
and
●
receive
from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be
purchased.
In
order to approve a person’s account for transactions in penny
stocks, the broker or dealer must:
●
obtain
financial information and investment experience objectives of the
person; and
●
make
a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
14
The
broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market that:
●
sets
forth the basis on which the broker or dealer made the suitability
determination; and
●
provides
that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Additionally, the investor must receive disclosure
about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered
representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in
penny stock transactions. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the
account and information on the limited market in penny
stocks. Generally, brokers may be less willing to
execute transactions in securities subject to the “penny
stock” rules. This may
discourage investor interest in and limit the
marketability of our securities.
While we intend to apply to list our common stock on a national
securities exchange, the exchange may not approve our listing and,
if approved, our common stock may not continue to trade on such
exchange.
We
intend to apply to list our common stock on a national securities
exchange. As such, we will need to satisfy certain qualitative and
quantitative requirements in order to successfully list our common
stock on such an exchange. We cannot assure you that we will be
able to meet the applicable requirements for such initial listing
or that our application will be approved.
If our
listing application is approved, we will be required to comply with
certain listing requirements of such exchange, which may include
compliance with certain requirements with respect to our corporate
governance, finances, stock trading volume and stock price. If we
fail to meet any of these requirements, such exchange may take
steps to delist our common stock. Such a delisting would likely
have a negative effect on the price of our common stock and would
adversely affect the ability to sell or purchase our common stock.
Further, even if we successfully apply to list our common stock on
a national exchange, we cannot assure you that an orderly and
active trading market in our common stock will ever develop or be
sustained.
We have a substantial number of options, warrants and convertible
debt outstanding, which could give rise to additional issuances of
our common stock and potential dilution of ownership to existing
shareholders.
As
of December 31, 2018, we had outstanding options and warrants to
purchase an aggregate of 26.9 million shares of our common stock at
exercise prices ranging from $0.05 to $2.10 per share. Of these,
320,000 represent shares underlying options with exercise prices
ranging from $0.05 to $2.10 per share and 26.6 million represent
shares underlying warrants at exercise prices ranging from $0.08 to
$1.00 per share. To the extent any holders of options or warrants
exercise same, the issuance of shares of our common stock upon such
exercise will result in dilution of ownership to existing
shareholders. Additionally, as a result of our 2017 financing, with
a remaining principal balance of $5,000,000 (See Note
6—Convertible Debt), the promissory notes issued are
convertible at $0.54 per share into an aggregate of 9,259,250
shares of common stock, if fully converted. If we fail to pay the
notes on or before the revised maturity dates of April 3, 2020, the
notes may be convertible at $0.11 per share into an aggregate of
45,454,545 common shares. As part of the original transaction, we
also issued warrants to purchase up to an additional 999,998 shares
of common stock at an exercise price of $0.69 per
share.
Item 1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
Item 2.
PROPERTIES
Our
U.S. headquarters, a 9,000 square foot office space, is located at
8430 Spires Way, Frederick, MD 21701.
The innovative facility includes a
warehouse, training room, quality control room, qualification
laboratory, and upon further installation will house its own custom
iHP SteraMist Complete Room System. The new warehouse is
significantly larger, than our previous headquarters, allowing TOMI
to store its new product lines and stock a greater variety of
inventory - quickly delivering a customer purchase. The training
room is integrated with the newest technology to be able to present
SteraMist virtually around the world. As the company keeps up with
the demand for SteraMist, there is a dedicated quality control room
to allow our service engineers to work on machines for quick and
efficient service to our customers. The lease for our U.S.
headquarters has a 10-year term and provides for annual rent of
approximately $143,000.
15
We
lease a 300 square foot office and conference space located at 9454
Wilshire Blvd., Penthouse, Beverly Hills, CA 90212. We lease this
space for $22,500 annually on a month-to-month tenancy in a
professional office building. The property serves as our sales and
executive office in the western region of the United States and is
used for meetings, sales demonstrations and various administrative
functions.
Item 3.
LEGAL PROCEEDINGS
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.
Item 4.
MINE SAFETY DISCLOSURES
Not
applicable.
16
PART II
Item 5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
common stock is quoted on the OTCQX Best Marketplace under the
symbol “TOMZ.” The market quotations were for OTCQX
Best Marketplace reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
Shareholders
As of
March 15, 2019, there were
771
record holders of our common
stock. On March 15, 2019, the last reported sale price of our
common stock on the OTCQX was $0.12 per share.
Dividends
We have
not paid and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. Our policy is to retain all
earnings, if any, to provide funds for operation and expansion of
our business. The declaration of dividends, if any, will be subject
to the discretion of our Board, which may consider such factors as
our results of operations, financial condition, capital needs and
acquisition strategy, among others.
Recent Sales of Unregistered Securities
None.
Item 6.
SELECTED
FINANCIAL DATA
Not
Required.
Item 7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition
and results of operations relates to the years ended December 31,
2018 and 2017. This discussion and analysis should be read in
conjunction with our financial statements and the notes to those
financial statements that are included elsewhere in this
report.
Overview
TOMI
Environmental Solutions, Inc. (“TOMI”, “we”
and “our”) is a global provider of disinfection and
decontamination essentials through our premier Binary Ionization
Technology
®
(BIT
™
)
platform, under which we manufacture, license, service and sell our
SteraMist
™
brand of
products, including SteraMist
®
BIT
™
, a hydrogen
peroxide-based mist/fog.
17
In response to the 2001 Anthrax spore
attacks, the United States Defense Advanced Research Projects
Agency (“DARPA”) and a leading defense company, Titan
Corporation, developed
BIT
™
to defend against chemical and
biological agents under a DARPA grant. In June 2005, L-3
Communications, Inc. (“L-3
Communications”) a leading defense company, acquired the
technology through the acquisition of Titan Corporation.
In 2011, TOMI recognized
the importance of this disruptive and innovative technology
and,
after two years of
negotiations, won the right to purchase the technology from L-3
Communications. Subsequently, we began the long
process
of registering
BIT
™
with the Environmental Protection Agency
(“EPA”), using good laboratory practice testing.
TOMI introduced
SteraMist
™
to the commercial market in
June 2013, using our inherited and pre-existing EPA mold label. In
June 2015, we successfully registered SteraMist
™
BIT
™
as a hospital-healthcare
disinfectant and broad-spectrum general use disinfectant for use as
a misting/fogging agent, at which time our technology became the
first EPA-registered hospital-healthcare disinfectant solution and
equipment on the market. TOMI proudly maintains this registration
and we continuously update our label with additional
pathogens.
TOMI’s cold plasma technology produces
ionized Hydrogen Peroxide (iHP
™
,
a mist/fog consisting of Reactive Oxygen Species, mainly hydroxyl
radicals (“
.
OH”).
This technology converts TOMI’s BIT
™
solution, which contains only one active
ingredient, a low-percentage hydrogen peroxide solution to
.
OH
by passing it through an atmospheric cold plasma
arc.
Markets
TOMI’s
SteraMist
™
products are designed to address multiple industries with various
needs. Our operations are organized into four main divisions based
on our current target industries: Life Sciences,
Hospital-Healthcare, TOMI Service Network and Food
Safety.
TOMI is committed to customer
satisfaction and client retention in all of our divisions both
domestically and internationally. Our core values revolve around
our commitment to the reduction of harmful pathogens and combating
public health threats worldwide, which are evidence by our motto of
Innovating for a Safer World
®
.
Regulation and Registrations
Under
United States federal guidelines, TOMI is required to register with
the EPA and certain state regulatory authorities as a seller of
solution and technology. SteraMist
™
BIT
™
holds EPA registrations both as a hospital-healthcare and general
disinfectant (EPA Registration 90150-2) and for mold control air
and surface remediation (EPA Registration 90150-1). In February
2016, we expanded our label with the EPA to include
C. diff spores
. Methicillin-resistant
Staphylococcus
aureus
(MRSA), and influenza virus
h1n1. In August 2017, our EPA label was further expanded to include
efficacy against
Salmonella
and Norovirus. As of January 2017, our product line is one of
fifty-three (53) published products on the EPA’s
“Registered Antimicrobial Products Effective against
Clostridium difficile
spores”, the EPA’s K List. In December 2017,
SteraMist
®
earned
publications on EPA Lists G, L and M, which pertain to norovirus,
Ebola, and avian influenza (h1n1), respectively. Since 2016, the
SteraMist
™
BIT
™
EPA-registered label has been accepted in all 50 U.S. states, and
over 20 countries worldwide including the EU, Canada and Taiwan
which registrations we continue to maintain.
We have
expanded our SteraMist
®
BIT
™
Technology
beyond the initial chemical and biological warfare applications to
resistant microorganisms (including spores) in a wide variety of
commercial and residential settings. SteraMist
®
BIT
™
is designed to
provide fast-acting biological six-log reduction, which is a
99.9999% kill, and works in hard-to-reach areas, leaving no
residue, requiring no manual wiping, and leaves behind no noxious
fumes.
All of
the SteraMist
®
products are
fully validated to comply with good manufacturing practice
standards, have received CE marks in the European Economic Area and
are approved by UL. Our solution is manufactured at an
EPA-registered solution blender and our products are manufactured
in an ISO 9001 certified facility.
Products
We
continue to offer our customers a wide range of innovative products
designed to be easily incorporated into their existing disinfection
and decontamination procedures. In addition, we offer equipment
installations, qualifications, and performance maintenance needs
all of which are structured to address iHP
®
service
disinfection and decontamination needs globally.
18
Divisions
Life Sciences
TOMI’s
SteraMist
®.
Environment
System, iHP Decontamination Complete Room, SteraMist
®
Select Surface
Unit, iHP
™
implementation
to decontamination chambers and cage washers, and our
iHP
®
Service Division, are designed to provide a complete room solution
to address the regulatory inspections of
disinfecting/decontaminating and validation processes within the
life sciences industry.
Hospital-Healthcare
In
2018, TOMI launched the E-Z SteraMist
®
Disinfection
Cart, an all-in-one cart that houses our handheld point-and-spray
SteraMist
®
Surface Unit as
well as accompanying supplies. This product is designed to make the
terminal cleaning process of patient rooms more efficient than
traditional manual cleaning methods. We believe that our E-Z
SteraMist
™
Disinfection
Cart will allow our customers within the Hospital-Healthcare
industry to address the growing concern regarding the increasing
high level of transference of pathogens including multiple drug
resistant organisms (MDRO’s) leading to HAI’s from
hospital and healthcare related environmental surfaces and
equipment to patients and healthcare workers.
TOMI Service Network
TSN is
our network comprised of outside professionals who are exclusively
licensed and trained to use the SteraMist
®
products. TSN
sells, trains and services professional remediation companies in
the use of SteraMist
®
. These
companies specialize in mold abatement, water damage (including
damage from CAT 1 though 3 water loss) and fire damage, as well as
professional specialists that are certified and practice in the
area of forensic restoration. Currently, TSN is comprised of
eighty-eight (88) such companies throughout the United States and
Canada. TSN members use SteraMist
®
as a standalone
service as well as incorporating our products into their existing
business models. TOMI derives a continuous revenue stream from our
TSN customers through recurring purchases of our BIT
™
solution.
Our TSN network continues to grow and currently
the total number of TSN provider contracts fully executed to date
is eighty-eight (88), expanding our network membership across
thirty-five (35) U.S. States and two (2) Canadian provinces.
Our service providers have a total of one hundred and eleven (111)
SteraMist
®
Surface
Units and forty-two (42) SteraMist
®
Environment
Systems in the field allowing for rapid deployment at a
moment’s notice.
In September 2018, we partnered with the
Global BioRisk Advisory Council (“GBAC”) to use
SteraMist
®
as
one of the training technologies used in their certification
classes. This also allows for the decontamination of everyday
crises as well as forensic restoration and bio-hazard scenes as
needed. TOMI also launched the Forensic Restoration Service Team
(or “FRST”), a U.S. based TOMI-certified forensic
restoration and crime clean network. This network is comprised of
service providers who specialize in forensic restoration such as
mass casualty, crime scene, suicide and unattended death cleanup.
Also included within this field are hoarding and bio-recovery
services. Participating FRST members will receive specialized
training and certifications by GBAC. We have four (4) certified
FRST
members
to date.
Food Safety
In
2017, TOMI launched a Food Safety division. Food
safety is quickly becoming one of our largest
targeted markets, as we believe it presents a clear potential for
substantial growth. This is in light of the implementation and
enforcement of new and existing rules in the United States under
the FDA Food Safety Modernization Act and in Canada under the Safe
Food for Canadians Act and the Safe Food for Canadians Regulations,
the latter two of which became effective in January 2019. This is
in part due to this increased focus on concerns within the food
safety industry in North America and abroad. We have consultants
submitting to the EPA and FDA a request to expand our current
labels from the treatment of food processing machinery, restaurants
and food contact areas, to include direct food and crop
applications.
We
intend to target the following segments, with an initial emphasis
on the profitable organic market:
●
Growing
crops
●
Seeds
●
Packaging
facilities
●
Food
storage (produce, meats, fish)
●
Food
transportation vehicle’s
●
Food
processing
●
Cannabis
19
In
each area, our main objective is to prevent and/or minimize food
decay without utilizing harsh chemicals that leave toxic residues.
This could create an opportunity to supplement, or replace, current
pesticides and fungicides currently being used by these industry
leaders.
With
regards to the Food Safety industry, we believe that the routine
treatment of tractor trailers and shipping containers will reduce
pathogen cross-contamination between cargo shipments. This is a
high priority within this market based on volume and potential. In
2018, we treated specific rooms utilized by a global distributor
with regards to their apple storage and lemon shelf life. In both
decontamination situations SteraMist successfully demonstrated a
clear pathogen reduction.
Business Highlights and Recent Events
During
2018 management was focused on allocating significant resources
into research and product development, raising brand awareness
through marketing and advertising initiatives, expanding our
internal and external sales infrastructure, increasing product
registrations, expanding our operational bandwidth with development
of our new facility and growing our revenue and customer
list.
Research and product development:
During
2018 we executed on our R&D initiatives in Healthcare, Life
Science and Food Safety areas and further developed the line of
products we offer. Our R&D expenses increased in 2018 by
approximately 102% compared to prior year as a result of the 2018
initiatives and product development.
On
the product development front, in 2018 we developed the following
three new lines of product:
EZ SteraMist
®
Cart
- offers our Hospital-Healthcare customers a more efficient way to
perform a terminal clean of their patient rooms. The EZ
SteraMist
®
Cart
was introduced in the third quarter of 2018 in connection with the
Shield Study.
SteraMist
®
Select Surface Unit - developed
for
our customers who have smaller enclosures in need of
decontamination. This unit is lightweight and easy to transport
with the added ability to function between a lower flow operation
and standard operation, such as the SteraMist Surface Unit. The
user can adjust air flow, adjust pump fluid flow, set the
programmable timer for automatic runs, modify spray/dwell times and
number of cycles, and is equipped with start and stop
buttons
Stainless
Steel 90-Degree Applicator - rolled out in the third quarter of
2018 and provides a solution for applications needs for small
enclosures and very tight spaces.
Environment
System software and reporting upgrades – the upgrades include
PDF printing capabilities and allows for reports to be generated
providing our Life Sciences customers with the necessary
information to be cGMP compliant.
Research studies
We continue to participate in a large study, a
“SHIELD study”, that compares hospital manual cleans to
a SteraMist
®
mechanical
clean. This study is being conducted at Los Angeles Public Health
Hospitals; UCLA Olive View Medical Center, Harbor-UCLA Medical
Center. Preliminary results have shown that there has been a
significant decrease in the transference of pathogens resulting in
HAIs and C.
difficile
infections in the rooms that used
SteraMist
®
for
their terminal clean, as compared to the rooms that have been
manually cleaned. Future results will be released as obtained from
the study’s lead investigators.
The
initial results received from the SHIELD study directly led to the
partnership between TOMI and MaxAir formed in 2018. TOMI developed
a terminal clean protocol that is less than one hour. MaxAir
developed a purifying respiratory protection helmet, this high-tech
helmet pushes 6-liters of cool clean air to the face of the
hospital Environmental Service employees and outside service
providers during TOMI’s hospital terminal clean
protocol.
TOMI and one of our corporate partners have
continued agricultural testing with the USDA to determine the
efficacy of SteraMist
®
against
viral threats to honey bees and hives. Initial results from such
testing suggest that SteraMist
®
may
be effective in inactivating such virus threating this particular
vertical.
20
In the third quarter of 2018, a major global
agricultural seed distributor began testing the efficacy of
SteraMist
®
against
common viral, fungal and bacterial threats to corn seeds and
various other large and small seeds of size. While testing
continues into 2019, to the extent the results indicate clear
efficacy, we intend to pursue all available opportunities within
the seed development industry.
As for direct crop application, we are targeting
those crops grown indoors, in particular, high value crops such as
vegetables, mushrooms and cannabis. Additionally, with the help of
strategic corporate partners, we have conducted tests and obtained
positive preliminary results from the application of
SteraMist
®
to
a particular pathogen that is a current threat to the mushrooms
industry.
During 2018, the World Health Organization
(“WHO”) published and identified
SteraMist
®
as
the only “Disinfecting solution and technology” in its
2016–2017 “WHO compendium of innovative health
technologies for low-resource settings”. As part of the
selection process, 562 technologies were evaluated by 35 internal
WHO staffers and 87 external independent reviewers, who presented
no conflict of interest. Once these evaluations were received and
the data compiled, a total of 39 prototypes and 29 commercially
available products were selected and presented in the compendium in
order to illustrate the innovative technologies that can empower
healthcare workers with the goal of supporting people and patients
to have a healthier life. SteraMist was the only disinfecting
technology cited.
