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 March 31, 2012

 

or

 

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

 

For the transition period from _____ to _____

 

Commission file number 000-09908

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Florida	59-1947988
(State or other jurisdiction of	(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 May 15, 2012, the registrant had 68,612,997 shares of common stock outstanding.

 

 

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2012
TABLE OF CONTENTS
		Page
PART I -	FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS	F-1
ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18
ITEM 4	CONTROLS AND PROCEDURES	18
PART II -	OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	20
ITEM 1A	RISK FACTORS	20
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	20
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20
ITEM 5	OTHER INFORMATION	20
ITEM 6	EXHIBITS	20

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

TOMI Environmental Solutions, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
		March 31, 2012		December 31, 2011
		(Unaudited)
Current Assets:
Cash and Cash Equivalents		$                 62,510		$                       -
Miscellaneous Receivable		7,562		10,569
Prepaids Expenses		8,512		4,950
Total Current Assets		78,584		15,519
Property and Equipment - net		49,137		29,313
Other Assets:
Intangible Assets, net		77,772		80,549
Security Deposits		500		500
Total Other Assets		78,272		81,049
TOTAL ASSETS		$             205,993		$             125,881
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Cash Overdraft		$                       -		$                   1,309
Accounts Payable and Accrued Expenses		212,835		290,527
Accrued Officer's Compensation		25,000		20,000
Notes Payable - Current Portion		-		2,157
Loan payables - Officer		113,908		81,468
Total Current Liabilities		351,743		395,461
Long-term Liabilities:
Convertible Debenture Payable, net of discount of $167,126 and $73,398 at March 31, 2012
and December 31 , 2011, respectively		7,874		1,602
Total Liabilities		359,617		397,063
COMMITMENTS AND CONTINGENCIES		-		-
Stockholders' Deficiency:
Cumulative Convertible Series A Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 510,000 shares issued and outstanding at March 31, 2012 and December 31, 2011		5,100		5,100
Cumulative Convertible Series B Preferred Stock, $1,000 stated value/ 7.5% cumulative dividend, 4,000 shares authorized; none issued and outstanding at March 31, 2012 and December 31, 2011		-		-
Common Stock, $.01 par value, 200,000,000 shares authorized; 66,335,283 and 64,629,033 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		663,353		646,290
Additional Paid-in Capital		11,127,769		10,934,799
Accumulated Deficit		(11,949,846)		(11,857,371)
Total Stockholders' Deficiency		(153,624)		(271,182)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY		$             205,993		$             125,881
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

TOMI Environmental Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
		For the Quarter Ended March 31, 2012		For the Quarter Ended March 31, 2011
Net Revenues		$                         65,229		$                        147,974
Cost of Sales		31,743		105,122
Gross Profit		33,486		42,852
Costs and Expenses:
Professional Fees		83,596		66,180
Other General and Administrative Expenses		46,803		362,399
Debt Extinguishment		(43,900)
Total Costs and Expenses		86,499		428,579
Loss from Operations		(53,013)		(385,727)
Other Expenses:
Amortization of Debt Discount		(6,272)
Finance charges related to convertible debt		(23,995)
Interest Expense		(9,195)		(3,192)
Total Other Expenses		(39,462)		(3,192)
Net Loss		$                      (92,475)		$                    (388,919)
Loss attributable to common stockholders
Net Loss		$                      (92,475)		$                    (388,919)
Preferred stock dividend		-		-
Loss Attributable to Common Stockholders		(92,475)		(388,919)
Non-Controlling Interest		-		4,171
Loss Attributable to Common Stockholders After Non-Controlling Interest		$                      (92,475)		$                    (393,090)
Net Loss per Common Share - Basic and Diluted		$                          (0.00)		$                          (0.01)
Weighted Average Common Shares Outstanding - Basic and Diluted		64,851,482		54,668,398
The accompanying notes are an integral part of these condensed consolidated financial statements

 

