Business Context and Reporting Period
TOMI Environmental Solutions, Inc. (TOMI) filed its Form 10-Q for the quarterly period ended September 30, 2010. The company operates as a global green surface-air decontamination and infectious disease control provider, utilizing Hydrogen Peroxide misters, UV Ozone generators, and UVGI technologies. In July 2010, TOMI established a 55% owned subsidiary, TOMI-Singapore, to expand operations in Asia. The company is classified as a smaller reporting company and a shell company is not applicable.
Key Financial Metrics
| Metric | Q3 2010 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|
| Net Revenues | $16,267 | $305,277 | $427,562 |
| Gross Profit | $15,099 | $175,701 | $313,873 |
| Net Income (Loss) | $208,008 | $(997,287) | $16,586,252 |
| Net Income (Loss) Attributable to Company | $205,857 | $(999,438) | $16,442,005 |
| Cash and Cash Equivalents (End of Period) | $0 | $0 | $1,548,433 |
| Total Assets | $226,130 | $226,130 | $4,202,991 |
| Total Liabilities | $1,513,997 | $1,513,997 | $1,685,563 |
| Stockholders' Equity (Deficiency) | $(1,287,867) | $(1,287,867) | $2,517,428 |
| Working Capital | $(1,506,877) | $(1,506,877) | $(1,665,095) |
Liquidity and Debt: The company reported zero cash and cash equivalents as of September 30, 2010. Current liabilities totaled $1,509,739, including $952,239 in accrued officer compensation and $52,871 in convertible notes payable. The company has a significant stockholders' deficiency of approximately $1.29 million.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues for the nine months ended September 30, 2010, decreased to $305,277 from $427,562 in the prior year period. Management attributes this to a strategic shift from direct service provision to a licensing and royalty model.
- Profitability Volatility: While the company reported a net loss of $999,438 for the nine months ended September 30, 2010, it reported a net income of $208,008 for the quarter. This quarterly income was driven primarily by a non-cash gain of $902,500 from the rescission of an acquisition of Adtec (reversal of R&D expense). Conversely, the prior year's nine-month income of $16.5 million was driven by a non-cash compensation credit of approximately $18.3 million related to equity issuance amendments.
- Asset Liquidation: Total assets plummeted from $4.2 million to $226,130. This was largely due to the liquidation of restricted investments ($3.56 million) used to redeem Series B Preferred Stock and the reversal of the Adtec acquisition assets.
- Cash Flow: Operating activities used $279,174 in cash for the nine months ended September 30, 2010. Investing activities provided $3.68 million primarily from the liquidation of investments, while financing activities used $3.41 million due to the redemption of Series B Preferred Stock and common stock.
Guidance, Outlook, and Risks
Going Concern: The filing explicitly states that the company's existence is dependent on management's ability to develop profitable operations and resolve liquidity problems. The company has negative working capital and has not generated positive cash from operations, raising substantial doubt about its ability to continue as a going concern.
Outlook and Strategy: TOMI plans to fund operations through licensing arrangements, debt financing, and equity sales. The company aims to be the "Global Green Leader in Surface-Air Decontamination." Recent developments include:
- L-3 Communications Partnership: On November 12, 2010, TOMI signed a term sheet for an exclusive license to distribute L-3 Communications' SteraMist products in the Middle East, Singapore, Thailand, and Hungary, as well as select U.S. businesses.
- International Expansion: Operations in Singapore have begun, with sales reported in October 2010 to the UAE.
Risks and Contingencies:
- Liquidity Risk: Immediate need for additional capital; inability to raise funds could force curtailment of operations.
- Convertible Debt: The company holds convertible notes with variable conversion prices (42% discount), creating significant dilution risk. Subsequent events noted conversions of $6,000 notes into shares at prices as low as $0.0304.
- Accrued Compensation: Significant accrued wages to the CEO ($952,239) pose a liability risk.
- Legal: The company settled a lawsuit in August 2010 by issuing 300,000 shares. Management believes no other legal proceedings will have a material adverse effect.
Investor Verification Checklist
- Cash Position: Verify the company's current cash balance and immediate access to liquidity, given the $0 balance reported in the filing.
- Debt Conversion Terms: Review the specific terms of the convertible notes (8% interest, 42% discount conversion) to assess potential dilution impact on existing shareholders.
- L-3 Communications Agreement: Confirm the execution of the definitive agreement following the November 2010 term sheet and the associated sales milestones required to maintain the license.
- Accrued Liabilities: Monitor the status of the $952,239 in accrued officer compensation and the plan for settlement.
- Going Concern Status: Assess the feasibility of the company's plan to raise capital via equity or debt to sustain operations beyond the current period.