In September 2018, we partnered with the
Global BioRisk Advisory Council (“GBAC”) to use
SteraMist
®
as
one of the training technologies used in their certification
classes. This also allows for the decontamination of everyday
crises as well as forensic restoration and bio-hazard scenes as
needed. TOMI also launched the Forensic Restoration Service Team
(or “FRST”), a U.S. based TOMI-certified forensic
restoration and crime clean network. This network is comprised of
service providers who specialize in forensic restoration such as
mass casualty, crime scene, suicide and unattended death cleanup.
Also included within this field are hoarding and bio-recovery
services. Participating FRST members will receive specialized
training and certifications by GBAC. We have four (4) certified
FRST
members
to date.
Registrations:
In
2018, we received our Taiwan Registration and added our Canadian
label to the Organic Materials Review Institute
(“OMRI”) certifying that our product follows Canadian
organic standards adding to our already robust BIT Solution
registrations.
Marketing and Advertising Campaigns:
In
early 2018 we established a plan to increase our marketing and
advertising initiatives in order to further build brand awareness.
As a result of our digital campaigns that were carried out in 2018,
our website statistics have improved significantly from 2017 to
2018. With our continual efforts in advertising within targeted
publications, Google search engine optimized campaigns, and organic
brand awareness built by our team we further increased our digital
footprint. We have increased our 2017 to 2018 digital advertising
in publications impressions. Our marketing director continues to
focus on digital campaigns to drive users to TOMI’s website
with the goal of creating higher lead conversations.
During
2018 we also attended fifty-two (52) national, state and local
tradeshows and conferences to increase our growing base of sales
leads and further build brand awareness. Our increased tradeshow
presence has increased our leads, sales opportunities and has
resulted in growth in our sales pipeline for 2019.
Personnel:
In
January 2018, we appointed our new Chief Operating Officer, Elissa
Shane, who had previously served us in other roles for several
years, and in January 2018, we announced the appointment of Dr. Lim
Boh Soon to our Board.
In
2018, we allocated resources into building our sales
infrastructure, training on our products and equipment and
expanding our internal and sales representative presence. We grew
our overall sales force in 2018 compared to 2017 from (2) to (5)
dedicated internal full-time dedicated sales personnel and from
(26) in 2017 to (56) independent sales representatives in the U.S.
We added consultants to assist with building brand awareness while
also providing sales and technical support. Internationally, we
continuously build our presence by the addition of distributors and
representatives throughout Asia, Australia, Europe and South
America.
In
addition, we also continued to build internal base of employees by
increasing our overall full-time employee headcount from 13 to 19
or by approximately 46% in 2018.
21
Facilities:
Management
also focused and allocated resources in 2018 on building our
internal operating infrastructure and bandwidth. In February 2018
we announced the relocation of our U.S. corporate headquarters, and
in April 2018 we finalized our lease for our new facility. Our new
state of the art facility is approximately 9,000 square feet and is
outfitted with an iHP Decontamination Complete room system, a
40-seat training room, a qualification laboratory, a quality
control room and increased warehouse space to accommodate our
anticipated growth. Full time business operations were moved
here and began out of this facility in December 2018.
Financial:
On the sales and business development front, we
continued to grow our customer base and build revenue in 2018.
Since bringing SteraMist
®
to the commercial market, we have
added approximately 300 customers. During 2018, we added 65
customers and sold 85 machines which includes 2
Permanent
iHP Complete Disinfection Room
s that
were installed during the year.
Our
revenue for the years ended December 31, 2018 and 2017 was
$5,584,612 and $4,993,668, respectively, representing a 12% year
over year increase. Q3 2018 was a record quarter with revenues of
$1,948,000.
Internationally,
our revenue for the years ended December 31, 2018 and 2017 were
$1,388,000 and $1,499,000, respectively. While regulatory and
product registrations have slowed our anticipated growth in Asia
and Europe, we continue to make strides in the registration
process, which we anticipate will position us to generate
additional revenue in those regions.
During
2018, we experienced a year over year 14% increase in our
reoccurring BIT Solution sales due to higher repeat orders from our
existing customer base. As our user base grows, we expect this
metric to improve over time.
Recently, TOMI was audited by Pfizer Global Supply
Manufacturing and Supplier Quality Assessments and were reported to
be “Acceptable”, the highest given rank, allowing us to
continue expanding SteraMist
®
implementation into Pfizer
facilities.
In
2018, we finalized our Installation & Performance Qualification
documentation allowing for an additional avenue to generate company
revenue. Along with this document we formalized User Requirement
Specifications for our SteraMist equipment.
In May 2018, we offered
a noteholder the option to convert its Note at a reduced conversion
price of $0.46.
The noteholder
accepted and converted at such price.
Pursuant to the terms
of the conversion offer, an aggregate of $700,000 of principal and
$5,212 of accrued interest outstanding under the Note were
converted into 1,877,960 shares of common stock. The
Company recognized an induced conversion cost of $57,201 related to
the conversion.
In December 2018, a
noteholder redeemed a note with a principal balance of $300,000 in
exchange for $150,000 in cash.
We recognized a gain on redemption of convertible
note income in the amount of $150,000 as a result of the
transacti
Intellectual Property (IP):
Since
TOMI’s inception we have continuously advanced our
intellectual property portfolio. Currently we hold a variety
of intellectual property both domestically and internationally -
registered design and utility patents as well as registered
trademarks that include both word and image marks registered across
four separate classes. TOMI continues to maintain and renew a
total of thirty-four (34) patents and seven (7) trademarks.
Since 2017, TOMI added a total of sixteen (16) patents and fifteen
(15) trademarks and is waiting for acceptance of eight (8)
additional patents, including two (2) Utility Patents, and seven
(7) additional registered trademarks.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S generally accepted
accounting principles. 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.
22
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 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)
, when
there is persuasive evidence that an arrangement exists, title and
risk of loss have passed, delivery has occurred, or the services
have been rendered, the sales price is fixed or determinable and
collection of the related receivable is reasonably
assured. Title and risk of loss generally pass to our
customers upon shipment.
Disaggregation of Revenue
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products or services.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within sales
and marketing expenses. These costs include our internal sales
force compensation program and certain partner sales incentive
programs as we have determined annual compensation is commensurate
with annual sales activities.
Contract Balances
As of
December 31, 2018, and December 31, 2017, 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 he 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.
Fair Value Measurement
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:
23
Level1:
Quoted prices in
active markets for identical assets or liabilities.
Level2:
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data or substantially the full term of the assets or
liabilities.
Level3:
Unobservable
inputs that are supported by little or no market activity and that
are significant to the value of the assets or
liabilities.
Our financial
instruments include cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and convertible debt. All these
items were determined to be Level 1 fair value
measurements.
The
carrying amounts of cash and equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments. The recorded
value of convertible debt approximates its fair value as the terms
and rates approximate market rates.
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. At December 31, 2018 and December 31, 2017, the
allowance for doubtful accounts was $300,000 and $500,000,
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 will not be usable. Our reserve for obsolete
inventory was $100,000 and $0 for the years ended December 31, 2018
and 2017, 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.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We make an
estimate of expected costs that will be incurred by us during the
warranty period and charge that expense to the consolidated
statement of operations at the date of sale. Our manufacturer
assumes warranty against product defects for one year from date of
sales, which we extend to our customers upon sales of the product.
We assume responsibility for product reliability and
results.
24
Income Taxes
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are, on a more
likely than not basis, not expected to be realized, in accordance
with Accounting Standards Codification (“ASC”) guidance
for income taxes. 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.
Leases and Tenant Improvement Allowance
For
lease agreements that provide for escalating rent payments or
free-rent occupancy periods, we recognize rent expense on a
straight-line basis over the non-cancelable lease term and option
renewal periods where failure to exercise such options would result
in an economic penalty in such amount that renewal appears, at the
inception of the lease, to be reasonably assured. The lease term
commences on the date that the Company takes possession of or
controls the physical use of the property. Deferred rent is
included in liabilities on the consolidated balance
sheet.
We
record landlord allowances and incentives received as deferred rent
based on their short-term or long-term nature. These landlord
allowances are amortized using the straight-line method over the
reasonably assured lease term as a reduction of rent expense. We
consider improvements to be a lessor asset if all of the following
criteria are met:
●
the lease specifically requires the lessee to make the
improvement;
●
the improvement is fairly generic;
●
the improvement increases the fair value of the property to the
lessor;
and
●
the useful life of the improvement is longer than the lease
term.
At
December 31, 2018 and 2017 our short term deferred rent was $13,215
and $0, respectively. At December 31, 2018 and 2017, our long term
deferred rent and tenant allowances was $401,734 and $0,
respectively.
Loss Per Share
Basic
loss per share is computed by dividing our net loss by the weighted
average number of shares of common stock outstanding during the
period presented. Diluted loss per share is based on the treasury
stock method and includes the effect from potential issuance of
shares of common stock, such as shares issuable pursuant to the
exercise of options and warrants and conversions of preferred stock
or debentures.
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
(the “2016 Plan”). The 2016 Plan authorizes the grant
of stock options, stock appreciation rights, restricted stock,
restricted stock units and performance units/shares. Up to
5,000,000 shares of common stock are authorized for issuance under
the 2016 Plan. Shares issued under the 2016 Plan may be either
authorized but unissued shares, treasury shares, or any combination
thereof. Provisions in the 2016 Plan permit the reuse or reissuance
by the 2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash. Equity
compensation expense will typically be awarded in consideration for
the future performance of services to us. All recipients of awards
under the 2016 Plan are required to enter into award agreements
with the Company at the time of the award; awards under the 2016
Plan are expressly conditioned upon such agreements. For the year
ended December 31, 2017, we issued 200,000 shares of common stock
out of the 2016 Plan. In addition, for the year ended December 31,
2018, we issued 300,000 shares of common stock out of the 2016
Plan. The balance of common shares authorized for issuance at
December 31, 2018, was 4,500,000.
25
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 years ended December 31, 2018 and
2017.
Recent Accounting Pronouncements
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
,
to replace the existing revenue recognition criteria for contracts
with customers. In August 2015, the FASB issued ASU
No. 2015-14,
Deferral of the
Effective Date
, to defer the effective date of ASU
No. 2014-09 to interim and annual periods beginning after
December 15, 2017. We adopted ASU Nos. 2014-09 and
2015-14 on January 1, 2018 on a modified retrospective basis, which
did not impact our beginning accumulated deficit and additional
paid-in capital.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, to require
lessees to recognize all leases, with limited exceptions, on the
balance sheet, while recognition on the statement of operations
will remain similar to current lease accounting. The ASU also
eliminates real estate-specific provisions and modifies certain
aspects of lessor accounting. Subsequently, the FASB issued ASU No.
2018-10, Codification Improvements to Topic 842, ASU No. 2018-11,
Targeted Improvements, and ASU No. 2018-20, Narrow-Scope
Improvements for Lessors, to clarify and amend the guidance in ASU
No. 2016-02. The ASUs are effective for interim and annual periods
beginning after December 15, 2018, with early adoption permitted.
We will adopt the ASUs on January 1, 2019 on a modified
retrospective basis through a cumulative adjustment to our
beginning accumulated deficit balance. Prior comparative periods
will not be restated under this method, and we will adopt all
available practical expedients, as applicable. Upon adoption, our
consolidated balance sheet will include an overall increase in
assets of approximately $800,000 and an increase in liabilities of
approximately $800,000. The ASUs are not expected to have a
material impact on our beginning accumulated deficit, consolidated
statement of operations or the consolidated statement of cash
flows
.
In
March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment
Accounting
, to simplify the accounting for the income tax
effects from share-based compensation, the accounting for
forfeitures and the accounting for statutory income tax
withholding, among others. In particular, ASU No. 2016-09
requires all income tax effects from share-based compensation to be
recognized in the consolidated statement of operations when the
awards vest or are settled, permits accounting for forfeitures as
they occur, and permits a higher level of statutory income tax
withholding without triggering liability accounting. Adoption of
ASU No. 2016-09 is modified retrospective, retrospective and
prospective, depending on the specific provision being adopted. We
adopted ASU No. 2016-09 on January 1, 2017, which did not
impact our beginning accumulated deficit and additional paid-in
capital.
In
January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill
Impairment
, to simplify the test for goodwill impairment
by
removing Step 2. An
entity will, therefore, perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount,
recognizing an
impairment charge for the amount by which the carrying amount
exceeds the fair value, not to exceed the total amount of goodwill
allocated to the
reporting unit. An entity still
has the option to perform a qualitative assessment to determine if
the quantitative impairment test is necessary. ASU No. 2017-04 is
effective
for interim
and annual periods beginning after December 15, 2019, with early
adoption permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. Adoption of ASU
No. 2017-04 is prospective.
26
In May
2017, the FASB issued ASU No. 2017-09,
Scope of Modification Accounting
, to
provide guidance on which changes to the terms or conditions of
a
share-based payment
award require an entity to apply modification accounting. ASU No.
2017-09 is effective for interim and annual periods beginning after
December 15,
2017,
with early adoption permitted. Adoption of ASU No. 2017-09 is
prospective. We adopted ASU No. 2017-09 on January 1, 2018,
which did not impact our consolidated financial statements upon
adoption.
Financial Operations Overview
Our
financial position as of December 31, 2018 and 2017, respectively,
was as follows:
|
|
As of December
31,
|
|
|
|
2018
|
2017
|
|
Total
shareholders’ equity
|
$
2,995,000
|
$
5,394,000
|
|
Cash and cash
equivalents
|
$
2,005,000
|
$
4,550,000
|
|
Accounts
receivable, net
|
$
2,146,000
|
$
1,836,000
|
|
Inventories,
net
|
$
2,682,000
|
$
3,519,000
|
|
Deposits
|
$
109,000
|
$
-
|
|
Current
liabilities
|
$
1,700,000
|
$
1,103,000
|
|
Convertible notes
payable, net
|
$
4,982,000
|
$
5,944,000 -
|
|
Long-term
liabilities (excluding long-term convertible notes)
|
$
402,000
|
$
-
|
|
|
|
|
|
Working
capital
|
$
5,544,000
|
$
9,073,000
|
During
the year ended December 31, 2018, our debt and liquidity positions
were affected by the following:
●
Net cash used in
operations of approximately $1,767,000; and
●
Purchases of
property and equipment of approximately $628,000.
●
Redemption and
conversion of convertible notes payable aggregating $1,000,000 in
principal.
Results of Operations for the Year Ended December 31, 2018 Compared
to the Year Ended December 31, 2017
|
|
Year
Ended
|
Year
Ended
|
|
|
December
31,
2018
|
December
31,
2017
|
|
|
|
|
|
Revenue,
Net
|
$
5,585,000
|
$
4,994,000
|
|
Gross
Profit
|
$
3,117,000
|
$
3,066,000
|
|
Total Operating
Expenses
(1)
|
$
6,188,000
|
$
6,510,000
|
|
Loss from
Operations
|
$
(3,070,000
)
|
$
(3,444,000
)
|
|
Total Other Income
(Expense)
|
$
(160,000
)
|
$
(196,000
)
|
|
Net
Loss
|
$
(3,230,000
)
|
$
(3,640,000
)
|
|
Basic (loss) per
share
|
$
(0.03
)
|
$
(0.03
)
|
|
Diluted (loss) per
share
|
$
(0.03
)
|
$
(0.03
)
|
(1)
Includes
approximately $77,000 and $649,000 in non-cash equity compensation
expense for the
years
ended
December 31, 2018 and 2017, respectively.
Sales
During
the years ended December 31, 2018 and 2017, we had net revenue
of approximately $5,585,000 and $4,994,000, respectively,
representing an increase in revenue of approximately $591,000 or
12%.
The increase in sales in the
current year period was attributable to large equipment orders from
new customers, and steady repeat solution orders from our existing
customer base.
27
Net Revenue
Product and Service Revenue
|
|
For the year ended December 31,
|
|
|
|
2018
|
2017
|
|
SteraMist
Product
|
$
4,652,000
|
$
4,097,000
|
|
Service
and Training
|
933,000
|
897,000
|
|
Total
|
$
5,585,000
|
$
4,994,000
|
Revenue by Geographic Region
|
|
For the year ended December 31,
|
|
|
|
2018
|
2017
|
|
United
States
|
$
4,197,000
|
$
3,495,000
|
|
International
|
1,388,000
|
1,499,000
|
|
Total
|
$
5,585,000
|
$
4,994,000
|
Cost of Sales
During
the years ended December 31, 2018 and 2017, our cost of sales was
approximately $2,467,000 and $1,928,000, respectively, representing
an increase of approximately $539,000 or 28%.
The primary reason for the increase in cost of
sales is attributable to the increase in revenue and the related
product mix in the current year period as compared to the prior
year period
and our inventory reserve that was recorded in
the fourth quarter of 2018. Our gross profit margins as a
percentage of sales for the year ended December 31, 2018 decreased
as compared to the prior period as a result of the customer and
product mix in sales and our inventory reserve established in
2018
Professional Fees
Professional fees
for the year ended December 31, 2018 were approximately $330,000,
as compared to $877,000 for the prior year, representing a decrease
of approximately $547,000, or 62%.
The
decrease is attributable to high professional fees incurred in the
prior year period in connection with a lawsuit we initiated and
settled in July 2017. Professional fees are comprised mainly of
legal, accounting and financial consulting
fees.
Depreciation and Amortization
Depreciation and
amortization were approximately $635,000 and $607,000 for the years
ended December 31, 2018 and 2017, respectively, representing an
increase of $28,000, or 5%. The increase in depreciation expense is
attributable to additional property and equipment acquired in 2018
and 2017.
Selling Expenses
Selling
expenses for the year ended December 31, 2018 were approximately
$1,360,000, as compared to $1,256,000 for the year ended December
31, 2017, representing an increase of approximately $104,000 or 8%.
The increase in selling expenses is
attributable to higher salaries due to increases in headcount and
marketing and advertising costs incurred for the year ended
December 31, 2018 as compared to the prior year period. Selling
expenses represent selling salaries and wages, trade show fees,
commissions, advertising and marketing
expenses.