TOMI Environmental Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
	For the Quarter Ended		For the Quarter Ended
	March 31, 2012		March 31, 2011
OPERATING ACTIVITIES:
Net Loss attributable to the Company	$                (92,475)		$               (393,090)
Add: Net loss attributable to non-controlling interest	-		4,171
Net Loss	(92,475)		(388,919)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	8,299		25,160
Amortization of debt discount	6,272		-
Finance charges in connection with convertible debt	23,995		-
Common stock and options issued for services	21,038		207,177
Amortization of deferred compensation	-		18,281
Changes in operating assets and liabilities:
(Increase) Decrease in prepaid expenses and other assets	(3,562)		2,862
Decrease in miscellaneous receivable	3,007		-
Increase (Decrease) in accounts payable and accrued expenses	(42,692)		71,068
(Decrease) in customer deposits	-		(53,940)
Net cash used in operating activities	(76,118)		(118,311)
INVESTING ACTIVITIES:
Purchase of equipment	(25,346)		(1,016)
Net cash used in investing activities	(25,346)		(1,016)
FINANCING ACTIVITIES:
Cash Overdraft	(1,309)		-
Proceeds from sale of common stock	35,000		63,750
Proceeds from Loans Payable	32,440		32,122
Proceeds from Convertible Note Payable	100,000		-
Payments of Loan Payables	-		(1,412)
Payments of Notes Payable	(2,157)		(1,942)
Net Cash Provided by Financing Activities	163,974		92,518
Effect of exchange rate change	-		269
Increase( decrease) in cash and cash equivalents	62,510		(26,540)
Cash and cash equivalents at beginning of period	-		61,179
Cash and cash equivalents at end of period	$                  62,510		$                  34,639
Cash paid during the period for:
Interest expense	$                    3,026		$                    3,192
Income tax	-		-
The accompanying notes are an integral part of these consolidated financial statements

TOMI Environmental Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
		For the Quarter Ended		For the Quarter Ended
		March 31, 2012		March 31, 2011
Supplemental Disclosures of Cash Flow Information:
Non Cash Financing Activities:
Forgiveness of compensation - officer	$	-	$	700,269
Common stock issued as consideration for accrued compensation - officer	$	-	$	366,000
Common stock issued as consideration for accrued expenses	$	3,000	$	14,875
Accrued expenses applied for option exercise	$	-	$	1,000
Payment of accrued expenses by former director applied to additional paid in capital	$	27,000	$	-
The accompanying notes are an integral part of these condensed consolidated financial statements

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: DESCRIPTION OF BUSINESS

 

TOMI Environmental Solutions, Inc. is a global decontamination and infectious disease control company, providing green energy-efficient environmental solutions for indoor surface decontamination through sales and licensing of our premier platform of Hydrogen Peroxide aerosols, Ultra-Violet Ozone Generators and Ultra-Violet Germicidal Irradiation ("UVGI") products and technologies.

 

Our products are designed to service a broad spectrum of commercial structures including medical facilities, office buildings, hotel and motel rooms, schools, restaurants, meat and produce processing facilities, military barracks, and athletic facilities. Our products and services have also been used in single-family homes and multi-unit residences.

In July 2010, the Company established TOMI Environmental Solutions-Singapore Pte, Ltd. ("TOMI-Singapore"), a subsidiary with an ownership interest of 55% and began operations in Singapore. In November 2011 the Company disposed of TOMI Singapore.

 

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The Company had limited revenues during the year ended December 31, 2011 and the quarter ended March 31, 2012. The Company has not been able to generate positive cash from operations for the years ended December 31, 2011 and the quarter ended March 31, 2012. In addition, for the three months ended March 31, 2012 the Company incurred a net loss of $92,475 and at March 31, 2012, the Company has a stockholders’ deficiency of $153,624 and a working capital deficiency of $273,159. These factors raise substantial doubt about the Company's ability to continue as a going concern.

 

The Company plans on funding operations and liquidity needs from licensing arrangements, debt financing and sales of its common stock and notes convertible into common stock. There can be no assurance that additional funds required for continued operations during the next year or thereafter will be generated from our operations.

 

Should the Company seek additional funds from external sources such as debt or additional equity financings or other potential sources, there can be no assurance that such funds will be available on terms acceptable to the Company or that they will not have a significant dilutive effect on the Company's existing stockholders. The inability to generate cash flow from operations or to raise sufficient capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business.

 

Accordingly, the Company's existence is dependent on management's ability to develop profitable operations and resolve its liquidity problems. The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 unaudited condensed consolidated interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2011 and notes thereto which are included in the Form 10-K previously filed with the SEC on March 30, 2012. 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 Environmental Solutions, Inc. (a Florida Corporation) (TOMI-Florida), its wholly owned subsidiary, TOMI Environmental Solutions, Inc. (a Nevada Corporation) (TOMI-Nevada) and through December 31, 2011 its 55% owned subsidiary, TOMI Environmental Solutions-Singapore Pte, Ltd. (TOMI-Singapore). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable, fair values of financial instruments, intangible assets, useful lives of intangible assets and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Reclassification of Accounts

 

Certain reclassifications have been made to prior-year comparative financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or financial position.

