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EX-31 - TOMI Environmental Solutions, Inc.tomi-10q_093009ex311.txt
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EX-31 - TOMI Environmental Solutions, Inc.tomi-10q_093009ex312.txt



                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended September 30, 2009

                                      or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934

     For the transition period from _____ to _____

Commission file number 000-09908

                        TOMI Environmental Solutions, Inc.
                          (Formerly The Ozone Man, Inc.)
________________________________________________________________________________
              (Exact name of registrant as specified in its charter)

             Florida                                      59-1947988
________________________________________________________________________________
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

             9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212
________________________________________________________________________________
               (Address of principal executive offices) (Zip Code)

                                 (800) 525-1698
________________________________________________________________________________
               (Registrant's telephone number, including area code)

                                 Not Applicable
________________________________________________________________________________
              (Former name, former address and former fiscal year,
                          if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes [X]  No [ ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 16, 2009 had 35,189,480 shares of common stock outstanding.
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2009 TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 ITEM 4. CONTROLS AND PROCEDURES 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 14 ITEM 1A. RISK FACTORS 15 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 5. OTHER INFORMATION 15 ITEM 6. EXHIBITS 15 1
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TOMI Environmental Solutions, Inc. CONDENSED CONSOLIDATED BALANCE SHEET Sept 30, 2009 December 31, 2008 ------------------ ----------------- (Unaudited) ASSETS ------ Current Assets: --------------- Cash and Cash Equivalents $ 1,548,433 $ 367,697 Investments - Restricted, at cost 3,250,000 - Accounts Receivable 155,882 4,590 Prepaids & Other Current Assets 8,547 18,710 ------------------ ----------------- Total Current Assets 4,962,862 390,997 ------------------ ----------------- Property and Equipment - net 329,810 372,990 ------------------ ----------------- Other Assets: ------------- Intangible Assets, net 105,545 111,100 Security Deposits 7,497 6,620 ------------------ ----------------- Total Other Assets 113,042 117,720 ------------------ ----------------- TOTAL ASSETS $ 5,405,714 $ 881,707 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: -------------------- Accounts Payable and Accrued Expenses $ 161,598 $ 175,327 Accrued Officers Compensation 708,004 546,536 Notes Payable - Current Portion 47,485 43,976 Obligations to be settled through issuance of common stock 268,500 - Dividends Payable on Preferred Convertible Stock 144,247 90,667 ------------------ ----------------- Total Current Liabilities 1,329,834 856,506 Long-term Liabilities: ---------------------- Non-Current Portion of Notes Payable - Other 30,303 66,365 ------------------ ----------------- Total Liabilities 1,360,137 922,871 ------------------ ----------------- COMMITMENTS AND CONTINGENCIES - - Stockholders' Equity (Deficit): ---------------------------------- Cumulative Convertible Series A Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 510,000 shares issued and outstanding at September 30, 2009 and December 31, 2008. 5,100 5,100 Cumulative Convertible Series B Preferred Stock, $1,000 stated value, 7.5% cumulative dividend, 4,000 shares authorized, 3,250 shares issued and outstanding at September 30, 2009 and none at December 31, 2008. 3,250,000 - Common Stock, $.01 par value, 75,000,000 shares authorized; 34,893,980 and 34,474,515 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively. 348,939 344,744 Additional Paid-in Capital 8,573,994 22,758,193 Accumulated Deficit (6,562,950) (23,149,201) Deferred compensation (1,569,506) - ------------------ ----------------- Total Stockholders' Equity (Deficit) 4,045,577 (41,164) ------------------ ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 5,405,714 $ 881,707 ================== ================= The accompanying notes are an integral part of these consolidated financial statements. 2
