Company Quick10K Filing
Quick10K
Tomi Environmental Solutions
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-26 Earnings, Exhibits
8-K 2019-05-20 Earnings, Exhibits
8-K 2019-01-28 Other Events, Exhibits
8-K 2019-01-28 Other Events, Exhibits
8-K 2018-11-19 Earnings, Exhibits
8-K 2018-09-18 Shareholder Vote
8-K 2018-08-30 Earnings, Exhibits
8-K 2018-05-17 Earnings, Exhibits
8-K 2018-03-29 Earnings, Exhibits
8-K 2018-01-29 Officers, Exhibits
8-K 2018-01-05 Enter Agreement, Officers, Exhibits
KMG KMG Chemicals 1,160
ZYXI Zynex 290
SINC Sincerity Applied Materials Holdings 258
GLTC Geltech Solutions 32
VCBD Vitalibis 12
RIT Rodin Income Trust 0
FSTJ First America Resources 0
NYB New York Community Bancorp 0
CHUBA CommerceHub 0
ICNN Incoming 0
TOMI 2019-06-30
Part I: Financial Information
Item 1. Financial Statements.
Note 1. Description of Business
Note 2. Summary of Significant Accounting Policies
Note 3. Inventories
Note 4. Property and Equipment
Note 5. Intangible Assets
Note 6. Leases
Note 7. Capitalized Software Development Costs
Note 8. Convertible Debt
Note 9. Shareholders’ Equity
Note 10. Commitments and Contingencies
Note 11. Contracts and Agreements
Note 12. Accrued Expenses and Other Current Liabilities
Note 13. Accrued Warranty
Note 14. Customer Concentration
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Ii: Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 tomi_ex311.htm
EX-31.2 tomi_ex312.htm
EX-32.1 tomi_ex321.htm
EX-32.2 tomi_ex322.htm

Tomi Environmental Solutions Earnings 2019-06-30

TOMI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tomi_10q.htm FORM 10-Q Blueprint
 
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
 
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)
 
 
Florida
59-1947988
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212
(Address of principal executive offices) (Zip Code)
 
 
(800) 525-1698
(Registrant’s telephone number, including area code)
 
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
Accelerated filer                   ☐
Non-accelerated filer   ☐
Smaller reporting company ☒
 
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
As of August 7, 2019, the registrant had 124,700,418 shares of common stock outstanding.
 
 

 
 
 
 
 
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2019
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “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 Form 10-Q, except for historical information, may be deemed forward-looking statements. You can generally identify forward-looking statements as statements containing the words “will,” “would,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “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” in our most recent Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
 
2
 
 
PART I: FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
 
ASSETS
 
 
 
 
 
 

 
 
 
 
 
 
Current Assets:
 
June 30, 2019 (Unaudited)
 
 
December 31, 2018
 
 Cash and Cash Equivalents
 $1,631,762 
 $2,004,938 
Accounts Receivable – net
  1,336,807 
  2,145,622 
Inventories (Note 3)
  2,502,434 
  2,682,014 
Deposits
  95,810 
  109,441 
Prepaid Expenses
  224,789 
  301,797 
       Total Current Assets
  5,791,602 
  7,243,812 
 
    
    
Property and Equipment – net (Note 4)
  1,525,115 
  1,588,591 
 
    
    
Other Assets:
    
    
Intangible Assets – net (Note 5)
  1,051,062 
  1,235,816 
Operating Lease - Right of Use Asset (Note - 6)
  693,564 
  - 
Capitalized Software Development Costs (Note 7)
  125,704 
  - 
Other Assets
  118,759 
  11,395 
     Total Other Assets
  1,989,089 
  1,247,211 
Total Assets
 $9,305,806 
 $10,079,614 
 
    
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
    
    
 
    
    
Current Liabilities:
    
    
  Accounts Payable
 $1,009,854 
 $1,133,649 
  Accrued Expenses and Other Current Liabilities (Note 12)
  398,739 
  415,199 
  Accrued Officers Compensation
  30,167 
  70,000 
  Accrued Interest (Note 8)
  66,667 
  66,667 
  Customer Deposits
  - 
  1,486 
  Current Portion of Long-Term Operating Lease
  61,006 
  - 
   Deferred Rent
  - 
  13,215 
 
 Convertible Notes Payable, net of discount of $0
 
    
     at June 30, 2019 (Note 8)
  5,000,000 
  - 
     Total Current Liabilities
  6,566,433 
  1,700,216 
 
    
    
Long-Term Liabilities:
    
    
  Long-Term Operating Lease, Net of Current Portion (Note 6)
  1,071,333 
  - 
  Deferred Rent and Tenant Improvement Allowances
  - 
  401,734 
 
 Convertible Notes Payable, net of discount of $17,534 at
 
    
December 31, 2018 (Note 8)
  - 
  4,982,466 
     Total Long-Term Liabilities
  1,071,333 
  5,384,200 
     Total Liabilities
  7,637,766 
  7,084,416 
 
    
    
 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 June 30, 2019 and December 31, 2018
  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 June 30, 2019 and December 31, 2018
  - 
  - 
 
