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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended
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Sep. 30, 2024
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared by us, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2023 and notes thereto which are included in the annual report on Form 10-K previously filed with the SEC on April 1, 2024 (the “Annual Report”). We follow the same accounting policies in the preparation of interim reports. The results of operations for the interim periods covered by this Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period. Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of TOMI and its wholly owned subsidiary, TOMI Environmental Solutions, Inc., a Nevada corporation. All intercompany accounts and transactions have been eliminated in consolidation. For the three and nine months periods ended September 30, 2024, our net income was $59,000 and a net loss of ($1,221,000) respectively and the cash used in operations for the nine months ended September 30, 2024 was $1,453,000. As of September 30, 2024, we had approximately $809,000 of cash and cash equivalents. Absent any other action, the Company may require additional liquidity to continue its operations over the next 12 months. However, management has considered its liquidity plans to continue the Company as a going concern and believes substantial doubt is alleviated by managing costs and expenses, raising capital by closing equity and debt offerings and generating additional revenue and funding through increased sales, government grants and other sources. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year's presentation. These reclassifications had no material effect on previously reported results of operations or financial position. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with 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:
| Level 1: | Quoted prices in active markets for identical assets or liabilities.
| Level 2: | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or corroborated by observable market data for substantially the full term of the assets or liabilities.
| Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. Cash and Cash Equivalents Cash and cash equivalents include 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. At September 30, 2024, and December 31, 2023, there were no cash equivalents. Accounts Receivable Our accounts receivable are typically from credit-worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of their status and maintain allowances for potential credit losses as deemed necessary. We 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. As of September 30, 2024, the allowance for credit losses stood at $1,271,000, down from $1,495,000 as of December 31, 2023. Long-term trade accounts receivable, are principally amounts arising from the sale of goods and services with a contractual maturity date or realization period of greater than one year and are recognized as "Long-Term Accounts Receivable" in our Consolidated Balance Sheet. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods and raw materials. We expense costs to maintain certification to cost of goods sold as incurred. We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable. Our reserve for obsolete inventory was $95,000 as of September 30, 2024 and December 31, 2023. Property and Equipment We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or service lives of the improvements, whichever is shorter. Leases We recognize a right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense in the period in which they are incurred. Accounts Payable As of September 30, 2024, one vendor accounted for approximately 56% of accounts payable. As of December 31, 2023, two vendors accounted for approximately 59% of accounts payable. For the three and nine months ended September 30, 2024, two vendors accounted for 53% and 65% of cost of sales, respectively. For the three and nine months ended September 30, 2023, two vendors accounted for 60% and 72% of cost of sales, respectively. Accrued Warranties Accrued warranties represent the estimated costs, if any, that will be incurred during the warranty period of our products. We estimate the expected costs to be incurred during the warranty period and record the expense to the consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects from date of sale, which we extend to our customers upon sale of the product. We assume responsibility for product reliability and results. As of September 30, 2024, and December 31, 2023, our warranty reserve was $30,000. (See Note 14). Income Taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are, on a more likely than not basis, not expected to be realized in accordance with FASB ASC Topic 740, Income Taxes guidance for income taxes. Net deferred tax assets have been fully reserved at September 30, 2024 and December 31, 2023. Net Income (Loss) Per Share Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the 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. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common stock and the denominator may have to adjust to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued during the period to reflect the potential dilution that could occur from shares of common stock issuable through a contingent shares issuance arrangement, stock options, warrants, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, and warrants, and the if-converted method is used for convertible preferred stock and convertible debt as prescribed in FASB ASC Topic 260. Potentially dilutive securities for the nine months ended September 30, 2024 consisted of 2,080,000 shares of common stock from convertible debentures, 2,765,846 shares of common stock issuable upon exercise of outstanding warrants, 805,042 shares of common stock issuable upon outstanding stock options and 63,750 shares of common stock issuable upon conversion of outstanding shares of Preferred A stock (“Convertible Series A Preferred Stock”). Potentially dilutive securities for the three months ended September 30, 2023 consisted of 2,773,585 shares of common stock issuable upon exercise of outstanding warrants, 610,500 shares of common stock issuable upon vesting of stock options and exercise and 63,750 shares of common stock issuable upon conversion of outstanding shares of Convertible Series A Preferred Stock. Options, warrants, preferred stock and shares associated with the conversion of debt to purchase approximately 5.7 million and 3.4 million shares of common stock were outstanding on September 30, 2024 and 2023, respectively. The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented:
|  | For the Three Months Ended September 30, |
|  | (Unaudited) |
|  | 2024 |  |  | 2023 |
Net Income (Loss) |  | $ | 58,962 |  |  | $ | (900,780 | )
Adjustments for convertible debt - as converted |  |  |  |  |  |  |  |
Net income (loss) attributable to common shareholders |  | $ | 58,962 |  |  | $ | (900,780 | )
Weighted average number of shares of common stock outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 20,015,205 |  |  |  | 19,823,955 |
Net income (loss) attributable to common shareholders per share: |  |  |  |  |  |  |  |
Basic |  | $ | 0.00 |  |  | $ | (0.05 | )
|  | For the Nine Months Ended September 30, |
|  | (Unaudited)
|  | 2024 |  |  | 2023 |
Net Income (Loss) |  | ($1,221,030) |  |  | ($2,176,858) |
Net income (loss) attributable to common shareholders |  | ($1,221,030) |  |  | ($2,176,858) |
Weighted average number of shares of common stock outstanding: |  |  |  |  |  |
Basic |  |  | 19,984,179 |  |  |  | 19,818,241 |
Net income (loss) attributable to common shareholders per share: |  |  |  |  |  |  |  |
Basic and Diluted |  | ($0.06) |  |  | ($0.11) |
The following provides a reconciliation of the shares used in calculating the per share amounts for the periods presented:
|  | For the Three Months Ended September 30, |
|  | (Unaudited) |
|  | 2024 |  |  | 2023 |
Numerator: |  |  |  |  |  |
Net Income (Loss) |  | $ | 58,962 |  |  | $ | (900,780 | )
Denominator: |  |  |  |  |  |  |  |
Basic weighted-average shares |  |  | 20,015,205 |  |  |  | 19,823,955 |
Effect of dilutive securities |  |  |  |  |  |  |  |
Warrants |  |  | 5,908 |  |  |  | - |
Options |  |  | 11,888 |  |  |  | - |
Preferred Stock |  |  | 63,750 |  |  |  | - |
Diluted Weighted Average Shares |  |  | 20,096,751 |  |  |  | 19,823,955 |
Net income (loss) attributable to common shareholders per share: |  |  |  |  |  |  |  |
Diluted |  | $ | 0.00 |  |  | $ | (0.05 | )
The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income per share net (loss) income per share because their effect was anti-dilutive:
|  | For the Three Months Ended September 30, |
|  | (Unaudited) |
|  | 2024 |  |  | 2023 |
Warrants |  |  | 2,734,596 |  |  |  | - |
Convertible Debt |  |  | 2,080,000 |  |  |  |  |
Options |  |  | 573,000 |  |  |  | - |
|  |  | 5,387,596 |  |  |  | - |
Note: Warrants, options, convertible debt and preferred stock for the nine months ended September 30, 2024 and for the nine months ended September 30, 2023, are not included in the computation of diluted weighted average shares as such inclusion would be anti-dilutive. Revenue Recognition We recognize revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations. We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. Title and risk of loss generally pass to our customers upon shipment. Our customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers. Disaggregation of Revenue The following table presents our approximate revenues disaggregated by revenue source. Product and Service Revenue
|  | For the three months ended September 30, (Unaudited) |
|  | 2024 |  |  | 2023 |
SteraMist Product |  | $ | 1,766,000 |  |  | $ | 953,000 |
Service and Training |  |  | 776,000 |  |  |  | 517,000 |
Total |  | $ | 2,542,000 |  |  | $ | 1,470,000 |
Revenue by Geographic Region
