TOMI ENVIRONMENTAL SOLUTIONS, INC. This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q")
contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties.
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. For example, statements in this Form 10-Q
regarding the potential future impact of the COVID-19 pandemic on the Company's
business and results of operations are forward-looking statements.
Forward-looking statements can also be identified by words such as "future,"
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"predicts," "will," "would," "could," "can," "may," and similar terms.
Forward-looking statements are not guaranteeing future performance and the
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such differences
include, but are not limited to, those discussed in Part I, Item 1A of the
Company's Annual Report on Form 10-K for the year ended
Unless otherwise stated, all information presented herein is based on the
Company's fiscal calendar, and references to particular years, quarters, months
or periods refer to the Company's fiscal years ended in December and the
associated quarters, months and periods of those fiscal years. Each of the terms
the "Company" and "TOMI" as used herein refers collectively to
The following discussion should be read in conjunction with the 2021 Form 10-K
filed with the
Quarterly Highlights Business Update
The first four months of the 2022 fiscal year has been active with respect to our sales and business development. We remain focused on growing our top line revenue, expanding our customer base, adding key employees, and making further innovations to our product line.
The first quarter of 2022 delivered improved revenue and operating results as we achieved a 11% growth in our first quarter sales and 24% reduction in our operating expenses when compared to the same period last year . Our first quarter revenue also grew by 15% sequentially over what was reported in the fourth quarter of 2021. The increase in sales was primarily due to higher demand for our mobile equipment and iHP corporate services.
In the first quarter of 2022, we report positive cash flow from operations for first time since the second quarter of 2020, and this improvement in cash flow was attributable to customer deposits we received in the first quarter in addition to lower operating expenses.
During the first quarter of 2022 we received approximately
As the markets need for our automated disinfection CES continues to increase, TOMI has re-engaged with our manufacturing sales representatives and partners both domestically and internationally. The renewed interest can be attributed to TOMI corporate's support and the launch of the SteraMist Support Portal that is available on desktop. We have also developed a mobile app which provides ease of use for sales support, branding, and assistance to our TOMI Service Network providers, sales representatives, and international distributors and end users.
Studies remain a focus as TOMI continues to pursue a wide array of industries. Studies focused on Botrytis cinerea and Mycotoxin, as well as furthering testing on chemical and biological warfare agents will further enhance TOMI's ability to further penetrate the market.
25
Table of Contents
Finally, our manufacturing capacity and capabilities were improved in the first
quarter of 2022 with the addition of
Product Development
As many industrial companies are reducing R&D and capital expenditures spending due to the economic impact of the pandemic, we are moving ahead with many new products in development. In 2022, we intend to increase capital expenditures (CapEx) and operating expenditures (OpEx), including development of new products, services and process technologies to sharpen our competitive advantage. In addition, we intend to expand our commercial service location to meet the expanding needs of our customers.
The second half of 2020 showed us that our customers prefer a disinfection
device with lower cost and more versatility. To respond, we developed the
Backpack (SteraPak) that includes our award winning 6-log and above kill
technology and speed. In addition, our solution and process are environmentally
friendly as the only biproduct from our decontamination process is oxygen and
humidity. Our solution is OMRI certified and organically listed in
During the third quarter 2021, we established and expanded our production capacity with the construction and purchase of the tooling and molds used in the production of our SteraPak. Our tooling and molds will allow us to streamline production and reduce manufacturing lead times and costs on the SteraPak.
Other new products that have been incorporated into our product line include the Select Plus, which is a hybrid product consisting of the Company's current Surface Select and Environment systems. The unit will allow for enhanced flexibility by using a single applicator to decontaminate full-room to small-space volume while maintaining the size of the current Surface Select unit with more robust process controls. The iHP SteraMist Transport System has been designed for the transportation market, specifically ambulances. The iHP SteraMist Transport System is a simple timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle. It will be an easy-to-use turn-key integration system. The implementation of this product and our patented non-corrosive iHP technology should replace the number one competitor in this marketplace, which uses an extremely harsh chemical.
Many of our customers have been waiting for the release and demonstration of these new products, especially the SteraPak. All SteraMist systems will remain important to the marketplace as they are designed for specific needs and budgets. The Select Surface Unit perform most of the functionality that the Plus offers and is priced at a lower cost, although Select Plus will provide additional options that are appealing to certain customers, such as laboratory and pharmaceutical companies. The SteraPak is a more cost-effective product and designed for residential and commercial real estate including large buildings and public space, any area that needs quick consistent disinfection. There are many new and existing clients that are interested in the SteraPak due to the cost and mobility.
