TOMI ENVIRONMENTAL SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Glimpses |

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 , 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 , L-3Communications, 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 , using our inherited and pre-existing EPA mold label. In , 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.


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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 . 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 , 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 , 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 , 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 , 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 , we added our Canadian label to the Organic Materials Review Institute ("OMRI") certifying that our product meets the Canadian organic standards. On - 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 . 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 when compared to the same period in the prior year.

In , 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 , Pfizer approved a press release of SteraMist being used in multiple facilities across the United States.

In , 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 , 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 , 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.


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Financial Operations Overview

Our financial position as of and 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 , 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 Compared to the Three Months Ended


                             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 and 2018, respectively.


                                       31


Sales, Net

Our sales, net for the three months ended 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 ,
                     (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               2018

Domestic       $1,428,000         $850,000
International  211,000            396,000
 Total         $1,639,000         $1,246,000



Cost of Sales

Cost of sales was approximately $663,000 and $558,000 for the three months ended and 2018, respectively, an increase of $105,000, in the current year period. The primary reason for the increase is due to higher sales for the three months ended . Our gross profit as a percentage of sales for the three months ended was 59.5% compared to 55.2% in the same prior period. The increase in gross profit is attributable to the customer and product mix in sales.

Professional Fees

Professional fees were approximately $109,000 and $86,000 for the three months ended and 2018, respectively, an increase of approximately $23,000, or 27%, in the current year period. Professional fees are comprised mainly of legal, accounting and financial consulting fees. The primary reason for the increase is attributable to legal fees incurred in connection with advancing our new trademarks and new patents on a domestic and international basis.

Depreciation and Amortization

Depreciation and amortization were approximately $180,000 and $152,000 for the three months ended and 2018, respectively, an increase of $28,000, or 18%, in the current year period. The increase in depreciation expense is attributable to additional property, equipment and leasehold improvements acquired in 2018 and 2019.


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Selling Expenses

Selling expenses were approximately $519,000 and $432,000 for the three months ended and 2018, respectively, an increase of $87,000, or 20%, in the current year period. We continue to invest and allocate resources into our sales, marketing and advertising initiatives and have increased efforts in the current year in order to further develop our brand recognition and grow our base of customers. We are hoping to see positive results in our revenue in the second half of the year directly related to the onboarding of different national sales groups during the first half of 2019. Our selling expenses increased in the current period as a result of the following:


-
Higher salaries due to increases in headcount in our sales department.
-
Onboarding and training of new independent sales representatives.
-
Customer mix in sales and the related commissions impact.
-
Increased tradeshows for the three months ended  compared to the
same prior year period which has contributed to growth in our sales pipeline in
all divisions
-
The acquisition of a new high-tech 30x40 tradeshow booth
-
Continual efforts in advertising within targeted publications, Google search
engine optimized campaigns, and organic brand awareness.
-
Continued investment in our Social Media presence across all platforms which has
shown growth in followers, impressions, and engagements.

Selling expenses represent salaries and wages for sales professionals, trade show fees, commissions, advertising and marketing expenses.

Research and Development

Research and development expenses were approximately $69,000 and $110,000 for the three months ended and 2018, respectively, a decrease of $41,000, or 37%, in the current year period. The primary reason for the decrease is attributable to the timing of costs related to testing and studies that occurred in the same prior period.

Equity Compensation Expense

Equity compensation expense was approximately $87,000 and $13,000 for the six months ended and 2018, respectively. The reason for the increase is attributable to warrants and options issued to officers and employees in the current year period.

Consulting Fees

Consulting fees were approximately $20,000 and $38,000 for the three months ended and 2018, representing a decrease of $18,000 or 47%. The reason for the decline in consulting fees in the current period is due to the timing of certain projects that occurred in the same prior period last year that did not reoccur in the second quarter of 2019.