 Common stock; par value $0.01 per share, 200,000,000 shares authorized;
 
    
 
     124,700,418 and 124,290,418 shares issued and outstanding
 
    
        at June 30, 2019 and December 31, 2018, respectively.
  1,247,004 
  1,242,904 
     Additional Paid-In Capital
  43,136,683 
  42,948,705 
     Accumulated Deficit
  (42,720,747)
  (41,201,511)
     Total Shareholders’ Equity
  1,668,040 
  2,995,198 
Total Liabilities and Shareholders’ Equity
 $9,305,806 
 $10,079,614 
 
    
    
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
3
 
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For The Three Months Ended
 
 
For The Six Months Ended
 
 
 
June 30,
 
 
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Sales, net
 $1,638,674 
 $1,246,472 
 $2,891,332 
 $2,558,938 
   Cost of Sales
  663,362 
  557,810 
  1,156,672 
  1,049,469 
   Gross Profit
  975,312 
  688,662 
  1,734,660 
  1,509,469 
 
    
    
    
    
Operating Expenses:
    
    
    
    
   Professional Fees
  108,923 
  85,714 
  214,404 
  192,172 
   Depreciation and Amortization
  179,535 
  152,468 
  356,380 
  315,206 
   Selling Expenses
  518,546 
  431,655 
  960,216 
  635,660 
   Research and Development
  68,659 
  109,823 
  161,236 
  242,310 
   Equity Compensation Expense (Note 9)
  6,116 
  - 
  87,033 
  12,685 
   Consulting Fees
  20,261 
  38,352 
  55,267 
  73,378 
   General and Administrative
  608,605 
  736,919 
  1,303,485 
  1,400,806 
Total Operating Expenses
  1,510,645 
  1,554,930 
  3,138,021 
  2,872,217 
Loss from Operations
  (535,333)
  (866,268)
  (1,403,361)
  (1,362,749)
 
    
    
    
    
Other Income (Expense):
    
    
    
    
   Amortization of Debt Discounts
  - 
  (7,904)
  (17,534)
  (15,941)
   Induced Conversion Costs
  - 
  (57,201)
  - 
  (57,201)
   Interest Income
  629 
  1,751 
  1,659 
  2,949 
   Interest Expense
  (50,000)
  (55,878)
  (100,000)
  (115,878)
Total Other Income (Expense)
  (49,371)
  (119,232)
  (115,875)
  (186,071)
 
    
    
    
    
Net Loss
 $(584,704)
 $(985,500)
 $(1,519,236)
 $(1,548,820)
 
    
    
    
    
Loss Per Common Share
    
    
    
    
   Basic and Diluted
 $(0.00)
 $(0.01)
 $(0.01)
 $(0.01)
 
    
    
    
    
 
    
    
    
    
Basic and Diluted Weighted Average Common Shares Outstanding
  124,699,539 
  123,457,386 
  124,679,534 
  122,847,063 
 
    
    
    
    
 
    
 
  The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
4
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019
(UNAUDITED)
 
 
 
 
 
Series A Preferred
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 
Additional Paid
 
 
Accumulated
 
 
Total Shareholders’
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
in Capital
 
 
Deficit
 
 
Equity
 
Balance at December 31, 2018
  510,000 
 $5,100 
  124,290,418 
 $1,242,904 
 $42,948,705 
 $(41,201,511)
 $2,995,198 
 
    
    
    
    
    
    
    
Equity Compensation
    
    
    
    
  146,878 
    
  146,878 
Common Stock Issued for Services Provided
    
    
  410,000 
  4,100 
  41,100 
    
  45,200 
Net Loss for the six months ended June 30, 2019
    
    
    
    
    
  (1,519,236)
  (1,519,236)
Balance at June 30, 2019
  510,000 
 $5,100 
  124,700,418 
 $1,247,004 
 $43,136,683 
 $(42,720,747)
 $1,668,040 
 
    
    
    
    
    
    
    
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
    
    
 
5
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
 
 
 
 
     
 
 
 
  For the Six Months Ended  
 
 
 
  June 30,  
 
 
 
2019
 
 
  2018
 
Cash Flow From Operating Activities:
 
 
 
 
   
 
  Net Loss
 $(1,519,236)
 $(1,548,820)
  Adjustments to Reconcile Net Loss to
    
  . 
     Net Cash Used In Operating Activities:
    
    
      Depreciation and Amortization
  356,380 
  315,206 
       Amortization of Lease Liability
  79,289 
  - 
      Amortization of Debt Discount
  17,534 
  15,941 
      Equity Compensation Expense
  87,033 
  13,590 
      Value of Equity Issued for Services
  45,200 
  37,500 
      Induced Conversion Costs
  - 
  57,201 
      Reserve for Bad Debt
  (175,000)
  (175,000)
 
    
    
 Changes in Operating Assets and Liabilities:
    
    
      Decrease (Increase) in:
    
    
         Accounts Receivable
  983,816 
  (154,065)
         Inventory
  179,580 
  506,315 
         Prepaid Expenses
  41,143 
  (90,924)
         Deposits
  13,630 
  (87,213)
         Other Assets
  (107,364)
  (86,259)
      Increase (Decrease) in:
    