In third quarter of 2021, we expanded our SteraMist® BIT™ solution product line with a 32-ounce bottle for the SteraPak, and the introduction of a ten (10) liter and five (5) gallon bottle. These three new additions bring the BIT Solution product line to a total of five (5) options provided to our customers, which should also benefit our razor razor-blade business model.
These new products and service introductions can significantly impact net sales, cost of sales and operating expenses. The timing of product introductions can also impact the Company's net sales to its indirect distribution channels as these channels are filled with new inventory following a product launch, and channel inventory of an older product often declines as the launch of a newer product approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction domestically and internationally.
26
Table of Contents
Overview
Our SteraMist® is a patented technology that produces ionized Hydrogen Peroxide
(iHP™) using cold plasma science created under a grant by the
Under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), we are
required to register with the
SteraMist® BIT™ brings to the world a mechanical and automated method of
cleaning using a game-changing technology and
Markets
Our SteraMist® products are designed to address a wide spectrum of industries
using iHP™. Our operations consist of five main divisions based on our current
target industries:
We continue to offer our customers a wide range of innovative mobile products
designed to be easily incorporated into their existing disinfection and
decontamination procedures and protocols. Our newly released SteraPak, among
other product lines will allow us to progress further into market share,
specifically for our Life Science,
27
Table of Contents
Each of these are structured to address the unique disinfection and decontamination needs of our customers worldwide regardless of industry requiring or requesting SteraMist® disinfection decontamination.
A brief overview of the target industries is presented below:
Life Sciences
The SteraMist® Environment System, Custom Engineered Systems (CES), the SteraMist® Select Surface Unit (Plus), SteraBox, 90 Degree Applicator and our iHP™ Corporate Service Division, are designed to be tailored to provide a complete solution to address the regulatory inspections of disinfecting/decontaminating and Installation Qualification (IQ)-Operational Qualification (OQ)-Performance Qualification (PQ) validation processes within the life sciences industry.
Long term, ongoing projects and validations continue to be a focus and lead to proposals and interest for our CES permanent decontamination room. As these are longer lead-time sales that can take months to design, build and implement, we expect installations to have impact to our results in 2022.
Further, we believe that post COVID pandemic has brought some attention to the
SteraMist product line, as our CES in Pfizer Missouri was recently showcased in
a New York Times article as they featured their COVID vaccine processes. In
addition, our iHP Corporate Service team treated one of four fill lines in a
For 2022 and beyond TOMI expects growth in SteraMist Custom Engineered
Systems (CES) bids and the manufacturing and implementation of these fully
automated decontamination systems. The first CES system was completed in 2016
for
Hospital-Healthcare
The SteraMist® line of products, specifically the SteraMist® Surface Unit and
SteraMist® Total Disinfection Cart, are our main solutions to aid our
Our team of technicians and representatives train, maintain, and service capital
equipment throughout the world for our
28
Table of Contents
TOMI anticipates this study will assist in the expansion of current HealthCare
customers to follow the model of Gila River Health Care.
TOMI Service Network
The TOMI Service Network, or TSN, is an expansive network consisting of
professionals throughout
The TOMI Service Network (TSN) division is addressing the cleaning protocols
that have changed permanently due to the COVID-19 pandemic, and our network is
expected to play a significant role in facilitating and maintaining these
protocols throughout
Our SteraPak release is an important factor for this market that we will increase the new member onboarding. Current members are showing interest in purchasing the SteraPak to expand their current SteraMist offerings.
Food Safety
Food Safety presents significant potential as an opportunity for substantial
growth with continued product research and compliance testing. With the food
safety industry in
TOMI continues to work with premium companies in testing and validating SteraMist® technology in the Food Safety and seed industries. In 2022, we look to make further progress in enhancing brand awareness by promoting and marketing this division. We are receiving an increase in inquiries within the Food Safety division directly from these efforts.