Research and Development
Research and
development expenses for the year ended December 31, 2018 were
approximately $916,000, as compared to $454,000 for the year ended
December 31, 2017, representing an increase of approximately
$462,000, or 102%.
The primary reason
for the increase is attributable to current and ongoing studies and
testing in connection with our product related to more effective
and quicker hospital terminal cleans and product development costs
we incurred in 2018. Research and development expenses mainly
include costs incurred in generating and supporting research on
improving, extending and applying our patents in the field of
mechanical cleaning and decontamination.
28
Equity Compensation Expen
se
Equity
compensation expense for the year ended December 31, 2018 was
approximately $77,000, as compared to $649,000 for the year ended
December 31, 2017, representing a decrease of approximately
$572,000 or 88%. The decline in equity compensation expense relates
to the timing of certain issuances that occurred in the prior
period. Equity compensation expense is incurred upon the issuance
of warrants and stock options. On the date of a grant, we determine
the fair value of the award and recognize compensation expense over
the requisite service period, which is generally the vesting period
of the award. The fair value of the award is calculated using the
Black-Scholes Method option-pricing model.
Consulting Fees
Consulting fees for
the year ended December 31, 2018 were approximately $141,000, as
compared to $211,000 for the year ended December 31, 2017,
representing a decrease of approximately $70,000, or 33%.
The decrease in consulting fees
relates to a one-time fee that was incurred in the prior year
period in connection with a short-term consulting agreement with no
such charge in the current period.
General and Administrative Expense
General
and administrative expense includes salaries and payroll taxes,
rent, insurance expense, utilities, office expense and product
registration costs. General and administrative expense was
approximately $2,729,000 and $2,775,000 for the years ended
December 31, 2018 and 2017, respectively, representing a decrease
of approximately $46,000 or 2%.
Other Income and Expense
Gain on
redemption of convertible note was $150,000 for the year ended
December 31, 2018.
Amortization of
debt discount was $38,000 and $6,000 during the years ended
December 31, 2018 and 2017, respectively. Amortization of debt
discount for the years ended December 31, 2018 and 2017, consists
of the amortization of debt discount on the $6,000,000 principal
amount of Notes issued in March and May 2017. The debt discount was
amortized over the life of the Notes utilizing the effective
interest method.
Induced
conversion costs of approximately $57,000 for the year ended
December 31,2018 were incurred in connection with the conversion of
$700,000 convertible note payable.
Interest income for
the years ended December 31, 2018 and 2017 was approximately $7,000
and $2,000, respectively.
Interest expense
for the years ended December 31, 2018 and 2017 was approximately
$222,000 and $191,000 respectively. Interest expense for the years
ended December 31, 2018 and 2017 consisted of the interest incurred
on the $6,000,000 principal amount of Notes issued in March and May
2017.
Net Loss
Net
loss for the years ended December 31, 2018 and 2017 was
approximately ($3,230,000) and ($3,640,000), respectively. Net loss
per common share, basic and diluted, for the year ended December
31, 2018 was ($0.03). Net loss per common share, basic and diluted,
for the year ended December 31, 2017 was ($0.03). The primary
reasons for the decreased net loss can be attributed
to:
●
Higher revenue and
gross profit of approximately $591,000 and $51,000,
respectively;
●
Lower operating
expenses of approximately $322,000,
●
Gain on redemption
of convertible note of $150,000, offset by
●
Higher interest
expense of approximately $31,000; and
●
Induced conversion
costs of approximately $57,000.
Liquidity and Capital Resources
As of
December
31, 2018, we had cash and cash equivalents of
approximately $2,005,000 and working capital of
$5,544,000.
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
debt and equity financings.
29
In
March and May 2017, we raised gross proceeds of $6,000,000 through
a private placement of the Notes. We issued the Notes in two
tranches of $5,300,000 and $700,000, respectively, which originally
were scheduled to mature on August 31, 2018 and November 8, 2018,
respectively, unless earlier redeemed, repurchased or converted.
The Notes are convertible at any time by the holder into common
stock at a conversion price of $0.54 per share. We may redeem the
Notes at any time prior to maturity at a price equal to 100% of the
outstanding principal amount of the Notes to be redeemed, plus
accrued and unpaid interest as of the redemption
date. Interest on the Notes is payable semi-annually in cash
on February 28 and August 31 of each year at a rate of 4 percent
per annum. In addition, we issued three-year warrants to purchase
up to an aggregate of 999,998 shares of common stock at an exercise
price of $0.69 per share. Currently, we are using the proceeds from
the private placement for research and development, international
product registration, expansion of our internal sales force,
marketing, public relations, expansions of our EPA label and for
working capital and general corporate purposes. I
n February and March 2018,
we and the holders of the Notes extended the
maturity date of the $5,000,000 principal
amount of Notes to April 1,
2019.
In May 2018, we offered
a noteholder the option to convert its Note at a reduced conversion
price of $0.46.
The noteholder
accepted and converted at such price.
Pursuant to the terms
of the conversion offer, an aggregate of $700,000 of principal and
$5,212 of accrued interest outstanding under the Note were
converted into 1,877,960 shares of common stock. The
Company recognized an induced conversion cost of $57,201 related to
the conversion.
In December 2018, a
noteholder redeemed a note with a principal balance of $300,000 in
exchange for $150,000 in cash.
We recognized a gain on redemption of convertible
note income in the amount of $150,000 as a result of the
transaction.
On
March 30, 2019, the remaining note holders agreed to extend the
maturity dates of their aggregate of $5,000,000 in notes to April
3, 2020.
For the
years ended December 31, 2018 and 2017, we incurred losses from
operations of approximately $3,070,000 and $3,444,000,
respectively. The cash used in operations was approximately
$1,767,000 and $2,432,000 for the years ended December 31, 2018 and
2017, respectively.
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;
●
Expansion into new
territories and markets; and
●
Timing of orders
from distributors.
We
could incur additional operating losses and an increase of costs
related to the continuation of product and technology development
and administrative activities.
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 domestic revenue in all hospital-healthcare
verticals;
●
Continued expansion
of our internal sales force and manufacturer representatives in an
effort to drive global revenue in the life science
verticals;
●
Expansion of
international distributors; and
●
Continued growth of
TSN, our new Forensic Restoration FRST sub-division and new growth
in the food safety market which includes using SteraMist for
increasing the storage time of pre- and post-harvest produce.
Increasing transportation shelf life by installing SteraMist in
semitrucks and ships that are transporting food.
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
We cannot make any
assurances that management’s strategies will be effective or
that any additional financing will be completed on a timely basis,
on acceptable terms or at all. Our inability to successfully
implement our strategies or to complete any other financing may
mean that we would have to significantly reduce costs and/or delay
projects, which would adversely affect our business, customers and
program development, and would adversely impact
us.
30
Until
such time, if ever, as we can generate substantial product revenue,
we expect to finance our cash needs through a combination of equity
or debt financings. Sufficient funds may not be available to us at
all or on attractive terms when needed from these sources. To the
extent that we raise additional capital through the future sale of
equity or debt, the ownership interests of our stockholders will be
diluted, and the terms of these securities may include liquidation
or other preferences that adversely affect the rights of our
existing common stockholders. If we raise additional funds through
the issuance of debt securities, these securities could contain
covenants that would restrict our operations. We may require
additional capital beyond our currently anticipated amounts. If we
are unable to obtain additional funding from these or other sources
when needed, it may be necessary to significantly reduce our scope
of operations and current rate of spending through reductions in
staff and delaying, scaling back, or stopping our research and
development or sales and marketing activities.
Operating Activities
Cash used in operating activities
for
the years ended December 31, 2018 and 2017 was approximately
$1,767,000 and $2,432,000, respectively. Cash used in operating
activities decreased in 2018 approximately $665,000 as compared to
the prior year period primarily due to the (reduced loss) incurred
in 2018, decrease in our inventory and increase in our accounts
payable.
Investing Activities
Cash used in investing activities
for
the years ended December 31, 2018 and 2017 was approximately
$628,000 and $15,000, respectively. Cash used in investing
activities increased $613,000 compared to the prior year period
primarily due to equipment, furniture and leasehold improvements
acquired in connection with our new facility.
Financing Activities
Cash used in financing activities
for
the year ended December 31, 2018 consisted of the $150,000 paid in
connection with the redemption of convertible notes payable with a
principal balance of $300,000.
Cash provided by financing activities
for the year ended December 31, 2017 consisted of the $6,000,000 in
aggregate gross proceeds received from the issuance of the Notes
and proceeds from the exercise of warrants of $48,750.
Off-Balance Sheet Arrangements
None.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not
required.
Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements required by this item are included in Part IV,
Item 15 of this Annual Report on Form 10-K, beginning on page F-1,
and are incorporated by reference herein.
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. 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 Annual Report on Form
10-K. Our disclosure controls and procedures are intended to ensure
that the information we are required to disclose in the reports
that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) accumulated
and communicated to our management, including the Principal
Executive Officer and Principal Financial Officer, to allow timely
decisions regarding required disclosures.
31
Based
on that evaluation, our Principal Executive Officer and Principal
Financial Officer have concluded that, as of the end of the period
covered by this Annual Report, our disclosure controls and
procedures were effective. Our management has concluded that the
financial statements included in this Annual Report on Form 10-K
present fairly, in all material respects, our financial position,
results of operations and cash flows for the periods presented in
conformity with generally accepted accounting
principles.
Our
disclosure controls and procedures are designed to provide
reasonable assurance of achieving the desired control objectives.
Our management recognizes that any control system, no matter how
well designed and operated, is based upon certain judgments and
assumptions and cannot provide absolute assurance that its
objectives will be met. In addition, the design of disclosure
controls and procedures 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. Similarly, an evaluation of
controls cannot provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and
instances of fraud, if any, have been detected.
Management’s Annual Report on Internal Control Over Financial
Reporting
Management is
responsible for establishing and maintaining adequate internal
control over our financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act). Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States.
Our
internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors,
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, with the participation of our Principal Chief Executive
Officer and our Principal Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control
—
Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our Principal
Chief Executive Officer along with our Principal Chief Financial
Officer concluded that, as of the end of the period covered by this
Annual Report on Form 10-K, our internal control over financial
reporting was effective. Our internal control over financial
reporting was not subject to attestation by our independent
registered public accounting firm as we are not an accelerated
filer, nor a large accelerated filer.
Changes in Internal Control Over Financial Reporting
During
our most recent fiscal quarter, there have been no changes in our
internal control over financial reporting that have materially
affected or are reasonably likely to materially affect our internal
control over financial reporting.
Item 9B. OTHER INFORMATION
None.
32
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Our
directors and executive officers and their ages and positions as of
March 15, 2019 are presented below.
|
Name
|
|
Age
|
|
Position
|
|
Halden S. Shane
|
|
74
|
|
Chief
Executive Officer and
Chairman of the
Board
|
|
Elissa J. Shane
|
|
39
|
|
Chief
Operating Officer
|
|
Nick Jennings
|
|
41
|
|
Chief Financial Officer
|
|
Harold W. Paul
|
|
70
|
|
Director, Secretary
|
|
Walter C. Johnsen
|
|
68
|
|
Director
|
|
Kelly J. Anderson
|
|
51
|
|
Director
|
|
Lim Boh Soon
|
|
63
|
|
Director
|
Halden S.
Shane
: Dr. Shane has
been our Chief Executive Officer and Chairman of the Board since
October 15, 2007, when we commenced our current operations.
Dr. Shane also served as
President and CEO of Tiger Management International, a private
management company that deals in business management of private and
public companies. Dr. Shane resigned all positions and closed Tiger
Management International in 2009. Dr. Shane was founder and CEO of
Integrated Healthcare Alliance, Inc. and also founder and General
Partner of Doctors Hospital West Covina, California. Prior thereto,
Dr. Shane practiced Podiatric Surgery specializing in ankle
arthroscopy. Dr. Shane received his Bachelor of Science degree
from the University of Miami in 1969, his Bachelor of Medical
Science degree from California College of Podiatric Medicine in
1971, and his Doctor of Podiatric Medicine Degree from the
California College of Podiatric Medicine in 1973. He is Board
Certified by the American Board of Podiatric Surgery, American
Board of Orthopedics, and the American Board of Quality Assurance
and Review. Dr. Shane brings to our Board experience in in the
medical and finance industries.
Elissa J.
Shane
:
Ms.
Shane
has been our Chief
Operating Officer
since January
2018.
Previously, she served
as
our Chief Regulatory
and Compliance Officer from September 2015 to December 2017
and
as our Corporate
Secretary in 2016. From January 2014 to September 2015, Ms. Shane
served as a paralegal with Levi Lubarsky Feigenbaum & Weiss
LLP, where she worked with the
firm’s managing
partners and staff attorneys and directed all operational aspects
of the litigation cycle from inception through appeal. From
September 2009 to January 2014, she served as a paralegal with
Olshan Frome Wolosky LLP, where she managed all regulatory and
compliance issues, litigation procedures and advertising and
promotional matters. Ms. Shane received a B.A. in Psychology and
Communications with a minor in Economics from the University of
Southern California in 2001.
Nick Jennings
: Mr. Jennings has been
our Chief Financial Officer since October 2014. From July 2014
until his employment by the Company, Mr. Jennings was self-employed
and provided consulting, accounting and tax compliance services to
private-owned companies. From November 2006 until June 2014, Mr.
Jennings was a senior manager at Richardson Kontogouris Emerson
LLP, where he worked with various public and private companies
providing services in a variety of business areas including tax
compliance, tax consulting, general accounting, and business
assurance. He is a graduate of Loyola Marymount College with a
degree in accounting and is a member of the American Institute of
Certified Public Accountants.
Harold W.
Paul
: Mr. Paul has
been one of our directors since June 2009
and currently acts as
our Corporate Secretary
. He has been engaged in the private
practice of law for more than thirty-five years, primarily as a
securities specialist. Mr. Paul has been company counsel to public
companies listed on the AMEX, NASDAQ and OTC exchanges. He has
served as a director for six public companies in a variety of
industries, including technology and financial services. He holds a
BA degree from SUNY at Stony Brook and a JD from Brooklyn Law
School and is admitted to practice in New York and Connecticut. Mr.
Paul brings to our Board experience as a director of public
companies and with the United States securities
laws.
Walter
C. Johnsen
:
Mr. Johnsen has been one of
our directors since January 2016. Since January 1, 2007, Mr.
Johnsen has served as Chairman of the Board and Chief Executive
Officer of Acme United Corporation, a leading worldwide supplier of
innovative branded cutting, measuring and safety products in the
school, home, office, hardware & industrial markets. From
November 30, 1995 to December 31, 2006, he held the titles of
President and Chief Executive Officer at Acme United. Mr. Johnsen
previously served as Vice Chairman and a principal of Marshall
Products, Inc., a medical supply distributor. Mr. Johnsen holds a
Bachelor of Science in Chemical Engineering and a Master of Science
in Chemical Engineering from Cornell University, and a Master of
Business Administration from Columbia University. Mr. Johnsen
brings to our Board experience with business and
operations.
33
Kelly
J. Anderson
:
Ms. Anderson has been one
of our directors since January 2016. Ms. Anderson is a partner in C
Suite Financial Partners, a financial consulting services company
dedicated to serving private, public, private equity,
entrepreneurial, family office and government-owned firms in all
industries. Between July 2014 and March 2015, Ms. Anderson was CFO
of Mavenlink, a SaaS company. Between October 2012 and January
2014, Ms. Anderson was Chief Accounting Officer of Fisker
Automotive. Between April 2010 and February 2012, Ms. Anderson was
the President and Chief Financial Officer of T3 Motion, Inc.,
(“T3”), an electric vehicle technology company. Between
March 2008 and April 2010, she served as T3’s Executive Vice
President and Chief Financial Officer, and as a director from
January 2009 until January 2010. From 2006 until 2008, Ms. Anderson
was Vice President at Experian, a leading credit reporting agency.
From 2004 until 2006, Ms. Anderson was Chief Accounting Officer for
TripleNet Properties and its affiliates. From 1996 to 2004, Ms.
Anderson held senior financial positions with The First American
Corp., a Fortune 500 title insurance company. Ms. Anderson is an
inactive California CPA and a 1989 graduate of the College of
Business and Economics at California State University, Fullerton.
Ms. Anderson brings to our Board experience in
finance.
Dr. Lim Boh Soon
: Dr. Lim has been one
of our directors since January 2018.
Dr. Lim has more than 25 years of experience in
the banking and finance industry. For more than the past five
years, he has been and continues to be a fellow of the Singapore
Institute of Directors, and is currently an independent
non-executive director on the board of two publicly-listed
companies on the Singapore Stock Exchange – since October
2015, he has been a director of Jumbo Group Limited and since June
2017, he has been a director of OUE Commercial REIT Management Pte.
Ltd. In addition, Dr. Lim has worked in various senior management
positions for several regional and multi-national organizations,
including UBS Capital Asia Pacific Limited, The NatSteel Group,
Rothschild Ventures Asia Limited and The Singapore Technologies
Group. Dr. Lim was also a member of the Regional Investment
Committee for UBS AG in Asia. Dr. Lim graduated with a First-Class
Honors in Mechanical Engineering from The University of Strathclyde
in the United Kingdom (formerly The Royal College of Science &
Technology) in 1981 and obtained his Doctor of Philosophy in
Mechanical Engineering from The University of Strathclyde in the
United Kingdom in 1985.
Family Relationships
Ms.
Elissa J. Shane, our Chief Operating Officer, is the daughter of
Dr. Halden Shane, our Chief Executive Officer and Chairman of the
Board.
Board Composition
Our Board currently consists of five members. Our bylaws provide
that our directors will hold office until their successors have
been duly elected and qualified. Our Board is responsible for the
business and affairs of our Company and considers various matters
that require its approval. Our executive officers are appointed by
our Board and serve at its discretion.
Scientific Advisory Board
In
February 2017, we approved and announced the formation of the TOMI
Scientific Advisory Board. The Scientific Advisory Board operates
under the terms of a written Advisory Board Charter.