General and Administrative Expense

General and administrative expense was approximately $609,000 and $737,000 for the three months ended and 2018, respectively, a decrease of $128,000, or 17%, in the current year period. The decrease in general and administrative expenses is primarily due to lower payroll costs and reduced bad debt expense. General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense and product registration costs.

Other Income and Expense

Amortization of debt discount was approximately $0 and $8,000 for the three months ended and 2018, respectively. Amortization of debt discount for the three months ended and 2018, consists of the amortization of debt discount on the $6,000,000 principal amount of Notes issued in March and . The debt discount was amortized over the life of the Notes utilizing the effective interest method.



                                       33


Induced conversion costs of approximately $57,000 for the three months ended were incurred in connection with conversion of $700,000 convertible note payable.

Interest income was approximately $600 and $1,800 for the three months ended and 2018, respectively.

Interest expense was approximately $50,000 and $56,000 for the three months ended and 2018, respectively. Interest expense for the three months ended and 2018 consisted of the interest incurred on the $6,000,000 principal amount of Notes issued in March and .

Net Loss

Net loss was approximately $585,000 and $986,000 for the three months ended and 2018, respectively, a decrease of $401,000, or 41%, in the current year period. The primary reasons for the decreased net loss are attributable to:


?
Higher sales and gross profit of approximately $393,000 and $286,000,
respectively;
?
Lower operating expenses of approximately $44,000; and
?
Lower other expenses of $70,000.

Results of Operations for the Six Months Ended  Compared to the Six
Months Ended 


                             Six Months Ended June 30,


                              (Unaudited)


                             2019          2018

Revenues, Net                 $2,891,000    $2,559,000
Gross Profit                  $1,735,000    $1,509,000

Total Operating Expenses (1) $3,138,000 $2,872,000 Loss from Operations $(1,403,000) $(1,363,000) Total Other Income (Expense) $(116,000) $(186,000) Net Loss

                      $(1,519,000)  $(1,549,000)
Basic Net Loss per Share      $(0.01)       $(0.01)
Diluted Net Loss per Share    $(0.01)       $(0.01)



(1)

Includes approximately $87,000 and $13,000 in non-cash equity compensation expense for the six months ended and 2018, respectively.

Net Revenue

Sales

Our revenue for the six months ended and 2018 was approximately $2,891,000 and $2,559,000, respectively, representing an increase of approximately $332,000 or 13%. The increase in sales in the current year period was attributable to 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 Revenue


                     For the six months ended ,
                     (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




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Revenue by Geographic Region


              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



Cost of Sales

Cost of sales was approximately $1,157,000 and $1,049,000 for the six months ended and 2018, respectively, an increase of $108,000 or 10%, in the current year period. The primary reason for the increase is due to higher revenue and improved gross profit on equipment sales for the six months ended . Our gross profit as a percentage of revenue for the six months ended was 60% compared to 59% in the same prior period. The increase in gross profit is attributable to the customer and product mix in sales.

Professional Fees

Professional fees were approximately $214,000 and $192,000 for the six months ended and 2018, respectively, an increase of approximately $22,000, or 11%, in the current year period. Professional fees are comprised mainly of legal, accounting and financial consulting fees. The primary reason for the increase is attributable to legal fees incurred in connection with advancing our new trademarks and new utility patents on a domestic and international basis.

Depreciation and Amortization

Depreciation and amortization were approximately $356,000 and $315,000 for the six months ended and 2018, respectively, an increase of $41,000, or 13%, in the current year period. The increase in depreciation expense is attributable to additional property, equipment and leasehold improvements acquired in 2018 and 2019.