With the global population explosion, we anticipate an increase in the demand
for a mechanical way to disinfect our food supply. Every day there are news
articles around the world pertaining to the contamination of food supply. The
many published articles that the
SteraMist will deliver more consistent and quicker results in all areas of our food supply- From Farm to Market, Processing to packaging and Storage to delivery. We plan on pursuing all these avenues. With the continued testing and need for the market coupled with our new .35% label, should make pursuing these opportunities successful. In addition, our solution and process is environmentally friendly in that the biproduct of SteraMist is only oxygen and humidity. We have our solution listed on OMRI and labeled as organic. Most disinfectants leave residue on furniture, objects, and foods. SteraMist does not leave any chemical residue on any surface. We have a very low carbon footprint, if any.
Commercial
Our Commercial division includes but is not limited to use sites such as aviation, airports, police and fire, prisons, manufacturing companies, automobile, military, cruise ships, shipping ports, preschool education, primary and secondary schools, colleges including dormitories, all modes of public and private transportation, regulatory consulting agencies, retail, housing and recreation, and of course emergency preparedness for counties and cities to use SteraMist® throughout their community.
29
Table of Contents
Interest in SteraMist disinfection within the commercial division remains high. The SteraPak is a popular product for this division because customers are looking for a more cost-effective solution compared to the current disinfectants on the market. As quick and mobile disinfection solution is preferred in this industry, we believe that SteraPak will generate substantial customer interest and create sales opportunities. Currently our customers are purchasing our SteraPak in all of our divisions to provide quick disinfection throughout various sites in their facilities.
Business Highlights and Recent Events
Revenues:
Total revenue for the three months ended
SteraMist product-based revenues for the three months ended
Our service-based revenue for the three months ended
Our domestic revenue for the three months ended
Internationally, our revenue for the three months ended
We continue to see positive signs in the marketplace with our customers and
prospective customers which has contributed to our growth in our reportable
revenue for the first quarter and bolstered our current sales pipeline. During
the first quarter we received approximately
We believe that we possess the best technologies in the world in the disinfection and decontamination space. The COVID-19 pandemic has provided us with the opportunity and motivation to implement a clear strategy to develop and manufacture additional products to add to our portfolio. In addition, we continue to move our BIT technology as a standard in disinfection and decontamination globally, which we believe will lead to increased market share, profitability, and capability strength. Our products are an environmentally friendly solution and process which address the concerns of sustainability. Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic results of other disinfectants.
Dangerous pathogens still exist and will exist long after we recover from this
pandemic. While
30
Table of Contents
2022 Events:
On
On
On
On
As conferences and tradeshows are reopening in 2022 companies to exhibit live, TOMI will be attending multiple shows across the country. It is critical for TOMI to perform live demonstrations to showcase the difference between our SteraMist iHP technology and our competitors. TOMI looks forward to making a large impact with live demonstrations of SteraMist disinfection technology throughout our multiple divisions.
On
On
Research Studies and Publications:
The
We continue to pursue acceptance of the additional 1% hydrogen peroxide label
with the
Partner Indoor Environmental Solutions and Consultants, or
TOMI has once again partnered with
31
Table of Contents
Received great preliminary biotoxin iHP inactivation data against Ricin A Chain
by a
Bio-Risk Decontamination and Restoration owner
As previously discussed, TOMI has engaged
We have participated in a large multi-year federal funded study, known as the "SHIELD study" that compares hospital manual cleaning to a SteraMist® mechanical cleaning. Preliminary results collected by the current hospitals in the study is showing a decrease in the transference of pathogens resulting in HAIs and Clostridium difficile infections in the rooms that used SteraMist® for their terminal clean, as compared to the rooms that have been manually cleaned. Sufficient data has been collected to complete the study in 2021, and we expect that data to be provided to the examiners with a published paper to soon follow.
Registrations & Intellectual Property (IP):
Our portfolio includes more than twenty (20) Utility
Patent applications worldwide for both method and system claims on
SteraMist® BIT™, either published or undergoing prosecution. In 2021, we were
granted utility patents in
We have submitted utility patent applications in multiple countries, including
Our products are sold around the world under various brand names and trademarks. We consider our brand names and trademarks to be valuable in the marketing of our products. As of today, we have over two hundred trademarks, (word and/or logo) registered or pending across the globe. TOMI registers marks in eight (8) classes of specification of goods and services: Class 1 for Chemicals for Treating Hazardous Waste, Class 5 for Disinfectants, All-Purpose for Hard Surfaces and for Treating Mold, Class 7 for Handheld Power Operated Spraying Machines, Class 11 for Sterilizers for Medical Use and Air Purification, Class 35 for Business Consultation and Management Services, Class 37 for General Disinfecting Services, Class 40 for Chemical Decontamination and Manufacturing Services, and Class 41 for Providing Education Training and information related to biological and bacterial decontamination services.