The role of
TOMI’s Scientific Advisory Board will be
to:
(1)
constructively
challenge and help develop proposals on
strategy;
(2)
attend
Scientific Advisory Board
meetings;
(3)
accept
responsibility, publicly and, where necessary, in writing when
required to do so under any act, regulation or code of
conduct;
(4)
scrutinize
the performance of management in meetings, prepare agreed goals and
objectives, and monitor the reporting of performance on
technological and regulatory trends that will impact our
business;
(5)
set
forth our strategic goals with respect to scientific research and
development and liaise with us to ensure we obtain the necessary
resources to meet our objectives, in scientific research and
development;
(6)
devote time to developing and refreshing the
knowledge of our
Company’s technology, products and mission
in “Innovating for a Safer World”;
and
(7)
uphold
the highest standards of integrity and probity, and support us in
maintaining the appropriate culture, values and
behaviors.
34
The Scientific Advisory Board consists of the following
members:
Miguel A. Grimaldo, MEng:
Miguel A. Grimaldo, MEng is an
Assistant Professor in the Department of Pathology, Director of
Institutional Biocontainment Resources at the University of Texas
Medical Branch (“UTMB”) and the Director of the
Biocontainment Engineering Division for the Galveston National
Laboratory. His responsibilities include the review of all design,
construction, commissioning and operation of High and Maximum
containment laboratories as well as to ensure regulatory compliance
and to conduct ongoing evaluation and recertification on all
critical containment features, equipment and operations for
Biosafety Level 3 (BSL
‐
3), Animal Biosafety
Level 3 (ABSL-3) and Biosafety Level 4 (BSL-4) laboratory
facilities at UTMB. He is also a member of the UTMB Institutional
Biosafety Committee. He has served as Committee Member for
development of the ANSI Z9.14
‐
2014
Standard
‐
Testing and Performance
‐
Verification
Methodologies for Ventilation Systems for Biosafety Level 3
(BSL
‐
3) and
Animal Biosafety Level 3 (ABSL3) facilities as well as for the 2016
Edition of the National Institute of Health (NIH)
‐
Design Requirements
Manual (DRM) for Biomedical Laboratories and Animal Research
Facilities. Mr. Grimaldo routinely serves as Biocontainment Advisor
for containment laboratories nationally and internationally on
design, construction and operations and also routinely contributes
to a technical column in the American Biological Safety Association
(ABSA) journal, Applied Biosafety, entitled, “Containment
Talk”. Mr. Grimaldo obtained his Masters of Engineering from
the University of Louisville and Bachelor of Science degrees in
Agricultural Engineering and Agricultural Economics from Texas
A&M University.
Dr. Helene Paxton, MS, MT(ASCP), PhD,
CIC
: Dr. Helene Paxton, MS, MT(ASCP), PhD, CIC, is an
Infection Preventionist, owner of Bio Guidance, LLC, adjunct
biology professor at Rowan University and Director of Infection
Prevention at Saint Francis Healthcare. She is Infection Control
Certified (CIC), board certified as an International Medical
Laboratory Scientist and holds a PhD in Epidemiology. Dr. Paxton
has over 40 years of experience in medical devices and infectious
disease consulting. Dr. Paxton obtained her PhD from Kennedy
Western University and her MS from Bowling Green State
University.
Audit Committee
Our
Audit Committee was established in June 2009 and currently is
comprised of Ms. Anderson, Mr. Paul and Dr. Lim.
Ms. Anderson serves as chairperson of the Audit
Committee. The Company relies on the exemption related to Mr.
Paul’s lack of standing as a financial expert, since a
majority of the Audit Committee was comprised of financial experts
and does not believe the committee composition materially affects
its ability to act independently
. The Audit Committee
operates under a written charter, which is available at
http://investor.tomimist.com/corporate-governance/audit-committee-charter.
The purpose of the Audit Committee is to assist the Board in
monitoring the integrity of the annual, quarterly and other
financial statements of the Company, the independent
auditor’s qualifications and independence, the performance of
the Company’s independent auditors and the compliance by the
Company with legal and regulatory requirements. The Audit Committee
also reviews and approves all related-party transactions. Our Board
has determined that Ms. Anderson is an “audit committee
financial expert” as defined by the regulations promulgated
by the SEC.
Code of Ethics
The
Board adopted a Code of Ethics in 2008 that applies to, among other
persons, Board members, officers (including our Chief Executive
Officer), contractors, consultants and advisors. Our Code of
Ethics, which is available at
http://investor.tomimist.com/corporate-governance/code-of-ethics,
sets forth written standards designed to deter wrongdoing and to
promote:
1.
honest and ethical
conduct including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships;
2.
full, fair,
accurate, timely and understandable disclosure in reports and
documents that we file with or submit to the SEC and in other
public communications made by us;
3.
compliance with
applicable governmental laws, rules and regulations;
4.
the prompt internal
reporting of violations of the Code of Ethics to an appropriate
person or persons identified in the Code of Ethics;
and
5.
accountability for
adherence to the Code of Ethics.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent of our common
stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock. Officers,
directors and greater than ten percent shareholders are required by
SEC regulations to furnish us with copies of all Section 16(a)
forms they file.
35
To our
knowledge, based solely on a review of the copies of Section 16(a)
reports furnished to us and a review of the shareholders register,
during the fiscal year ended December 31, 2018, our officers,
directors and greater than ten percent beneficial owners complied
with all Section 16(a) filing requirements.
Item 11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth the total compensation paid to or earned
by our named executive officers for the years ended December 31,
2018 and 2017, respectively:
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
Option/
Warrant
Awards
($)(1)
|
All
Other
Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
Halden S.
Shane
|
2018
|
360,000
|
40,000
(6)
|
—
|
17,932
(2)
|
—
|
417,932
|
|
Chairman and CEO
(2)
|
2017
|
360,000
|
—
|
—
|
434,847
(3)
|
—
|
794,847
|
|
|
|
|
|
|
|
|
|
|
Elissa J. Shane
(4)
|
2018
|
200,000
|
20,000
(6)
|
—
|
36,474
|
9,000
(4)
|
265,474
|
|
COO
|
2017
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
Nick Jennings
(5)
|
2018
|
155,000
|
10,000
(6)
|
—
|
—
|
—
|
165,000
|
|
CFO
|
2017
|
144,000
|
—
|
—
|
—
|
—
|
144,000
|
(1)
The
amounts shown in this column represent the aggregate grant date
fair value of stock, option and/or warrant award, as applicable,
granted during the year computed in accordance with FASB ASC Topic
718. See Note 2 of the notes to our audited consolidated financial
statements contained in this Annual Report on Form 10-K for a
discussion of valuation assumptions made in determining the grant
date fair value of the awards.
(2)
During
the year ended December 31, 2018, we issued Dr. Shane five-year
warrants to purchase an aggregate of 250,000 shares of common stock
as executive compensation. The exercise price of the warrant was
$0.08 per share, based on the three-day trailing VWAP on the date
of issuance. Utilizing the Black-Scholes pricing model, we
determined the fair value of the warrants issued to Dr. Shane was
approximately $18,000, with the following assumptions: volatility,
142%; expected dividend yield, 0%; risk free interest rate, 2.95%;
and a life of 5 years. The grant date fair value of each share of
common stock underlying the warrants was $0.07. We recognized
equity-based compensation to Dr. Shane of approximately $18,000 on
the warrants during the year ended December 31, 2018. Please refer
to Item 11 Employment Agreements for additional details of Dr.
Shane’s annual compensation.
(3)
Pursuant
to his employment agreement, during the year ended December 31,
2017, we issued Dr. Shane five-year warrants to purchase an
aggregate of 3,750,000 shares of common stock as executive
compensation. The exercise prices of the warrants range from $0.10
to $0.12 per share, based on the three day trailing VWAP on the
date of issuance . Utilizing the Black-Scholes pricing model, we
determined the fair value of the warrants issued to Dr. Shane was
approximately $435,000, with the following assumptions: volatility,
145%–153%; expected dividend yield, 0%; risk free interest
rate, 1.90%–2.23%; and a life of 5 years. The grant date fair
value of each share of common stock underlying the warrants ranged
from $0.09–$0.12. We recognized equity-based compensation to
Dr. Shane of approximately $435,000 on the warrants during the year
ended December 31, 2017.
(4)
In
connection with the execution of Ms. Shane’s employment
agreement, on January 5, 2018, we issued her an option under the
2016 Plan to purchase 100,000 shares of common stock. The exercise
price of the option was $0.12 per share, based on the closing price
of our common stock on the date of issuance. Utilizing the
Black-Scholes pricing model, we determined the fair value of the
option issued to Ms. Shane was approximately $12,000, with the
following assumptions: volatility, 146%; expected dividend yield,
0%; risk free interest rate, 2.27%; and a life of 5 years. The
grant date fair value of each share of common stock underlying the
option was $0.12. In addition, pursuant to her employment
agreement, on January 3, 2019, we issued her an option under the
2016 Plan to purchase 250,000 shares of common stock. The exercise
price of the option was $0.11 per share, based on the closing price
of our common stock on the date of issuance. Utilizing the
Black-Scholes pricing model, we determined the fair value of the
option issued to Ms. Shane was approximately $25,000, with the
following assumptions: volatility, 144%; expected dividend yield,
0%; risk free interest rate, 2.47%; and a life of 5 years. The
grant date fair value of each share of common stock underlying the
option was $0.10. The option was accrued for as of December 31,
2018. We recognized total equity-based compensation to Ms. Shane of
approximately $37,000 on the options during the year ended December
31, 2018. The other compensation in the amount of $9,000 represents
an auto allowance pursuant to Ms. Shane’s employment
agreement. Please refer to Item11 Employment Agreements for
additional details of Ms. Shane’s annual
compensation.
(5)
Please
refer to Item 11 Employment Agreement for additional details of Mr.
Jennings’ annual compensation.
(6)
In
December 2018, the compensation committee approved cash bonuses to
the CEO, COO and CFO which were paid in 2019.
36
Outstanding Equity Awards at 2018 Fiscal Year-End
The
following table sets forth certain information with respect to
outstanding warrants to purchase common stock previously awarded to
our named executive officers as of December 31, 2018.
|
|
|
Option
Awards
|
|
||||||||
|
Name
|
|
Number of
Securities Underlying Unexercised Warrants/Options
Exercisable
(#)
|
|
Number of
Securities Underlying Unexercised
Warrants/Options
Unexercisable
(#)
|
|
Equity Incentive
Plan
Awards: Number
of
Securities
Underlying Unexercised Unearned Warrants
(#)
|
|
Warrant Exercise
Price
($)
|
|
Warrant
Expiration Date
|
|
|
Halden
S. Shane
|
|
3,000,000
(1)
|
|
—
|
|
—
|
|
$0.30
|
|
2/11/2019-2/11/2021
|
|
|
|
|
250,000
(2)
|
|
—
|
|
—
|
|
$0.50
|
|
3/31/2021
|
|
|
|
|
250,000
(3)
|
|
—
|
|
—
|
|
$0.42
|
|
6/30/2021
|
|
|
|
|
250,000
(4)
|
|
—
|
|
—
|
|
$0.32
|
|
9/30/2021
|
|
|
|
|
250,000
(5)
|
|
—
|
|
—
|
|
$0.27
|
|
12/30/2021
|
|
|
|
|
250,000
(8)
|
|
—
|
|
—
|
|
$0.10
|
|
7/17/2022
|
|
|
|
|
3,500,000
(9)
|
|
—
|
|
—
|
|
$0.12
|
|
12/22/2022
|
|
|
|
|
250,000(11)
|
|
—
|
|
—
|
|
$0.08
|
|
11/19/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elissa
J. Shane
|
|
100,000
(10)
|
|
—
|
|
—
|
|
$0.12
|
|
1/5/2023
|
|
|
Nick
Jennings
|
|
300,000
(6)
|
|
—
|
|
—
|
|
$0.30
|
|
10/1/2019-10/1/2021
|
|
|
|
|
100,000
(7)
|
|
—
|
|
—
|
|
$0.55
|
|
1/26/2021
|
|
(1)
Warrants vested in
increments of 1,000,000 on 2/11/2014, 2/11/2015 and 2/11/2016 and
have a term of 5 years
(2)
Warrants vested on
3/31/2016 and have a term of 5 years
(3)
Warrants vested on
6/30/2016 and have a term of 5 years
(4)
Warrants vested on
9/30/2016 and have a term of 5 years
(5)
Warrants vested on
12/30/2016 and have a term of 5 years
(6)
Warrants vested in
increments of 100,000 on 10/1/2014, 10/1/2015 and 10/1/2016 and
have a term of 5 years
(7)
Warrants vested on
1/26/2016 and have a term of 5 years
(8)
Warrants vested on
7/17/2017 and have a term of 5 years
(9)
Warrants vested on
12/22/2017 and have a term of 5 years
(10)
Options vested on
1/5/2018 and have a term of 5 years
(11)
Warrants vested on
11/19/2018 and have a term of 5 years
Employment Agreements, Termination of Employment and
Change-in-Control Arrangements
Except
as described below, we currently have no employment agreements with
any of our executive officers, nor any compensatory plans or
arrangements resulting from the resignation, retirement or any
other termination of any of our executive officers, from a
change-in-control, or from a change in any executive
officer’s responsibilities following a
change-in-control.
Employment Agreements
We have
entered into employment agreements with each of the named executive
officers and generally include the named executive officer’s
initial base salary and an indication of equity compensation
opportunities.
Halden S. Shane
On January 15, 2016, we
entered into
an employment agreement
with Dr. Shane, effective January 1, 2016. The agreement
provides for a base annual salary of $360,000. The agreement
also provides for the quarterly issuance of an option to purchase
250,000 shares of
common stock
in 2016 with an
exercise price equal to the three-day trailing volume weighted
average price of our
common stock
. In the event Dr.
Shane is terminated for any reason or becomes disabled or dies, any
options he holds at such time will become cashless and will be
entitled to piggyback registration and exercise immediately. Dr.
Shane is also entitled to performance bonuses, subject to the
achievement of certain objectives, including (i) a minimum
semi-annual grant of stock options to purchase up to 250,000 shares
of
common
stock
and (ii) a cash bonus,
determined in the sole discretion of the Board. The agreement also
provides that we will reimburse Dr. Shane for certain business and
entertainment expenses, including the use of an
automobile.
37
In the event Dr. Shane
is terminated as CEO as a result of a change in control, Dr. Shane
will be entitled to a lump sum payment of two years salary at the
time of such termination and will be granted an option to purchase
3,000,000 shares of
common stock
that are cashless and,
when exercised, will have piggyback registration or demand
registration rights, and if applicable, any and all outstanding
stock grants will be accelerated and be fully
vested.
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 January 5, 2018, in connection with her
appointment as
our Chief
Operating Officer, we entered into
an employment agreement with Elissa J.
Shane
, effective January 1,
2018
. Pursuant to her
employment agreement, Ms. Shane will receive an annual base salary
of at least $200,000, 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, and the
agreement
provides that
we will issue Ms.
Shane annually an option to purchase at least 250,000 shares of
common stock pursuant to the 2016 Plan. Additionally, in connection
with the execution of
her
employment agreement, on January 5, 2018,
we issued Ms. Shane an option under the 2016 Plan
to purchase 100,000 shares of
common stock at an exercise price of $0.12 per
share
. 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 $750 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.
Nick Jennings
On
September 2, 2015, we entered into a new employment agreement with
Mr. Jennings, which superseded his prior agreement, pursuant to
which he continues to serve as our Chief Financial Officer. Mr.
Jennings’ annual salary is $132,000, which is reviewed
annually. On January 26, 2016, we issued Mr. Jennings a five-year
warrant to purchase up to 100,000 shares of common stock at an
exercise price of $0.55 per share. The agreement also provided for
the issuance of an additional five-year warrant to purchase 100,000
shares of common stock in 2016, however, this provision was
modified to grant a salary increase in lieu of the options. In
January 2018, Mr. Jennings’ annual salary was increased to
$155,000 per year. Mr. Jennings is also entitled to additional
equity compensation based upon superior performance of his
responsibilities, as determined by the Board in its sole
discretion.
The agreement also
provides that we will reimburse Mr. Jennings for certain business
and entertainment expenses.
In the event of a change in
control of the Company that results in his termination, Mr.
Jennings will be entitled to a lump sum payment of one year’s
salary and all equity awards will be accelerated and fully vested.
In the event his employment is terminated other than for cause, Mr.
Jennings will receive an amount equal to his annual salary as of
such termination date after the second employment
anniversary.
38
Director Compensation
Each of our
non-employee directors receives cash fees and stock as compensation
for their service on the Board and the committees of the Board on
which they are a member. The tables below set forth
cash and
stock compensation earned by each non-employee director during the
fiscal year ended December 31, 2018.
|
Name
|
Fees earned or
paid in cash
($)
|
Stock awards
($)
|
Option awards
($)
|
Other Compensation
($)
|
Total
($)
|
|
Harold
W. Paul (1)
|
40,000
|
7,500
|
—
|
60,000
|
107,500
|
|
Walter
Johnsen (2)
|
40,000
|
7,500
|
—
|
—
|
47,500
|
|
Kelly
Anderson (3)
|
45,000
|
7,500
|
—
|
—
|
52,500
|
|
Lim
Boh Soon (4)
|
40,000
|
7,500
|
—
|
—
|
47,500
|
|
Ronald E.
Ainsworth (5)
|
20,000
|
3,500
|
—
|
—
|
23,500
|
(1)
Mr. Paul also
received $60,000 in cash compensation in exchange for legal
services rendered during 2018.
(2)
Mr. Johnsen was
elected to the Board on January 29, 2016. The term of his
agreement as director commenced on February 1, 2016 for up to two
years and until a successor is elected, or resignation or
removal. Our agreement with Mr. Johnsen provides for an annual
fee in the amount of $40,000 paid on a quarterly basis and an
annual grant of shares of common stock. In February 2018, we
issued Mr. Johnsen 75,000 shares of common stock that were valued
at $7,500.
