Business Context and Reporting Period
Company: TOMI Environmental Solutions, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: TOMI provides surface and air decontamination and infectious disease control solutions, primarily through Hydrogen Peroxide misters, UV Ozone generators, and UVGI products. The company operates service hubs in Southern California and New York/New Jersey and established a subsidiary in Singapore in July 2010. The company shifted strategy in 2010 from direct service provision to licensing and selling equipment to third parties.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Revenue | $357,167 | $499,172 |
| Gross Profit | $211,871 | $298,553 |
| Net Loss | $(1,538,923) | $13,659,889 (Income) |
| Net Loss Attributable to Common Stockholders | $(1,543,179) | $13,454,204 (Income) |
| Cash and Cash Equivalents (Ending) | $61,179 | $13,126 |
| Working Capital | $(1,256,790) | $(1,256,790) (Deficiency) |
| Total Assets | $314,754 | $4,202,991 |
| Total Liabilities | $1,323,076 | $1,685,563 |
| Stockholders' Equity (Deficiency) | $(1,008,322) | $2,517,428 |
Note: 2009 Net Income was significantly inflated by a non-cash compensatory credit of $18,312,558 related to equity issuance modifications. Excluding this, 2009 represented a net loss of approximately $4.65 million.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased by approximately 28% to $357,167, attributed to a strategic shift toward licensing and equipment sales rather than direct service provision.
- Profitability Reversal: The company moved from a reported net income in 2009 to a net loss of $1.54 million in 2010. The 2009 income was largely non-cash; 2010 losses were driven by general and administrative expenses, including $1.19 million in management and consulting fees.
- Asset Reduction: Total assets dropped significantly from $4.2 million to $314,754. This was primarily due to the liquidation of a restricted investment ($3.56 million) used to redeem Series B Preferred Stock and the cancellation of the Adtec acquisition.
- Equity Deficiency: Stockholders' equity turned negative, resulting in a deficiency of $1.01 million, compared to a positive equity position in 2009.
- Going Concern: The independent auditor issued a "going concern" opinion, citing limited revenues, net losses, negative cash flow from operations, and a working capital deficiency.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management aims to be the "Global Leader in Surface-Air Decontamination." Growth strategies include expanding sales in the Middle East (UAE, Saudi Arabia, Kuwait), Europe, and the Far East. In late 2010 and early 2011, the company secured a term sheet for an exclusive license with L-3 Communications for SteraMist products and formed a joint venture in Singapore with Zera Investments.
Risks and Contingencies
- Liquidity Risk: The company has an "immediate and urgent need for additional capital." It plans to fund operations through equity sales, convertible notes, and licensing arrangements, with no assurance of success.
- Going Concern: Substantial doubt exists regarding the company's ability to continue as a going concern without additional financing.
- Competition: The industry is highly competitive with larger, better-funded competitors (e.g., BioQuell, Steris, Honeywell).
- Key Personnel: Success is heavily dependent on CEO Dr. Halden Shane, who has significant accrued unpaid compensation ($1.07 million as of year-end, partially settled via stock in subsequent events).
Unusual Items
- Adtec Rescission: The company reversed a $902,500 expense related to the rescission of a 19% interest in Adtec due to patent infringement issues.
- Series B Redemption: The company redeemed 3,250 shares of Series B Preferred Stock, utilizing proceeds from the liquidation of restricted investments.
- Stock Settlements: Significant use of stock to settle litigation ($18,000 value) and pay accrued officer compensation ($275,000 value).
Investor Verification Checklist
- Cash Runway: Verify current cash balance and immediate burn rate given the "urgent need for capital" and negative working capital.
- Debt Obligations: Confirm status of notes payable ($10,234 total) and loans payable ($23,158, including $20,658 from the CEO).
- Accrued Compensation: Verify the settlement of the $1.07 million accrued officer compensation, noting the subsequent issuance of 14 million shares to the CEO in February 2011.
- Licensing Agreements: Confirm the execution of definitive agreements with L-3 Communications and the status of the Singapore joint venture.
- Stock Dilution: Assess the impact of recent and planned equity issuances on existing shareholders, given the high volume of shares issued for services and debt settlement.