TOMI Environmental Solutions, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The company sells equipment and services and licenses its SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide-based decontamination system. This unaudited report covers the three and six months ended June 30, 2015; results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $740,000 | $416,000 | $1,416,000 | $689,000 |
| Gross profit | $464,000 | $278,000 | $862,000 | $437,000 |
| Gross margin | 62.7% | 66.8% | 60.9% | 63.5% |
| Operating expenses | $2,323,000 | $1,003,000 | $3,145,000 | $2,723,000 |
| Operating loss | $(1,859,000) | $(724,000) | $(2,283,000) | $(2,286,000) |
| Net income (loss) | $(7,202,000) | $416,000 | $(11,473,000) | $319,000 |
| Basic loss per share | $(0.08) | $0.01 | $(0.13) | $0.00 |
Q2 revenue increased 78% year over year; first-half revenue increased 105%. Management attributed growth to market expansion, product availability and a more diverse customer base. Gross margin was lower than the comparable periods despite management’s characterization that margins were consistent.
First-half operating cash use was $950,000, versus $388,000 in 2014; the filing cites higher receivables ($383,000 increase) and inventory ($183,000 increase) as contributing factors. Investing cash use was $20,000. Financing provided $4,490,000, principally from stock and warrant issuance, partly offset by $1,300,000 of note repayments. Cash and equivalents were $3,680,000 at June 30, compared with $161,000 at year-end 2014. Working capital was $4,493,000; total assets were $8,308,000 and stockholders’ equity was $7,213,000.
All $5,074,000 of convertible notes were retired in June: $3,774,000 of principal plus accrued interest was converted into shares, and $1,300,000 of principal plus accrued interest was repaid in cash. Notes payable and the related derivative liability were zero at quarter-end. The company reported that debt retirement and an $8 million Arise equity investment eliminated the going-concern issue noted in its prior quarterly filing. The investment comprised $5 million received in June and $3 million in July; the July receipt is subsequent to quarter-end.
Material changes, outlook and notable items
- The first-half net loss principally reflected debt-related and equity-accounting items: $3,996,000 debt-discount amortization, a $3,811,000 derivative-liability fair-value loss and $930,000 of induced conversion costs. The derivative was reclassified to additional paid-in capital when the notes were retired. These items materially affected reported earnings and are not equivalent to operating cash expenses.
- Q2 equity compensation rose to $1,386,000 from $263,000, including approximately $1,259,000 related to 3,000,000 consultant warrants. First-half equity compensation was $1,511,000. The warrants carry a $1.00 exercise price; exercise and proceeds are not assured.
- Common shares issued and outstanding were approximately 112.3 million at June 30 and 119.2 million on August 5. The filing also reports 35.5 million outstanding warrants at quarter-end, indicating substantial potential dilution.
- The company received a $559,000 USAID grant to develop mobile decontamination chambers for Ebola response, payable against milestones; management anticipated the first milestone in Q3 2015. EPA registered BIT in June 2015 as a two-stage healthcare-hospital disinfectant. The company also described new distribution, licensing and service-network activity.
- No formal financial forecast or quantified revenue guidance is provided. Management expected research and development spending to increase significantly in Q3 and thereafter. It was evaluating the impact of the new customer-contract revenue accounting standard. The filing cautions that forward-looking statements are subject to uncertainty.
- Management said disclosure and internal controls were effective for the six months ended June 30 and reported no control changes during Q2. The company reported no material legal proceedings, no market-risk disclosures and no off-balance-sheet arrangements.
Key facts for investors to verify
- Reconcile the substantial reported loss with the noncash debt-discount and derivative charges, and assess recurring operating losses and cash burn.
- Confirm the timing, receipt and terms of the full $8 million Arise investment, including the $3 million received after quarter-end.
- Assess dilution from the share issuances and 35.5 million outstanding warrants, including consultant awards and potential exercise proceeds.
- Track collection of receivables, inventory conversion, gross-margin trends and operating cash requirements as sales expand.
- Verify USAID milestone completion and grant recognition, and the commercial impact of EPA registration, new distributors and the service network.
- Check share-count disclosures: the balance sheet reports 112,299,592 shares at June 30, while the statement of stockholders’ equity reports 112,299,593.