(3)
Ms. Anderson was
elected to the Board on January 29, 2016 and serves as the
chairperson of our Audit Committee. The term of her agreement
as director commenced on February 1, 2016 for up to two years and
until a successor is elected, or resignation or removal. Our
agreement with Ms. Anderson provides for an annual fee in the
amount of $45,000 paid on a quarterly basis and an annual grant of
shares of common stock. In February 2018, we issued Ms.
Anderson 75,000 shares of common stock that were valued at
$7,500.
(4)
Mr.
Lim was elected to the Board
on January 29, 2018. The term of his agreement as director
commenced on February 1, 2018 for up to three years and until a
successor is elected, or resignation or removal. Our agreement
with Mr. Lim provides for an annual fee in the amount of $40,000
paid on a quarterly basis and an annual grant of shares of common
stock. In February 2018, we issued Mr. Lim 75,000 shares of
common stock that were valued at $7,500.
(5)
Mr. Ainsworth was elected to the Board on July 7, 2017. The term of
his agreement as director commenced on July 7, 2017 for up to one
year and until a successor is elected, or resignation or
removal. In July 2018, Mr. Ainsworth was removed from the
Board. During 2018, Mr. Ainsworth received cash fees in the amount
of $20,000 and was issued 62,500 shares of common stock that were
valued at $3,500.
39
Item 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER
MATTERS
Equity
Compensation
Plan
Information
We
currently maintain one compensation plan: the 2016 Plan. The 2016
Plan was approved by the Board on January 29, 2016 and received
shareholder approval on July 7, 2017. The 2016 Plan authorizes the
issuance of 5,000,000 shares of common stock. On August 25, 2015,
the Board terminated the 2008 Plan, which we had maintained
previously and which our shareholders had approved. Accordingly, we
will issue future awards under the 2016 Plan.
The following table
provides information as of December 31, 2018 with respect to
compensation plans under which
our equity securities
are authorized for issuance.
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans(3)
|
|
Equity
compensation plans approved by security holders
|
320,000
(1)
|
$
0.52
|
4,180,000
|
|
Equity
compensation plans not approved by security
holders
|
15,425,000
(2)
|
$
0.36
|
—
|
|
Total
|
15,745,000
|
$
0.36
|
—
|
|
(1)
|
Prior
to August 25, 2015, we granted awards under the 2008
Plan.
|
|
(2)
|
Represents
shares of common stock issuable upon the exercise of warrants
issued to executive officers, employees and consultants in exchange
for services rendered.
|
|
(3)
|
On July
7, 2017, the 2016 Plan received shareholder approval, which permits
the grant up to 5,000,000 shares of common stock
|
Security
Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
the beneficial ownership of our common stock and Series A preferred
stock (together, “Voting Stock”) as of March 15, 2019
for:
●
each person (or group of affiliated persons) known by us to be the
beneficial owner of more than 5% of our outstanding shares of
common stock or Series A preferred stock;
●
each of our directors and nominees for election to the
Board;
●
each of the executive officers named in the summary compensation
table; and
●
all of our directors and executive officers as a
group.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the persons
and entities named in the following table have sole voting and
investment power with respect to all shares of Voting Stock that
they beneficially own, subject to applicable community property
laws.
Applicable percentage ownership is based on
124,690,418 shares of common stock and 510,000 shares of Series A
preferred stock outstanding at March 15,
2019. In computing the number of shares of
Voting Stock beneficially owned by a person and the percentage
ownership of that person, we deemed to be outstanding all shares of
Voting Stock subject to options, warrants or other convertible
securities held by that person or entity that are currently
exercisable or releasable or that will become exercisable or
releasable within 60 days of March 15, 2019. We did not deem
these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Except as otherwise
noted, the address of each person or entity in the following table
is c/o TOMI Environmental Solutions, Inc., 9454 Wilshire Blvd.,
Penthouse, Beverly Hills, CA 90212.
40
|
|
Shares
Beneficially Owned
|
|
|||
|
|
Common
Stock
|
Series A
Preferred Stock
|
|
||
|
|
Shares
|
% of
Class
|
Shares
|
% of
Class
|
% of
Total
Voting
Power(1)
|
|
Named
Executive Officers and Directors:
|
|
|
|
|
|
|
Halden S. Shane,
CEO and Chairman of the Board
|
28,345,048
(2)
|
21.3
%
|
510,000
|
100
%
|
21.6
%
|
|
Elissa J. Shane,
Chief Operating Officer
|
2,241,310
(3)
|
1.7
%
|
|
|
1.7
%
|
|
Nick Jennings,
Chief Financial Officer
|
562,145
(4)
|
*
|
—
|
—
|
*
|
|
Harold W. Paul,
Secretary, Director
|
1,479,774
(5)
|
1.1
%
|
—
|
—
|
1.1
%
|
|
Walter Johnsen,
Director
|
250,000
(6)
|
*
|
—
|
—
|
*
|
|
Kelly Anderson,
Director
|
250,000
(7)
|
*
|
—
|
—
|
*
|
|
Lim Boh Soon,
Director
|
690,190
(8)
|
*
|
—
|
—
|
*
|
|
All current
directors and executive officers as a group (7
persons)
|
33,818,467
(9)
|
25.4
%
|
510,000
|
100
%
|
25.7
%
|
|
|
|
|
|
|
|
|
5%
Beneficial Owners:
|
|
|
|
|
|
|
Lau Sok
Huy
|
17,361,111
(10)
|
13.9
%
|
—
|
—
|
13.9
%
|
|
Ah Kee
Wee
|
11,666,669
(11)
|
9.4
%
|
—
|
—
|
9.4
%
|
*
Denotes ownership of less than 1%
|
(1)
|
Percentage of total voting power represents voting power with
respect to all shares of our common stock and Series A preferred
stock, as a single class. The holders of
common stock
and Series A preferred
stock are each entitled to one vote per share.
|
|
(2)
|
Consists
of (i) 18,845,048 shares of common stock held of record by Dr.
Shane, (ii) 1,500,000 shares of common stock held of record by the
Shane Family Trust, (iii) 1,000,000 shares of common stock held of
record by Belinha Shane and (iv) 8,000,000 shares of
common stock
issuable upon the
exercise of warrants to purchase common stock held by Dr. Shane
that are exercisable within 60 days of March 15, 2019. Dr.
Shane is a co-trustee of the Shane Family Trust and may be
deemed to share voting and investment power over the securities
held by the trust. Belinha Shane is Dr. Shane’s wife. Dr.
Shane disclaims ownership of such shares held by his wife, except
to the extent of his pecuniary interest.
|
|
(3)
|
Consists
of (i) 1,891,310 shares of common stock held of record by Ms. Shane
and (ii) 350,000 shares of
common stock
issuable upon the
exercise of options to purchase
common stock
held by Ms. Shane
that are exercisable within 60 days of March 15, 2019.
|
|
(4)
|
Consists
of (i) 112,145 shares of common stock held of record by Mr.
Jennings and (ii) 450,000 shares of
common stock
issuable upon the
exercise of warrants and options to purchase
common stock
held by Mr.
Jennings that are exercisable within 60 days of March 15,
2019.
|
|
(5)
|
Consists of (i) 1,414,774 shares of
common stock
held of record by Mr. Paul
and (ii) 65,000 shares of common stock issuable upon exercise of
stock options that are exercisable within 60 days of
March
15, 2019
.
|
|
|
|
|
(6)
|
Consists of (i) 225,000 shares of
common stock
held of record by Mr. Johnsen and (ii)
25,000 shares of common stock issuable upon exercise of stock
options that are exercisable within 60 days of
March 15,
2019
.
|
|
(7)
|
Consists of (i) 225,000 shares of
common stock
held of record by Ms. Anderson and (ii)
25,000 shares of common stock issuable upon exercise of stock
options that are exercisable within 60 days of
March 15,
2019
.
|
|
(8)
|
Consists of 690,190 shares of
common stock
held of record by Dr.
Lim.
|
|
(9)
|
Consists
of (i) 24,903,467 shares of common stock, (ii) 8,400,000 shares of
common stock
issuable upon the exercise of warrants to purchase common stock and
(iii) 515,000 shares of
common stock
issuable upon
exercise of stock options that are exercisable within 60 days of
March 15, 2019.
|
|
(10)
|
Based
on Form 3 filed with the SEC by Lau Sok Huy on January 24,
2018.
|
|
(11)
|
Based
on information reported by Mr. Wee to the Company. Consists of
(i) 8,666,669 shares of common stock and (ii) 3,000,000 shares of
common stock issuable upon the exercise of warrants to purchase
common stock held by Mr. Wee that are exercisable within 60 days of
March 15, 2019.
|
41
Changes in Control
We are
unaware of any contract or other arrangement the operation of which
may at a subsequent date result in a change in control of our
Company.
Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Transactions with Related Persons
None.
Independence of the Board
Based
upon information submitted by Mr. Johnsen, Ms. Anderson, Dr. Lim
and Mr. Paul the Board has determined that each of them is
“independent” for purposes of OTC Governance Guidelines
for directors. Mr. Shane is not an independent director. No
director will be considered “independent” unless the
Board affirmatively determines that the director has no direct or
indirect material relationship with the Company.
Our
Board has three separate standing committees: the Audit Committee,
the Compensation Committee and the Nominating and Corporate
Governance Committee.
We have
made each of our committee charters available on our website at
http://investor.tomimist.com/.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Accountant Fees
The
following table presents the aggregate fees billed for audit and
other services provided by our independent registered public
accounting firm, Wolinetz, Lafazan & Company, P.C, during the
2018 and 2017 fiscal years:
|
|
For the Fiscal
Years Ended December 31,
|
|
|
|
2018
|
2017
|
|
Audit
Fees(1)
|
$
108,000
|
$
99,000
|
|
Audit-Related
Fees(2)
|
—
|
—
|
|
Tax
Fees(3)
|
—
|
—
|
|
All Other
Fees(4)
|
—
|
—
|
|
Total
|
$
108,000
|
$
99,000
|
|
(1)
|
Audit Fees
—Audit fees represent the professional
services rendered for the audit of our annual financial statements
and the review of our financial statements included in quarterly
reports, along with services normally provided by the accounting
firm in connection with statutory and regulatory filings or
engagements.
|
|
|
|
|
(2)
|
Audit-Related Fees
—Audit-related fees represent
professional services rendered for assurance and related services
by Wolinetz, Lafazan & Company, P.C. that were reasonably
related to the performance of the audit or review of our financial
statements that are not reported under audit fees.
|
|
|
|
|
(3)
|
Tax Fees
— Tax fees represent professional services
rendered by the accounting firm for tax compliance, tax advice, and
tax planning.
|
|
|
|
|
(4)
|
All Other Fees
—All other fees represent fees billed
for products and services provided by Wolinetz, Lafazan &
Company, P.C other than the services reported for the other
categories.
|
Pre-Approval Policies
and
Procedures of the
Audit Committee
Consistent with the
rules and regulations promulgated by the Securities and Exchange
Commission, the Audit Committee approves the engagement of our
independent registered public accounting firm and is also required
to pre-approve all audit and non-audit expenses. All of the
services described above were approved by the Audit Committee in
accordance with its procedure. We do not otherwise rely on
pre-approval policies and procedures.
42
PART IV
Item 15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report:
(1)
Financial Statements. See Index to Financial Statements and
Schedule on page F-1.
(2)
Schedules to Financial Statements. All financial statement
schedules have been omitted because they are either inapplicable or
the information required is provided in our consolidated financial
statements and the related notes thereto, included in Part II,
Item 8 of this Annual Report on Form 10-K.
(3) The
exhibits listed on the accompanying Exhibit Index are filed (or
incorporated by reference herein) as part of this Annual Report on
Form 10-K.
43
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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.
|
|
|
|
|
DATED:
April 1, 2019
|
|
TOMI
ENVIRONMENTAL SOLUTIONS, INC.
|
|
|
|
|
|
|
|
/s/
HALDEN S. SHANE
|
|
|
|
Halden S Shane
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
POWER
OF ATTORNEY
The
undersigned directors and officers of TOMI Environmental Solutions,
Inc. constitute and appoint Halden S. Shane and Nick Jennings, or
either of them, as their true and lawful attorney and agent with
power of substitution, to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem
necessary or advisable to enable said corporation to comply with
the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K,
including specifically but without limitation, power and authority
to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto; and we do hereby
ratify and confirm all that said attorney and agent shall do or
cause to be done by virtue hereof. Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/ HALDEN S. SHANE
|
Chairman of the
Board and Chief Executive Officer (Principal Executive
Officer)
|
April
1, 2019
|
|
Halden
S. Shane
|
|
|
|
|
|
|
|
/s/ NICK JENNINGS
|
Chief Financial
Officer (Principal Financial Officer and Principal Accounting
Officer)
|
April
1, 2019
|
|
Nick
Jennings
|
|
|
|
|
|
|
|
/s/ HAROLD W.
PAUL
|
Director
|
April
1, 2019
|
|
Harold
W. Paul
|
|
|
|
/s/ WALTER C.
JOHNSEN
|
Director
|
April
1, 2019
|
|
Walter
C. Johnsen
|
|
|
|
/s/ KELLY J.
ANDERSON
|
Director
|
April
1, 2019
|
|
Kelly
J. Anderson
|
|
|
|
/s/ LIM BOH
SOON
|
Director
|
April
1, 2019
|
|
Lim
Boh Soon
|
|
|
44
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
Form
|
|
File No.
|
|
Date
|
|
Exhibit
|
|
Filed Herewith
|
|
|
Articles
of Restatement of the Registrant, effective October 6,
2009
|
|
S-1
|
|
333-162356
|
|
10/6/09
|
|
3.1
|
|
|
|
|
|
Articles
of Amendment of Articles of Incorporation of the Registrant,
effective October 24, 2011
|
|
8-K
|
|
000-09908
|
|
10/24/11
|
|
3.1(a)
|
|
|
|
|
|
Amended
Bylaws of the Registrant, adopted effective November 2,
2007
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
3.2
|
|
|
|
|
|
Amendment
to Amended Bylaws of the Registrant, adopted effective January 29,
2016
|
|
8-K
|
|
000-09908
|
|
2/1/16
|
|
3.2
|
|
|
|
|
|
2016
Equity Incentive Plan, as adopted by the Registrant’s Board
of Directors on January 29, 2016
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.6
|
|
|
|
|
|
Offer
Letter, dated January 15, 2016, by and between the Registrant and
Dr. Halden Shane
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.1
|
|
|
|
|
|
Employment
Agreement, dated February 8, 2016, by and between the Registrant
and Robert Wotczak
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.2
|
|
|
|
|
|
Offer
Letter, dated September 2, 2015, by and between the Registrant and
Nick Jennings
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.3
|
|
|
|
|
|
Offer
Letter, dated September 2, 2015, by and between the Registrant and
Norris Gearhart
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.4
|
|
|
|
|
|
Form of
Appointment to the Board of Directors as Independent Director of
the Registrant
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.5
|
|
|
|
|
|
Restated
Manufacturing and Development Agreement, dated November 10, 2016,
by and between the Registrant and RG Group
|
|
10-Q
|
|
000-09908
|
|
9/30/16
|
|
10.1
|
|
|
|
|
|
Employment
Agreement, entered into as of January 5, 2018, by and between the
Registrant and Elissa J. Shane, effective as of January 1,
2018
|
|
8-K
|
|
000-09908
|
|
1/18/18
|
|
10.1
|
|
|
|
|
|
Code of
Ethics
|
|
10-K
|
|
000-09908
|
|
3/31/07
|
|
14
|
|
|
|
|
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
|
|
|
|
X
|
|
|
24.1
|
|
Power
of Attorney (included in signature page)
|
|
|
|
|
|
|
|
|
|
X
|
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.1
#
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
#
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
X
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
|
|
|
|
X
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
+
Indicates
a management contract or compensatory plan.
#
The
information in Exhibits 32.1 and 32.2 shall not be deemed
“filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, or otherwise
subject to the liabilities of that section, nor shall they be
deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act (including this
report), unless the Registrant specifically incorporates the
foregoing information into those documents by
reference.
45
TOMI ENVIRONMENTAL SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting
Firm.
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2018 and
2017
|
F
-3
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2018
and 2017
|
F-4
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended
December 31, 2018 and 2017
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2018
and 2017
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-1
Report of Independent Registered Public Accounting
Firm
To the
shareholders and the board of directors of
TOMI
Environmental Solutions, Inc.
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of TOMI
Environmental Solutions, Inc. and subsidiary (the "Company") as of
December 31, 2018 and 2017, the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 2018, and the related
notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of
their operations and their cash flows for each of the two years in
the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on the Company's consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
WOLINETZ, LAFAZAN
& COMPANY, P.C.
We have
served as the Company's auditor since 2007.