TOMI Environmental Solutions, Inc. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For the For the For the For the Nine Months Nine Months Quarter Ended Quarter Ended Ended Ended Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008 -------------- -------------- -------------- -------------- Net Revenues $ 218,176 $ 3,086 $ 427,562 $ 3,086 Cost of Sales 54,586 - 113,689 - -------------- -------------- -------------- -------------- Gross Profit 163,590 3,086 313,873 3,086 -------------- -------------- -------------- -------------- Costs and Expenses: ------------------- Professional Fees 46,984 886,489 583,099 1,047,065 Other General and Administrative Expenses 225,568 172,993 882,326 461,803 Management and Consulting Fees 284,651 - (17,743,256) - -------------- -------------- -------------- -------------- Total Costs and Expenses 557,203 1,059,482 (16,277,831) 1,508,868 -------------- -------------- -------------- -------------- Income (Loss) from Operations (393,613) (1,056,396) 16,591,704 (1,505,782) -------------- -------------- -------------- -------------- Other Income (Expenses): ------------------------ Financing Costs - - - (14,444) Interest income 593 - 2,109 - Interest expense (2,310) (1,109) (7,561) (1,109) -------------- -------------- -------------- -------------- Total Other Expense (1,717) (1,109) (5,452) (15,553) -------------- -------------- -------------- -------------- Net Income (Loss) $ (395,330) $ (1,057,505) $ 16,586,252 $ (1,521,335) ============== ============== ============== ============== Income (Loss) attributable to common stockholders Net Income (Loss) $ (395,330) $ (1,057,505) $ 16,586,252 $ (1,521,335) Preferred stock dividend 61,483 - 144,247 - -------------- -------------- -------------- -------------- Income (Loss) atributable to common stockholders $ (456,768) $ (1,057,505) $ 16,442,005 $ (1,521,335) ============== ============== ============== ============== Net Income (Loss) per Common Share - Basic $ (0.01) $ (0.03) $ 0.47 $ (0.05) ============== ============== ============== ============== Net Income (Loss) per Common Share - Diluted $ (0.01) $ (0.03) $ 0.46 $ (0.05) ============== ============== ============== ============== Weighted Average Common Shares Outstanding - Basic 34,870,268 31,509,607 34,765,150 32,462,702 ============== ============== ============== ============== Weighted Average Common Shares Outstanding - Diluted 34,870,268 31,509,607 35,925,150 32,462,702 ============== ============== ============== ============== The accompanying notes are an integral part of these consolidated financial statements. 3
TOMI Environmental Solutions, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the Nine For the Nine Months Ended Months Ended Sept 30, 2009 Sept 30, 2008 -------------- -------------- OPERATING ACTIVITIES -------------------- Net Income (Loss) $ 16,586,252 $ (1,521,335) Adjustments to reconcile net income (loss) to net cash (used) by operating activities: Depreciation and amortization 69,176 22,272 Amortization of Debt Discount - 14,444 Common and Preferred Stock Issued for Services 300,655 902,000 Amortization of Deferred Compensation 569,302 - Management and Consulting Fees (18,312,558) - Changes in Operating Assets and Liabilities: (Increase) in Security deposits (876) (4,540) (Increase) in Accounts Receivable (151,292) (884) Increase (Decrease) in Prepaids and other current assets 10,163 (3,284) Increase in Accounts Payable and Accrued Liabilities 612,908 146,124 -------------- -------------- Net Cash (Used) in Operating Activities (316,270) (445,203) -------------- -------------- INVESTING ACTIVITIES -------------------- Purchase of investments (3,250,000) - Capital Expenditures (20,442) (245,540) Purchase of Intangible Assets - (111,100) -------------- -------------- Net Cash (Used) in Investing activities (3,270,442) (356,640) -------------- -------------- FINANCING ACTIVITIES -------------------- Proceeds from the Sale of Common Stock 1,750,000 1,299,401 Expense of private placement (200,000) - Purchase of cancelled Common Stock - (7,000) Proceeds from sale of Cumulative Convertible Series B Preferred Stock 3,250,000 - (Payments) Proceeds of Note Payable - Other (Net) (32,553) 41,080 -------------- -------------- Net Cash Provided by Financing Activities 4,767,447 1,333,481 -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,180,736 531,638 -------------- -------------- CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 367,697 3,095 -------------- -------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,548,433 $ 534,733 ============== ============== The accompanying notes are an integral part of these consolidated financial statements. 4
TOMI Environmental Solutions, Inc. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the Nine Months For the Nine Months Ended Sept 30, 2009 Ended Sept 30, 2008 ------------------- ------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest expense $ 7,561 $ 1,109 =================== =================== Income taxes $ - $ - =================== =================== Supplemental Disclosures of Cash Flow Information: -------------------------------------------------- Non Cash Financing Activities: Issuance of Common Stock for payment of accounts payable $ 46,670 $ - =================== =================== Forgiveness of Accrued Compensation to Related Party $ 150,000 $ - =================== =================== Dividends payable on preferred stock - Series B $ 144,247 $ - =================== =================== Return of Overissuance of Shares Related to Recapitalization $ - $ 425 =================== =================== Reversal of dividends payable on preferred stock - Series A $ (90,667) $ - =================== =================== Change in stated value on preferred stock - Series A $ (12,744,900) $ - =================== =================== The accompanying notes are an integral part of these consolidated financial statements. 5
