TOMI Environmental Solutions, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Interim financial statements are unaudited. TOMI sells equipment, services and licenses for its SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide-based decontamination system.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $273,029 | $39,165 |
| Gross profit / gross margin | $159,184 / 58.3% | $5,795 / 14.8% |
| Operating expenses | $1,720,873 | $195,431 |
| Operating loss | $(1,561,689) | $(189,636) |
| Net loss | $(97,208) | $(192,693) |
| Net loss per share, basic and diluted | $(0.00) | $(0.00) |
| Cash used in operating activities | $(386,128) | $(52,739) |
Revenue rose approximately 600%, with U.S. sales of $245,000 and international sales of $28,000. Product/equipment contributed $167,000 and BIT solution $74,000; the remainder was services, maintenance and training. Gross margin improved as TOMI attributed lower unit costs to greater scale following its 2013 acquisition of the SteraMist product line.
Reported net loss narrowed despite a much larger operating loss. The principal offset was a $1.751 million noncash gain from remeasuring the embedded conversion feature in convertible notes. Operating expenses included $1.142 million of noncash equity compensation, primarily related to executive warrants. Interest expense was $127,406, versus $3,057 a year earlier; financing-cost and debt-discount amortization were $84,450 and $74,968, respectively.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $282,757, with a further $98,970 of restricted cash. Cash and equivalents declined $423,593 during the quarter.
- Current assets were $1.283 million and current liabilities $6.394 million, a working-capital deficit of approximately $5.111 million. Total liabilities were $6.540 million; stockholders’ deficiency was $1.576 million.
- The company had $5.074 million of 10% secured convertible notes due July 31, 2015. Their balance-sheet carrying amount, net of a substantial unamortized discount, was $145,410. A separately recorded derivative liability was $5.914 million at quarter-end, down from $7.666 million at year-end.
- The notes are secured by specified intellectual property and other assets and require 15% of reported quarterly revenue to be deposited into a sinking fund. TOMI deposited $28,846 into the fund during Q1.
- Common shares outstanding were 80,201,520 at quarter-end. Potential dilution included 17.5 million shares from convertible debentures and 28.6 million shares from warrants, in addition to options and convertible preferred stock.
Material changes and business developments
- Revenue growth followed TOMI’s April 2013 acquisition of BIT-related assets from L-3 for $3.51 million, including patents, trademarks, equipment and inventory. Patent amortization contributed to the increase in depreciation and amortization.
- Two hospitals represented 50% of Q1 sales, creating customer-concentration risk. TOMI reported progress with U.S. hospital and clean-room customers and described a Panama hospital-services contract; the initial Panama project was completed in 2013, with maintenance services continuing.
- In February 2014, TOMI granted substantial warrant awards to its three executive officers and additional warrants to its CFO; these awards drove most of the quarter’s equity-compensation expense. The company also adopted a 2014 stock option plan, subject to shareholder approval, reserving up to 5 million shares.
- In March, TOMI appointed an exclusive distributor for Mexico. It was transitioning to a new manufacturer, and in April entered into inventory purchase commitments of $465,000.
Outlook, risks and contingencies
Management disclosed substantial doubt about TOMI’s ability to continue as a going concern, citing recurring operating cash outflows, limited cash, a large working-capital deficit and the need for additional capital. The company plans to rely on product and service sales, licensing, debt or equity financing, but gave no assurance that funding will be available on acceptable terms. Failure to generate cash or raise capital could require substantial curtailment or cessation of operations and could materially dilute existing shareholders.
Management said product availability and the acquired product line supported its expectation of increased sales, but the filing provides no quantified revenue or earnings guidance. A disclosed Saudi order of approximately $356,000 remained subject to laboratory results and import/regulatory approval; management noted approval could be delayed. The filing also identifies the derivative valuation as Level 3 and dependent on significant unobservable assumptions. TOMI reported no material legal proceedings, defaults on senior securities or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether TOMI can obtain sufficient near-term financing and meet operating and debt-related cash requirements.
- Whether sales growth converts into recurring cash flow, given the operating loss, quarterly cash burn and large noncash derivative gain that reduced reported net loss.
- Customer concentration, the status and economics of the Panama maintenance contract, and progress on the pending Saudi order and other prospective business.
- Whether the manufacturer transition and $465,000 inventory commitment can support demand without worsening liquidity.
- The potential dilution from convertible notes, warrants, executive awards and equity plans, and the assumptions underlying the Level 3 derivative valuation.