    
         Accounts Payable
  (123,795)
  (86,716)
         Accrued Expenses
  43,385 
  83,444 
         Accrued Interest
  - 
  (8,122)
         Accrued Officer Compensation
  (39,833)
  - 
         Deferred Rent
  - 
  (781)
         Customer Deposits
  (1,486)
  (2,062)
 Net Cash Used in Operating Activities
  (119,725)
  (1,210,765)
 
    
    
 Cash Flow From Investing Activities:
    
    
   Capitalized Software Costs
  (125,704)
  - 
   Purchase of Property and Equipment
  (127,747)
  (3,604)
 Net Cash Used in Investing Activities
  (253,451)
  (3,604)
 
    
    
  The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
6
 
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
 
 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
 
 
 (UNAUDITED)
 
 
 
For the Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 Cash Flow From Financing Activities:
  - 
  - 
 (Decrease) In Cash and Cash Equivalents
  (373,176)
  (1,214,370)
 Cash and Cash Equivalents - Beginning
  2,004,938 
  4,550,003 
 Cash and Cash Equivalents – Ending
 $1,631,762 
 $3,335,637 
 
    
    
 Supplemental Cash Flow Information:
    
    
   Cash Paid For Interest
 $100,000 
 $124,000 
   Cash Paid for Income Taxes
 $800 
 $800 
 Non-Cash Investing and Financing Activities:
    
    
Right of Use Asset Arising from Adoption of ASC 842
 $714,421 
 $- 
Equity Compensation as Consideration for Accrued Expenses
 $59,845 
 $- 
Conversion of Convertible Note Payable and Accrued Interest into Common Stock
 $- 
 $705,212 
 
    
    
  The accompanying notes are an integral part of the condensed consolidated financial statements.  
 
 
7
 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. DESCRIPTION OF BUSINESS
 
TOMI Environmental Solutions, Inc., a Florida corporation (“TOMI”, the “Company”, “we”, “our” and “us”) is a global provider of disinfection and decontamination essentials through 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).
 
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.
 
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.
 
 
8
 
 
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.
 
 
9
 
 
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.
 
 
10
 
 
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).
 
 
11
 
 
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)
 
    
    
 
 
12
 
 
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 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.
 
 
13
 
 
               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.
 
 
14
 
 
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 Liquidity and Capital Resources
 
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.
 
 
15
 
 
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, 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.
 
NOTE 3. INVENTORIES
 
Inventories consist of the following at:
 
 
 
June 30,
2019 (Unaudited)
 
 
December 31,
2018
 
             Finished goods
 $2,602,434 
 $2,782,014 
             Inventory Reserve
  (100,000)
  (100,000)
 
 $2,502,434 
 $2,682,014 
 
NOTE 4. PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following at:
 
 
 
June 30,
2019
(Unaudited)
 
 
December 31, 2018
 
Furniture and fixtures
 $352,992 
 $277,976 
Equipment
  1,336,440 
  1,300,139 
Vehicles
  60,703 
  60,703 
Computer and software
  160,009 
  143,579 
Leasehold improvements
  355,898 
  355,898 
Tenant Improvement Allowance
  405,000 
  405,000 
 
  2,671,042 
  2,543,295 
Less: Accumulated depreciation
  1,145,928 
  954,704 
 
 $1,525,115 
 $1,588,591 
 
 
16
 
 
For the three and six months ended June 30, 2019, depreciation was $87,160 and $171,626, respectively. For the three and six months ended June 30, 2018, depreciation was $60,091 and $130,452, respectively. For the three and six months ended June 30, 2019, amortization of tenant improvement allowance was $9,798 and $19,597, respectively and was recorded as lease expense and included within general and administrative expense on the consolidated statement of operations.
 
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 $92,377 and $184,754 for the three and six months ended June 30, 2019 and 2018, respectively.
 
            
Definite life intangible assets consist of the following:
 
 
 
June 30,
2019
(Unaudited)
 
 
December 31,
2018
 
Intellectual Property and Patents
 $2,848,300 
 $2,848,300 
Less: Accumulated Amortization
  2,294,030 
  2,109,276 
Intangible Assets, net
 $554,270 
 $739,024 
 
Indefinite life intangible assets consist of the following:
 
Trademarks  
 $496,792 
 $496,792 
Total Intangible Assets, net 
 $1,051,062 
 $1,235,816 
 
 
Approximate amortization over the next five years is as follows:
 
 
   Year Ended
 Amount 
  July 1 – December 31, 2019
 $184,000 
  December 31, 2020
  370,000 
  December 31, 2021
  - 
  December 31, 2022
  - 
  December 31, 2023
  -
 