TOMI Environmental Solutions, Inc. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: DESCRIPTION OF BUSINESS TOMI Environmental Solutions, Inc. (formerly "The Ozone Man, Inc.") (The "Company" or "TOMI") provides green, energy-efficient environmental solutions for infectious disease control and air remediation through inspection, air quality testing, training and treatment using our premier platform of UV Ozone generation services, products and technologies. Our focus to combat Hospital infection control was recently enhanced with the addition of (MRA) TM - Magnetic Resolution Activation product line as an additional cost effective method to control the spread of infectious disease and can also be used after a biological attack of our homeland security. Our products and services cover a broad spectrum of commercial structures including office buildings, medical facilities, hotels, single homes, multi-unit residences and schools. Our products and services have also been used in restaurants and dairies. During the second quarter of 2009, the Company exited the status of development stage enterprise. The Company commenced its planned principal operations and earned revenues during the quarter ended June 30, 2009. The Company changed its name to TOMI Environmental Solutions, Inc. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. These consolidated interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2008 and notes thereto which are included in the Form 10-K previously filed with the SEC on March 31, 2009. The Company follows the same accounting policies in the preparation of interim reports. Principles of Consolidation The accompanying financial statements include the accounts of TOMI (a Florida Corporation) (Parent) and its wholly owned subsidiary, The Ozone Man, Inc. (a Nevada Corporation). All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassification of Accounts Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year and prior period presentation. These reclassifications had no effect on previously reported results of operations or financial position. 6
Concentration of Credit Risk The Company maintains cash balances at several financial institutions. Accounts at institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Account balances that exceed this limit are not insured. The restricted investment, at cost, is subject to market fluctuations. The non- restricted cash in the amount of $1,551,562 and restricted investment are held in an investment fund and are not insured. Income (Loss) Per Share The computation of income (loss) per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents. For the three months ended September 30, 2009, diluted loss per common share is the same as basic loss per common share because the effect of any potentially dilutive securities outstanding (convertible Series of stock, options and warrants) would be anti-dilutive and has therefore, been excluded from the computation. For the nine months ended September 30, 2009, there were 510,000 shares of Convertible Series A Preferred Stock outstanding at a conversion rate of one common shares for every preferred share (510,000 common shares) and 3,250 Series B Convertible Preferred Stock at a conversion rate of two hundred common shares for every preferred share (650,000 common shares). There were no common stock equivalents outstanding during the three and nine months ended September 30, 2008. The common stock issued and outstanding has been included for all presented periods with respect to the effect of the recapitalization. Revenue Recognition For revenue from services and product sales, the Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB No. 104), which superseded Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) service has been rendered or delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the selling prices of the services rendered or products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowance, and other adjustments will be provided for in the same period the related sales are recorded. 7
