TOMI Environmental Solutions, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited interim financial statements; amounts below are U.S. dollars.
Business context and results
TOMI sells equipment and services and licenses its SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide-based decontamination system. Management attributed revenue growth in part to its 2013 acquisition of the SteraMist technology and increased sales and marketing activity.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $515,465 | $294,627 | $1,204,949 | $506,656 |
| Gross profit | $327,522 | $109,529 | $765,020 | $226,253 |
| Gross margin | 63.5% | 37.2% | 63.5% | 44.6% |
| Operating expenses | $1,749,477 | $811,346 | $4,472,911 | $1,510,640 |
| Operating loss | $(1,421,955) | $(701,817) | $(3,707,891) | $(1,284,387) |
| Net loss | $(1,253,637) | $(2,946,146) | $(934,984) | $(11,124,772) |
| Basic and diluted loss per share | $(0.02) | $(0.04) | $(0.01) | $(0.15) |
Cash flow, debt and liquidity
- Cash and cash equivalents were $85,837 at September 30, down from $706,350 at December 31, 2013; restricted cash was $228. Nine-month operating cash use was $1,158,100, investing cash use was $64,774, and financing cash provided was $602,361. Cash declined by $620,513.
- At quarter-end, current assets were $1,464,998 and current liabilities were $4,965,742; management reported a working-capital deficiency of approximately $3.501 million and stockholders’ deficiency of approximately $442,000.
- The company had $5.074 million principal amount of 10% secured convertible notes, due July 31, 2015. Their reported net carrying amount was approximately $560,000 after debt discounts; accrued interest was $84,567. The notes are secured by specified assets, including intellectual property, and require a revenue-based sinking-fund deposit.
- A Level 3 derivative liability related to the notes’ embedded conversion feature was $3,765,541, down from $7,665,502 at year-end. The nine-month $3,899,961 fair-value gain is noncash and materially affected reported net loss.
Changes versus prior periods
- Revenue rose 75% in Q3 and 138% for the first nine months. Nine-month international revenue increased to $684,000 from $128,000; U.S. revenue was $521,000 versus $379,000.
- Gross margin improved, while operating losses increased as operating expenses rose. Nine-month selling expense, research and development, and general and administrative expense increased; consulting fees declined.
- Net loss narrowed substantially year over year, but the comparison reflects large noncash derivative fair-value changes and prior-year financing costs, not just operating performance. The company recorded $2.449 million of equity compensation expense in the first nine months of 2014, largely associated with executive warrants that vested upon two executives’ resignations.
- Common shares outstanding increased from 79.9 million at December 31, 2013 to 82.7 million at September 30, 2014; 83,459,210 shares were reported outstanding November 7, 2014. Warrants outstanding totaled 32.4 million at quarter-end.
Outlook, risks and unusual items
- Going concern: Management stated that substantial doubt exists about TOMI’s ability to continue as a going concern, citing recurring losses, negative operating cash flow, low cash, and working-capital deficiency. It plans to fund operations through sales, licensing, debt and/or equity financing, but stated that additional funding is not assured and could dilute shareholders; inability to raise funds could force a substantial curtailment or cessation of operations.
- No formal financial guidance is provided. Management described plans to grow sales and applications and expected six new hospitals in Panama to be serviced in Q4 2014 and Q1 2015. It also reported 29 clients across multiple industries and markets. These are management expectations, not assured outcomes.
- In the quarter, TOMI raised $580,313 gross through common-stock and equity-unit sales. Subsequent to quarter-end, it reported a November sale of equity units for $160,000 gross. It also reported depositing approximately $79,000 into the note sinking fund in November, representing 15% of Q3 revenue.
- Other developments include the September lease of a new Maryland facility through January 2018, with approximately $151,000 in scheduled minimum rent; a $465,000 inventory purchase commitment, of which approximately $278,000 had been purchased by quarter-end; and the October termination of the Rolyn support agreement.
- The President and COO resigned effective September 2014; their remaining executive warrants vested immediately, creating significant noncash compensation expense. The CFO also resigned in July; a new principal financial officer began employment in October.
- The filing reported no material legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements. Management said disclosure and internal controls were effective for the period and reported no control changes.
Important facts for investors to verify
- Whether TOMI can raise sufficient capital and manage its near-term liquidity needs, including required note payments and sinking-fund deposits.
- Whether revenue growth, improved gross margins and Panama-related activity translate into sustainable operating cash flow and reduced operating losses.
- The potential dilution and economic effects of convertible notes, reset provisions, warrants, equity-unit financing and further capital raises.
- The assumptions behind the Level 3 derivative valuation and the effect of future fair-value changes on reported earnings.
- Whether the reported customer, distributor, manufacturing-partner and hospital opportunities convert into completed contracts and collected revenue.