   
 $554,000
 
 
NOTE 6. LEASES
 
In April 2018, we entered into a 10-year lease agreement for a new 9,000-square-foot facility that contains office, warehouse, lab and research and development space in Frederick, Maryland. The lease agreement was scheduled to commence on December 1, 2018 or when the property was ready for occupancy. The agreement provided for annual rent of $143,460, an escalation clause that increases the rent 3% year over year, a landlord tenant improvement allowance of $405,000 and additional landlord work as discussed in the lease agreement. We took occupancy of the property on December 17, 2018 and the lease was amended in March 2019 to provide for a 4-month rent holiday and a commencement date of April 1, 2019. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
 
 
 
17
 
 
The balances for our operating lease where we are the lessee are presented as follows within our condensed consolidated balance sheet:
 
 
 
    June 30, 2019 (Unaudited)
 
Operating leases:
 
Assets:
 
 
 
  Operating lease right-of-use asset
 $693,564 
Liabilities:
    
  Current Portion of Long-Term Operating Lease
 $61,006 
  Long-Term Operating Lease, Net of Current Portion
 $1,071,333 
 
 $1,132,339 
 
The components of lease expense are as follows within our condensed consolidated statement of operations:
 
 
 
Three Months Ended June 30, 2019
(Unaudited)
 
 
Six Months Ended June 30, 2019
(Unaudited)
 

 
 
 
 
 
 
  Operating lease expense
 $39,644 
 $79,289 
 
    
    
 
Other information related to leases where we are the lessee is as follows:
 
 
 
June 30, 2019
(Unaudited)
 
Weighted-average remaining lease term:
 
 
 
Operating leases
 
 9.75 years
 
 
 
 
 
Discount rate:
 
 
 
Operating leases
  7.00%
 
    
 
Supplemental cash flow information related to leases where we are the lessee is as follows:
 
 
 
Three Months Ended June 30, 2019
(Unaudited)
 
 
Six Months Ended June 30, 2019
(Unaudited)
 
Cash paid for amounts included in the measurement of lease liabilities:
 $- 
 $- 
 
 
 
18
 
 
As of June 30, 2019, the maturities of our operating lease liability are as follows:
 
Year Ended:
 
 Operating Lease
 
July 1 – December 31, 2019
 $65,753 
December 31, 2020
  146,688 
December 31, 2021
  151,088 
December 31, 2022
  155,621 
December 31, 2023
  160,290 
Thereafter
  910,280 
Total minimum lease payments
  1,589,720 
Less: Interest
  457,381 
Present value of lease obligations
  1,132,339 
Less: Current portion
  61,006 
Long-term portion of lease obligations
 $1,071,333 
 
As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:
 
 Year Ended:
 
Operating Lease
 
 December 31, 2019
 $102,000 
 December 31, 2020
  147,000 
 December 31, 2021
  151,000 
 December 31, 2022
  156,000 
 December 31, 2023
  160,000 
Thereafter
  923,000 
 
 $1,639,000 
 
NOTE 7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
 
In accordance with ASC 985-20 we capitalized certain software development costs associated with updating our continuing line of product offerings. As of June 30, 2019, a total of $125,704 of development costs are reported on our condensed consolidated balance sheet.
 
NOTE 8. CONVERTIBLE DEBT
 
In March and May 2017, we closed a private placement transaction in which we 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 three and six months ended June 30, 2019 was $50,000 and $100,000, respectively. Interest expense related to the Notes for the three and six months ended June 30, 2018 was $55,878 and $115,878, respectively.
 
 
19
 
 
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%. We 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 was amortized over the life of the Notes using the effective interest method. Amortization expense for the three and six months ended June 30, 2019 was $0 and $17,534, respectively. Amortization expense for the three and six months ended June 30, 2018 was $7,904 and $15,941, respectively.
 
In February and March 2018, we extended the maturity date of the Notes— we extended the maturity date to April 1, 2019 for $5,300,000 of principal on the Notes and to June 8, 2019 for the remaining $700,000 Note. No additional consideration was paid or accrued by us. 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.  We 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 two-remaining noteholders agreed to extend the maturity dates of their notes totaling $5,000,000 to April 3, 2020. As part of the extensions, we agreed that if we do 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 our common shares 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. We determined that the modification of these Notes is not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments”. At June 30, 2019, the convertible notes payable with a maturity of April 3, 2020 is classified as a current liability on our balance sheet.
 
Convertible notes consist of the following at:
 
 
 
  June 30, 2019 (Unaudited)
 
 
  December 31, 2018
 
 
 
 
 
 
 
 
Convertible notes
 $5,000,000 
 $5,000,000 
Initial discount
  (53,873)
  (53,873)
Accumulated amortization
  53,873 
  36,339 
Convertible notes, net
 $5,000,000 
 $4,982,466 

NOTE 9. 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.
 
 
20
 
 
Convertible Series A Preferred Stock
 
Our authorized Convertible Series A Preferred Stock, $0.01 par value, consists of 1,000,000 shares. At June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, there were no shares issued and outstanding, respectively. Each share of Convertible Series B Preferred Stock may be converted (at the holder’s election) into two hundred shares of our common stock.
 
Common Stock
 
During the six months ended June 30, 2018, we issued 362,500 shares of common stock valued at $37,500 to members of our board of directors (see Note 11).
 
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 8).
 