32
Table of Contents
Financial Operations Overview
Our financial position as of March 31, 2022 and December 31, 2022 , respectively,
was as follows:
March 31, 2022
Unaudited December 31, 2021
Total shareholders' equity $ 13,288,000 $ 13,595,000
Cash and cash equivalents $ 5,330,000 $ 5,317,000
Accounts receivable, net $ 2,500,000 $ 1,965,000
Inventories $ 5,100,000 $ 4,743,000
Prepaid expenses $ 456,000 $ 344,000
Vendor Deposits $ 315,000 $ 289,000
Other Receivables $ 164,000 $ 236,000
Current liabilities $ 3,069,000 $ 1,816,000
Long-term liabilities $ 837,000 $ 861,000
Working Capital $ 10,797,000 $ 11,077,000 During the three months ended
· Net cash provided from operations of approximately$27,000 . · Customer deposits received of approximately$607,000 .
Results of Operations for the three months ended
For The Three Months Ended
March 31, Change
2022 2021 $ %
Revenue, Net $ 2,309,000 $ 2,073,000 $ 236,000 11 %
Gross Profit 1,421,000 1,235,000 186,000 15 %Total Operating Expenses (1) 2,081,000 2,745,000 (664,000 ) -24 % Income (Loss) from Operations (660,000 ) (1,510,000 ) 850,000
-56 %
Total Other Income (Expense) - (1,000 ) 1,000 NM
Provision for Income Taxes - - - NM
Net Income (Loss) $ (660,000 ) $ (1,511,000 ) 851,000 -56 %
Basic Net Income (Loss) per
share $ (0.03 ) $ (0.09 ) $ 0.06 -63 %
Diluted Net Income (Loss) per
share $ (0.03 ) $ (0.09 ) $ 0.06 -63 %
(1) Includes $352,000 and $228,000 in non-cash equity compensation expense for
the three months ended March 31, 2022 and 2021, respectively.
(2) NM - Not Meaningful
Sales and Revenue
Total revenue for the three months ended
As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic subsides, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities.
33
Table of Contents
Net Revenue
Product and Service Revenue
For The Three Months Ended
March 31, Change
2022 2021 $ %
SteraMist Product $ 1,886,000 $ 1,661,000 $ 225,000 14 %
Service and Training 423,000 412,000 11,000 3 %
Total $ 2,309,000 $ 2,073,000 $ 236,000 11 %
SteraMist product-based revenues for the three months ended
Our service-based revenue for the three months ended
Revenue byGeographic Region For The Three Months Ended March 31, Change 2022 2021 $ % United States$ 1,879,000 $ 1,804,000 $ 75,000 4 % International 430,000 269,000 161,000 60 % Total$ 2,309,000 $ 2,073,000 $ 236,000 11 %
Our domestic revenue for the three months ended
Internationally, our revenue for the three months ended
Cost of Sales
For The Three Months Ended
March 31, Change
2022 2021 $ %
Cost of Sales $ 888,000 $ 838,000 50,000 6 %
Cost of sales was
Professional Fees
For The Three Months Ended
March 31, Change
2022 2021 $ %
Professional Fees $ 191,000 $ 173,000 $ 18,000 10 %
34
Table of Contents
Professional fees are comprised mainly of legal, accounting, and financial consulting fees.
Professional fees were
Depreciation and Amortization
For The Three Months Ended
March 31, Change
2022 2021 $ %
Depreciation and Amortization
Depreciation and amortization were approximately
Selling Expenses
For The Three Months Ended
March 31, Change
2022 2021 $ %
Selling Expenses $ 341,000 $ 474,000 $ (133,000 ) -28 %
Selling expenses for the three months ended
Research and Development
For The Three Months Ended
March 31, Change
2022 2021 $ %
Research and Development $ 37,000 $ 196,000 $ (159,000 ) -81 %
Research and development expenses for the three months ended
Consulting Fees
For The Three Months Ended
March 31, Change
2022 2021 $ %Consulting Fees$ 63,000 $ 106,000 $ (43,000 ) -41 %
Consulting fees were
35
Table of Contents
General and Administrative Expense
For The Three Months Ended
March 31, Change
2022 2021 $ %
General and Administrative $ 1,367,000 $ 1,712,000 $ (345,000 ) -20 %
General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs, equity compensation and bad debt expense.