 

 TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Fair Value Measurements

 

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

 

Level 1 Quoted prices in active markets for identical assets or liabilities.

 

Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or corroborated by observable market data or substantially the full term of the assets or liabilities.

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the value of the assets or liabilities.

 

The Company's financial instruments include cash and equivalents, accounts receivable, other current assets, accounts payable and accrued expenses. All these items were determined to be Level 1 fair value measurements.

 

The carrying amounts of cash and equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments. The recorded value of long-term 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. Amounts held at financial institutions did not exceed federally insured limits at March 31, 2011.

 

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.

 

Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets

 

The Company reviews its property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible 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 have made no material adjustments to our long-lived assets in any of the periods presented.

 

Intangible assets with definite lives are amortized over their estimated useful lives of 10 years.

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 loss per common share is the same as basic loss per share, as the effect of potentially dilutive securities (Series A Preferred Stock, options, convertible debt and warrants: 5,065,000 and 570,000 shares at March 31, 2012 and 2011 respectively) would be antidilutive.

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 to customers, and allowance, and other adjustments will be provided for in the same period the related sales are recorded.

 

Share-based Compensation

 

We account for stock-based compensation in accordance with FASB ASC 718, Compensation - Stock Compensation. Under the provisions of FASB ASC 718, stock- based compensation cost is estimated at the grant date based on the award's fair value and is recognized as expense over the requisite service period. The Company currently has one active stock-based compensation plan, TOMI Environmental Solutions, Inc. Stock Option and Restricted Stock Plan (the "Plan"). The Plan calls for the Company through a committee of its Board of Directors, to issue up to 2,500,000 shares of restricted common stock or stock options. The Company generally issues grants to its employees, consultants, and board members. Stock options are granted with an exercise price equal to the closing price of its common stock on the date of grant with a term no greater than 10 years. Generally, stock options vest over two to four years. Incentive stock options granted to shareholders who own 10% or more of the Company's outstanding stocks are granted at an exercise price that may not be less than 110% of the closing price of the Company's common stock on the date of grant and have a term no greater than five years. At the date of grant, the Company determines the fair value of the stock option award and recognizes compensation expense over the requisite service period, which is generally the vesting period of the award. The fair value of the stock option award is calculated using the Black-Scholes option-pricing model. As of March 31, 2012, the Company has 80,000 options outstanding and 1,122,750 common shares issued under the Plan.

 

Debt Discount

 

The Company follows the authoritative guidance for accounting for debt discount and valuation of detachable warrants. The Company recognized the value of detachable warrants issued in conjunction with issuance of the convertible Debenture note. The Company valued the warrants using the Black-Scholes pricing model. The Company recorded the warrant relative fair value as an increase to additional paid-in capital and discount against the related debt. The discount attributed to the value of the warrants is amortized over the term of the underlying debt.

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

Advertising and Promotional Expenses

 

The Company expenses advertising costs in the period in which they are incurred. For the quarter ended March 31, 2012 and 2011, advertising and promotional expenses totaled approximately $0 and $321, respectively.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. The Company's adoption of this updated guidance was not significant to our consolidated financial statements.

 

In February 2010, the FASB issued updated guidance related to subsequent events. As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements; however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures. This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial position or results of operations.

 

 

 

 

 

 

 TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 3: PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		March 31, 2012		December 31, 2011
		(Unaudited)
Furniture and fixture		$                    18,937		$                    18,937
Equipment		102,861		102,861
Vehicles		88,687		88,687
Demonstration Equipment		25,346		-
		235,831		210,485
Less: Accumulated depreciation		186,694		181,172
		$ 49,137		$ 29,313

 

 

Depreciation was $5,522 and $22,382 for the three months ended March 31, 2012 and 2011, respectively.

 

 

NOTE 4: INTANGIBLE ASSETS

 

Definite life intangible assets consist of the following:

 

		March 31, 2012		December 31, 2011
		(Unaudited)
Intellectual property and trademarks		$         111,100		$         111,100
Less: Accumulated Amortization		33,328		30,551
		$           77,772		$           80,549

 

The Company’s definite life intangible assets are being amortized over their estimated useful lives of ten years. Amortization expense was $2,777 and $ 2,778 for the quarters ended March 31, 2012 and 2011, respectively.