During the six months ended June 30, 2019, we issued 400,000 shares of common stock valued at $44,000 to members of our board of directors (see Note 11). During the six months ended June 30, 2019, we issued 10,000 shares of common stock valued at $1,200 to a consultant.
 
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.
 
In January 2019, pursuant to an employment agreement, we issued options to purchase an aggregate of 250,000 shares of common stock to our Chief Operating Officer, valued at $24,694. The options have an exercise price of $0.11 per share and expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 144%; dividend yield: 0%; zero coupon rate: 2.47%; and a life of 5 years. The value of the options was expensed in the fourth quarter of 2018 and included in accrued expenses at December 31, 2018.
 
In January 2019, we issued options to purchase an aggregate of 50,000 shares of common stock to our Chief Financial Officer, valued at $4,483. The options have an exercise price of $0.10 per share and expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 143%; dividend yield: 0%; zero coupon rate: 2.58%; and a life of 5 years.
 
 
21
 
 
The following table summarizes stock options outstanding as of June 30, 2019 and December 31, 2018:
 
 
 
June 30, 2019
(Unaudited)
 
 
December 31, 2018
 
 
 
Number of Options
 
 
Weighted Average Exercise Price
 
 
Number of Options
 
 
Weighted Average Exercise Price
 
Outstanding, beginning of period
  320,000 
 $0.52 
  200,000 
 $0.76 
Granted
  300,000 
  0.11 
  120,000 
  0.12 
Exercised
   
   
   
   
Outstanding, end of period
  620,000 
 $0.32 
  320,000 
 $0.52 
 
 
Options outstanding and exercisable by price range as of June 30, 2019 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 
  1.53 
  20,000 
 $0.05 
 $0.10 
  70,000 
  5.72 
  70,000 
 $0.10 
 $0.11 
  250,000 
  4.51 
  250,000 
 $0.11 
 $0.12 
  100,000 
  3.53 
  100,000 
 $0.12 
 $0.27 
  40,000 
  5.51 
  40,000 
 $0.27 
 $0.55 
  100,000 
  6.60 
  100,000 
 $0.55 
 $2.10 
  40,000 
  0.51 
  40,000 
 $2.10 

  620,000 
  4.54 
  620,000 
 $0.32 
 
 
Stock Warrants
 
We did not issue any warrants during the six months ended June 30, 2018.
 
               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 an employment agreement. The warrant was valued at $89,654 and has a term of 5 years. We utilized the Black-Scholes model 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 a warrant to purchase 250,000 shares of common stock to an employee at an exercise price of $0.12 per share. The warrant was valued at $21,931 and has a term of 3 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 148%; expected dividend yield, 0%; risk free interest rate, 2.55%; and a life of 3 years. The grant date fair value of each share of common stock underlying the warrant was $0.09. The value of the warrants was expensed in the fourth quarter of 2018 and included in accrued expenses at December 31, 2018.
 
In April 2019 we issued a warrant to purchase 50,000 shares of common stock to an employee at an exercise price of $0.14 per share. The warrant was valued at $6,116 and has a term of 5 years. We utilized the Black-Scholes model to fair value the warrant received by the employee with the following assumptions: volatility, 134%; expected dividend yield, 0%; risk free interest rate, 2.32%; and a life of 5 years. The grant date fair value of each share of common stock underlying the warrant was $0.12.
 
 
22
 
 
The following table summarizes the outstanding common stock warrants as of June 30, 2019 and December 31, 2018:
 
 
 
June 30, 2019
(Unaudited)
 
 
December 31, 2018
 
 
 
 Number of Warrants
 
 
 Weighted Average Exercise Price
 
 
 Number of Warrants
 
 
 Weighted Average Exercise Price
 
Outstanding, beginning of period
  26,550,611 
 $0.34 
  35,501,411 
 $0.33 
Granted
  1,300,000 
  0.11 
  250,000 
  0.08 
Exercised
  - 
  - 
  - 
  - 
Expired
  (1,000,000)
  (0.30)
  (9,200,800)
  (0.30)
Outstanding, end of period
  26,850,611 
 $0.33 
  26,550,611 
 $0.34 
 
 
Warrants outstanding and exercisable by price range as of June 30, 2019 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 
  4.40 
  250,000 
 $0.08 
 $0.10 
  1,265,000 
  4.26 
  1,265,000 
 $0.10 
 $0.12 
  3,750,000 
  3.42 
  3,750,000 
 $0.12 
 $0.12 
  4,000,000 
  0.29 
  4,000,000 
 $0.12 
 $0.14 
  50,000 
  4.80 
  50,000 
 $0.14 
 $0.17 
  10,000 
  3.32 
  10,000 
 $0.17 
 $0.27 
  250,000 
  2.50 
  250,000 
 $0.27 
 $0.29 
  5,510,088 
  0.17 
  5,510,088 
 $0.29 
 $0.29 
  4,615,525 
  2.66 
  4,615,525 
 $0.29 
 $0.30 
  2,300,000 
  1.14 
  2,300,000 
 $0.30 
 $0.32 
  250,000 
  2.25 
  250,000 
 $0.32 
 $0.42 
  250,000 
  2.00 
  250,000 
 $0.42 
 $0.50 
  250,000 
  1.75 
  250,000 
 $0.50 
 $0.55 
  100,000 
  1.58 
  100,000 
 $0.55 
 $0.69 
  999,998 
  0.72 
  999,998 
 $0.69 
 $1.00 
  3,000,000 
  0.84 
  3,000,000 
 $1.00 

  26,850,611 
  1.57 
  26,850,611 
 $0.33 
    
    
    
    
    
There were no unvested warrants outstanding as of June 30, 2019.
 