Rockville
Centre, NY
April
1, 2019
F-2
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEET
|
ASSETS
|
|
|
|
Current
Assets:
|
December
31,
2018
|
December
31,
2017
|
|
Cash and Cash
Equivalents
|
$
2,004,938
|
$
4,550,003
|
|
Accounts Receivable
- net
|
2,145,622
|
1,835,949
|
|
Inventories (Note
3)
|
2,682,014
|
3,518,884
|
|
Deposits
|
109,441
|
-
|
|
Prepaid
Expenses
|
301,797
|
270,419
|
|
Total
Current Assets
|
7,243,812
|
10,175,255
|
|
|
|
|
|
Property and
Equipment – net (Note 4)
|
1,588,591
|
712,822
|
|
|
|
|
|
Other
Assets:
|
|
|
|
Intangible Assets
– net (Note 5)
|
1,235,816
|
1,548,532
|
|
Security
Deposits
|
11,395
|
4,700
|
|
Total
Other Assets
|
1,247,211
|
1,553,232
|
|
Total
Assets
|
$
10,079,614
|
$
12,441,309
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable
|
$
1,133,649
|
$
751,730
|
|
Accrued
Expenses and Other Current Liabilities (Note 11)
|
415,199
|
267,136
|
|
Accrued
Officers Compensation
|
70,000
|
-
|
|
Accrued
Interest (Note 6)
|
66,667
|
80,000
|
|
Customer
Deposits
|
1,486
|
3,062
|
|
Deferred
Rent
|
13,215
|
781
|
|
Total
Current Liabilities
|
1,700,216
|
1,102,709
|
|
|
|
|
|
Long-Term
Liabilities:
|
|
|
|
Deferred
Rent and Tenant Improvement Allowances
|
401,734
|
-
|
|
Convertible
Notes Payable, net of discount of $17,534 and $55,625
|
|
|
|
at
December 31, 2018 and 2017, respectively (Note 6)
|
4,982,466
|
5,944,375
|
|
Total
Long-Term Liabilities
|
5,384,200
|
5,944,375
|
|
Total
Liabilities
|
7,084,416
|
7,047,084
|
|
|
|
|
|
Commitments
and Contingencies
|
-
|
-
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
Cumulative
Convertible Series A Preferred Stock;
|
|
|
|
par
value $0.01 per share, 1,000,000 shares authorized; 510,000 shares
issued
|
|
|
|
and
outstanding at December 31, 2018 and December 31, 2017
|
5,100
|
5,100
|
|
Cumulative
Convertible Series B Preferred Stock; $1,000 stated
value;
|
|
|
|
7.5%
Cumulative dividend; 4,000 shares authorized; none
issued
|
|
|
|
and
outstanding at December 31, 2018 and December 31, 2017
|
-
|
-
|
|
Common
stock; par value $0.01 per share, 200,000,000 shares
authorized;
|
|
|
|
124,290,418
and 122,049,958 shares issued and outstanding
|
|
|
|
at
December 31, 2018 and December 31, 2017, respectively.
|
1,242,904
|
1,220,499
|
|
Additional
Paid-In Capital
|
42,948,705
|
42,139,675
|
|
Accumulated
Deficit
|
(41,201,511
)
|
(37,971,049
)
|
|
Total
Shareholders’ Equity
|
2,995,198
|
5,394,225
|
|
Total Liabilities
and Shareholders’ Equity
|
$
10,079,614
|
$
12,441,309
|
The
accompanying notes are an integral part of the consolidated
financial statements.
F-3
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
For The Year
Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Sales,
net
|
$
5,584,612
|
$
4,993,668
|
|
Cost
of Sales
|
2,467,114
|
1,927,773
|
|
Gross
Profit
|
3,117,498
|
3,065,895
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
Professional
Fees
|
329,674
|
876,880
|
|
Depreciation
and Amortization
|
634,671
|
607,127
|
|
Selling
Expenses
|
1,360,430
|
1,256,465
|
|
Research
and Development
|
916,003
|
454,089
|
|
Equity
Compensation Expense (Note 7)
|
77,242
|
649,348
|
|
Consulting
Fees
|
140,858
|
210,538
|
|
General
and Administrative
|
2,728,840
|
2,774,916
|
|
Other
|
-
|
(319,388
)
|
|
Total Operating
Expenses
|
6,187,718
|
6,509,976
|
|
Loss from
Operations
|
(3,070,219
)
|
(3,444,081
)
|
|
|
|
|
|
Other Income
(Expense):
|
|
|
|
Gain
on Redemption of Convertible Note
|
150,000
|
-
|
|
Amortization
of Debt Discounts
|
(38,091
)
|
(6,279
)
|
|
Induced
Conversion Costs
|
(57,201
)
|
-
|
|
Interest
Income
|
6,928
|
1,800
|
|
Interest
Expense
|
(221,878
)
|
(191,256
)
|
|
Total Other Income
(Expense)
|
(160,242
)
|
(195,735
)
|
|
|
|
|
|
Net
Loss
|
$
(3,230,462
)
|
$
(3,639,815
)
|
|
|
|
|
|
Loss Per Common
Share
|
|
|
|
Basic
and Diluted
|
$
(0.03
)
|
$
(0.03
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
Weighted Average Common Shares Outstanding
|
123,574,672
|
121,372,605
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated
financial statements.
F-4
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
Series A
Preferred
|
Common
Stock
|
|
|
|
||
|
|
|
|
|
|
Additional
Paid
|
Accumulated
|
Total
Shareholders’
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
in
Capital
|
Deficit
|
Equity
|
|
Balance
at December 31, 2016
|
510,000
|
$
5,100
|
120,825,134
|
$
1,208,252
|
$
41,367,946
|
$
(34,331,234
)
|
$
8,250,064
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Expense
|
|
|
|
|
635,223
|
|
635,223
|
|
Common
stock issued for services provided
|
|
|
249,824
|
2,498
|
35,602
|
|
38,100
|
|
Warrants
exercised
|
|
|
975,000
|
9,750
|
39,000
|
|
48,750
|
|
Warrants
issued as part of debt private placement
|
|
|
|
|
61,904
|
|
61,904
|
|
Net
Loss for the year ended December 31, 2017
|
|
|
|
|
|
(3,639,814
)
|
(3,639,814
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
510,000
|
5,100
|
122,049,958
|
1,220,499
|
42,139,675
|
(37,971,049
)
|
5,394,225
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Expense
|
|
|
|
|
31,522
|
|
31,522
|
|
Common
Stock Issued for Services Provided
|
|
|
362,500
|
3,625
|
33,875
|
|
37,500
|
|
Conversion
of Notes Payable and Accrued Interest into Common
Stock
|
|
|
1,877,960
|
18,780
|
686,432
|
|
705,212
|
|
Induced
Conversion Costs
|
|
|
|
|
57,201
|
|
57,201
|
|
Net
Loss for the year ended December 31, 2018
|
|
|
|
|
|
(3,230,462
)
|
(3,230,462
)
|
|
Balance
at December 31, 2018
|
510,000
|
$
5,100
|
124,290,418
|
$
1,242,904
|
$
42,948,705
|
$
(41,201,511
)
|
$
2,995,198
|
The
accompanying notes are an integral part of the consolidated
financial statements.
F-5
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Cash
Flow From Operating Activities:
|
|
|
|
Net
Loss
|
$
(3,230,462
)
|
$
(3,639,814
)
|
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
Net
Cash Used In Operating Activities:
|
|
|
|
Depreciation
and Amortization
|
634,671
|
607,127
|
|
Amortization
of Debt Discount
|
38,091
|
6,279
|
|
Equity
Compensation Expense
|
31,522
|
635,223
|
|
Value
of Equity Issued for Services
|
37,500
|
38,100
|
|
Induced
Conversion Costs
|
57,201
|
-
|
|
Reserve
for Bad Debt
|
(200,000
)
|
200,000
|
|
Inventory
Reserve
|
100,000
|
-
|
|
Gain
on Redemption of Convertible Note
|
(150,000
)
|
-
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
Decrease
(Increase) in:
|
|
|
|
Accounts
Receivable
|
(109,673
)
|
(514,572
)
|
|
Inventory
|
629,023
|
204,622
|
|
Prepaid
Expenses
|
(88,170
)
|
(165,971
)
|
|
Deposits
|
(109,441
)
|
147,010
|
|
Security
Deposits
|
(6,695
)
|
-
|
|
Increase
(Decrease) in:
|
|
|
|
Accounts
Payable
|
381,919
|
15,851
|
|
Accrued
Expenses
|
148,063
|
(11,277
)
|
|
Accrued
Interest
|
(8,122
)
|
80,000
|
|
Accrued
Officer Compensation
|
70,000
|
-
|
|
Deferred
Rent
|
9,168
|
(7,760
)
|
|
Customer
Deposits
|
(1,576
)
|
(27,058
)
|
|
Net
Cash Used in Operating Activities
|
(1,766,980
)
|
(2,432,241
)
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
Purchase
of Property and Equipment
|
(628,085
)
|
(14,829
)
|
|
Net
Cash Used in Investing Activities
|
(628,085
)
|
(14,829
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS –
CONTINUED
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
Cash
Flow From Financing Activities:
|
|
|
|
Proceeds
from Exercise of Warrants
|
-
|
48,750
|
|
Repayment
of Principal Balance on Convertible Note
|
(150,000
)
|
-
|
|
Proceeds
from Convertible Notes
|
-
|
6,000,000
|
|
Net
Cash Provided (used) by Financing Activities
|
(150,000
)
|
6,048,750
|
|
Increase
(Decrease) In Cash and Cash Equivalents
|
(2,545,065
)
|
3,601,679
|
|
Cash
and Cash Equivalents - Beginning
|
4,550,003
|
948,324
|
|
Cash
and Cash Equivalents – Ending
|
$
2,004,938
|
$
4,550,003
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
Cash
Paid For Interest
|
$
230,000
|
$
111,256
|
|
Cash
Paid for Income Taxes
|
$
800
|
$
800
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
Establishment
of discount on convertible debt
|
$
-
|
$
61,904
|
|
Transfer
of equipment from
|
|
|
|
inventory
to property and equipment
|
$
107,846
|
$
323,805
|
|
Trademark
Costs Reclassified
|
|
|
|
to
intangible assets, net
|
$
56,792
|
$
-
|
|
Establishment
of Tenant Improvement Allowance
|
$
405,000
|
$
-
|
|
Abandonment
of Fully Depreciated
|
|
|
|
Property
and Equipment
|
$
66,428
|
$
-
|
|
Common
Stock Issued Upon Conversion of
|
|
|
|
Note
Payable and Accrued Interest
|
$
705,212
|
$
-
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
TOMI ENVIRONMENTAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
TOMI
Environmental Solutions, Inc. (“TOMI”, the
“Company”, “we”, “our” and
“us”) is a global provider of disinfection and
decontamination essentials through its premier Binary Ionization
Technology
®
(BIT
™
)
platform, under which it manufactures, licenses, services and sells
its SteraMist
™
brand of
products, including SteraMist™ BIT™, a hydrogen
peroxide-based mist and fog.
Invented under a defense grant in association with
the Defense Advanced Research Projects Agency (DARPA) of the U.S.
Department of Defense, BIT
™
is
registered with the U.S. Environmental Protection Agency
(“EPA”) and
uses a low
percentage hydrogen peroxide as its only active ingredient to
produce a fog composed mostly of a hydroxyl radical
(
.
OH
ion), known as ionized Hydrogen Peroxide
(“iHP
™
”).
Represented by the SteraMist
™
brand
of products, iHP™ produces a germ-killing aerosol that works
like a visual non-caustic gas.
TOMI’s
products are designed to service a broad spectrum of commercial
structures, including, but not limited to, hospitals and medical
facilities, bio-safety labs, pharmaceutical facilities, meat and
produce processing facilities, universities and research
facilities, vivarium labs, all service industries including cruise
ships, office buildings, hotel and motel rooms, schools,
restaurants, military barracks, police and fire departments, and
athletic facilities. TOMI products are also used in
single-family homes and multi-unit residences.
TOMI’s
mission is to help its customers create a healthier world through
its product line in its divisions (Healthcare, Life Sciences, TOMI
Service Network and Food Safety) and its motto is “innovating
for a safer world” for healthcare and life.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of TOMI and its wholly-owned subsidiary, TOMI Environmental
Solutions, Inc., a Nevada corporation. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Reclassification of Accounts
Certain
reclassifications have been made to prior-year comparative
financial statements to conform to the current year presentation.
These reclassifications had no effect on previously reported
results of operations or financial position.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions that affect
the amounts reported and disclosed in the accompanying 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:
F-8
|
Level
1:
|
Quoted
prices in active markets for identical assets or
liabilities.
|
|
|
|
|
Level
2:
|
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data or substantially the full term of the assets or
liabilities.
|
|
|
|
|
Level
3:
|
Unobservable
inputs that are supported by little or no market activity and that
are significant to the value of the assets or
liabilities.
|
Our
financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and convertible
debt. All these items were determined to be Level 1 fair value
measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments. The recorded
value of convertible debt approximates its fair value as the terms
and rates approximate market rates (See Note 6).
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. Bad debt expense for the years ended
December 31, 2018 and 2017 was $96,929 and $263,882,
respectively.
At
December 31, 2018 and December 31, 2017, the allowance for doubtful
accounts was $300,000 and $500,000,
respectively.
As of December 31, 2018, two customers accounted for 37% of
accounts receivable. One customer accounted for 13% of net revenues
for the year ended December 31, 2018.
As of December 31, 2017, two customers accounted for 24% of
accounts receivable. Two customers accounted for 22% of net
revenues for the year ended December 31, 2017.
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 will not be usable. Our reserve for obsolete
inventory was $100,000 and $0 for the years ended December 31, 2018
and 2017, 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.
F-9
Accounts Payable
As of December 31, 2018, three vendors accounted for approximately
63% of total accounts payable. As of December 31, 2017, one vendor
accounted for approximately 45% of total accounts
payable.
One vendor accounted for 70% and 73% of cost of sales for the years
ended December 31, 2018 and 2017, respectively.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We make an
estimate of expected costs that will be incurred by us during the
warranty period and charge that expense to the consolidated
statement of operations at the date of sale. Our manufacturer
assumes the warranty against product defects for one year from date
of sale, which we extend to our customers upon sale of the product.
We assume responsibility for product reliability and results. As of
December 31, 2018, and 2017, our warranty reserve was $30,000 and
$5,000, respectively.
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 December 31, 2018 and 2017. 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.
Leases and Tenant Improvement Allowance
For
lease agreements that provide for escalating rent payments or
free-rent occupancy periods, we recognize rent expense on a
straight-line basis over the non-cancelable lease term and option
renewal periods where failure to exercise such options would result
in an economic penalty in such amount that renewal appears, at the
inception of the lease, to be reasonably assured. The lease term
commences on the date that the Company takes possession of or
controls the physical use of the property. Deferred rent is
included in other liabilities on the consolidated balance
sheet.
We
record landlord allowances and incentives received as deferred rent
based on their short-term or long-term nature. These landlord
allowances are amortized using the straight-line method over the
reasonably assured lease term as a reduction of rent expense. We
consider improvements to be a lessor asset if all of the following
criteria are met:
●
the lease
specifically requires the lessee to make the
improvement;
●
the improvement is
fairly generic;
●
the improvement
increases the fair value of the property to the lessor;
and
●
the useful life of
the improvement is longer than the lease term.
At
December 31, 2018 and 2017 our short term deferred rent was $13,215
and $0, respectively. At December 31, 2018 and 2017, our long term
deferred rent and tenant improvement allowances was $401,734 and
$0, respectively.
Net Loss Per Share
Basic
net loss per share is computed by dividing the Company’s net
loss by the weighted average number of shares of common stock
outstanding during the period presented. Diluted loss per share is
based on the treasury stock method and includes the effect from
potential issuance of shares of common stock, such as shares
issuable pursuant to the exercise of options and warrants and
conversions of preferred stock or debentures.
Potentially
dilutive securities as of December 31, 2018 consisted of 9,259,250
shares of common stock from convertible debentures, 26,550,611
shares of common stock issuable upon exercise of outstanding
warrants, 320,000 shares of common stock issuable upon outstanding
options and 510,000 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”). Diluted and basic weighted
average shares are the same, as potentially dilutive shares are
anti-dilutive.
F-10
Potentially
dilutive securities as of December 31, 2017 consisted of 11,111,100
shares of common stock from convertible debentures, 35,501,411
shares of common stock issuable upon exercise of outstanding
warrants, 200,000 shares of common stock issuable upon outstanding
options and 510,000 shares of common stock issuable upon conversion
of outstanding shares of Preferred A stock (“Convertible
Series A Preferred Stock”). Diluted and basic weighted
average shares are the same, as potentially dilutive shares are
anti-dilutive.
Diluted
net loss per share is computed similarly to basic net loss per
share except that the denominator is increased to include the
number of additional shares of common stock that would have been
outstanding if the potential shares of common stock had been issued
and if such additional shares were dilutive. Options, warrants,
preferred stock and shares associated with the conversion of debt
to purchase approximately 36.6 million and 47.3 million shares of
common stock were outstanding at December 31, 2018 and 2017,
respectively, but were excluded from the computation of diluted net
loss per share due to the anti-dilutive effect on net loss per
share.
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Net
loss
|
$
(3,230,462
)
|
$
(3,639,815
)
|
|
Adjustments
for convertible debt - as converted
|
|
|
|
Interest
on convertible debt
|
221,878
|
191,256
|
|
Amortization
of debt discount on convertible debt
|
38,091
|
6,279
|
|
Net
loss attributable to common shareholders
|
$
(2,970,473
)
|
$
(3,442,279
)
|
|
Weighted
average number of shares of common stock outstanding:
|
|
|
|
Basic
and diluted
|
123,574,672
|
121,372,605
|
|
Net
loss attributable to common shareholders per share:
|
|
|
|
Basic
and diluted
|
$
(0.02
)
|
$
(0.03
)
|
|
|
|
|
Revenue Recognition
We recognize revenue in accordance with Financial
Accounting Standards Board (“FASB”) Accounting
Standards Update (“ASU”) No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, when there is persuasive evidence that an
arrangement exists, title and risk of loss have passed, delivery
has occurred, or the services have been rendered, the sales price
is fixed or determinable and collection of the related receivable
is reasonably assured. Title and risk of loss generally
pass to our customers upon shipment.
Disaggregation of Revenue
The
following table presents our revenues disaggregated by revenue
source.
Net Revenue
Product and Service Revenue
|
|
For the year ended December 31,
|
|
|
|
2018
|
2017
|
|
SteraMist
Product
|
$
4,652,000
|
$
4,097,000
|
|
Service
and Training
|
933,000
|
897,000
|
|
Total
|
$
5,585,000
|
$
4,994,000
|
F-11
Revenue by Geographic Region
|
|
For the year ended December 31,
|
|
|
|
2018
|
2017
|
|
United
States
|
$
4,197,000
|
$
3,495,000
|
|
International
|
1,388,000
|
1,499,000
|
|
Total
|
$
5,585,000
|
$
4,994,000
|
Product
revenue includes sales from our standard and customized equipment,
solution and accessories sold with our equipment. Revenue is
recognized upon transfer of control of promised products to
customers in an amount that reflects the consideration we expect to
receive in exchange for those products or services.