 

 

 TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 5: NOTES AND LOANS PAYABLE

 

Convertible Notes Payable

 

On November 21, 2011, we sold a $75,000 convertible promissory note bearing interest at 10% per annum and maturing on December 31, 2016. The note is convertible at any time, contains various default provisions and the conversion price is initially $0.05 per share. After June 30, 2012, the conversion price will at the end of each month adjust to the lower of the current conversion price or 110% of that month’s volume weighted average price as reported by Bloomberg subject to being no lower than $0.005 per shares. Accordingly, a derivative instrument will be established at that time. The purchaser of the Note also received 375,000 warrants to acquire common shares. The warrants expire on December 31, 2017 and have an initial exercise price which is $0.05 per share and can adjust lower in the same manner as the accompanying convertible note, thereby becoming a derivative instrument at that time.

 

These warrants and note were valued at $89,999 using the Black-Scholes pricing model with the following assumptions: expected volatility 327%; expected dividend -0-; expected term 6.12 years; and risk free rate .25%.

 

The Company recorded a deferred debt discount in the amount of $75,000 and finance charge of $14,999. The deferred debt discount was recorded as a reduction of the carrying amount of the convertible debt and an addition to paid-in capital. The finance charges were recognized in the current period. Amortization of the debt discount was $3,556 for the quarter ended March 31, 2012.

 

In February 20, 2012 we sold a $100,000 convertible promissory note bearing interest at10% per annum and maturing December 31, 2015. The note is convertible at any time and the conversion price is initially $0.05 per share. After August 30, 2012, the conversion price will at the end of each month adjust to the lower of the current conversion price or 110% of that month’s volume weighted average price as reported by Bloomberg subject to being no lower than $0.005 per shares. The purchaser of the Note also received 600,000 warrants to acquire common shares. The warrants expire on December 31, 2017 and have an initial exercise price which is $0.05 per share and can adjust lower in the same manner as the accompanying convertible note, thereby becoming a derivative instrument at that time.

 

These warrants and note were valued at $123,995 using the Black-Scholes pricing model with the following assumptions: expected volatility 309%; expected dividend -0-; expected term 5.87 years; and risk free rate .25%.

 

The Company recorded a deferred debt discount in the amount of $100,000 and finance charge of $23,995. The deferred debt discount was recorded as a reduction of the carrying amount of the convertible debt and an addition to paid-in capital. The finance charges were recognized in the current period. Amortization of the debt discount was $2,716 for the quarter ended March 31, 2012.

 

Loans Payable- Officer

 

Loans payable to the Company’s CEO bear interest at 5% per annum and are payable on demand. Included in loans payable at March 31, 2012 is accrued interest of $3,903.

 

 TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 6: SHAREHOLDERS' EQUITY

 

The Company's Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of any authorized but unissued or unreserved shares of preferred stock in series and at the time of issuance, determine the rights, preferences and limitations of each series. The holders of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of the common stock. Furthermore, the board of directors could issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of the common stock.

 

Convertible Series A Preferred Stock

 

The Company has authorized 1,000,000 shares of Convertible Series A Preferred Stock, $0.01 par value. At March 31, 2012 and December 31, 2011, there were 510,000 shares issued and outstanding. The Series A Convertible Preferred Stock is convertible at the rate of one share of common stock for one share of Preferred A stock.

 

Common Stock

 

The Company has authorized 200,000,000 shares of common stock, par value $0.01. At March 31, 2012 and December 31, 2011, there were 66,335,283 and 64,629,033 shares issued and outstanding, respectively.

 

During the quarter ended March 31, 2012, the Company sold an aggregate of 925,000 shares of common stock for $35,000.

 

During the quarter ended March 31, 2012, the Company issued 181,250 shares of common stock valued at $5,438 to Harold Paul for legal services rendered and 500,000 shares of common stock valued at $15,000 to another attorney for legal services rendered.

 

During the quarter ended March 31, 2012 the Company issued 100,000 shares of common stock valued at $3,000 to a former director in connection with payment of accrued liabilities.