Selling Expenses

Selling expenses were approximately $960,000 and $636,000 for the six months ended and 2018, respectively, an increase of $324,000, or 51%, in the current year period. We continue to invest and allocate resources into our sales, marketing and advertising initiatives and have increased efforts in the current year in order to further develop our brand recognition and grow our base of customers. We are hoping to see positive results in our revenue in the second half of the year directly related to the onboarding of different national sales groups during the first half of 2019. Our selling expenses increased in the current period as a result of the following:


-
Higher salaries due to increases in headcount in our sales department.
-
Onboarding and training of new sales independent sales representatives.
-
Customer mix in sales and the related commissions impact.
-
Increased tradeshows for the six months ended  compared to the same
prior year period which has contributed to growth in our sales pipeline in all
divisions
-
The acquisition of a new high-tech 30x40 tradeshow booth
-
Continual efforts in advertising within targeted publications, Google search
engine optimized campaigns, and organic brand awareness.
-
Continued investment in our Social Media presence across all platforms which has
shown growth in followers, impressions, and engagements.

Selling expenses represent selling salaries and wages, trade show fees, commissions, advertising and marketing expenses.


                                       35


Research and Development

Research and development expenses were approximately $161,000 and $242,000 for the six months ended and 2018, respectively, a decrease of $81,000, or 33%, in the current year period. The primary reason for the decrease is attributable to the timing of costs related to testing and studies that occurred in the same prior period.

Equity Compensation Expense

Equity compensation expense was approximately $87,000 and $13,000 for the six months ended and 2018, respectively. The reason for the increase is attributable to warrants and options issued to officers and employees in the current year period.

Consulting Fees

Consulting fees were approximately $55,000 and $73,000 for the six months ended and 2018, representing a decrease of $18,000 or 25%. The reason for the decline in consulting fees in the current period is due to the timing of certain projects that occurred in the same prior period last year that did not reoccur in the second quarter of 2019.

General and Administrative Expense

General and administrative expense was approximately $1,303,000 and $1,401,000 for the six months ended and 2018, respectively, a decrease of $98,000, or 7%, in the current year period. The decrease in general and administrative expenses is primarily due to lower payroll costs and reduced bad debt expense. General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense and product registration costs.

Other Income and Expense

Amortization of debt discount was approximately $18,000 and $16,000 for the six months ended and 2018, respectively. Amortization of debt discount for the six months ended and 2018, consists of the amortization of debt discount on the $6,000,000 principal amount of Notes issued in March and . The debt discount was amortized over the life of the Notes utilizing the effective interest method.

Induced conversion costs of approximately $57,000 for the six months ended were incurred in connection with conversion of $700,000 convertible note payable.

Interest income was approximately $1,700 and $2,900 for the six months ended and 2018, respectively.

Interest expense was approximately $100,000 and $116,000 for the six months ended and 2018, respectively. Interest expense for the six months ended and 2018 consisted of the interest incurred on the $6,000,000 principal amount of Notes issued in March and .

Net Loss

Net loss was approximately $1,519,000 and 1,549,000 for the six months ended and 2018, respectively, a decrease of $30,000, or 2%, in the current year period. The primary reasons for the decreased net loss are attributable to:


?
Higher revenue and gross profit of approximately $332,000 and $226,000,
respectively;
?
Lower other expenses of $70,000, offset by.
?
Higher operating expenses of approximately $266,000



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Liquidity and Capital Resources

As of , we had cash and cash equivalents of approximately $1,632,000. Our working capital before consideration of the convertible notes payable of $5,000,000 was $4,225,000. Working capital after consideration of the convertible notes payable was ($775,000). Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of public company filing requirements. We have historically funded our operations through debt and equity financings.

In March and , we raised gross proceeds of $6,000,000 through a private placement of the Notes. We issued the Notes in two tranches of $5,300,000 and $700,000, respectively, which originally were scheduled to mature on and , respectively, unless earlier redeemed, repurchased or converted.

In 2018, a portion of our convertible notes aggregating $1,000,000 principal were either converted to equity or paid.

On , the remaining note holders agreed to extend the maturity dates of their aggregate of $5,000,000 in notes to . As a result, the Company has a working capital deficiency of $774,831 at and does not currently have sufficient resources to satisfy this debt when due. Accounting principles define this as raising 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.

For the six months ended and 2018, we incurred losses from operations of approximately $1,403,000 and $1,363,000, respectively. The cash used in operations was approximately $120,000 and $1,211,000 for the six months ended and 2018, respectively.

