TOMI Environmental Solutions, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. TOMI provides environmental decontamination and infectious-disease-control products and services, including SteraMist hydrogen-peroxide systems and UV technologies.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $261,266 | $42,062 | $544,968 | $200,550 |
| Gross profit | $68,255 | $10,210 | $193,251 | $58,639 |
| Gross margin | 26.1% | 24.3% | 35.5% | 29.2% |
| Operating loss | $(51,034) | $(118,421) | $(135,550) | $(629,419) |
| Net loss | $(220,380) | $(124,055) | $(361,106) | $(642,917) |
Quarterly revenue increased substantially, which management attributed to SteraMist market acceptance. Nine-month growth was attributed primarily to repeat and increased hospital and remediation-industry sales. Nine-month general and administrative expense fell to $214,371 from $529,983, principally due to lower CEO compensation and a changed business model; professional fees were essentially flat at $158,330.
Net loss was significantly affected by noncash debt-related charges: nine-month debt-discount amortization was $173,398 and convertible-debt finance charges were $27,939. The Q3 net loss included $156,791 of debt-discount amortization. The filing reports basic and diluted loss per share of $(0.00) for Q3 and $(0.01) for the nine-month period.
Cash flow, balance sheet and capital
- Cash flow, nine months: Operating activities used $221,601; investing activities used $45,972, mainly for equipment; financing activities provided $491,742. Cash increased from zero at year-end 2011 to $224,169 at September 30, 2012.
- Liquidity: Current assets were $490,892 and current liabilities were $548,643, yielding a $57,751 working-capital deficit. Total assets were $617,557; total liabilities were $548,643; stockholders’ equity was $68,914, versus a deficit of $271,182 at December 31, 2011.
- Debt: At September 30, related-party loans payable were $156,678, including accrued interest; no convertible debenture balance remained. A $75,000 convertible note was converted into 1.5 million shares in July, and a $100,000 convertible note was repaid in July. Related-party loans bore 5% interest and were payable on demand.
- Share issuance: Nine-month stock sales generated $420,000. Common shares outstanding were 73,437,444 at September 30 and 75,432,905 as of November 9, 2012.
Outlook, risks and unusual items
- Management stated that the company had a near-term need for additional capital and that its limited capital materially constrained operations. It planned to fund operations through licensing arrangements, debt financing, and common-stock or convertible-note sales, but gave no quantified forecast.
- The filing states that recurring operating cash outflows, limited revenue, a $361,106 nine-month net loss, and the working-capital deficit raise substantial doubt about TOMI’s ability to continue as a going concern. Additional financing may be unavailable on acceptable terms or may significantly dilute existing stockholders; failure to obtain funds could require the company to curtail or cease operations.
- Management described sales and distribution activity in Latin America, including a Panama pilot and plans to expand the program to multiple hospitals, continued sales to Sinai Hospital, and testing at two other U.S. hospitals. These initiatives are not quantified as contracted future revenue.
- In October 2012, TOMI issued 1.44 million shares to its CEO to settle $144,000 of loans; the filing says it will recognize $72,000 of finance charges. It also issued 350,000 shares to settle $35,000 of accrued compensation, with $17,500 of compensation expense to be recognized. An additional 125,000 shares were sold for $25,000.
- The company reported no material legal proceedings, commitments or contingencies, off-balance-sheet arrangements, or defaults upon senior securities. Management considered disclosure and internal controls effective and reported no control changes in the quarter.
Important facts for investors to verify
- Whether TOMI can secure sufficient financing and achieve positive operating cash flow, given the explicit going-concern warning and working-capital deficit.
- Whether reported sales growth and the Panama and hospital initiatives translate into recurring, collectible revenue and improved gross margins.
- The full dilution and economic cost of financing, including convertible-note terms, warrants, stock issuances, and the October related-party settlements and associated charges.
- Cash and liquidity after quarter-end, including the reported October 31 cash balance of approximately $212,158 and subsequent share issuances.
- The size and timing of future debt-discount, finance-charge, compensation, and other noncash or related-party expenses.