General and administrative expense was
Other Income and Expense
For The Three Months Ended
March 31, Change
2022 2021 $ %
Interest Expense - (1,000 ) 1,000 NM
Other Income (Expense) $ - $ (1,000 ) $ 1,000 NM
Interest expense was
Liquidity and Capital Resources
As of
In
For the three months ended
36
Table of Contents
A breakdown of our statement of cash flows for the three months ended
For the three months ended
March 31,
2022 2021
Net Cash Provided By (Used) in Operating Activities
$ (14,000 ) $ (28,000 ) Net Cash Provided by Financing Activities: $ - $ - Operating Activities
Cash provided by operating activities for the three months ended
Investing Activities
Cash used in investing activities for the three months ended
Financing Activities
Cash provided by financing activities for three months ended
Liquidity
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;
· global response to the outbreak of COVID-19 Pandemic;
· expansion into new territories and markets; and
· timing of orders from distributors.
We could incur operating losses and an increase of costs related to the continuation of product and technology development, sales expense as we continue to grow our sales teams, inventory as we continue to ensure we have products needed and geographic presence, tooling capital expenditures as we ramp up and streamline our production and administrative activities including compliance with the Sarbanes-Oxley Act of 2002 Section 404.
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 global revenue in all verticals;
· continue research and development and add new products to our "Stera"
product line;
· source alternative lower-cost suppliers;
· expansion of international distributors; and
· continued growth in all of our verticals.
We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources.
37
Table of Contents
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.
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
Revenue Recognition
We recognize revenue in accordance with
We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above.
Title and risk of loss generally pass to our customers upon shipment. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from Customers.
Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products.
Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services.
Costs to Obtain a Contract with a Customer
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses.
38
Table of Contents
Contract Balances
As of
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.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with
Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that
are observable or corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market
activity and that are significant to the value of the assets or
liabilities.
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. All these items were determined to be Level 1 fair value measurements.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments.
39
Table of Contents
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents includes cash on hand, held at financial institutions and other liquid investments with original maturities of three months or less. At times, these deposits may be in excess of insured limits.
Accounts Receivable
Our accounts receivable are typically from credit worthy customers or, for certain international customers, are supported by pre-payments. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances for potential credit losses as deemed necessary. We have a policy of reserving for doubtful accounts based on our best estimate of the amount of potential credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods.
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
We recognize a right-of-use ("ROU") asset and lease liability for all leases with terms of more than 12 months, in accordance with ASC 842. We utilize the short-term lease recognition exemption for all asset classes as part of our on-going accounting under ASC 842. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease.
As a lessee, we utilize the reasonably certain threshold criteria in determining which options we will exercise. Furthermore, our lease payments are based on index rates with minimum annual increases. These represent fixed payments and are captured in the future minimum lease payments calculation. In determining the discount rate to use in calculating the present value of lease payments, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.
We have also elected the practical expedient to not separate lease and non-lease components for all asset classes, meaning all consideration that is fixed, or in-substance fixed, will be captured as part of our lease components for balance sheet purposes. Furthermore, all variable payments included in lease agreements will be disclosed as variable lease expense when incurred. Generally, variable lease payments are based on usage and common area maintenance. These payments will be included as variable lease expense when recognized.
Capitalized Software Development Costs
In accordance with ASC 985-20 regarding the development of software to be sold, leased, or marketed we expense 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.
40
Table of Contents
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 condensed consolidated statement of operations at the date of sale. Our manufacturers assume the warranty against product defects 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.
Net Income (Loss) Per Share
Basic net income or (loss) per share is computed by dividing our net income or (loss) by the weighted average number of shares of common stock outstanding during the period presented. Diluted income or (loss) per share is based on the 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 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 and is recognized as expense over the requisite service period.
On
On
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
41
Table of Contents
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 months ended
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In
Recently adopted accounting pronouncements
In
42
Table of Contents© Edgar Online, source
