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TOMI Environmental Solutions, Inc. - Quarter Report: 2014 March (Form 10-Q)

tomz_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2014
 
or
 
o 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  þ No o
 
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 þ No o
 
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 o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
(Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
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 o No o
 
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 5, 2014, the registrant had 80,225,889 shares of common stock outstanding.
 


 
 
 
 
 
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31 , 2014
 
TABLE OF CONTENTS
 
   
Page
PART I -
FINANCIAL INFORMATION
 
     
ITEM 1
FINANCIAL STATEMENTS
5
     
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22
     
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
     
ITEM 4
CONTROLS AND PROCEDURES
28
     
PART II -
OTHER INFORMATION
 
     
ITEM 1
LEGAL PROCEEDINGS 
28
     
ITEM 1A
RISK FACTORS
28
     
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
28
     
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 
29
     
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
29
     
ITEM 5
OTHER INFORMATION
29
     
ITEM 6
EXHIBITS
29
 
 
 
2

 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements

The accompanying financial statements are unaudited for the interim periods, but include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for the fair presentation of results for the three months ended March 31, 2014.

Moreover, these financial statements do not purport to contain complete disclosure in conformity with U.S. generally accepted accounting principles and should be read in conjunction with our audited financial statements as of, and for the year ended December 31, 2013.

The results reflected for the three months ended March 31, 2014 are not necessarily indicative of the results for the entire year ending December 31, 2014.
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
 
ASSETS
           
Current Assets:
 
March 31,
2014
 (Unaudited)
   
December 31,
2013
 
Cash and Cash Equivalents
  $ 282,757     $ 706,350  
Cash – Restricted (Note 6)
    98,970       70,124  
Accounts Receivable
    485,542       805,809  
Inventories (Note 3)
    403,038       407,549  
Prepaid Expenses
    12,718       7,980  
Total Current Assets
    1,283,025       1,997,812  
                 
Property & Equipment – net (Note 4)
    271,564       164,068  
                 
Other Assets:
               
Intangible Assets – net (Note 5)
    2,934,187       3,026,564  
Deferred Financing Costs – net (Note 6)
    457,666       542,116  
Deposits
    16,947       2,543  
Total Other Assets
    3,408,801       3,571,223  
Total Assets
  $ 4,963,390     $ 5,733,103  
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
               
Current Liabilities:
               
Accounts Payable and Accrued Expenses
  $ 309,543     $ 383,349  
Accrued Interest on Convertible Notes (Note 6)
    84,567       211,194  
Accrued Officers Compensation (Note 9)
    27,000       25,000  
Common Stock to be Issued (Note 12)
    49,256       150,871  
Customer Deposits
    9,765       14,105  
Derivative Liability (Note 7)
    5,914,197       7,665,502  
Total Current Liabilities
    6,394,328       8,450,021  
                 
Convertible Notes Payable, net of discount of $4,928,590 and $5,003,558 at March 31, 2014 and December 31, 2013, respectively  (Note 6)
    145,410       70,442  
Total Long-term Liabilities
    145,410       70,442  
Total Liabilities
    6,539,738       8,520,463  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders’ Deficiency:
               
Cumulative Convertible Series A Preferred Stock; par value $0.01, 1,000,000 shares authorized; 510,000 shares issued and outstanding at March 31, 2014 and December 31, 2013
    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, 2014 and December 31, 2013
    -       -  
Common stock; par value $0.01, 200,000,000 shares authorized; 80,201,520 and 79,867,217 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively.
    802,015       798,672  
Additional Paid-In Capital
    16,979,835       15,674,958  
Accumulated Deficit
    (19,363,298 )     (19,266,090 )
Total Stockholders’ Deficiency
    (1,576,348 )     (2,787,360 )
Total Liabilities and Stockholders’ Deficiency
  $ 4,963,390     $ 5,733,103  

The accompanying notes are an integral part of the financial statements.
 
 
3

 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
   
For The Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
             
   Sales, net
  $ 273,029     $ 39,165  
   Cost of Sales
    113,845       33,370  
   Gross profit
    159,184       5,795  
                 
Operating Expenses:
               
   Professional Fees
    113,830       109,129  
   Depreciation and Amortization
    111,906       9,711  
   Selling Expenses
    61,448       5,250  
   Research and Development
    31,292       -  
   Equity Compensation Expense (Note 8)
    1,142,349       -  
   Consulting fees
    58,403       -  
   General and Administrative
    201,645       71,341  
Total Operating Expenses
    1,720,873       195,431  
Loss from Operations
    (1,561,689 )     (189,636 )
                 
Other Income (Expense):
               
   Amortization of Deferred Financing Costs
    (84,450 )     -  
   Amortization of Debt Discounts
    (74,968 )     -  
   Fair Value Adjustment of Derivative Liability
    1,751,305       -  
   Interest Expense
    (127,406 )     (3,057 )
Total Other Income (Expense)
    1,464,481       (3,057 )
                 
Net Loss
  $ (97,208 )   $ (192,693 )
                 
Loss Per Common Share
               
   Basic and Diluted
  $ (0.00 )   $ (0.00 )
                 
Basic and Diluted Weighted Average Common Shares Outstanding
    80,147,114       75,493,465  
 
The accompanying notes are an integral part of the financial statements.
 
 
4

 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(UNAUDITED)
 
   
Series A Preferred
   
Common Stock
                   
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional Paid
in Capital
   
Accumulated
Deficit
   
Total Stockholders’
Equity (Deficiency)
 
Balance at December 31, 2013
    510,000     $ 5,100       79,867,217     $ 798,672     $ 15,674,958     $ (19,266,090 )   $ (2,787,360 )
Equity based compensation
                    -       -       1,142,349       -       1,142,349  
Common stock issued for services provided
                    256,178       2,562       138,309       -       140,871  
Common stock issued for executive compensation
                    78,125       781       24,219       -       25,000  
Net loss for the three months ended March 31, 2014
                    -       -       -       (97,208 )     (97,208 )
Balance at March 31, 2014
    510,000     $ 5,100       80,201,520     $ 802,015     $ 16,979,835     $ (19,363,298 )   $ (1,576,348 )
 
The accompanying notes are an integral part of the financial statements.
 