NOTE 3: PROPERTY AND EQUIPMENT Property and equipment consisted of the following: September 30, 2009 December 31, 2008 ------------------ ----------------- (Unaudited) ------------------ Furniture and fixture $ 15,557 $ 13,339 Equipment 191,096 172,872 Vehicles 219,766 219,766 ------------------ ----------------- 426,419 405,977 Less: Accumulated depreciation 96,609 32,987 ------------------ ----------------- $ 329,810 $ 372,990 ================== ================= Depreciation was $21,823 and $63,622 for the three months and nine months ended September 30, 2009, respectively. Depreciation expense was $10,085 and $22,272 for the three and nine months ended September 30, 2008, respectively. NOTE 4: INTANGIBLE ASSETS On February 23, 2008 the Company purchased from S.C.O. Medallion Healthy Homes LTD all intellectual property for the Medallion methodology system for $60,000. On April 18, 2008 the Company purchased intellectual property from Air Testing and Design, Inc. for $50,000. The property purchased includes patents, trademarks, literature, drawings, schematics, vendor lists and rights to purchase and resell equipment and other proprietary and intellectual property associated with the ozone generators manufactured by the seller. The Company began amortizing the intangible assets during the second quarter of 2009 over the estimated useful life of ten years. The Company recorded amortization expense of $2,775 and $5,555 during the three and nine months ended September 30, 2009, respectively. These assets are tested for impairment annually or if certain circumstances indicate a possible impairment may exist in accordance with SFAS 142, Goodwill and Other Intangible Assets. The carrying value of these assets is assessed at least annually and an impairment charge is recorded if appropriate. As of September 30, 2009 there was no impairment. NOTE 5: LONG TERM DEBT The Company finances five field service vehicles using notes with various terms that are recorded in the financial statements as notes payable. The notes expire at various times through March 2012 and have interest rates from 8.8% to 10.1% per annum and payable in monthly installments of $4,448 including principal and interest and due by March, 2012. The remaining notes payable amount will mature through 2012 as follows: 2009 - $11,423, 2010 - $45,896, 2011 - $16,153, 2012 - $4,316. Each note is secured by the vehicle acquired. September 30, 2009 December 31, 2008 ------------------ ----------------- (Unaudited) ------------------ Total Vehicle Notes $ 77,788 $ 110,341 Less: Current Portion 47,486 43,996 ------------------ ----------------- Long term Portion $ 30,302 $ 66,345 ================== ================= 8
NOTE 6: SHAREHOLDERS' EQUITY On February 27, 2009 the Company completed the sale of 350,000 shares of its common stock and 3,250 shares of Series B Convertible Preferred Stock for per share purchase prices of $5.00 and $1,000, respectively. Gross proceeds from the sale were $5,000,000. The Company incurred costs of $200,000 in connection with the sale. Under the terms of the Subscription Agreement, the Company created a new class of preferred stock as Series B Convertible Preferred Stock ("Series B"). The Company is authorized to issue 4,000 shares of its new Series B preferred stock. The Series B stock is convertible into 200 shares of the Company's common stock for every share of Series B stock. The Series B preferred has a stated value of $1,000 per share, carries an annual cumulative dividend of 7.5% and is senior in liquidation preference to all other classes of stock. As of September 30, 2009, the Company accrued $144,247 for these dividends. The Company Board of Directors' amended the Company's articles of incorporation on March 31, 2009 to reduce the par value per share for its Cumulative Convertible Series A Preferred Stock ("Series A Preferred Stock") to $0.01 from $25 and to reduce the conversion rate to common stock to one from five. The effect of the change in par value has been reflected in the consolidated financial statements. All share and per share data have been retroactively adjusted to reflect the recapitalization. On August 15, 2009, the Company canceled the agreement dated July 6, 2009 between TOMI and industry third parties. In November 2008 the Company's Board of Directors approved the 2008 Stock Option and Restricted Stock Plan (the "Plan"). The Stockholders of the Company approved the Plan in May 2009. The Plan's purpose is to provide an incentive to key Employees, Directors and Consultants of the Company and to increase their interest in the Company's welfare and to aid in attracting and retaining Employees, Directors and Consultants of outstanding ability. The aggregate number of shares that may be issued under the Plan is 2,500,000 shares. NOTE 7: RELATED PARTY On November 16, 2008, the Company entered into an employment agreement with its President and CEO, Dr. Halden Shane, ("Employment Agreement"). As of September 30, 2009, the Company has accrued $708,004 for unpaid wages under the employment agreement. On September 18, 2009, the Board of Directors accepted an offer by Dr. Halden Shane to forego $150,000 in unpaid wages. The foregone compensation has been recorded as an increase to additional paid-in capital. On September 18, 2009, the Board of Directors granted 75,000 Shares of the Company's common stock, valued at $146,250, to Dr. Halden Shane. The common shares were valued based on the closing price per common share at the date of grant. The common shares vest after two years of employment from the date of grant. The fair market value of the unvested shares has been recorded as deferred compensation at September 30, 2009. On December 