| NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Basis
of Presentation The
interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted
accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared
by the Company, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These
financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for fair presentation of the information contained therein. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2018 and notes
thereto which are included in the Annual Report on Form 10-K previously filed with the SEC on April 1, 2019. The Company follows
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. The
Company's convertible notes payable aggregating $5,000,000 principal (see Note 8) are due April 3, 2020. As a result, the Company
has a working capital deficiency of $774,831 at June 30, 2019 and does not currently have sufficient resources to satisfy this
debt when due. This raises substantial doubt about the Company's ability to continue as a going concern. The Company plans to
raise additional capital in order to satisfy this debt when due or at any potential extension date thereof. The
accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability
or classification of asset-carrying amounts or the amounts and classifications of liabilities that may result should the Company
be unable to continue as a going concern. Principles
of Consolidation The
accompanying condensed consolidated financial statements include the accounts of TOMI and its wholly-owned subsidiary, TOMI Environmental
Solutions, Inc., a Nevada corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassification
of Accounts Certain
reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These
reclassifications had no effect on previously reported results of operations or financial position. Use
of Estimates The
preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that
affect the amounts reported and disclosed in the accompanying condensed consolidated financial statements and the accompanying
notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including
those related to accounts receivable, inventory, fair values of financial instruments, intangible assets, useful lives of intangible
assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results
of which form the basis for making judgments about the carrying values of our assets and liabilities. Fair
Value Measurements The
authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance
describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value, which are the following:
Level
1: 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 8). 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 credit worthy customers or, for certain international customers, are supported by pre-payments. For those
customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances for potential credit losses
as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential
credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance
is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. Bad debt expense for the three and six months ended June
30, 2019 was approximately $(27,000) and $32,000, respectively. Bad debt expense for the three and six months ended June 30, 2018
was approximately $64,000. At
June 30, 2019 and December 31, 2018, the allowance for doubtful accounts was $125,000 and $300,000, respectively. As
of December 31, 2018, two customers accounted for 37% of accounts receivable. Two
customers accounted for 26% of net revenue
for the three months ended June 30, 2018 and one customer accounted for 12% of net revenue
for the six months ended June 30, 2018. One
customer accounted for 26% of net revenue for the three months ended June 30, 2019 and two customers accounted for 29% of net
revenue for the six months ended June 30, 2019. Inventories Inventories
are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist primarily of finished
goods. We
expense costs to maintain certification to cost of goods sold as incurred. We
review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated
losses when the facts and circumstances indicate that particular inventories may not be usable. Our reserve for obsolete inventory
was $100,000 as of June 30, 2019 and December 31, 2018. Property
and Equipment We
account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method
over the estimated useful lives of the assets, generally three to five years. Depreciation for equipment, furniture and fixtures
and vehicles commences once placed in service for its intended use. Leasehold improvements are amortized using the straight-line
method over the lives of the respective leases or service lives of the improvements, whichever is shorter. Leases In
February 2016, the FASB issued ASU No. 2016-02 (“ASC 842”), Leases, to require lessees to recognize all leases, with
certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease
accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted
Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and
amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.
We adopted ASC 842 as of January 1, 2019 using the modified retrospective basis with a cumulative effect adjustment as of that
date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard,
which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial
direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures,
have not been recast to reflect the application of the new standard to all comparative periods presented. Operating
lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded
as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current
portion on our condensed consolidated balance sheet as of June 30, 2019. We
have elected not to present short-term leases on the consolidated balance sheet as these leases have a lease term of 12 months
or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All
other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement
date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the
information available at adoption date in determining the present value of lease payments. Adoption
of the new lease standard on January 1, 2019 had a material impact on our interim unaudited condensed consolidated financial statements.