Service
and training revenue include sales from our high-level
decontamination and service engagements, validation of our
equipment and technology and customer training. Service revenue is
recognized as the agreed upon services are rendered to our
customers in an amount that reflects the consideration we expect to
receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We
apply a practical expedient to expense costs as incurred for costs
to obtain a contract with a customer when the amortization period
would have been one year or less. We generally expense sales
commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within sales
and marketing expenses. These costs include our internal sales
force compensation program and certain partner sales incentive
programs as we have determined annual compensation is commensurate
with annual sales activities.
Contract Balances
As of
December 31, 2018, and December 31, 2017 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 cost 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
(the “2016 Plan”). The 2016 Plan authorizes the grant
of stock options, stock appreciation rights, restricted stock,
restricted stock units and performance units/shares. Up to
5,000,000 shares of common stock are authorized for issuance under
the 2016 Plan. Shares issued under the 2016 Plan may be either
authorized but unissued shares, treasury shares, or any combination
thereof. Provisions in the 2016 Plan permit the reuse or reissuance
by the 2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash. Equity
compensation expense will typically be awarded in consideration for
the future performance of services to us. All recipients of awards
under the 2016 Plan are required to enter into award agreements
with the Company at the time of the award; awards under the 2016
Plan are expressly conditioned upon such agreements. For the year
ended December 31, 2017, the Company issued 200,000 shares of
common stock out of the 2016 Plan. In addition, for the year ended
December 31, 2018, the Company issued 300,000 shares of common
stock out of the 2016 Plan.
F-12
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 years ended December 31, 2018 and
2017.
Advertising and Promotional Expenses
We
expense advertising costs in the period in which they are incurred.
Advertising and promotional expenses
for the years ended December 31, 2018 and 2017, were approximately
$204,000 and $66,000, respectively.
Research and Development Expenses
We expense research and
development expenses in the period in which they are
incurred.
For the years ended
December 31, 2018 and 2017, research and development expenses were
approximately $916,000 and $454,000,
respectively.
Shipping and Handling Costs
We include shipping and
handling costs relating to the delivery of products directly from
vendors to the Company in cost of sales. Other shipping and
handling costs, including third-party delivery costs relating to
the delivery of products to customers, are classified as a general
and administrative expense.
Shipping and handling costs included in general
and administrative expense were approximately $206,000 and $119,000
for the years ended December 31, 2018 and 2017,
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 May
2014, the FASB issued Accounting Standards Update
(“ASU”) No. 2014-09,
Revenue from Contracts with Customers
,
to replace the existing revenue recognition criteria for contracts
with customers. In August 2015, the FASB issued ASU
No. 2015-14,
Deferral of the
Effective Date
, to defer the effective date of ASU
No. 2014-09 to interim and annual periods beginning after
December 15, 2017. We adopted ASUs No. 2014-09 and 2015-14 on
January 1, 2018 on a modified retrospective basis, which did not
impact our beginning accumulated deficit and additional paid-in
capital.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, to require
lessees to recognize all leases, with limited exceptions, on the
balance sheet, while recognition on the statement of operations
will remain similar to current lease accounting. The ASU also
eliminates real estate-specific provisions and modifies certain
aspects of lessor accounting. Subsequently, the FASB issued ASU No.
2018-10, Codification Improvements to Topic 842, ASU No. 2018-11,
Targeted Improvements, and ASU No. 2018-20, Narrow-Scope
Improvements for Lessors, to clarify and amend the guidance in ASU
No. 2016-02. The ASUs are effective for interim and annual periods
beginning after December 15, 2018, with early adoption permitted.
We will adopt the ASUs on January 1, 2019 on a modified
retrospective basis through a cumulative adjustment to our
beginning accumulated deficit balance. Prior comparative periods
will not be restated under this method, and we will adopt all
available practical expedients, as applicable. Upon adoption, our
consolidated balance sheet will include an overall increase in
assets of approximately $800,000 and an increase in liabilities of
approximately $800,000. The ASUs are not expected to have a
material impact on our beginning accumulated deficit, consolidated
statement of operations or the consolidated statement of cash
flows
.
F-13
In
March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment
Accounting
, to simplify the accounting for the income tax
effects from share-based compensation, the accounting for
forfeitures and the accounting for statutory income tax
withholding, among others. In particular, ASU No. 2016-09 requires
all income tax effects from share-based compensation to be
recognized in the consolidated statement of operations when the
awards vest or are settled, permits accounting for forfeitures as
they occur, and permits a higher level of statutory income tax
withholding without triggering liability accounting. Adoption of
ASU No. 2016-09 is modified retrospective, retrospective and
prospective, depending on the specific provision being adopted. We
adopted ASU No. 2016-09 on January 1, 2017, which did not
impact our beginning accumulated deficit and additional paid-in
capital.
In
January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill
Impairment
, to simplify the test for goodwill impairment
by
removing Step 2. An
entity will, therefore, perform the goodwill impairment test by
comparing the fair value of a reporting unit with its carrying
amount,
recognizing an
impairment charge for the amount by which the carrying amount
exceeds the fair value, not to exceed the total amount of goodwill
allocated to the
reporting unit. An entity still
has the option to perform a qualitative assessment to determine if
the quantitative impairment test is necessary. ASU No. 2017-04 is
effective
for interim
and annual periods beginning after December 15, 2019, with early
adoption permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. Adoption of ASU
No. 2017-04 is prospective.
In May
2017, the FASB issued ASU No. 2017-09,
Scope of Modification Accounting
, to
provide guidance on which changes to the terms or conditions of
a
share-based payment
award require an entity to apply modification accounting. ASU No.
2017-09 is effective for interim and annual periods beginning after
December 15,
2017,
with early adoption permitted. Adoption of ASU No. 2017-09 is
prospective. We adopted ASU No. 2017-09 on January 1, 2018,
which did not impact our consolidated financial statements upon
adoption.
NOTE
3. INVENTORIES
|
Inventories
consist of the following at:
|
|
|
|
|
|
|
|
|
December
31,
2018
|
December
31,
2017
|
|
Finished
goods
|
$
2,782,014
|
$
3,518,884
|
|
Inventory
Reserve
|
(100,000
)
|
-
|
|
|
$
2,682,014
|
$
3,518,884
|
NOTE 4. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at:
|
|
December 31,
|
December 31,
|
|
|
2018
|
2017
|
|
Furniture
and fixtures
|
$
277,976
|
$
91,216
|
|
Equipment
|
1,300,139
|
1,192,293
|
|
Vehicles
|
60,703
|
56,410
|
|
Computer
and software
|
143,579
|
113,319
|
|
Leasehold
improvements
|
355,898
|
15,554
|
|
Tenant
Improvement Allowance
|
405,000
|
-
|
|
|
2,543,295
|
1,468,792
|
|
Less:
Accumulated depreciation
|
954,704
|
755,969
|
|
|
$
1,588,591
|
$
712,822
|
F-14
For
the years ended December 31, 2018 and 2017, depreciation was
$265,163 and $237,619, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets
consist of patents and trademarks related to our Binary Ionization
Technology. We amortize the patents over the estimated remaining
lives of the related patents. The trademarks have an indefinite
life.
Amortization expense was
$369,508 and $369,508 for the years ended December 31, 2018 and
2017, respectively.
Definite life
intangible assets consist of the following:
|
|
December
31,
2018
|
December
31,
2017
|
|
|
|
|
|
Intellectual
Property and Patents
|
$
2,848,300
|
$
2,848,300
|
|
Less: Accumulated
Amortization
|
2,109,276
|
1,739,768
|
|
Intangible Assets,
net
|
$
739,024
|
$
1,108,532
|
Indefinite life
intangible assets consist of the following:
|
Trademarks
|
$
496,792
|
$
440,000
|
|
|
|
|
|
Total Intangible
Assets, net
|
$
1,235,816
|
$
1,548,532
|
Approximate
amortization over the next five years is as follows:
|
Twelve Month Period Ending December 31,
|
Amount
|
|
|
|
|
2019
|
$
370,000
|
|
2020
|
369,000
|
|
2021
|
-
|
|
2022
|
-
|
|
2023
|
-
|
|
|
$
739,000
|
NOTE 6. CONVERTIBLE DEBT
In
March and May 2017, the Company closed a private placement
transaction in which it issued to certain accredited investors
unregistered senior callable convertible promissory notes (the
“Notes”) and three-year warrants to purchase an
aggregate of 999,998 shares of common stock at an exercise price of
$0.69 per share in exchange for aggregate gross proceeds of
$6,000,000. The Notes bear interest at a rate of 4% per annum.
$5,300,000 in principal was originally scheduled to mature on
August 31, 2018 and $700,000 in principal was originally scheduled
to mature on November 8, 2018, unless earlier redeemed, repurchased
or converted. The Notes are convertible at the option of the holder
into common stock at a conversion price of $0.54 per share.
Subsequent to September 1, 2017, we may redeem the Notes that are
scheduled to mature on August 31, 2018 at any time prior to
maturity at a price equal to 100% of the outstanding principal
amount of the Notes to be redeemed, plus accrued and unpaid
interest as of the redemption date. Prior to November 8,
2018, we may redeem the Notes that are scheduled to mature on such
date at any time prior to maturity at a price equal to 100% of the
outstanding principal amount of the Notes to be redeemed, plus
accrued and unpaid interest as of the redemption date. Interest on
the Notes is payable semi-annually in cash on February 28 and
August 31 of each year, beginning on August 31, 2017.
Interest expense related to the Notes for the year
ended December 31, 2018 and 2017 was $221,878 and $191,256,
respectively.
F-15
The
warrants were valued at $62,559 using the Black-Scholes pricing
model with the following assumptions: expected volatility: 104.06%
–111.54%; expected dividend: $0; expected term: 3 years; and
risk-free rate: 1.49%–1.59%. The Company recorded the
warrants’ relative fair value of $61,904 as an increase to
additional paid-in capital and a discount against the related
Notes.
The
debt discount is being amortized over the life of the Notes using
the effective interest method.
Amortization expense for the years ended December
31, 2018 and 2017, was $38,091 and $6,279,
respectively.
In February and March 2018, we extended the
maturity date of the Notes—we extended the maturity dates for
$5,300,000 of principal on the Notes to April 1, 2019 and $700,000
in principal of the Notes to June 8, 2019
.
No additional consideration was paid or accrued by
the Company. The stated rate of the Notes was unchanged, and the
estimated fair value of the new debt approximates its carrying
amount (principal plus accrued interest at the date of the
modification). We determined that the modification of these Notes
is not a substantial modification in accordance with ASC 470-50,
“Modifications and
Extinguishments”.
In May 2018, we offered
a noteholder the option to convert
its Note at a reduced
conversion price of $0.46.
The
noteholder accepted and converted at
such price.
Pursuant to the terms
of the conversion offer, an aggregate of $700,000 of
principal
and $5,212 of accrued interest
outstanding under the
Note were converted into 1,877,960 shares of common
stock. The Company recognized an induced conversion cost
of $57,201 related to the conversion.
In December 2018, a
noteholder redeemed a note with a principal balance of $300,000 in
exchange for $150,000 in cash.
We recognized a gain on redemption of convertible
note income in the amount of $150,000 as a result of the
transaction.
On
March 30, 2019, the remaining note holders agreed to extend the
maturity dates of their aggregate of $5,000,000 in notes to April
3, 2020. See Note 14-Subsequent Events.
Convertible notes
consist of the following at:
|
|
December
31,
2018
|
December 31,
2017
|
|
Convertible
notes
|
$
5,000,000
|
$
6,000,000
|
|
Initial
discount
|
(53,873
)
|
(61,904
)
|
|
Accumulated
amortization
|
36,339
|
6,279
|
|
Convertible
notes, net
|
$
4,982,466
|
$
5,944,375
|
NOTE 7. SHAREHOLDERS’ EQUITY
Our
Board of Directors (the “Board”) may, without further
action by our shareholders, from time to time, direct the issuance
of any authorized but unissued or unreserved shares of preferred
stock in series and at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of such
preferred stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of our common
stock. Furthermore, the Board could issue preferred stock with
voting and other rights that could adversely affect the voting
power of the holders of our common stock.
Convertible Series A Preferred Stock
Our
authorized Convertible Series A Preferred Stock, $0.01 par value,
consists of 1,000,000 shares. At December 31, 2018 and 2017, there
were 510,000 shares issued and outstanding. The Convertible Series
A Preferred Stock is convertible at the rate of one share of common
stock for one share of Convertible Series A Preferred
Stock.
Convertible Series B Preferred Stock
Our
authorized Convertible Series B Preferred Stock, $1,000 stated
value, 7.5% cumulative dividend, consists of 4,000 shares. At
December 31, 2018 and 2017, 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.
F-16
Common Stock
During
the year ended December 31, 2017, the Company issued 249,824 shares
of common stock valued at $38,100 for professional services
rendered, of which the Company issued 200,000 shares that were
valued at $32,000 and issued to our Board (See Note
9).
In
August 2017, warrants to purchase 375,000 and 600,000 shares of
common stock were exercised, which resulted in gross proceeds to
the Company of $18,750 and $30,000, respectively.
During
the year ended December 31, 2018, we issued 362,500 shares of
common stock valued at $33,500 to members of our Board (see Note
9).
In May
2018, we
issued
1,877,960
shares of
common stock in connection with the conversion of
$
705,212 of principal
and accrued interest
outstanding under a
Note (see Note 6).
Stock Options
In
January 2018, we issued options to purchase an aggregate of 100,000
shares of common stock to our Chief Operating Officer, valued at
$11,780. The options have an exercise price of $0.12 per share and
expire in January 2023. The options were valued using the
Black-Scholes model using the following assumptions: volatility:
146%; dividend yield: 0%; zero coupon rate: 2.27%; and a life of 5
years.
In
January 2018, we issued options to purchase an aggregate of 20,000
shares of common stock to our Scientific Advisory Board members,
valued at $1,810 in total. The options have an exercise price of
$0.10 per share and expire in January 2028. The options were valued
using the Black-Scholes model using the following assumptions:
volatility: 147%; dividend yield: 0%; zero coupon rate: 2.41%; and
a life of 10 years.
The
following table summarizes stock options outstanding as of December
31, 2018 and 2017:
|
|
December 31, 2018
|
December 31, 2017
|
||
|
|
Number of Options
|
Weighted Average Exercise Price
|
Number of Options
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
200,000
|
$
0.76
|
200,000
|
$
0.76
|
|
Granted
|
120,000
|
$
0.12
|
—
|
—
|
|
Exercised
|
—
|
—
|
—
|
—
|
|
Outstanding,
end of period
|
320,000
|
$
0.52
|
200,000
|
$
0.76
|
F-17
Options
outstanding and exercisable by price range as of December 31, 2018
were as follows:
|
Outstanding
Options
|
Average
Weighted
|
Exercisable
Options
|
||
|
Range
|
Number
|
Remaining
Contractual
Life in
Years
|
Number
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$
0.05
|
20,000
|
2.02
|
20,000
|
$
0.05
|
|
$
0.10
|
20,000
|
9.08
|
20,000
|
$
0.10
|
|
$
0.12
|
100,000
|
4.02
|
100,000
|
$
0.12
|
|
$
0.27
|
40,000
|
6.01
|
40,000
|
$
0.27
|
|
$
0.55
|
100,000
|
7.10
|
100,000
|
$
0.55
|
|
$
2.10
|
40,000
|
1.01
|
40,000
|
$
2.10
|
|
|
320,000
|
5.05
|
320,000
|
$
0.52
|
Stock Warrants
In
March and May of 2017, in connection with the issuance of the
Notes, we issued three-year warrants to purchase up to an aggregate
of 999,998 shares of common stock at an exercise price of $0.69 per
share (see Note 6).
On
June 30, 2017, we issued warrants to purchase up to 15,000 shares
of common stock at an exercise price of $0.10 per share to the
members of the Scientific Advisory Board with a term of five years,
which vested upon issuance. The Company utilized the Black-Scholes
method to fair value the warrants received by the members of the
Scientific Advisory Board at $1,400 with the following assumptions:
volatility, 150%; expected dividend yield, 0%; risk free interest
rate, 1.83%; and a life of 5 years. The grant date fair value of
each share underlying the warrant was $0.09.
During
the first and second quarter of 2017, we recognized approximately
$23,000 in equity compensation expense for the vested and unvested
portion of a warrant issued to a former employee pursuant to his
agreement with the Company. In September 2017, the employee
resigned from his position with the Company and the unvested
portion of his warrant was terminated. For the year ended December
31, 2017, we reversed the equity compensation expense for the
accrued but unvested portion of his warrant of
$22,000.
In
June 2017, we modified the terms of outstanding warrants to
purchase 4,000,000 shares of common stock. Pursuant to a
settlement agreement, the term of the warrants was increased by 2
years and the exercise price was modified to $0.12 per share
(decrease of $0.03 per share). Pursuant to ASC 718, the
modified terms of the warrants resulted in approximately $196,000
in incremental equity compensation expense for the year ended
December 31, 2017. We utilized the Black-Scholes method to
fair value the warrants under the original and modified terms with
the following range of assumptions: volatility, 81%-97%; expected
dividend yield, 0%; risk free interest rate, 1.28%; and a life of
0.33 - 2.33 years, respectively. The grant date fair value of each
share of common stock underlying the warrant was $0.01 and $0.06,
respectively.
In
July 2017 we issued a warrant to purchase 250,000 shares of common
stock to the CEO at an exercise price of $0.10 per share pursuant
to his employment agreement with the Company. The warrant was
valued at approximately $23,000 and has a term of 5 years. We
utilized the Black-Scholes method to fair value the warrant
received by the CEO with the following assumptions: volatility,
153%; expected dividend yield, 0%; risk free interest rate, 1.90%;
and a life of 5 years. The grant date fair value of each share of
common stock underlying the warrant was $0.09.