 
 
5

 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
   
For The
 
   
Three Months Ended
 
   
March 31,
 
   
2014
   
2013
 
Cash Flow From Operating Activities:
           
  Net Loss
  $ (97,208 )   $ (192,693 )
  Adjustments to Reconcile Net loss to
               
     Net Cash Used In Operating Activities:
               
     Depreciation and Amortization
    111,906       9,711  
     Amortization of Deferred Financing Costs
    84,450       -  
     Amortization of Debt Discount
    74,968       -  
     Fair Value Adjustment of Derivative Liability
    (1,751,305 )     -  
     Equity Based Compensation
    1,142,349       -  
     Value of Equity Issued for Services
    165,872       46,532  
  Changes in Operating Assets and Liabilities:
               
     Decrease (increase) in:
               
        Accounts Receivable
    320,266       120,892  
        Inventory
    (113,897 )     -  
        Prepaid Expenses
    (4,738 )     1,246  
        Deposits
    (14,404 )     -  
     Increase (Decrease) in:
               
        Accounts Payable and Accrued Expenses
    (73,805 )     (43,427 )
        Accrued Interest
    (126,628 )     -  
        Accrued Officers Compensation
    2,000       5,000  
        Common Stock to be Issued
    (101,615 )     -  
        Customer Deposits
    (4,340 )     -  
Net Cash Used in Operating Activities
    (386,128 )     (52,739 )
                 
Cash Flow From Investing Activities:
               
  Purchase of Property and Equipment
    (8,618 )     (21,700 )
Net Cash Used in Investing Activities
    (8,618 )     (21,700 )
 
The accompanying notes are an integral part of the financial statements.
 
 
6

 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
(UNAUDITED)
 
   
For The
Three Months Ended
March 31,
 
   
2014
   
2013
 
             
Cash Flow From Financing Activities:
           
Proceeds from Loan Payable – Officer
    -       4,919  
Escrow Funds - Restricted
    -       (3,318,978 )
Escrow Liability
    -       3,318,978  
Proceeds From Issuance of Common Stock
    -       19,999  
Increase in Bond Sinking Fund
    (28,846 )     -  
Net Cash (Used In) Provided by Financing Activities
    (28,846 )     24,918  
Decrease In Cash and Cash Equivalents
    (423,593 )     (49,521 )
Cash and Cash Equivalents - Beginning
    706,351       73,424  
Cash and Cash Equivalents – Ending
  $ 282,757     $ 23,903  
                 
Supplemental Cash Flow Information:
               
Cash Paid For Interest
  $ 254,033     $ 3,057  
Cash Paid For Income Taxes
  $ 1,426     $ -  
Non-Cash Investing Activities:
               
Reclassification of demo Equipment from inventory to property and equipment
  $ 118,408     $ -  
 
The accompanying notes are an integral part of the financial statements.
 
 
7

 
 
TOMI ENVIRONMENTAL SOLUTIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As discussed in the Quarterly Report on Form 10-Q, “Company,” “we,” “us,” “our,” and “TOMI” refer to TOMI Environmental Solutions, Inc.
 
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 and outdoor surface decontamination through the sale of equipment, services and licensing of our SteraMistTM Binary Ionization Technology® (“BIT™”) hydrogen peroxide based mist and fogs.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern
 
The Company incurred net losses of approximately $97,000 and $193,000 for the three months ended March 31, 2014 and 2013, respectively. In addition, the Company had a working capital deficiency of approximately $5,111,000 and a stockholders' deficit of $1,576,000 at March 31, 2014.  Cash and cash equivalents was approximately $283,000 as of March 31, 2014.  These factors raise substantial doubt about the Company's ability to continue as a going concern. There can be no assurance that the Company will be able to raise additional capital.
 
The Company plans on funding operations and liquidity needs from the sales of its products and services, licensing arrangements, debt financing and/or 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 unaudited consolidated 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.

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein, presented in accordance with generally accepted accounting principles utilized in the United States of America (“GAAP”), and stated in U.S. dollars, have been prepared by the Company, without an audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP 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 financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2013 and notes thereto which are included in the Form 10-K previously filed with the SEC on March 25, 2014. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of TOMI Environmental Solutions, Inc. (a Florida Corporation) (TOMI-Florida), and its wholly-owned subsidiary, TOMI Environmental Solutions, Inc. (a Nevada Corporation) (TOMI-Nevada).  The Company’s 55% owned subsidiary, TOMI Environmental-China (TOMI-China), has been dormant since its formation in April 2011. All significant intercompany accounts and transactions have been eliminated in consolidation.

 
8

 
 
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.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the accompanying unaudited condensed consolidated 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 our assets and liabilities.

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, accounts payable and accrued expenses and loans payable.  All these items were determined to be Level 1 fair value measurements.

The carrying amounts of cash and equivalents, accounts receivable, accounts payable and accrued expenses approximated fair value because of the short maturity of these instruments.  The recorded value of long-term convertible debt approximates its fair value as the terms and rates approximate market rates (See also Note 6).

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.

Inventories

Inventories are valued at the lower of cost or market using the first-in, first-out (”FIFO”) method.  Inventories consist primarily of raw materials and finished goods.

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.

 
9

 

Deferred Financing Costs

The Company follows authoritative guidance for accounting for financing costs as it relates to convertible debt issuance cost.  These costs are deferred and amortized over the term of the debt period or until redemption of the convertible debentures.  Amortization of deferred financing costs amounted to approximately $84,000 for the three months ended March 31, 2014.

Income taxes

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized; in accordance with ASC guidance for income taxes. Net deferred tax benefits related to the U.S. operations have been fully reserved at March 31, 2014 and 2013. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

Loss Per Share

Basic loss per share is computed by dividing the Company’s net loss by the weighted average number of common shares outstanding during the period presented.  Diluted loss per share is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of warrants and conversions of debentures.

Potentially dilutive securities as of March 31, 2014, consisted of 17,496,552 common shares from convertible debentures, 28,625,800 common shares from outstanding warrants, 80,000 common shares from options and 510,000 common shares from convertible Series A preferred stock.  Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

Potentially dilutive securities as of March 31, 2013, consisted of 8,475,000 common shares from outstanding warrants, 330,000 common shares from options and 510,000 common shares from convertible Series A preferred stock.  Diluted and basic weighted average shares are the same, as potentially dilutive shares are anti-dilutive.

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) collectability 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 collectability 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.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“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 the 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 equity securities 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. On the date of a 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, 2014, the Company had 762,011 shares available to be issued under the Plan.

 
10

 

On February 11, 2014, the Company’s Board of Directors adopted the 2014 Stock Option Plan (the “Plan”), subject to shareholder approval, intended to attract and retain individuals of experience and ability, to provide incentive to our employees, consultants, and non-employee directors, to encourage employee and director proprietary interests in us, and to encourage employees to remain in our employ.  Each of the named executive officers is eligible for annual equity awards, which are granted pursuant to the Plan.  The Plan authorizes the grant of non-qualified and incentive stock options, stock appreciation rights and restricted stock awards (each, an “Award”). A maximum of 5,000,000 shares of common stock are reserved for potential issuance pursuant to Awards under the Plan.  As of March 31, 2014, no shares have been issued under the 2014 Stock Option Plan.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents.  The Company maintains cash balances at financial institutions which exceed the current Federal Deposit Insurance Corporation (“FDIC”) limit of $250,000 at times during the year.