 
23
 
 
NOTE 10. COMMITMENTS AND CONTINGENCIES
 
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 June 30, 2019, and December 31, 2018, there were no claims against us for product liability.
 
 
NOTE 11. 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. Director compensation also includes the annual issuance of our common stock.
 
For the six months ended June 30, 2018, we issued an aggregate of 362,500 shares of common stock that were valued at $37,500 to members of our board of directors.
 
For the six months ended June 30, 2019, we issued an aggregate of 400,000 shares of common stock that were valued at $44,000 to members of our board of directors.
 
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 June 30, 2019, we had entered into 91 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.
 
 
24
 
 
NOTE 12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
Accrued expenses and other current liabilities consisted of the following at:
 
 
 
 
 
 
 
 
 
 
June 30, 2019
(Unaudited)
 
 
December 31, 2018
 
Commissions
 $101,558 
 $136,631 
Payroll and related costs
  155,213 
  144,359 
Director fees
  41,250 
  41,250 
Sales Tax Payable
  4,335 
  11,296 
Accrued warranty (Note 13)
  30,000 
  30,000 
Other accrued expenses
  66,383 
  51,663 
Total
 $398,739 
 $415,199 
 
 
NOTE 13. 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:
 
 
 
June 30, 2019
(Unaudited)
 
 
December 31, 2018
 
Beginning accrued warranty costs
 $30,000 
 $5,000 
Provision for warranty expense
  1,734 
  47,454 
Settlement of warranty claims
  (1,734)
  (22,454)
Ending accrued warranty costs
 $30,000 
 $30,000 
 
 
NOTE 14. 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.
 
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.
 
 
25
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”
 
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.
 
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.
 
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 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.
 
Markets
 
TOMI’s SteraMist® products are designed to address a panoply of industries using iHP. Our operations are organized into four main divisions based on our current target industries: Hospital-Healthcare, Life Sciences, TOMI Service Network (TSN) and Food Safety.
 
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, iHP® Service (routine & emergency), validations and qualifications, and onsite performance maintenance requests - all of which are structured to address the disinfection and decontamination needs of our customers worldwide.
 
Divisions
 
Hospital-Healthcare
 
TOMI’s hospital-healthcare customer list expands with the close of every quarter. TOMI’s 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 has shown an increased interest in our technology for this division. 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.
 
 
26
 
 
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.
 
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 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. We derive 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 ninety-two (92) expanding our network membership across 35 U.S. States and two (2) Canadian provinces.  Our service providers, with approximately 160 SteraMist® with BIT technology units in the field, allows for rapid deployment for use in the control of a biological outbreak and border security nationally and internationally.
 
Food Safety
 
Food Safety is 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 the increased focus on concerns within the food safety industry in North America and abroad. Our consultants have submitted to the regulatory bodies 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 using an acceptable concentration of hydrogen peroxide that is already approved for direct food use by the USDA and EPA.
 
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
 
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.
 
 
27
 
 
Business Highlights and Recent Events
 
Research Studies & Product Development
 
We continue to participate in a large study, a “SHIELD study”, that compares hospital manual cleans to a SteraMist® mechanical clean. Preliminary results collected by the current hospitals in the study is showing a 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. University of Michigan, a recognized teaching university hospital, will be joining the California hospitals in this Shield Study in September 2019, allowing for additional collection of data to validate the value of SteraMist technology in hospitals. Future results will be released as obtained from the study’s lead investigators, which we believe will expand our presence in the hospital healthcare market.
 
TOMI has been included in the published Global Disinfectants Market-Trends, Insights & Forecasts by Melvin Bright. The April 2019, 289-page report is on “Potential Risks from Epidemic, Drug Resistant Viruses and the Resulting Focus on Safety, Health, and Sanitation Drives Demand for Disinfectants.” The report shows that the disinfection market was a $4.48 billion market in 2018 and expects to grow and reach a $8.40 billion-dollar market by 2025.
 
In April 2019, CETA, the Controlled Environment Testing Association published a performance review on “Validating A Decontamination Protocol Utilizing/ionized Hydrogen Peroxide (iHP)”. The paper validates that TOMI’s produced ionized hydrogen peroxide was effective for complete kill in the pharmacy trailer system, after achieving greater than 6-log kill in each of its three validation cycles.
 
We have added three new products to our growing line of products, the first is our single applicator build-in unit for decontamination chambers and cage washers, which was recently successfully validated at the University of Houston. The second new product is a decontamination cart for a Pfizer facility. The third is our stainless-steel mobile 90-degree applicator and the answer to the mobile treatment and decontamination of BSC cabinets and isolators.
 