15, 2008 the Board of Directors approved the issuance of 510,000 shares of the Company's Series A Preferred Stock to Tiger Management, LLC, a limited liability company wholly owned by the Company's CEO. The shares were issued for management services performed by Tiger Management, LLC in 2007 and 2008 and were convertible into five shares of the Company's common stock at the holder's option. The Company recorded a non-cash expense of $20,400,000 in management and consulting fees during the year ended December 31, 2008, for services rendered based on the fair value of the underlying common stock. The fair value was determined using the price of the stock on the date the board approved the issuance. On March 31, 2009, the Company and Tiger Management, LLC amended the management service agreement to include the vesting period for the Series A Preferred Stock issued. The vesting period was established as June 2007 through December 31, 2010 and until the Company had reached at least one million dollars in annual gross revenue. The Series A Preferred Stock issued to the CEO was also amended to remove dividends; therefore, dividends accrued of $90,667 at December 31, 2008 were reversed during the three months ended March 31, 2009. 9
The Company's Board of Directors' amended its articles of incorporation on March 31, 2009 to reduce the conversion rate to common stock for its Series A Preferred Stock from five shares to one and to reduce the par value per share of Series A Preferred Stock to $0.01 from $25. As a result, of both the establishment of a vesting period and the change in conversion rate, the Company has recorded $18,312,558 in compensation credit for equity issuance during the first quarter of 2009. The Company had previously recorded $20,400,000 in other general and administrative expenses during the year ended December 31, 2008. At September 30, 2009, the Company has recorded $1,423,256 in deferred compensation related to the vesting feature and this deferred amount will be amortized over the remaining 15 month period. Amortization of deferred compensation was $284,651 and $569,302 for the three and nine months ended September 30, 2009, respectively. The fair value was determined using the price of the stock on the date the board approved the amendment to the agreement. All share and per share data have been retroactively adjusted to reflect the recapitalization. NOTE 8: COMMITMENTS AND CONTINGENCIES The Company is subject to a legal proceeding and claim which has arisen in the ordinary course of its business. This action, when finally concluded and determined, will not in the opinion of management, have a material adverse effect upon the financial position, liquidity and results of operations of the Company. NOTE 9: SUBSEQUENT EVENTS The Company has evaluated subsequent events through November 14, 2009. On October 16, 2009, the Company entered into a material definitive agreement to purchase nineteen (19%) percent of the issued and outstanding member interests of Advanced Disinfectant Technologies LLC ("Adtec"). Pursuant to the agreement the Company purchased the stated interest in Adetec for consideration of 190,000 shares of its common stock valued at $807,500 based on the closing price of the Company's common stock of $4.25 on October 16, 2009. The agreement provides a stipulation that the Company intends to purchase the remaining member interests or Adtec's assets subject to an appraisal to determine the final purchase price. No closing date has been set for the intended transaction. On November 9, 2009, the company obtained an executed proposal from Degmor Industries, a environmental remediation firm based in New York City with expertise in facility restoration after disaster related and environmental contamination. The proposal grants Degmor licensing rights for New York and the purchase of two commercial scale equipment packages designed to treat infectious disease and air contaminants for large and small spaces. TOMI will issue 100,000 common shares priced at $200,000 to Degmor and will also receive a down payment of $250,000, for a total of $450,000. TOMI will be entitled to revenue sharing on future projects using this equipment. 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION In this report references to "TOMI" "we," "us," and "our" refer to TOMI Environmental Solutions, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "project," or "continue" or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Overview of the Business TOMI Environmental Solutions, Inc. (formerly "The Ozone Man, Inc.") (The "Company" or "TOMI") provides green, energy-efficient environmental solutions for infectious disease control and air remediation through inspection, air quality testing, training and treatment using our premier platform of UV Ozone generation services, products and technologies. Our focus to combat Hospital infection control was recently enhanced with the addition of (MRA) TM - Magnetic Resolution Activation product line as an additional cost effective method to control the spread of infectious disease and can also be used