| 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:
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. 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. 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) 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 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. 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 Deferral of the Effective Date 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 In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment In May 2017, the FASB issued ASU No. 2017-09,
Scope of Modification Accounting |