The Company had sales to an aggregate of five hospitals during the current period and  two of those hospitals represented  50% of total sales for the three months ended March 31, 2014.

Long-Lived Assets Including Acquired Intangible Assets

The Company assesses long-lived assets for potential impairments at the end of each year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating long-lived assets for impairment, the Company measures recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate.  If the Company’s long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. The Company bases its calculations of the estimated fair value of its long-lived assets on the income approach. For the income approach, The Company uses an internally developed discounted cash flow model that include, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations. We have had no long-lived asset impairment charges for the three months ended March 31, 2014.

Advertising and Promotional Expenses

The Company expenses advertising costs in the period in which they are incurred. For the three months ended March 31, 2014 and 2013, advertising and promotional expenses were approximately $3,000 and $0, respectively.

Recent Accounting Pronouncements

In 2014, the FASB issued Accounting Standards Updates (“ASU”) 2014-1 through 2014-08. These updates did not have a significant impact on the financial statements.

NOTE 3: INVENTORIES
 
Inventories consist of the following:
 
   
March 31,
   
December 31,
 
   
2014
   
2013
 
Raw materials
  $ 228,695     $ 1,500  
Finished goods
    174,343       406,049  
Inventory, end of period
  $ 403,038     $ 407,549  
 
 
11

 
 
NOTE 4. PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following:

   
March 31,
   
December 31,
 
   
2014
   
2013
 
   
(Unaudited)
       
             
Furniture and fixture
  $ 22,390     $ 22,390  
Equipment
    335,855       217,672  
Computer equipment
    8,843       -  
Vehicles
    44,344       44,344  
      411,432       284,406  
Less: Accumulated depreciation
    139,868       120,338  
    $ 271,564     $ 164,068  
 
For the three months ended March 31, 2014 and 2013, depreciation was $19,529 and $9,711, respectively.

NOTE 5. INTANGIBLE ASSETS AND ASSET ACQUISITION
 
On April 15, 2013 the Company completed the acquisition of binary ionization technology and related patents and other assets consisting of personal property and inventory related to implementation of the Binary Ionization Technology related to these patents from L-3 Applied Technologies, Inc. ("L-3"). All of these assets are pledged as collateral for the convertible notes issued as described below in Note 5.

The purchase price allocation was obtained from an independent valuation firm. The following sets forth the components of the final purchase price allocation:
 
Purchase Price
     
Cash payment
  $ 3,500,000  
Warranty expense
    10,000  
Total purchase price
  $ 3,510,000  
         
Assets Purchased
       
Inventory
  $ 71,700  
Fixed assets
    150,000  
Patents
    2,848,300  
Trademarks
    440,000  
Total Assets Acquired
  $ 3,510,000  
 
The intangible assets purchased consist of Patents and Trademarks.  The patents are being amortized over the estimated remaining lives of the related patents, which is 7.7 years.  The trademarks have an indefinite life.  Amortization expense was $92,377 and $0 for the three months ended March 31, 2014 and 2013.

Definite life intangible assets consist of the following:

   
March 31,
2014
   
December 31,
2013
 
             
Intellectual property and patents and trademarks
  $ 2,959,400     $ 2,959,400  
Less: Accumulated Amortization
     465,213        372,836  
Intangible Assets, net
  $ 2,494,187     $ 2,586,564  

 
12

 
 
Indefinite life intangible assets consist of the following:

   
March 31,
2014
   
December 31,
2013
 
             
Trademarks
  $ 440,000     $ 440,000  
Total Trademarks
  $ 440,000     $ 440,000  
 
NOTE 6. CONVERTIBLE DEBT

In November 2012, the Company initiated a Private Placement offering a maximum of 240 Units of the Company’s securities at a price of $25,000 per Unit or $6,000,000. The initial closing of the offering occurred in April 2013 as the bulk of the net proceeds of the offering were to be allocated for the asset purchase from L-3 Applied Technologies, Inc., which agreement was not finalized until April 2013.  Each Unit consists of $25,000 par amount of a 10% Senior Secured Callable Convertible Promissory Note due and payable on July 31, 2015 and 37,500 warrants each of which allows the investor to purchase one share of common stock and expires on July 31, 2018.  Interest is payable on the Notes at a rate of 10% per annum, and payable on July 31st and January 31st.  The Notes are secured by the Company's intellectual property such as the Patents, royalties, receivables of the Company and all equipment except for the new equipment acquired with the proceeds from any future financing that is initially secured by this new equipment.  The Notes call for the establishment of a sinking fund.  Within 45 days of each calendar quarter 15% of the Company’s reported revenue will be deposited into the Company’s escrowed sinking fund account.

The Company sold 202.96 Units for gross proceeds of $5,074,000 and issued 7,611,000 warrants in connection with the Units.  Net proceeds amounted to $4,462,693 after expenses of offering totaling $611,307.  In addition, the placement agent received 1,014,800 warrants valued at $165,180.

The convertible notes are convertible, at the option of the note holder, into shares of our common stock at an initial conversion price of $.29 (which conversion price is subject to adjustment upon the occurrence of events specified in the Convertible Notes, including stock dividends, stock splits, certain fundamental corporate transactions, and certain issuances of common stock by the Company).

The Warrants are exercisable into shares of Common Stock (the "Warrant Shares") at an initial exercise price of $0.30 (which may be subject to certain adjustments as set forth in the Warrants). 

The Company evaluated the warrants under ASC 815-40-15 due to the exercise price being adjustable upon certain events occurring.  The company determined that the warrants are considered indexed to the Company’s own stock and thus meet the scope exception under FASB ASC 815-10-15-74 and are therefore not considered a derivative.  The estimated fair value of the warrants, which contain reset provisions, were calculated using the Monte Carlo valuation model.   The Company recorded the warrant’s relative fair value of $956,712 as an increase to additional paid in capital and a discount against the related debt.

The Convertible Notes contain a provision whereby the conversion price is adjustable upon the occurrence of certain events, including the issuance of common stock or common stock equivalents at a price which is lower than the current conversion price. Under FASB ASC 815-40-15-5, the embedded conversion feature is not considered indexed to the Company’s own stock and, therefore, does not meet the scope exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability.  The initial fair value of the embedded conversion feature was estimated at $7,316,092 and recorded as a derivative liability, resulting in an additional discount of $4,117,288 to the convertible notes and a finance charge of $3,198,804 included in the statement of operations for the year ended December 31, 2013.  The fair value of the embedded conversion feature is estimated at the end of each quarterly reporting period using the Monte Carlo model.

The debt discount is being amortized over the life of the convertible note using the effective interest method.

Inherent in the Monte Carlo Valuation model are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield.  For the Convertible Notes using a Monte Carlo model, we estimate the probability and timing of potential future financing and fundamental transactions as applicable.  The assumptions used by the Company are summarized below:
 
 
13

 
 
Convertible Notes
 
   
March 31,
2014
   
Inception
 
Closing stock price
  $ 0.34     $ 0.13-0.55  
Conversion price
  $ 0.29     $ 0.29  
Expected volatility
    175 %     185%-190 %
Remaining term (years)
    1.33       2.30-2.07  
Risk-free rate
    0.24 %     0.25%-0.43 %
Expected dividend yield
    0 %     0 %
 
Convertible notes consist of the following at March 31, 2014 and December 31, 2013:
 
   
March 31,
2014
   
December 31,
2013
 
             
Convertible notes
  $ 5,074,000     $ 5,074,000  
Initial Discount on convertible notes
    (5,074,000 )     (5,074,000 )
Accumulated amortization of discount
    145,410       70,442  
Total convertible notes, net
  $ 145,410     $ 70,442  

NOTE 7. FAIR VALUE
 
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, the following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:
 
March 31, 2014:
 
Level 3
   
Total
 
             
Derivative Instruments
  $ 5,914,197     $ 5,914,197  
 
December 31, 2013:
 
Level 3
   
Total
 
             
Derivative Instruments
  $ 7,665,502     $ 7,665,502  
 
Level 3 financial instruments consist of certain embedded conversion features. The fair value of these embedded conversion features that have exercise reset features are estimated using a Monte Carlo valuation model. The Company adopted the disclosure requirements of ASU 2011-04, “Fair Value Measurements,” during the quarter ended March 31, 2012. The unobservable input used by the Company was the estimation of the likelihood of a reset occurring on the embedded conversion feature of the Convertible Notes.  These estimates of the likelihood of completing an equity raise that would meet the criteria to trigger the reset provisions are based on numerous factors, including the remaining term of the financial instruments and the Company’s overall financial condition.
 
The following table summarizes the changes in fair value of the Company’s Level 3 financial instruments for the period ended March 31, 2014.
 
   
March 31,
2014
 
       
Balance at December 31, 2013
  $ 7,665,502  
Fair Value Adjustment of Derivative Liability
    (1,751,305 )
         
Balance at March 31, 2014
  $ 5,914,197  
 
           Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input used in the fair value measurement is the estimation of the likelihood of the occurrence of a change to the conversion price based on the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result in a higher (lower) fair value measurement.

 
14

 
 
NOTE 8. STOCKHOLDERS’ DEFICIENCY

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 such 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 our 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 our 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, 2014 and December 31, 2013, there were 510,000 shares issued and outstanding, respectively. The Convertible Series A Preferred Stock is convertible at the rate of one share of common stock for one share of Convertible Series A Preferred Stock.
 
Convertible Series B Preferred Stock

The Company has authorized 4,000 shares of Convertible Series B Preferred Stock, $1,000 stated value, 7.5% Cumulative dividend. At March 31, 2014 and December 31, 2013, there were no shares issued and outstanding, respectively.

Common Stock

During the three months ended March 31, 2014, the Company issued 19,758 shares of common stock valued at approximately $9,000 for professional services rendered. In addition, the Company issued 6,420 shares of common stock valued at $3,000 to Harold Paul, Director, as payment for legal services rendered. The Company also issued 230,000 shares to the Rolyn Companies, Inc. (“Rolyn”) for labor and services support during the three months ended December 31, 2013 (See Note 9).
 
During the three months ended March 31, 2014, the Company issued 78,125 shares as consideration for payment of accrued compensation to the CEO amounting to $25,000.

Stock Options

The Company issued 20,000 options valued at $3,000 to a director in January 2013. The options have an exercise price of $0.15 per share. The options expire in January 2023. The options were valued using the Black-Scholes model using the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 10 years.

The Company issued 20,000 options valued at $8,723 to a director in January 2014. The options have an exercise price of $0.44 per share. The options expire in January 2024. The options were valued using the Black-Scholes model using the following assumptions: volatility: 233%; dividend yield: 0%; zero coupon rate: 1.72%; and a life of 10 years.

The following table summarizes stock options outstanding as of March 31, 2014:

   
March 31, 2014
 
   
Number of Options
   
Weighted Average Exercise Price
 
Outstanding, January 1, 2014
   
60,000
   
$
1.42
 
Granted
   
20,000
     
.44
 
Exercised
   
-
     
-
 
Outstanding, March 31, 2014
   
80,000
   
$
1.17
 

 
15

 

Options outstanding and exercisable by price range as of March 31, 2014 were as follows:

Outstanding Options
   
Average
Weighted
   
Exercisable Options
 
Range
   
Number
   
Remaining
Contractual
Life in Years
   
Number
   
Weighted
Average
Exercise Price
 
                           
$ 0.05       20,000       6.77       20,000     $ 0.05  
$ 2.10       40,000       5.77       40,000     $ 2.10  
$ 0.44       20,000       9.76       20,000     $ 9.76  

Stock Warrants

The Company issued 250,000 warrants valued at $37,495 to a consultant in January 2013.  The warrants have an exercise price of $0.15 and expire in January 2018.  The warrants were valued using the Black-Scholes model with the following assumptions: volatility: 343%; dividend yield: 0%; zero coupon rate: 0.25%; and a life of 5 years.

During the year ended December 31, 2013, the Company issued 7,611,000 warrants in connection with convertible debt units and 1,014,800 warrants to the placement agent (see Note 6).  These warrants have an initial exercise price of $0.30 per share and expire July 31, 2018.

In June 2013, the Company issued 100,000 warrants with an exercise price of $.261 per share to a consultant for services.  The warrants were valued at $54,767 using the Black-Scholes model with the following assumptions: volatility, 245%; dividend yield, 0%; zero coupon rate, 0.25%; and a life of 5 years.

On September 26, 2013, the Company’s Chief Financial Officer, Christopher Chipman, was granted 300,000 warrants. The warrants have a term of five years and vest 100,000 upon the grant date, 100,000 on September 26, 2014 and 100,000 on September 26, 2015. The exercise price of the warrant is $0.77 per share based on the volume weighted average price of the Company’s common stock for the five days prior to the grant date.  If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall be deemed null and void. The Company utilized the Black-Scholes method to fair value the 300,000 warrants received by this individual totaling $200,476 with the following assumptions: volatility, 179%; expected dividend yield, 0%; risk free interest rate, 1.43%; and a life of 5 years.  For the three months ended March 31, 2014, the Company recorded approximately $17,000 in stock based compensation expense on the vested portion of these warrants. The grant date fair value of each warrant was $0.67.
 
On February 11, 2014, as part of the employment agreements entered into with its three executive officers, the Board of Directors approved the grant of 3,000,000 stock warrants to each of them as executive compensation. The warrants have a term of five years and vest as follows: 1,000,000 warrants will vest upon issuance; 1,000,000 warrants will vest as of February 11, 2015, and 1,000,000 warrants will vest as of February 11, 2016. The exercise price of the warrants is $0.30 per share based on the closing price of the Company’s common stock on the grant date of $0.32.  If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall immediately vest on termination. The Company utilized the Black-Scholes method to fair value the 3,000,000 warrants received by these individuals totaling approximately $952,000 for each executive with the following assumptions: volatility, 233%; expected dividend yield, 0%; risk free interest rate, 1.54%; and a life of 5 years. The grant date fair value of each warrant was $0.32.
 
On February 11, 2014, the Company’s Board of Directors approved the granting of 300,000 stock warrants to its CFO as incentive compensation. The warrants have a term of five years and vest as follows: 100,000 warrants will vest upon issuance; 100,000 warrants will vest as of February 11, 2015, and 100,000 warrants will vest as of February 11, 2016. The exercise price of the warrants is $0.30 per share based on the closing price of the Company’s common stock on the grant date of $0.32.  If employment is terminated, the terms of any then outstanding warrant held by the holder shall extend for a period ending on the earlier of the date on which such warrant would otherwise expire or three months after such termination of employment and the warrant shall be exercisable to the extent it was exercisable as of the date of termination of employment. Any unvested warrants shall immediately vest on termination. The Company utilized the Black-Scholes method to fair value the 300,000 warrants received by the Company’s executive totaling approximately $95,000 with the following assumptions: volatility, 233%; expected dividend yield, 0%; risk free interest rate, 1.54%; and a life of 5 years. The grant date fair value of each warrant was $0.32.
 
 
16

 

For the three months ended March 31, 2014, the Company recorded approximately $1,113,000 in stock based compensation expense on the vested portion of the warrants issued to the executives on February 11, 2014.

The following table summarizes the outstanding common stock warrants as of March 31, 2014:

   
March 31, 2014
 
         
Weighted Average
 
   
Number of Warrants
   
Exercise Price
 
Outstanding, January 1, 2014
   
19,325,800
   
$
       0.21
 
Granted
   
9,300,000
     
0.30
 
Exercised
   
-
     
-
 
Outstanding, March 31, 2014
   
28,625,800
   
$
0.24
 
 
Warrants outstanding and exercisable by price range as of March 31, 2014 were as follows:
 
Outstanding Warrants
    Average
Weighted
   
Exercisable Warrants
 
Range
   
Number
   
Remaining
Contractual
Life in Years
   
Number
   
Weighted
Average
Exercise Price
 
$ 0.01       1,575,000       3.28       1,575,000     $ 0.01  
$ 0.05       975,000       3.37       975,000     $ 0.05  
$ 0.15       7,750,000       3.55       7,750,000     $ 0.15  
$ 0.261       100,000       4.24       100,000     $ 0.261  
$ 0.30       17,925,800       4.61       11,725,800     $ 0.30  
$ 0.77       300,000       4.49       100,000     $ 0.77  

Unvested warrants outstanding as of March 31, 2014 were as follows:
 
Unvested Warrants
    Average
Weighted
 
Weighted
Average
Exercise Price
   
Number
   
Remaining
Contractual
Life in Years
 
$ 0.77       200,000       4.49  
$ 0.30       6,200,000       4.87  
 
NOTE 9.  RELATED PARTY TRANSACTIONS

Employment Agreement

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.

 
17

 
 
On February 11, 2014, the Company entered into an amended employment agreement with its CEO as well as new employment agreements with its President and COO that provide each with a base salary of $36,000 per year.  The agreements provide for an increase in the base salary to $120,000 if annual gross revenue exceeds five million and $175,000 if annual gross revenue were to exceed ten million on a calendar year basis.  Any bonuses awarded will be based upon the Company’s performance and be made at the discretion of the Board of Directors.  The CEO, President and COO will also have the right to receive expense reimbursements and certain employee benefits.  The terms of the employment agreements will be three years terminating on December 31, 2016.  The CEO’s base salary will no longer be subject to CPI adjustments and the incentive performance bonus equal to 12% of the Company’s annual GAAP earnings for the years 2011 through 2015 was removed.

Support and Service Agreement

Effective April 1, 2013 the Company entered into a Support and Service Agreement (“the Agreement”) with Rolyn Companies, Inc. (“Rolyn”) under the terms of which Rolyn will provide labor and services support.  The Agreement called for payment to Rolyn of 76,666 shares of the Company’s common stock per month as well as payment of out of pocket expenses.  This agreement was amended, effective January 1, 2014, to reduce the payment to Rolyn to 25,000 shares of the Company’s common stock per month.  All other terms and conditions of the agreement remained the same.  Either party can terminate the Agreement within 30 days written notice.  The Company has recorded approximately $30,000 and $0 support and service expense for the three months ended March 31, 2014 and 2013, respectively, and a related liability of approximately $30,000 has been recorded as common stock to be issued based on the fair value of the Company’s common stock as of March 31, 2014.  Certain officers of Rolyn were appointed officers of the Company in June and July 2013.

Engagement Agreement

On September 26, 2013, the Company entered into an engagement agreement with Christopher M. Chipman.  Pursuant to the engagement agreement, Mr. Chipman serves as our Chief Financial Officer and receives a base annual fee of at least $60,000.  On February 11, 2014, the Company’s Board of Directors approved an increase to its Chief Financial Officer’s base annual fee to at least $120,000. 

Distribution Agreement

On March 21, 2014, the Company entered into an agreement with Plascencia Universal, S. de R.L. de C.V. (“Plascencia Universal”), a Mexican company that will act as the exclusive distributor of TOMI’s products and services in Mexico. The principal of Plascencia Universal is also the broker for the Company’s insurance policies.

NOTE 10. COMMITMENTS AND CONTINGENCIES

The Company also leases 1,611 square feet of office/warehouse space in San Diego, CA for research and development purposes.  The lease payments amount to approximately $2,000 per month with expiration on May 31, 2014.

NOTE 11. CONTRACTS AND AGREEMENTS

On May 29, 2013, the Company entered into a contract manufacturing agreement with DIVIND LLC (“DivInd”) for the manufacture of the Company’s Steramist Binary Ionization Technology (“BIT”) as well as the Company’s proprietary BIT solution.  DivInd will manufacture exclusively for the Company and also provide research and development services for the Company.  The Company is currently in the process of transitioning to a new manufacturer that has more ability for capacity and is regional to the Company’s East Coast office in Rockville, MD.

In September 2013, the Company entered into a Sales and Distribution Agreement, superseding previous agreements, with TOMI Panama covering Panama, Columbia and Honduras.  The option period to extend to both Columbia and Honduras has expired.  TOMI Panama is its exclusive distributor of the Company’s products and services within the country of Panama.

NOTE 12. COMMON STOCK TO BE ISSUED

               As of March 31, 2014, the Company was obligated to issue 167,704 shares of common stock valued at approximately $49,000 primarily to certain vendors and consultants.
 
NOTE 13. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements were issued and up to the time of filing of the financial statements with the Securities and Exchange Commission.

In April 2014, the Company entered into purchase commitments with a new manufacturer for the procurement of inventory amounting to $465,000.
 
 
18

 

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

The Company was incorporated in Florida in 1979. In October 2007, the Company and its controlling shareholders entered into a definitive Agreement whereby the Company acquired 100% of the issued and outstanding common shares of The Ozone Man, Inc., a Nevada Corporation (“Ozone Nevada”). Although the Company was the legal acquirer, for accounting purposes Ozone Nevada was the surviving entity and, accordingly, the transaction has been accounted for as a reverse acquisition that was in substance a recapitalization of Ozone Nevada.

During the second quarter of 2009, the Company exited the status of development stage enterprise and commenced its planned principal operations since the Company earned revenues during the quarter ended June 30, 2009.

During August 2010, TOMI entered into negotiations with BIT Technology a division of L-3, and we began to develop applications for and distribution of the SteraMistTM equipment that currently accounts for nearly all of our revenue.

      In April 2013, we completed the acquisition of certain assets from L-3 Applied Technologies, Inc. (“L-3”) for $3,510,000. This acquired patented technology relates to a disinfection/decontamination system that applies cold plasma activation to a hydrogen peroxide based mist and fog and produces a Reactive Oxygen Species (ROS) mist and is trademarked as Binary Ionization Technology® (BITTM) which deactivates most organic compounds quickly and effectively kills viruses, bacteria, bacteria spores, molds spores, other fungi and yeast, both in the air and on surfaces. The product is environmentally friendly.

       The technology applies cold plasma activation to a low percentage hydrogen peroxide based solution to create a mist and fog which does not damage delicate medical equipment and computers. SteraMistTM (BITTM) provides a group of ROS that provides fast acting, broad-spectrum decontamination, and leaves no residue or noxious fumes. The environmentally friendly characteristics ensure safety of employees and equipment, while providing maximum decontamination efficacy to both air and surfaces.  BITTM has also been shown to effectively decontaminate weaponized biological agents like Anthrax, chemical agents such as VX, and Mustard gas when applied using properly developed protocols. A summary of BITTM capabilities can be found in the DHS “Guide for the Selection of Chemical, Biological, Radiological, and Nuclear Decontamination Equipment for Emergency First Responders” (2nd Edition, March 2007).

By acquiring this technology, TOMI now controls this innovative, patented technology and has the ability to build its client base and expand into other market segments. For example, once a hospital customer has purchased one of our portable hand-held or mobile units (or has tried our service), they have regularly reordered TOMI’s reactive solution for continued applications and have expanded their initial SteraMistTM program assuring repeat business and an ongoing revenue stream as long as the system is in use.

We believe that reducing Healthcare Associated Infections (“HAIs”), which are the fourth leading cause of death in the United States and cost the healthcare system is approximately $36 - $45 billion annually according to the Centers for Disease Control provide significant opportunities for our technology, services, and products. Statistically, it has been documented that approximately 10% of inpatients contract infections from hospitals resulting in more than 2,000,000 illnesses and over 100,000 deaths per annum. Further, it has been estimated that approximately 15% of all discharged patients are readmitted with infections, which among other things results in the healthcare facility becoming financially penalized. According to published studies, current hospital cleaning procedures leave behind between 30%-60% of microorganisms depending upon the process. These remaining surface and air pathogens increase the risk of acquiring a HAI. TOMI’s BITTM safely and effectively kills 99.9999% (a six-log kill) of all known pathogens. In comparison to most of its competitors, SteraMistTM technology has a quicker and higher kill level, leaves no residue, is green, is not effected by humidity, is not caustic, has a shorter treatment time and converts to oxygen and water which differentiates us from our competition.

 
19

 

Our SteraMistTM and BITTM technology and TOMI’s related service platform are currently being used in a broad spectrum of industries including:

  
medical facilities
  
tissue labs
  
office buildings
  
hospitality
  
schools
  
pharmaceutical companies
  
clean rooms
  
remediation companies
  
military
  
transportation
  
airports
  
first responders
  
single-family homes and multi-unit residences
 
Other vertical industry applications for SteraMistTM that have expressed interest in our technology, service and products include:

  
blood banks
  
food safety industry
  
athletic facilities (from professional to educational)
  
airlines
  
entertainment
  
homeland defense of multiple countries
 
The Company intends to generate and support research on improving, extending and applying our patents. To date, we have received interest, both domestically and internationally, to form business alliances with major healthcare companies, tissue and blood labs, cruise industry, pharmaceutical companies, the food safety industry, border protection including homeland defense companies, construction companies and remediation companies.

In September 2013, the Company entered into a Sales and Distribution Agreement with TOMI Panama, a non-affiliated company in Panama and successfully completed an official pilot study at the request of Panama Social Security Program (CSS), performing bio-mass reduction and remediation of biological bacterial colonies. As a result, the Panamanian Government accepted the Company’s technology as the only decontamination product of its kind that is authorized by the Panamanian Government to be purchased by their hospitals for the next two years. On September 30, 2013, TOMI was awarded a multi-year contract from Panama Social Security Program (“CSS Contract”) to initiate bio-mass reduction and decontamination services. During the 4th quarter 2013, TOMI completed the bio-mass reduction and decontamination services at The Complejo Hospitalario Metropolitano in Panama City, Panama. Currently, we are actively engaged to expand this program and make SteraMistTM a standard for decontamination in over 41 Panamanian hospitals.

During the 4th quarter of 2013, the Company’s Panamanian distribution partner initiated bio-mass reduction and decontamination services at The Complejo Hospitalario Metropolitano in Panama City, Panama.  The initial project in Panama provides for decontamination services for 64,583 sq/ft. of space for an approximate value to the Company of $420,000. The Company completed this project in October 2013. Rolyn Companies, Inc. was engaged by TOMI to perform the bio-mass reduction and decontamination services as a subcontractor, as well as to train our Panamanian distribution partner’s personnel.  The revenue distribution for the CSS Contract is broken up into two segments:

(1)  
The first segment consisted of bio-mass reduction, a deep cleaning, and the initial application of SteraMistTM. This consisted of 64,583 sq/ft at $6.50 per sq/ft which amounted to approximately $420,000.
 
(2)  
The second segment consists of maintenance services for the same square footage area which has a contract value of $60,000 per month for 3 years. The Company receives 15% of the $60,000 or $9,000 per month as a management fee for the first 12 months and 10% or $6,000 for the remaining 24 months of the CSS Contract. As of March 31, 2014, 5 1/2 months of maintenance service has been completed.

During the year ended December 31, 2013, as a result of certain members of the our management team, traveling to and leading a symposium entitled “Insights and Solutions for Emerging Viruses and Infectious Diseases” in Riyadh, Saudi Arabia on August 29, 2013, the Company generated sales to Al Ramez Establishments for Medical Supplies, a division of Al Ramez Group amounting to $99,000. TOMI has also received an order for approximately $356,000 from Al Ramez pending written results of our lab tests completed at their hospital along with complying with the Saudi Arabian import regulatory requirement We are still waiting for approval from the Minister of Health who has been recently replaced and believe the approval process will be delayed as a result until a new Minister of Health is appointed.
 
 
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Domestically, we have continued to increase the use and subsequent sales of TOMI’s™ patented BITTM technology under our existing decontamination programs with Sinai Hospital in Baltimore, Maryland, Northwest Hospital in Randallstown, Maryland, St. Mary’s in Philadelphia, Baptist Hospital in Little Rock, Arkansas, and Geisenger Medical Center in Danville, Pennsylvania and Geisenger, Wyoming Valley. The BITTM system has recently been purchased by Union Memorial, a Med-Star partner hospital, part of the 10 hospital chain, as well as Spring Hill Medical Center,  Bayhealth Kent General and Bayhealth Milford General. TOMI has also expanded sales to the pharmaceutical and clean-room market with sales of its Environmental Unit to Six-Log, Mannkind Corporation, Controlled Contamination Services, Felder Services and Telstar Life Sciences along with RTI Biologicals. SteraMistTM is also currently being tested in two other major U.S. teaching hospitals and the Sperry Group each of which are in the process of completing peer review studies with results anticipated to be published within 15 months.  We are currently awaiting an update on the progress of these studies.

As of April 1, 2013, we entered into a Support and Service Agreement (“the Agreement”) with Rolyn Companies, Inc. (“Rolyn”) under the terms of which Rolyn will provide labor and services support.  The Agreement calls for payment to Rolyn of 76,666 shares of the Company’s common stock per month in exchange for these labor and support services.  This agreement was amended, effective January 1, 2014, to reduce the payment to Rolyn to 25,000 shares of the Company’s common stock per month.  All other terms and conditions of the agreement remained the same.  The Company has recorded $30,000 and $0 support and service expense for the three months ended March 31, 2014 and 2013, respectively. The agreement provides for either party to terminate the Agreement within 30 days written notice.  Certain officers of Rolyn were appointed officers of the Company in July 2013.
 
Through our sales and services, our business growth objective is to be “The Global Leader in Decontamination and Infectious Disease Control” through our premier novel platform of hydrogen peroxide mists and fogs, as well as other green products and technologies. We have, and continue to expand and support research on other air remediation solutions including hydroxyl radicals and other ROS and to form business alliances which may include selling licenses and or performing decontamination services with tissue banks, pharmaceutical labs, blood labs, kidney dialysis centers, major remediation companies, construction companies and corporations specializing in disaster relief. Our intended targets are located in North America, South America, Central America, Middle East and the Far East.

Results of Operations for the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
 
Net Loss and Net Loss Attributable to Common Shareholder

Net loss for the three months ended March 31, 2014 and 2013 amounted to approximately $97,000 and $193,000, respectively, representing a decrease in net loss of $96,000.  The primary reasons for this decrease in net loss can be attributed to:

  
An approximate $1,751,000 gain on the change in the fair value of the embedded conversion feature of the convertible notes; offset by;
  
Non-cash charges of approximately $1,142,000 in equity compensation expense;
  
Higher interest expense of approximately $124,000, higher amortization of deferred finance costs of $84,000 and higher amortization of debt discount charges of $75,000 all related to the $5,074,000 in convertible notes issued in 2013;
  
Higher general and administrative expenses of approximately$130,000 mainly due to higher salaries and wages due to new hires during the current period, and;
  
Higher depreciation and amortization charges of approximately $102,000 in connection with our patent acquistion associated with the SteraMistTM line of products.

Sales

During the three months ended March 31, 2014 and 2013, we had net revenue of approximately $273,000 and $39,000, respectively, representing an increase in revenue of $234,000 or 600%. The primary reason for the increase in revenue was attributable mainly to the fact that we were able to acquire and take control over the entire SteraMistTM line of products from L-3 in April 2013, including manufacturing as well as research and development, which facilitated the Company having sufficient supply of product to fill orders, as well as diversify our client base.

 
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Cost of Sales

During the three months ended March 31, 2014 and 2013, we had cost of sales of approximately $114,000 and $33,000, respectively, representing an increase of $81,000 or 245%.  The primary reason for the increase in cost of sales was due to sales increasing during the three months ended March 31, 2014 versus the same period in the prior year.  Costs of sales did not increase in conjunction with sales as we experienced higher profit margins attributable to gaining economies of scale through the acquisition of the SteraMistTM line of products from L-3 in April 2013.

Professional Fees

Professional fees for the three months ended March 31, 2014 totaled approximately $114,000 as compared to $109,000 during the same quarter in the prior year representing an increase of approximately $5,000 or 5%.  Professional fees were mainly comprised of legal, accounting and financial consulting fees during the three months ended March 31, 2014. Professional fees were mainly comprised of environmental advisory, accounting and legal fees during the three months ended March 31, 2013.

Depreciation and Amortization

Depreciation and amortization was approximately $112,000 and $10,000 for the three months ended March 31, 2014 and 2013, respectively. The increase is primarily the result of amortization expense recognized during the three months ended March 31, 2014 in connection with our patents associated with the SteraMistTM line of products.  There was no such expense during the three months ended March 31, 2013 as the patents were acquired in April 2013.

Selling Expenses

Selling expenses for the three months ended March 31, 2014 totaled approximately $61,000 as compared to $5,000 for the same period in 2013 representing an increase of $56,000.  These expenses increased in conjunction with sales and are mainly comprised of selling salaries and wages, trade show fees, commissions and marketing expenses.

Research & Development

Research and development expenses for the three months ended March 31, 2014 totaled approximately $31,000 as compared to $0 in 2013.  Research and development expenses mainly include costs incurred in generating and supporting research on improving, extending and applying our patents in the field of mechanical cleaning and decontamination. There were no such costs during the three months ended March 31, 2013 as we had not yet acquired the patents associated with the SteraMistTM line of products from L-3 (April 2013).

Consulting Fees

Consulting fees for the three months ended March 31, 2014 totaled approximately $58,000 as compared to $0 during the same quarter in the prior year representing an increase of approximately $58,000.  The increase in consulting fees is primary due to: 1) Non-cash charges incurred with regard to the support and services agreement with Rolyn Companies, Inc. (“Rolyn”) amounting to $30,000; and 2) EPA advisory services amounting to $10,000.

Equity Compensation Expense

Equity compensation expense represents non-cash charges for the three months ended March 31, 2014 totaled approximately $1,142,000 as compared to $0 in 2013.  Equity compensation expense incurred upon the issuance of warrants to our executive officers.  On the date of a grant, we determine the fair value of the stock option award and recognize 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 Method option-pricing model.  See Note 8. Stockholders’ Equity (Deficiency) for details on these issuances.

General and Administrative Expense

General and administrative expenses include salaries and payroll taxes, rent, insurance expense, and office expenses.  General and administrative expenses were approximately $202,000 and $71,000 for the three months ended March 31, 2014 and 2013, respectively, representing an increase of $131,000 or 185%.  The primary reason for the increase in General and administrative expenses can be attributed to higher salaries and wages due to new hires during the current period.

 
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Other Income and Expense

Amortization of deferred financing costs was approximately $84,000 for the three months ended March 31, 2014 compared to no such costs in the prior period.  This represents the amortization of costs incurred to raise capital in relation to the acquisition of the SteraMistTM line of products from L-3.

Amortization of debt discount was approximately $75,000 during the three months ended March 31, 2014, representing the charges related to the amortization of debt discount on our $5,074,000 in convertible notes issued in 2013.  These convertible notes are being amortized over the life of the note utilizing the effective interest method.

The fair value adjustment of the derivative liability during the three months ended March 31, 2014, amounted to approximately a $1,751,000 gain versus no such costs in the prior period.  This represents the change in the fair value of the embedded conversion feature of the convertible notes.

Interest expense for the three months ended March 31, 2014 and 2013 was approximately $127,000 and 3,000, respectively.  The primary reason for the increase in interest expense can be attributed to the interest due on the $5,074,000 in convertible notes issued in 2013 in connection with the acquisition of the SteraMistTM line of products from L-3.

Summary of Quarterly Results
 
   
For the three
   
For the three
 
   
months ended
   
months ended
 
   
March 31,
2014
   
March 31,
2013
 
             
Revenues
  $ 273,000     $ 39,000  
Gross Profit
    159,000       6,000  
Total Operating Expenses*
    1,721,000       195,000  
Net loss from Operations
    (1,562,000 )     (189,000 )
Total Other Income (Expense)
    1,464,000       (3,000 )
Net Loss
  $ (97,000 )   $ (193,000 )
Basic net loss per share
  $ (0.00 )   $ (0.00 )
Diluted net loss per share
  $ (0.00 )   $ (0.00 )

*Includes approximately $1,142,000 in non-cash equity compensation expense for the three
Months ended March 31, 2014.

Summary of Revenues

   
For the three
   
For the three
 
   
months ended
   
months ended
 
   
March 31,
2014
   
March 31,
2013
 
             
Revenues:
           
   Equipment / Product
  $ 167,000     $ 23,000  
   BIT Solution
    74,000       16,000  
   Bio-mass and Decontamination
               
     Services
    2,000       -  
   Maintenance fees
    27,000          
   Training
    3,000       -  
Total Revenues
  $ 273,000     $ 39,000  
 
 
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Sales Information of Geographic Basis

   
For the three
   
For the three
 
   
months ended
   
months ended
 
   
March 31,
2014
   
March 31,
2013
 
             
Revenues:
           
   International
  $ 28,000     $ -  
   United States
    245,000       39,000  
Total Revenues
  $ 273,000     $ 39,000  
 
Liquidity and Capital Resources
 
Going Concern

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 liquidity needs from the sales of its products and services, licensing arrangements, debt financing and/or 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 we 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 us or that they will not have a significant dilutive effect on our existing stockholders. The inability to generate cash flow from operations or to raise sufficient capital from external sources would force us to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business.
 
Operating activities
 
Cash used in operating activities during the three months ended March 31, 2014 and 2013 was approximately $386,000 and $53,000, respectively.  Cash used in operating activities increased $333,000 as compared to the three months ended March 31, 2013, primarily due to: 1) the Company expending funds for the hiring and engaging of experienced staff and consultants in 2014, 2) procuring raw material inventory for an anticipated increase in sales in 2014, and 3) higher interest payments on convertible notes.
 
Investing Activities

Cash used in investing activities during the three months ended March 31, 2014, amounted to approximately $9,000 primarily due to the acquisition of computer equipment.  Cash used in investing activities during the three months ended March 31, 2013, amounted to approximately $22,000, primarily from the acquisition of equipment from L-3.

Financing Activities

Cash used in financing activities during the three months ended March 31, 2014 amounted to approximately $29,000, primarily from the increase in funds deposited within the bond sinking fund during the current period as a result of higher revenues.

Cash provided by financing activities during the three months ended March 31, 2014 amounted to approximately $25,000, primarily from proceeds received of approximately $20,000 during the period from the issuance of common stock.
  
As of March 31, 2014 we had a cash balance of approximately $283,000.  We have incurred significant net losses since inception, including a net loss of approximately $97,000 for the three months ended March 31, 2014. We have, since inception, consistently incurred negative cash flow from operations. We experienced an increase in working capital deficiency and an increase in stockholders’ deficiency mainly related to non-cash charges incurred as a result of the completion of the private placement in April 2013 in which the Company raised approximately $5,074,000 in gross proceeds, enabling it to complete the asset purchase from L-3. As of March 31, 2014, we had a working capital deficiency of approximately $5,111,000 and a stockholders’ deficiency of $1,576,000.

In April 2014, we have entered into purchase commitments with a new manufacturer for the procurement of inventory amounting to $465,000.
 
 
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We currently have 7,611,000 warrants issued to note holders of our convertible debt at an exercise price of $0.30.  In the event, all holders were to exercise their warrant holdings, we would receive approximately $2,283,000 in gross proceeds.  There can be no assurance that the note holders will exercise their warrants by the expiration date of their respective warrant.
   
Recently Issued Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1. Financial Statements above.

Disclosure About Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

Critical Accounting Policies

See Note 2 to the Condensed Consolidated Financial Statements contained in Item 1. Financial Statements above.

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, 2014.
 
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, 2014.
 
 
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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 our discussion contained in our Form 10-K filed with the Commission on March 25, 2014.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.

 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
 
Exhibit No.   Description
     
31.1   Principal Executive Officer Certification
     
31.2   Principal Financial Officer Certification
     
32.1   Section 1350 Certification
     
32.2   Section 1350 Certification
 
Part II: Exhibits
 
None.
 
 
26

 
 
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 14, 2014
By:
/s/ Halden Shane  
    Halden Shane  
   
Principal Executive Officer
 
       
 
 
 
 
 
 
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