after a biological attack of our homeland security. Our Board of Directors' amended our articles of incorporation and changed our corporate name to TOMI Environmental Solutions from "The Ozone Man, Inc" on March 31, 2009. Our products and services cover a broad spectrum of commercial structures including office buildings, medical facilities, hotel , single homes, multi-unit residences and schools. Our products and services have also been used in restaurants and dairies. We commenced our operations in the fourth quarter of 2007 and since 2008 we began to implement our business plan by acquiring for cash both the intellectual property and methodology that forms the basis of our ozone treatment system that is at the core of our plan. We have also opened five service hubs around the country in California, New York/New Jersey, Florida and North Carolina with service vans and certified, trained personnel and we expect to continue the expansion of our facilities. During the second quarter of 2009, the Company exited the status of development stage enterprise because the Company commenced its planned principal operations and because the Company earned revenues during the quarter ended June 30, 2009. On October 16, 2009, the Company entered into a material definitive agreement to purchase nineteen (19%) percent of the issued and outstanding member interests of Advanced Disinfectant Technologies LLC ("Adtec"). Pursuant to the agreement the Company purchased the stated interest in Adetec for consideration of 190,000 shares of its common stock valued at $807,500 based on the closing price of the Company's common stock of $4.25 on October 16, 2009. The agreement provides a stipulation that the Company intends to purchase the remaining member interests or Adtec's assets subject to an appraisal to determine the final purchase price. No closing date has been set for the intended transaction. On November 9, 2009, the company obtained an executed proposal from Degmor Industries, a leading environmental remediation firm based in New York City with expertise in facility restoration after disaster related and environmental contamination. Degmor has been servicing a broad array of clients in the New York metro area for more than twenty years. The proposal grants Degmor licensing rights for New York and the purchase of two commercial scale equipment packages designed to treat infectious disease and air contaminants for large and small spaces. TOMI has received $200,000.00 as an investment from Degmor and will receive a down payment of $250,000.00, for a total of $450,000.00. TOMI will be entitled to revenue sharing on future projects using this equipment. Further, the company and Degmor are negotiating a license agreement in addition to the proposal. 11
Business Outlook TOMI's business growth strategy is to be "Your Professional Infectious Disease Control & Air Remediation Company" by developing and acquiring a premier platform of UV Ozone generation services, products and technologies. We also strive to generate top-notch research on other air remediation solutions including hydroxyl radicals and to form business alliances with major construction companies and corporations specializing in disaster relief. We continue to pursue complementary businesses in manufacturing ozone-related products, testing labs and other indoor air treatment and maintenance products. During the second quarter of 2009, the Company began generating revenue related to commercial projects. TOMI continues to pursue revenue from multiple sources and anticipates that our revenue stream will grow more diverse in the coming quarters. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our 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 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. Income (Loss) Per Share The computation of income (loss) per share is based on the weighted average number of common shares outstanding during the periods presented. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding plus the dilutive effect of common stock equivalents. Revenue Recognition For revenue from services and product sales, the Company recognized revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB No. 104), which superseded Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) service has been rendered or delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the selling prices of the services rendered or products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowance, and other adjustments will be provided for in the same period the related sales are recorded. 12