Our revenues can fluctuate due to the following factors, among others:


?
Ramp up and expansion of our internal sales force and manufacturers'
representatives;
?
Length of our sales cycle;
?
Expansion into new territories and markets; and
?
Timing of orders from distributors.

We could incur additional operating losses and an increase of costs related to the continuation of product and technology development and administrative activities.

Management has taken and will endeavor to continue to take a number of actions in order to improve our results of operations and the related cash flows generated from operations in order to strengthen our financial position, including the following items:


?
Expanding our label with the EPA to further our product registration
internationally;
?
Continued expansion of our internal sales force and manufacturer representatives
in an effort to drive domestic revenue in all hospital-healthcare verticals;
?
Continued expansion of our internal sales force and manufacturer representatives
in an effort to drive global revenue in the life science verticals;
?
Expansion of international distributors; and
?
Continued growth of TSN, our new Forensic Restoration FRST sub-division and new
growth in the food safety market which includes using SteraMist for increasing
the storage time of pre- and post-harvest produce, and increasing transportation
shelf life by installing SteraMist in semitrucks and ships that are transporting
food.

We believe that our existing balance of cash and cash equivalents and amounts expected to be provided by operations will provide us with sufficient financial resources to meet our cash requirements for operations, working capital and capital expenditures over the next twelve months. We cannot make any assurances that management's strategies will be effective or that any additional financing will be completed on a timely basis, on acceptable terms or at all. Our inability to successfully implement our strategies or to complete any other financing may mean that we would have to significantly reduce costs and/or delay projects, which would adversely affect our business, customers and program development, and would adversely impact us.



                                       37


Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings. Sufficient funds may not be available to us at all or on attractive terms when needed from these sources. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. We may require additional capital beyond our currently anticipated amounts.

Operating Activities

Cash used in operating activities for the six months ended and 2018 was approximately $120,000 and $1,211,000, respectively. Cash used in operating activities decreased approximately $1,091,000 compared to the prior year period primarily as a result of the collection of accounts receivable and the decline in inventory.

Investing Activities

Cash used in investing activities for the six months ended and 2018 was approximately $253,000 and $4,000, respectively. Cash used in investing activities increased $249,000 compared to the prior year period primarily due to software development costs and the acquisition of fixed assets.

Financing Activities

Cash used in financing activities for the six months ended and 2018 were $0.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimation process requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from our estimates.

The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. We consider the following policies to be critical to an understanding of our condensed consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows.



                                       38


Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2014-09,Revenue from Contracts with Customers (Topic 606), when there is persuasive evidence that an arrangement exists, title and risk of loss have passed, delivery has occurred, or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to our customers upon shipment.

Disaggregation of Revenue

Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services.

Costs to Obtain a Contract with a Customer

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses.

Contract Balances

As of , and we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations.

Significant Judgments

Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services.

Fair Value Measurement

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level1:

Quoted prices in active markets for identical assets or liabilities. Level2:

 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or corroborated
by observable market data or substantially the full term of the assets or
liabilities.
Level3:
Unobservable inputs that are supported by little or no market activity and that
are significant to the value of the assets or liabilities.



                                       39

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.

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.

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.

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 , 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 , with early adoption permitted. We adopted ASC 842 as of 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.



                                       40


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 other long-term liabilities as long-term operating lease, net of current portion on our condensed consolidated balance sheet as of .

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.

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 costs of sales.

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.

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.

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.

Equity Compensation Expense

We account for equity compensation expense using the Black Scholes model in accordance with FASB ASC 718, "Compensation-Stock Compensation." Under the provisions of FASB ASC 718, equity compensation expense is estimated at the grant date based on the award's fair value.

On , 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.



                                       41


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.

Recent Accounting Pronouncements

In , 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 , with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after . Adoption of ASU No. 2017-04 is prospective.

Recently Issued Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1 above.

Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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