|  | For the three months ended September 30, (Unaudited) |
|  | 2024 |  |  | 2023 |
United States |  | $ | 1,886,000 |  |  | $ | 1,271,000 |
International |  |  | 656,000 |  |  |  | 199,000 |
Total |  | $ | 2,542,000 |  |  | $ | 1,470,000 |
Product and Service Revenue
|  | For the nine months ended September 30, (Unaudited) |
|  | 2024 |  |  | 2023 |
SteraMist Product |  | $ | 5,247,000 |  |  | $ | 4,501,000 |
Service and Training |  |  | 1,423,000 |  |  |  | 1,326,000 |
Total |  | $ | 6,670,000 |  |  | $ | 5,827,000 |
Revenue by Geographic Region
|  | For the nine months ended September 30, (Unaudited) |
|  | 2024 |  |  | 2023 |
United States |  | $ | 5,169,000 |  |  | $ | 5,001,000 |
International |  |  | 1,501,000 |  |  |  | 826,000 |
Total |  | $ | 6,670,000 |  |  | $ | 5,827,000 |
Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services. Costs to Obtain a Contract with a Customer We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses. Contract Balances As of September 30, 2024, and December 31, 2023, we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations. Significant Judgments Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services. Equity Compensation Expense We account for equity compensation expense in accordance with FASB ASC 718, “Compensation-Stock Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award’s fair value. The valuation methodology used to determine the fair value of options and warrants issued as compensation during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The expected term of the Company’s warrants has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” warrants. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its common stock, par value $0.01 (the “Common Stock”) and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment. On July 7, 2017, our shareholders approved the Company’s Amended and Restated 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 2,000,000 shares of Common Stock are authorized for issuance under the 2016 Plan. Shares issued under the 2016 Plan may be either authorized but unissued shares, treasury shares, or any combination thereof. Provisions in the 2016 Plan permit the reuse or reissuance by the 2016 Plan of shares of Common Stock for numerous reasons, including, but not limited to, shares of Common Stock underlying canceled, expired, or forfeited awards of stock-based compensation and stock appreciation rights paid out in the form of cash. Equity compensation expense will typically be awarded in consideration for the future performance of services to us. All recipients of awards under the 2016 Plan are required to enter into award agreements with us at the time of the award, and awards under the 2016 Plan are expressly conditioned upon such agreements. In May 2024, we issued 60,000 shares of Common Stock to members of our Board under the 2016 Plan. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation limit of $250,000 at times during the year. Long-Lived Assets Including Acquired Intangible Assets We assess long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, we measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If our long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. We base the calculations of the estimated fair value of our long-lived assets on the income approach. For the income approach, we use an internally developed discounted cash flow model that includes, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We had no long-lived asset impairment charges for the three and nine months ended September 30, 2024 and 2023. Advertising and Promotional Expenses Advertising and promotional costs are expensed in the period they are incurred. For the three and nine months ended September 30, 2024, advertising and promotional expenses included in selling expenses were approximately $35,000 and $192,000, respectively. For the same periods in 2023, these expenses were approximately $66,000 and $405,000, respectively. Research and Development Expenses Research and development expenses are expensed in the period they are incurred. For the three and nine months September 30, 2024, these expenses were approximately $56,000 and $186,000, respectively. For the same periods in 2023, research and development expenses were approximately $76,000 and $221,000, respectively. Business Segments We currently have one reportable business segment due to the fact that we derive our revenue primarily from one product iHP (ionized Hydrogen Peroxide) with a variety of applications. A breakdown of revenue is presented in “Revenue Recognition” in Note 2 above. Recent Accounting Pronouncements Recently issued accounting pronouncements not yet adopted In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. This ASU will likely result in us including the additional required disclosures when adopted. We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024. In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted.

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