Intangible Assets We report intangible assets in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets which requires than an intangible asset with indefinite useful economic life not be amortized, but instead be separately tested for impairment using a fair-value approach. The evaluation of possible impairment of intangible assets is affected by factors such as changes in economic conditions and changes in operating performance. These factors could cause us to recognize a material impairment charge as we assess the ongoing expected cash flows and carrying amounts of intangible assets. New Accounting Pronouncements In May 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 165 ("FASB 165"), Subsequent Events. This statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This statement was adopted on June 30, 2009 and the adoption of this statement did not have a significant impact on our financial statements. Results of Operations for the Three and Nine Months Ended September 30, 2009 Compared to the Three and Nine Months Ended September 30, 2008: We began our planned principal operations during the second quarter of 2009. Revenue for the three and nine months ended September 30, 2009 totaled $218,176 and $427,562, respectively. Revenue for the three and nine months ended September 30, 2008 totaled $3,086 and $3,086, respectively. Revenue and operating results for the two periods are not comparable because the Company began its planned principal operations during the second quarter of 2009 and was in its development stage prior to the second quarter of 2009. Net (loss) income for the three and nine months ended September 30, 2009 was ($395,330) and $16,586,252. The net income for the nine months ended September 30, 2009 is primarily attributed to a non-cash compensatory credit element from equity issuances of $18,312,558. On March 31, 2009, the Company and Tiger Management, LLC amended the management service agreement to establish the vesting period for the Series A Preferred Stock issued. The vesting period was established to be the period June 2007 through December 31, 2010 and until the Company had reached at least one million in annual gross revenue. Our Board of Directors' amended the Company's articles of incorporation to reduce the conversion rate to common stock for its Series A Preferred Stock from five shares to one share and to reduce the par value per Series A Preferred Stock to $0.01 from $25. As a result, the Company recorded $18,312,558 in compensation credit for equity issuance during the first quarter of 2009. The Company had previously recorded $20,400,000 in non-cash other general and administrative expenses during the year ended December 31, 2008. The fair value was determined using the price of the stock on the date the board approved the amendment to the agreement. Professional and consulting fees include legal, accounting and consulting expenses. General and administrative expenses primarily include payroll and payroll related expenses, rent and depreciation. Liquidity and Capital Resources Operations and liquidity needs are funded through cash flows from equity offerings and debt. On February 27, 2009 the Company completed the sale of 350,000 shares of its common stock and 3,250 shares of Series B Convertible Preferred Stock for per share purchase prices of $5.00 and $1,000, respectively. Gross proceeds from the sale were $5,000,000. At September 30, 2009, we have an unrestricted cash balance of $1,548,433. We have a restricted investment with an original cost of $3,250,000 pursuant to the terms of the Subscription Agreement, which stipulated the use of the proceeds for merger and acquisition reserves to be used to acquire established independent providers of heating, ventilation and air conditioning ("HVAC") sales and services. No approval from the investor is required to acquire these HVAC companies. Off-Balance Sheet Arrangements None. 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. ITEM 4. CONTROLS AND PROCEDURES We have established a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls have also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We believe our disclosure controls and internal controls are effective for the three months ended September 30, 2009. We do not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We did not implement any changes in controls during the three and nine months ended September 30, 2009. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. At September 30, 2009, we were involved in a legal matter arising from the ordinary course of business. Although the ultimate resolution of this matter cannot be determined at this time, we do not believe that this matter will have a material adverse effect on our future consolidated results of operations, cash flows or financial condition. ITEM 1A. RISK FACTORS. See discussion contained in 10-K filed with the Commission on March 31, 2009. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. In October 2009, the Company issued 5,500 common shares in lieu of cash compensation and issued 190,000 common shares as consideration for an acquisition. In November 2009, the Company sold 100,000 common shares at $2 per share. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS Part I Exhibits 31.1 Principal Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification Part II Exhibits None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOMI ENVIRONMENTAL SOLUTIONS, INC. Date: November 16, 2009 By: /s/ Halden Shane ------------------------------------------------ Halden Shane Principal Executive Officer Principal Financial and Accounting Officer 1