The 90-degree applicator product has led to a partnership with a large design and manufacturing company of washing and contamination control systems. One of our products has allowed TOMI to innovate an all-in-one efficient and quick decontamination solution for Gnotobiotic Housings.
 
At AALAS’s  annual meeting this October in Denver, the University of Iowa and Iowa State University is presenting a study about our technology and the effect of iHP on pinworms this will be presented in the poster section of the conference.
 
In 2019, we have also focused on improving our SteraMist Environment System and the development of our own proprietary software that will be integrated into the next generation of SteraMist equipment, both mobile and permanent. The new software will improve communication between our equipment and the end user’s system, provide improved reporting results and simplify the overall usage of the system itself. During the first quarter of 2019, we reached feasibility with the software being developed. Just this past month, testing and validation has started on an Environment System prototype.
 
 
28
 
 
             The United States Department of Agriculture (USDA) is in its final edits of another published paper titled “Cold Plasma Enhances the Efficacy of ionized Hydrogen Peroxide in Reducing Populations of Salmonella Typhimurium and Listeria innocua on Grape tomatoes, Apples, Cantaloupe and Romaine Lettuce”.
 
In July 2019, the author presented, and a poster was shown at the International Association of Food Protection (IAFP). This was a successful introduction of SteraMist to this audience and many are interested in further testing and research of the technology. The poster and presentation focused on the urgent need of a decontamination technology, such as SteraMist to enhance microbial safety of fresh produce. Greater reductions were documented when aerosolized hydrogen peroxide was passed through the plasma arc and greater than 5 log reductions of Salmonella were achieved. TOMI is looking forward to the publication of this paper this year in a recognized international food safety journal.
 
TOMI is in the beginning phases of designing, engineering, and going into production with its partner Arkema and their client a Global food storage and safety company of a newly designed concept for treating large industrial food warehouse facilities. The concept is a six (6) applicator fully automated fogging system permanently mounted on a hydraulic lift that is capable of coverage in such high-volume spaces.
 
Registrations & Intellectual Property (IP):
 
In February 2019, we added our Canadian label to the Organic Materials Review Institute (“OMRI”) certifying that our product meets the Canadian organic standards. On May 15, 2019 - TOMI’s BIT solution disinfectant was listed and certified with the OMRI in compliance with the USDA National Organic Program. Thus, our product is now listed as an acceptable product as OMRI Listed© and appears on OMRI Products List© and the OMRI Canada Products List©.
 
TOMI has been actively pursuing registration in mainland China. We successfully passed the Chinese CDC requirements for registration and have hired a CDC consultant. In addition, we have strengthened our intellectual property in the region, submitting trademarks and patent registrations. We have identified a Chinese customer that we expect will generate revenue shortly in 2019. TOMI successfully passed all eighteen (18) testing measures required including microbiological test. All our toxicity studies demonstrated that our BIT fog was classified as an actual non-toxic substance. We are currently finalizing the necessary custom declaration forms required for shipment of our products to the region.
 
Our 90 degree surface mounted applicator device was allowed and published in the Philippines. We have submitted this design patent in multiple countries and expect the others to follow shortly in publication. This additional design patent adds nicely to our other design patents, including our permanent modular applicator, decontamination cart, and our two decontamination chambers.
 
In addition, TOMI has received a notice of allowance to two utility patents. We had previously reported in 2017 and 2018 the filing of these two utility patents, and last month received notice that both the system claims (US15/858,446) and the method claims (US16/127,915) will be published in the upcoming weeks with the USPTO. The application for the latter of the two has already been designated a patent number of 10,391,188 and an issue date of August 27, 2019. TOMI has submitted these to national stage for protection internationally and continues to file additional patents, both utility and design worldwide.
 
Operations:
 
TOMI has brought on nineteen (19) new customers across all our divisions in Q2 2019. This represents a twenty-seven (27%) percent increase over the same quarter in 2018.
 
Six (6) of these new customers are high profile university research facilities in the U.S. and Canada, bolstering an already robust profile of research institutions.
 
 
29
 
 
TOMI brought on five (5) new facilities in its hospital-healthcare division in Quarter 2 of 2019. These new facilities had a combined purchase of eleven (11) units, including our first E-Z SteraMist® Disinfection Cart sale to a hospital in Perrysburg, Ohio.
 
The hospital-healthcare division showed a 974% increase in revenue in second quarter of 2019 when compared to the same quarter last year, and a 74% increase in revenue for the six months ended June 30, 2019 when compared to the same period in the prior year.
 
In May 2019, we received our largest order to date for mobile equipment of over $400,000 for the Kansas Department of Health in the United States.
 
TOMI exhibited at the Association of Professionals in Infection Control (APIC) Annual Conference with its new booth creating the largest presence TOMI has had at a tradeshow. The E-Z SteraMist Cart was on display as well as multiple educational presentations to Infection Preventionists. The show provided many valuable leads and our new exhibit received considerable praise.
 