The most significant impacts related to the recognition of right-of-use ("ROU") asset of $714,421 and lease liability
of $678,556 for our operating lease on the consolidated balance sheet. We also reclassified prepaid expenses of $35,865 and deferred
rent balance, including tenant improvement allowances, and other liability balances of $414,949 relating to our existing lease
arrangements as of December 31, 2018, into the ROU asset balance as of January 1, 2019. ROU assets represent our right to use
an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the
lease. The standard did not materially impact our consolidated statement of operations and consolidated statement of cash flows. The
cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2019 for the adoption of the new lease
standard was as follows:
Balances
at December 31, 2018 Effect
of Adoption of New Lease Standard Balances
at January 1, 2019
Assets
Prepaid
Expenses $ 301,797 $ (35,865 ) $ 265,932
Operating
Lease Right of Use Asset $ - $ 714,421 $ 714,421
Liabilities
Deferred
Rent $ 13,215 $ (13,215 ) $ -
Current
Portion of Long-Term Operating Lease $ - $ - $ -
Deferred
Rent and Tenant Improvement Allowances $ 401,734 $ (401,734 ) $ -
Long-Term
Operating Lease, Net of Current Portion $ - $ 1,093,505 $ 1,093,505
Shareholders’
Equity
Accumulated
Deficit $ (41,201,511 ) $ - $ (41,201,511 ) Capitalized
Software Development Costs In
accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed, the Company expenses such costs
as they are incurred until technological feasibility has been established, at and after which time those costs are capitalized
until the product is available for general release to customers. The periodic expense for the amortization of capitalized software
development costs will be included in cost of sales. Accounts
Payable As
of June 30, 2019, one vendor accounted for approximately 45% of accounts payable. As of December 31, 2018, three vendors accounted
for approximately 63% of accounts payable. For
the three and six months ended June 30, 2019, one vendor accounted for 79% and 74% of cost of sales, respectively. For the three
and six months ended June 30, 2018, one vendor accounted for 75% and 73% 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 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 June 30, 2019 and
December 31, 2018, our warranty reserve was $30,000 (See Note 13). 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 June 30, 2019 and December 31, 2018. The effect
on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes
are enacted. Net
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 June 30, 2019 consisted of 9,259,250 shares of common stock from convertible debentures, 26,850,611
shares of common stock issuable upon exercise of outstanding warrants, 620,000 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 June 30, 2018 consisted of 9,814,805 shares of common stock from convertible debentures, 35,076,411
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. 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 37.2 million and 36.6 million shares of common stock were outstanding at June 30, 2019 and December
31, 2018, 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 Three Months Ended June 30, (Unaudited)
2019 2018
Net
loss $ (584,704 ) $ (985,500 )
Adjustments
for convertible debt - as converted
Interest
on convertible debt 50,000 55,878
Amortization
of debt discount on convertible debt - 7,904
Net
loss attributable to common shareholders $ (534,704 ) $ (921,718 )
Weighted
average number of shares of common stock outstanding:
Basic
and diluted 124,699,539 123,457,386
Net
loss attributable to common shareholders per share:
Basic
and diluted $ (0.00 ) $ (0.01 )
For
the Six Months Ended June 30, (Unaudited)
2019 2018
Net
loss $ (1,519,236 ) $ (1,548,820 )
Adjustments
for convertible debt - as converted
Interest
on convertible debt 100,000 115,878
Amortization
of debt discount on convertible debt 17,534 15,941
Net
loss attributable to common shareholders $ (1,401,702 ) $ (1,417,001 )
Weighted
average number of shares of common stock outstanding:
Basic
and diluted 124,679,534 122,847,063
Net
loss attributable to common shareholders per share:
Basic
and diluted $ (0.01 ) $ (0.01 ) 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 three months ended June 30, (Unaudited)
2019 2018
SteraMist
Product $ 1,504,000 $ 1,018,000
Service
and Training 135,000 228,000
Total $ 1,639,000 $ 1,246,000
For
the six months ended June 30, (Unaudited)
2019 2018
SteraMist
Product $ 2,533,000 $ 2,110,000
Service
and Training 358,000 449,000
Total $ 2,891,000 $ 2,559,000 Revenue
by Geographic Region
For
the three months ended June 30, (Unaudited)
2019 2018
United
States $ 1,428,000 $ 850,000
International 211,000 396,000
Total $ 1,639,000 $ 1,246,000
For
the six months ended June 30, (Unaudited)
2019 2018
United
States $ 2,563,000 $ 1,801,000
International 328,000 758,000
Total $ 2,891,000 $ 2,559,000 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 selling expenses. Contract
Balances As
of June 30, 2019, and December 31, 2018 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 using the Black Scholes model in accordance with FASB ASC 718, “Compensation—Stock
Compensation.” Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on
the award’s fair value. On
July 7, 2017, our shareholders approved the 2016 Equity Incentive Plan (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 six months ended June 30,
2019 and 2018, we issued 400,000 and 300,000 shares of common stock, respectively, 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 three and six months ended June 30, 2019 and 2018. Advertising
and Promotional Expenses We
expense advertising costs in the period in which they are incurred. Advertising and promotional expenses included in selling expenses
for the three and six months ended June 30, 2019 were approximately $25,000 and $65,000, respectively. Advertising and promotional
expenses included in selling expenses for the three and six months ended June 30, 2018 were approximately $58,000 and $112,000,
respectively. Research
and Development Expenses We
expense research and development expenses in the period in which they are incurred. For
the three and six months ended June 30, 2019, research and development expenses were approximately $69,000 and $161,000, respectively.
For the three and six months ended June 30, 2018, research and development expenses were approximately $110,000 and $242,000,
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 $40,000 and $79,000 for the three
and six months ended June 30, 2019, respectively. Shipping and handling costs included in general and administrative
expense were approximately $40,000 and $92,000 for the three and six months ended June 30, 2018, 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
January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment |
