TOMI Environmental Solutions, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless otherwise stated.
Business context and reporting period
TOMI provides indoor air and surface decontamination products and services, including hydrogen peroxide-based technology, ozone generators and UVGI products. It reported operations in the U.S. and through 55%-owned subsidiaries in Singapore and China; the China subsidiary was dormant at June 30. The company said it had begun international sales in Q3 2010 and reported $136,511 of international revenue through June 30, 2011.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $10,514 | $17,978 | $158,488 | $289,023 |
| Gross profit | $5,577 | $17,443 | $48,429 | $160,602 |
| Gross margin | 53.0% | 97.0% | 30.6% | 55.6% |
| Operating loss | ($125,271) | ($716,028) | ($510,998) | ($1,151,614) |
| Net loss | ($129,943) | ($834,701) | ($518,862) | ($1,205,295) |
- Cash flow: Six-month operating cash use was $197,610, versus $186,378 in the prior-year period. Investing activities used $1,969; financing activities provided $155,398, including $127,500 from common-stock sales and $33,241 in loan proceeds. Cash declined $43,533 to $17,646 from $61,179 at year-end 2010.
- Balance sheet and liquidity: Current assets were $18,670 and current liabilities $292,973, for negative working capital of $274,303. Total assets were $221,470 against liabilities of $292,973, leaving stockholders’ deficiency of $71,503.
- Debt: Current vehicle notes payable were $6,303. Related-party loans from the CEO totaled $54,987, including accrued interest; they bear 5% interest and are payable on demand. The filing reports no long-term notes at June 30.
- Margins and expenses: Gross margin fell materially year over year in both periods. Six-month operating expenses were $559,427, down from $1,312,216; related-party management and consulting fees were zero versus $569,302 in the first half of 2010.
Material changes versus the prior comparable period
- Revenue declined 41.5% in Q2 and 45.2% for the first half. Management attributed the quarterly decline to fewer service orders and the first-half decline primarily to the 2010 shift toward licensing, after prior-period equipment sales.
- Net loss narrowed in both comparisons, mainly alongside lower expenses. Management cited reduced CEO salary and operating costs associated with the business-model change; the first half of 2011 also included $197,077 of non-cash share-based compensation.
- Cash fell 71.2% from December 31, 2010. Common shares outstanding increased from 48,282,871 to 64,457,533 during the first half.
- In February 2011, TOMI issued the CEO 14,076,923 shares valued at $563,077 to settle $366,000 of accrued compensation; the excess $197,077 was recorded as share-based compensation. The CEO also forgave $700,269 of accrued compensation, recorded as a capital contribution.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing limited revenues, recurring operating cash outflows, a six-month net loss of $518,862 and negative working capital. It said operations would require licensing and sales arrangements and further debt or equity financing; funding availability and acceptable terms were not assured. Failure to obtain capital could force substantial curtailment or cessation of operations.
- Outlook: Management aimed to expand sales internationally and pursue licensing, product sales, business alliances and complementary environmental businesses. It reported orders through its Singapore activity and two major-product orders associated with the Zera agreement, and described expected additional orders and ongoing market discussions. The filing provides no quantified revenue or earnings guidance.
- Equity and dilution: The company planned to continue raising capital through restricted-stock sales and short-term notes convertible into common stock. Such financing could significantly dilute existing shareholders.
- Contingencies: The notes describe an ordinary-course legal claim that management did not expect to materially affect financial position, liquidity or results; Part II states there were no material proceedings or threatened proceedings. Contractual obligations and off-balance-sheet arrangements were reported as none.
- Other unusual items: Prior-year comparisons included a $55,120 derivative-liability fair-value expense and equipment/vehicle sale effects; these items did not recur in 2011. No impairment of intangible assets was reported.
Important facts for investors to verify
- Whether TOMI secured adequate financing after quarter-end and whether the stated going-concern uncertainty was resolved.
- Cash runway, collections, upcoming payment needs and the status and repayment terms of the CEO’s demand loans.
- Whether reported international orders and market opportunities converted into recognized revenue and cash receipts.
- The impact of the licensing/business-model transition on recurring revenue, gross margins and operating cash flow.
- Share-count changes, the terms and potential dilution of future stock or convertible-note financing, and the valuation of CEO-related share issuances.
- The nature and status of the legal claim, which the filing does not describe in detail.