Earlier this year we were audited by Pfizer Global Supply Manufacturing and Supplier Quality Assessments and were reported to be “Acceptable”, allowing us to continue expanding SteraMist® implementation into Pfizer facilities. Management has further focused and allocated resources towards expanding quality control procedures and protocols based on recommendations received during the audit. In April 2019, Pfizer approved a press release of SteraMist being used in multiple facilities across the United States.
 
In May 2019, we added our second compounding pharmacy customer, an FDA 503B outsourcing facility which meets all rigorous national standards with quality sterile products. The FDA created this new designation of compounding pharmacy to establish a new level of patient care and safety, and these facilities must comply with strict cGMP (current good manufacturing practices) guidelines, which is the same standards that pharmaceutical manufacturers follow.
 
In July 2019, we announced in a press release the implementation of SteraMist® iHP™ Plasma Decontamination Chamber at the University of Houston and a partnership with Lynx Product Group. TOMI currently has additional proposals in review with other universities in the United States, with the likelihood of two to close by the end of the year.
 
Last month, TOMI won a bid with a niche pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals as well as animal and consumer health products with a focus on injectables. The iHP Service team treated the 170,000 cubic foot space, classified and non-classified areas, validating with chemical and biological indicators in over 300 areas. The service was a success with all 300 biological indicators passing a six-log kill, and the company plans for this to be a routine iHP Service decontamination. Further, this facility is in discussion over several custom iHP applications for their facility.
 
Through the early part of the third quarter the TOMI iHP Service division revenue has already surpassed the total iHP Service revenue received in 2018. Additional service in the pipeline from existing clients is anticipated to be performed before the end of the fourth quarter which should show an increase in growth when compared to 2018.
 
The TSN division achieved a 79% increase in growth in second quarter revenue from 2018 to 2019. The majority of the revenue increase in this division was comprised of increased equipment and BIT Solution sales to existing customers.
 
In April 2019, after receiving our registration in Israel, TOMI entered into a distribution agreement with an Israeli company, Cleancor Technologies Ltd., an advanced solution company for the industrial cleaning and repair of water and fire damages. Cleancor has already diversified and started a subsidiary named Clean Bit Environmental Solutions and has already made immense marketing strategies and has a firm pipeline in the HealthCare, Food industry, Defense, and Medical Cannabis verticals.
 
 
30
 
  
Financial Operations Overview
 
Our financial position as of June 30, 2019 and December 31, 2018 was as follows:
 
 
June 30, 2019
(Unaudited)
 
 
December 31, 2018
 
Total shareholders’ equity
 $1,668,000 
 $2,995,000 
Cash and cash equivalents
 $1,632,000 
 $2,005,000 
Accounts receivable, net
 $1,337,000 
 $2,146,000 
Inventories, net
 $2,502,000 
 $2,682,000 
Prepaid expenses
 $225,000 
 $302,000 
Deposits
 $96,000 
 $109,000 
Current liabilities (excluding convertible notes)
 $1,566,000 
 $1,700,000 
Convertible notes payable, net
 $5,000,000 
 $4,982,000 
Long-term liabilities (excluding convertible notes)
 $1,071,000 
 $402,000 
Working Capital (excluding convertible notes)
 $4,225,000 
 $5,544,000 
Working Capital (including convertible notes)
 $(775,000)
 $5,544,000 
 
During the six months ended June 30, 2019, our liquidity positions were affected by the following:
 
Net cash used in operations of approximately $120,000.
Costs incurred to develop software of approximately $126,000.
Purchase of property and equipment of approximately $128,000.
 
Results of Operations for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
 
 
 
Three Months Ended June 30,
 
 
 
 (Unaudited)
 
 
 
2019
 
 
2018
 
Sales, Net
 $1,639,000 
 $1,246,000 
Gross Profit
 $975,000 
 $689,000 
Total Operating Expenses (1)
 $1,511,000 
 $1,555,000 
Loss from Operations
 $(535,000)
 $(866,000)
Total Other Income (Expense)
 $(49,000)
 $(119,000)
Net Loss
 $(585,000)
 $(986,000)
Basic Net Loss per Share
 $(0.00)
 $(0.01)
Diluted Net Loss per Share
 $(0.00)
 $(0.01)
 
(1)
Includes approximately $6,000 and $0 in non-cash equity compensation expense for the three months ended June 30, 2019 and 2018, respectively.
 
 
31
 
 
Sales, Net
 
Our sales, net for the three months ended June 30, 2019 and 2018 was approximately $1,639,000 and $1,246,000, respectively, representing an increase of approximately $393,000 or 32%. The increase in sales, net in the current year period was attributable to larger equipment orders from new customers, and steady repeat solution orders from our existing customer base. We continued to increase our customer base and saw positive trends in our repeat orders for solution and consumables by our growing customer base.
 
Product and Service Sales
 
The following table sets forth our sales, net for each of product sales and for services for the periods indicated:
 
 
 
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 
 
Revenue by Geographic Region
 
The following table sets forth our sales in the United States and in all other countries for the periods indicated:
 
 
 
For the three months ended June 30,
(Unaudited)
 
 
 
2019