 

Stock Options

 

The Company issued a total of 20,000 options valued at $600 to one director in January 2012. The options have an exercise price of $0.03 and a fair market value of $0.03 per option. The options expire on January 2022. The options were valued using the Black-Scholes model using the following assumptions: volatility – 322%; dividend yield - 0%; zero coupon rate .25% and a life of 10 years. The following table summarizes stock option as of March 31, 2012:

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

		March 31, 2012
		Number of		Weighted Average
		Options		Exercise Price
Outstanding, January 1, 2012		60,000		$                       1.42
Granted		20,000		.03
Exercised		-		-
Outstanding, March 31, 2012		80,000		$                      1.07

Options outstanding and exercisable by price range as of March 31, 2012 were as follows:

 

Outstanding Options			Exercisable Options
Range	Number	Average Weighted Remaining Contractual Life in Years	Number	Weighted Average Exercise Price
$2.10	40,000	7	40,000	$2.10
$0.05	20,000	6	20,000	$0.05
$0.03	20,000	9	20,000	$0.03

 

 

NOTE 7. RELATED PARTY

 

In February 2011, the Company entered into a new employment agreement with its CEO that provides for a base salary of $20,000, subject to CPI adjustments, incentive performance bonuses equal to 12% of the Company's annual GAAP earnings for the years 2011 through 2015 and discretionary bonuses, as well as expense reimbursements and certain employee benefits. The agreement terminates December 31, 2015.

 

As of March 31, 2012, the Company has accrued $25,000 for unpaid wages under the employment agreement.

 

 

NOTE 8. DEBT EXTINGUISHMENT

 

During the quarter ended March 31, 2012 a vendor of the Company forgave indebtedness in the amount of $43,900 in exchange for certain of the Company’s test equipment that has no carrying value on the Company’s books.

 

 

TOMI ENVIRONMENTAL SOLUTIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

 

 

NOTE 9. COMMITMENTS AND CONTINGENCIES

 

None.

 

 

NOTE 10. SUBSEQUENT EVENTS

 

In April 2012 we issued 46,945 shares of common restricted stock in exchange for services rendered.

 

In April 2012, we sold 2,230,769 shares of common restricted stock for proceeds of $95,000 to two investors.

 

 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.

 

General

Surface and air remediation and environmental solutions to treat viruses and resistant bacteria is a multi-billion dollar industry. TOMI Environmental Solutions, Inc. is positioned as a global decontamination and infectious disease control company, providing green energy-efficient environmental solutions for indoor surface decontamination through sales and licensing of our premier platform of Hydrogen Peroxide aerosols, Ultra-Violet Ozone Generators and Ultra-Violet Germicidal Irradiation ("UVGI") products and technologies.

 

Our effort to combat bacterial and viral outbreaks along with hospital infection control was recently enhanced with the addition of our ability to distribute a newly developed line of fixed and portable units that utilizes hydrogen peroxide misting for a cost-effective method to control the spread of infectious diseases including neutralizing pathogens from bio-terrorism attacks. Healthcare associated infections are the fourth leading cause of death in the United States, costing the healthcare system approximately $40 Billion annually. Ten percent of inpatients contract infections from the hospital resulting in more than 2 Million illnesses and over 100,000 deaths. According to most published studies generic hospital cleaning procedures leave between 30-60% of microorganisms depending upon the process. TOMI's products safely and effectively kill 99.9999% of all known pathogens. In comparison to its competitors, our SteraMist product has a higher kill level, leaves no reisdue and a shorter operating time.

 

The products which we distribute and those that we own the manufacturing rights are designed to service a broad spectrum of commercial structures including medical facilities, office buildings, hotel and motel rooms, schools, restaurants, meat and produce processing facilities, military barracks, and athletic facilities. We have also used these products and services in single-family homes and multi-unit residences.

 

We commenced our planned principal operations in the second quarter of 2009. Since 2008, we began to implement our business plan by acquiring the related intellectual property and/or the distribution rights for the Hydrogen Peroxide aerosols, Ultra-Violet ozone Generators, and the UVGI (Ultra Violet Germicidal Irradiation) system that are at the core of our plan.

 

We have also opened two service hubs in Southern California and New York/New Jersey.

 

We also intend to generate and support research on other air remediation solutions including hydroxyl radicals and other Reactive Oxygen Species (“ROS”) and to form business alliances with major remediation companies, construction companies and corporations specializing in disaster relief along with expanding our sales in North America, Europe, the Middle East and the Far East.

 

We continue to pursue complementary businesses in manufacturing ROS related products, testing labs and other indoor air treatment and maintenance products.

 

During the first quarter of 2010 the company completed the sale of its equipment to its licensee partner in New Your City and its alliance partner Rolyn in Rockville, Maryland. The company also successfully trained approximately 43 technicians for those respective companies.

 

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.

 

The Company began sales to international locations during the third quarter of 2010. In February 2012 the Company entered into a Sales and Distribution Agreement covering Latin America and the Caribbean and sold its first Steramist unit in Latin America in March 2012.

 

In April 2012 we completed our first sale in Panama arising from this new agreement. We also made continued aerosol solution sales under our ongoing program with Sinai Hospital in Baltimore, MD.

 

Business Outlook

 

TOMI's business growth objective is to be "The Global Leader in Decontamination and Infectious Disease Control” by developing and acquiring a premier platform of Hydrogen Peroxide aerosols, UV Ozone Generators and other green UVGI products and technologies. We also intend to generate and support research on other air remediation solutions including hydroxyl radicals and other Reactive Oxygen Species (“ROS”) and to form business alliances with major remediation companies, construction companies and corporations specializing in disaster relief along with expanding our sales in North America, South America, Central America, Europe, the Middle East and the Far East.

 

We continue to pursue complementary business opportunities in manufacturing ROS (Reactive Oxygen Species)-related products, testing labs and other indoor air treatment and maintenance products.

 

Management believes that these contacts will foster critical relationships and convince more customers that TOMI Environmental Solutions will improve homeland security and infectious disease control within indoor environments.

 

Also during the third quarter of 2010, TOMI rescinded its stock purchase agreement with Adtec and reversed its 19% holding in Adtec due to a patent infringement law suit from L-3 Communications, a major U.S. defense contractor that raised legal issues about Adtec’s ownership of the intellectual property. TOMI has received its stock back.

 

On November 12, 2010, TOMI signed a term sheet it received from L-3 Communications setting forth the terms for a license /partnership agreement between L-3 Communications Holding, Inc., a Delaware corporation and its subsidiary Binary Ionization, Inc., a Delaware corporation, or any subsidiaries thereof ("BII") and TOMI Environmental Solutions, Inc. ("TOMI"), a Florida corporation for the sale of BII's product the SteraMistMobile Control Unit with the detachable applicator (the "gun"), the SteraMist Room Decontamination Unit, and the associated consumables (the "Product").

 

 

 

Critical Accounting Policies and Estimates

 

Refer to our Form 10-K filed with SEC on March 30, 2012.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. The Company's adoption of this updated guidance was not significant to our consolidated financial statements.

 

In February 2010, the FASB issued updated guidance related to subsequent events. As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements; however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures. This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial position or results of operations.

 

 

Results of Operations for the Three Months March 31, 2012 Compared to the Three Months Ended March 31, 2011

 

During the quarter ended March 31, 2012, we had total revenue of $65,229 as compared to total revenue of $147,974 for the quarter ended March 31, 2011. This decrease in revenue is primarily attributable to our shift in our primary product line from ozone generating equipment to our platform of hydrogen peroxide aerosols and our change in focus from an air remediation company to a full service decontamination control company.

 

Our net loss from operations for the quarter ended March 31, 2012 was $53,013 as opposed to a net loss for the quarter ended March 31, 2011 of $385,727, a decrease of $332,714. The substantial change was due to a reduction in general and administrative expenses consisting of the elimination of management and consulting fees.

 

Liquidity and Capital Resources

 

The condensed consolidated financial statements contained in this Interim Report have been prepared on a "going concern" basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have an immediate and urgent need for additional capital. For the reasons discussed herein, there is a significant risk that we will be unable to continue as a going concern, in which case, you would suffer a total loss of your investment in our company.

 

We plan on funding operations and our liquidity needs from licensing and sales arrangements, structured similarly to our current Licensing and Sales Agreement that have profit margins from sale of equipment, licensing of equipment, and recurring income from solution sales.

 

We also intend to continue to raise equity capital through the sale of restricted stock and short-term notes convertible into common stock.

 

Our liquid assets consist of cash and cash equivalents.

 

Contractual Obligations

 

None.

 

Off-Balance Sheet Arrangements

 

None.

 

 

 

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 March 31, 2012.

 

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 months ended March 31, 2012.

 

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not a party to any material proceedings or threatened proceedings as of the date of this filing.

 

ITEM 1A. RISK FACTORS.

 

See discussion contained in 10-K filed with the Commission on March 30, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

In April 2012 we issued 46,945 shares of common restricted stock in exchange for services rendered.

 

In April 2012, we sold 2,230,769 shares of common restricted stock for proceeds of $95,000 to two investors.

 

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: May 15, 2012

 

By: /s/ Halden Shane

------------------------------------------------

Halden Shane

Principal Executive Officer

Principal Financial and Accounting Officer