In
October 2017, we issued warrants to purchase up to 10,000 shares of
common stock at an exercise price of $0.17 per share to the members
of the Scientific Advisory Board with a term of five years, which
vested upon issuance. The Company utilized the Black-Scholes method
to fair value the warrants received by the members of the
Scientific Advisory Board at approximately $1,500 with the
following assumptions: volatility, 147%; expected dividend yield,
0%; risk free interest rate, 1.98%; and a life of 5 years. The
grant date fair value of each share underlying the warrant was
$0.15.
In
December 2017 we issued a warrant to purchase 3,500,000 shares of
common stock to the CEO at an exercise price of $0.12 per share
pursuant to his employment agreement with the Company. The warrant
was valued at approximately $412,000 and has a term of 5 years. We
utilized the Black-Scholes method to fair value the warrant
received by the CEO with the following assumptions: volatility,
145%; expected dividend yield, 0%; risk free interest rate, 2.23%;
and a life of 5 years. The grant date fair value of each share of
common stock underlying the warrant was $0.12.
F-18
In
November 2018 we issued a warrant to purchase 250,000 shares of
common stock to the CEO at an exercise price of $0.08 per share
pursuant to his employment agreement with the Company. The warrant
was valued at approximately $18,000 and has a term of 5 years. We
utilized the Black-Scholes method to fair value the warrant
received by the CEO with the following assumptions: volatility,
142%; expected dividend yield, 0%; risk free interest rate, 2.95%;
and a life of 5 years. The grant date fair value of each share of
common stock underlying the warrant was $0.07.
The
following table summarizes the outstanding common stock warrants as
of December 31, 2018 and 2017:
|
|
December 31, 2018
|
December 31, 2017
|
||
|
|
Number of Warrants
|
Weighted Average Exercise Price
|
Number of Warrants
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
35,501,411
|
$
0.33
|
37,076,413
|
$
0.31
|
|
Granted
|
250,000
|
0.08
|
4,774,998
|
0.24
|
|
Exercised
|
-
|
-
|
(975,000
)
|
0.05
|
|
Expired
|
(9,200,800
)
|
(0.30
)
|
(5,375,000
)
|
0.13
|
|
Outstanding,
end of period
|
26,550,611
|
$
0.34
|
35,501,411
|
$
0.33
|
Warrants
outstanding and exercisable by price range as of December 31, 2018
were as follows:
|
Outstanding
Warrants
|
|
Exercisable
Warrants
|
||
|
Exercise
Price
|
Number
|
Average
Weighted
Remaining
Contractual
Life in
Years
|
Number
|
Weighted
Average
Exercise
Price
|
|
$
0.08
|
250,000
|
4.89
|
250,000
|
$
0.08
|
|
$
0.10
|
265,000
|
3.53
|
265,000
|
$
0.10
|
|
$
0.12
|
3,500,000
|
3.98
|
3,500,000
|
$
0.12
|
|
$
0.12
|
4,000,000
|
0.79
|
4,000,000
|
$
0.12
|
|
$
0.17
|
10,000
|
3.82
|
10,000
|
$
0.17
|
|
$
0.27
|
250,000
|
3.00
|
250,000
|
$
0.27
|
|
$
0.29
|
10,125,613
|
1.80
|
10,125,613
|
$
0.29
|
|
$
0.30
|
3,300,000
|
1.17
|
3,300,000
|
$
0.30
|
|
$
0.32
|
250,000
|
2.75
|
250,000
|
$
0.32
|
|
$
0.42
|
250,000
|
2.50
|
250,000
|
$
0.42
|
|
$
0.50
|
250,000
|
2.25
|
250,000
|
$
0.50
|
|
$
0.55
|
100,000
|
2.08
|
100,000
|
$
0.55
|
|
$
0.69
|
999,998
|
1.22
|
999,998
|
$
0.69
|
|
$
1.00
|
3,000,000
|
1.34
|
3,000,000
|
$
1.00
|
|
|
26,550,611
|
2.24
|
26,550,611
|
$
0.34
|
|
|
|
|
|
|
There
were no unvested warrants outstanding as of December 31,
2018.
F-19
NOTE 8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
In
September 2014, we entered into a lease agreement for office and
warehouse space in Frederick, Maryland. As part of the lease
agreement, we received a rent holiday in the first 5 months of the
lease. The lease also provides for an escalation clause pursuant to
which the Company was subject to an annual rent increase of 3%,
year over year. The term of the lease expired on January 31, 2018
and was extended on a month-to-month basis through the occupancy
date of our new lease.
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.
Approximate minimum annual rents under the lease are as
follows:
|
Twelve Month Period Ending
December 31,
|
Amount
|
|
2019
|
$
102,000
|
|
2020
|
147,000
|
|
2021
|
151,000
|
|
2022
|
156,000
|
|
2023
|
160,000
|
|
Thereafter
|
923,000
|
|
|
$
1,639,000
|
Legal Contingencies
We may become a party to litigation in the normal
course of business. In the opinion of management, there
are no legal matters involving us that would have a material
adverse effect upon our financial condition, results of operations
or cash flows.
In addition, from time to time, we may have
to file claims against parties that infringe on our intellectual
property.
Product Liability
As
of December 31, 2018, and 2017, there were no claims against us for
product liability.
NOTE 9. CONTRACTS AND AGREEMENTS
Agreements with Directors
In
December 2017, we increased the annual board fee to directors to
$40,000, to be paid in cash on a quarterly basis, with the
exception of the audit committee chairperson, whose annual fee we
increased to $45,000, also to be paid in cash on a quarterly basis.
The board fee also includes the issuance of 75,000 shares of common
stock on an annual basis. For the year ended December 31, 2018, we
issued an aggregate of 362,500 shares of common stock that were
valued at $33,500 to members of our Board.
In
January 2018, Dr. Lim Boh Soon was elected to our Board. His term
is for three years or until his successor is elected, or he resigns
or is removed. His director agreement provides for an annual cash
board fee of $40,000 and annual issuance of shares of common stock,
as indicated above.
F-20
Other Agreements
In June
2015, we launched the TOMI Service Network (“TSN”). The
TSN is a national service network composed of existing full-service
restoration industry specialists that have entered into licensing
agreements with us to become Primary Service Providers
(“PSPs”). The licensing agreements grant protected
territories to PSPs to perform services using our
SteraMist
™
platform of
products and also provide for potential job referrals to PSPs
whereby we are entitled to referral fees. Additionally, the
agreement provides for commissions due to PSPs for equipment and
solution sales they facilitate to other service providers in their
respective territories. As part of these agreements, we are
obligated to provide to the PSPs various training, ongoing support
and facilitate a referral network call center. As of December 31,
2018, we had entered into 87 licensing agreements in connection
with the launch of the TSN. The licensing agreements contain fixed
price minimum equipment and solution orders based on the population
of the territories granted pursuant to the licensing agreements.
The nature and terms of our TSN agreements may represent multiple
deliverable arrangements. Each of the deliverables in these
arrangements typically represent a separate unit of
accounting.
NOTE 10. INCOME TAXES
The Company’s income tax expense consisted of:
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2018
|
2017
|
|
Current:
|
|
|
|
United
States
|
$
-
|
$
-
|
|
Foreign
|
-
|
-
|
|
|
-
|
-
|
|
Deferred:
|
|
|
|
United
States
|
-
|
-
|
|
Foreign
|
-
|
-
|
|
|
-
|
-
|
|
Total
|
$
-
|
$
-
|
The Company’s net income (loss) before income tax consisted
of:
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2018
|
2017
|
|
|
|
|
|
United
States
|
$
(3,230,462
)
|
$
(3,639,814
)
|
|
Foreign
|
-
|
-
|
|
Total
|
$
(3,230,462
)
|
$
(3,639,814
)
|
Our
income tax expense differed from the amounts computed by applying
the United States statutory corporate income tax rate for the
following reasons:
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act (“Tax
Act”) was enacted into law making significant changes to the
Internal Revenue Code. Changes include, but are not limited to, a
federal corporate tax rate decrease from 35% to 21% for tax years
beginning after December 31, 2017, the transition of U.S.
international taxation from a worldwide tax system to a territorial
system and a one-time transition tax on the mandatory deemed
repatriation of foreign earnings. We are required to recognize the
effect of the tax law changes in the period of enactment, such as
re-measuring our U.S. deferred tax assets and liabilities as well
as reassessing the net realizability of our deferred tax assets and
liabilities. The Tax Act did not give rise to any material impact
on the consolidated balance sheets and consolidated statements of
operations due to our historical worldwide loss position and the
full valuation allowance on our net U.S. deferred tax
assets.
F-21
In
December 2017, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax
Cuts and Jobs Act
(“SAB 118”), which allows
us to record provisional amounts during a measurement period not to
extend beyond one year from the enactment date. As such, in
accordance with SAB 118, we completed our analysis during the
fourth quarter of 2018 considering current legislation and guidance
resulting in no material adjustments from the provisional amounts
recorded during the prior year.
The
reconciliation of taxes at the federal and state statutory rate to
our provision for income taxes for the years ended
December 31, 2018 and 2017 was as follows:
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2018
|
2017
|
|
|
|
|
|
Loss
before income tax
|
$
(3,230,462
)
|
$
(3,639,814
)
|
|
US
statutory corporate income tax rate (federal and
state)
|
28.00
%
|
39.45
%
|
|
Income
tax expense computed at US statutory corporate income tax
rate
|
|
|
|
Income
tax expense computed at US statutory corporate income tax
rate
|
(904,529
)
|
(1,435,907
)
|
|
Reconciling
items:
|
|
|
|
Effect
of U.S. tax law change (1)
|
-
|
1,793,212
|
|
Change
in valuation allowance on deferred tax assets
|
741,982
|
(675,889
)
|
|
Provision to prior
year tax return
|
113,068
|
69,767
|
|
Incentive stock
options and warrants
|
21,628
|
256,168
|
|
Amortized
debt discount
|
1,758
|
2,477
|
|
Meals
and Entertainment
|
4,134
|
5,825
|
|
Induced
Conversion Costs
|
16,016
|
-
|
|
Other
|
5,943
|
(15,653
)
|
|
Income
tax expense
|
$
-
|
$
-
|
(1)
Due to the Tax Act,
our U.S. deferred tax assets and liabilities as of December 31,
2017 were re-measured from 39.45% to 28%. The change in tax rate
resulted in a decrease to our gross U.S. deferred tax assets which
is offset by a corresponding decrease to our valuation
allowance.
Components of our
deferred income tax assets (liabilities) are as
follows:
|
|
December 31,
2018
|
December 31,
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Reserve
for Bad Debt
|
$
84,000
|
$
140,000
|
|
Inventory Reserve
|
28,000
|
-
|
|
Inventory
Capitalization
|
-
|
94,000
|
|
Accrued
Expenses
|
52,000
|
31,000
|
|
Deferred
Rent
|
4,000
|
-
|
|
Warranty
Reserve
|
8,000
|
-
|
|
Property
and Equipment
|
-
|
21,000
|
|
Intangible
Assets
|
362,000
|
208,000
|
|
Net
operating losses
|
4,718,000
|
3,724,000
|
|
Valuation
Allowance
|
(4,959,000
)
|
(4,218,000
)
|
|
Deferred
Tax Assets
|
$
297,000
|
$
-
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Property
Plant and Equipment
|
$
(297,000
)
|
$
-
|
|
|
$
(297,000
)
|
-
|
|
|
|
|
|
Net
Deferred Tax Assets and Liabilities
|
$
-
|
$
-
|
F-22
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 December 31,
2018
, we recorded a
valuation allowance of $4,959,000 for the portion of the deferred
tax assets that we do not expect to be realized. The valuation
allowance on our net deferred taxes increased by $741,000 during
the year ended December 31,
2018
, primarily due to
U.S. deferred tax assets incurred in the current year that cannot
be realized. The 2017 additional U.S. deferred tax assets are net
of re-measurement from 35% to 21% as a result of the Tax act.
Management believes that based on the available information, it is
more likely than not that the 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.
For
income tax purposes in the United States, we had available federal
net operating loss carryforwards ("NOL") as of December 31, 2018
and 2017 of approximately $17,544,000 and $13,898,000 respectively
to reduce future federal taxable income.
For income tax purposes
in the United States, we had available state NOL carryforwards as
of December 31, 2018 and 2017 of approximately $14,773,000 and
$11,506,000 respectively to reduce future state taxable
income.
If any of the NOL's are not utilized, they will
expire at various dates through 2038. There may be certain
limitations as to the future annual use of the NOLs due to certain
changes in our ownership.
We
record uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process whereby (1) we determine whether it is
more likely than not that the tax positions will be sustained on
the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition
threshold, we recognize the largest amount of tax benefit that is
more than 50 percent likely to be realized upon ultimate settlement
with the related tax authority. As of December 31, 2018, and 2017,
the management of the Company determined there were no reportable
uncertain tax positions.
NOTE 11. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the following
at:
|
|
December 31,
2018
|
December 31,
2017
|
|
Commissions
|
$
136,631
|
$
115,506
|
|
Payroll
and related costs
|
144,359
|
43,484
|
|
Director
fees
|
41,250
|
27,750
|
|
Accrued
warranty
|
30,000
|
5,000
|
|
Other
accrued expenses
|
62,959
|
75,396
|
|
Total
|
$
415,199
|
$
267,136
|
NOTE 12. ACCRUED WARRANTY
Our
manufacturer assumes warranty against product defects for one year
from the sale to customers, which we extend to our customers upon
sale of the product. We assume responsibility for product
reliability and results. The warranty is generally limited to a
refund of the original purchase price of the product or a
replacement part. We estimate warranty costs based on historical
warranty claim experience.
The
following table presents warranty reserve activities
at:
|
|
December 31,
2018
|
December 31,
2017
|
|
Beginning
accrued warranty costs
|
$
5,000
|
$
-
|
|
Provision for
warranty expense
|
47,454
|
10,731
|
|
Settlement of
warranty claims
|
(22,454
)
|
(5,731
)
|
|
Ending
accrued warranty costs
|
$
30,000
|
$
5,000
|
F-23
NOTE 13. CUSTOMER CONCENTRATION
The
Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% or
more of the Company’s accounts receivable.
As of December 31, 2018, two customers accounted for 37% of
accounts receivable. One customer accounted for 13% of net revenues
for the year ended December 31, 2018.
As of December 31, 2017, two customers accounted for 24% of
accounts receivable. Two customers accounted for 22% of net
revenues for the year ended December 31, 2017.
NOTE 14. SUBSEQUENT EVENTS
In
January of 2019, TOMI entered into an exclusive co-marketing and
supply agreement with Arkema Inc. to further develop a market for
our fogging/misting technology within the Food Safety
industry. The agreement provides that the parties will
develop the market for TOMI’s Fogging Technology using the
TOMI SteraMist Technology for food safety applications. Arkema Inc.
will manufacture and supply the food grade hydrogen peroxide for
use in an EPA-registered solution. Together, the companies will
address the need in the industry for a non-bleach, quick and
effective food safety process and bring it to Arkema’s global
food clients who currently use its hydrogen peroxide for
organic-certified products.
In
January 2019 we issued a warrant to purchase 1,000,000 shares of
common stock to the CEO at an exercise price of $0.10 per share
pursuant to his employment agreement with the Company. The warrant
was valued at approximately $90,000 and has a term of 5 years. We
utilized the Black-Scholes method to fair value the warrant
received by the CEO with the following assumptions: volatility,
143%; expected dividend yield, 0%; risk free interest rate, 2.58%;
and a life of 5 years. The grant date fair value of each share of
common stock underlying the warrant was $0.09.
In
January 2019 we issued an option to purchase 250,000 shares of
common stock to the COO at an exercise price of $0.11 per share
pursuant to her employment agreement with the Company. The option
was valued at approximately $25,000, has a term of 5 years. We
utilized the Black-Scholes method to fair value the option received
by the COO with the following assumptions: volatility, 144%;
expected dividend yield, 0%; risk free interest rate, 2.47%; and a
life of 5 years. The grant date fair value of each share of common
stock underlying the option was $0.10. The value of this stock
option was included in accrued expenses at December 31,
2018.
In
January 2019 we issued an option to purchase 50,000 shares of
common stock to the CFO at an exercise price of $0.10 per share.
The option was valued at approximately $4,000 and has a term of 5
years. We utilized the Black-Scholes method to fair value the
option received by the CFO with the following assumptions:
volatility, 143%; expected dividend yield, 0%; risk free interest
rate, 2.58%; and a life of 5 years. The grant date fair value of
each share of common stock underlying the option was
$0.09.
Pursuant to our
agreement with our Board, in January 2019, we issued an aggregate
of 400,000 shares of common stock valued at approximately $44,000.
The agreements with our Board provide for the annual issuance of
shares of our common stock.
On
March 30, 2019, the two remaining note holders agreed to extend the
maturity dates of their notes totaling $5,000,000 to April 3, 2020.
As part of the extensions, the Company agreed that if it does not
make payment on or before the new maturity dates, after five (5)
days written notice, the holders will have the right, but not the
obligation, to convert the notes into common shares of the Company
at a conversion price of $0.11 per share or a total of 45,454,545
shares. All other provisions of the notes remain
unchanged.
F-24
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1. Description Of BusinessNote 2. Summary Of Significant Accounting PoliciesNote 3. InventoriesNote 4. Property and EquipmentNote 5. Intangible AssetsNote 6. Convertible DebtNote 7. Shareholders EquityNote 8. Commitments and ContingenciesNote 9. Contracts and AgreementsNote 10. Income TaxesNote 11. Accrued Expenses and Other Current LiabilitiesNote 12. Accrued WarrantyNote 13. Customer ConcentrationNote 14. Subsequent Events