TOMI Environmental Solutions, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; financial statements are unaudited. TOMI provides environmental decontamination products and services, including SteraMist Binary Ionization Technology (BIT).
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $172,864 | $218,473 | $212,029 | $283,702 |
| Gross profit | $110,930 | $91,510 | $116,725 | $124,996 |
| Gross margin | 64.2% | 41.9% | 55.1% | 44.1% |
| Operating loss | $(392,933) | $(31,504) | $(582,569) | $(84,517) |
| Net loss | $(7,985,934) | $(48,252) | $(8,178,627) | $(140,727) |
Revenue declined 21% in Q2 and 25% for the six-month period year over year. Management attributed the shortfall to L-3 Applied Technologies’ shutdown of the product division while negotiating the asset sale, which left TOMI without enough product to fill orders. TOMI said it took control of the product line and manufacturing after the April acquisition.
Gross margin improved, but operating expenses increased substantially, including consulting, professional fees, and depreciation and amortization. Net loss was heavily affected by non-cash financing items: a $4.56 million fair-value loss on the embedded derivative and $2.87 million in convertible-debt finance charges for the six-month period.
Cash, liquidity and financing
- Cash was $1.19 million at June 30, 2013, compared with $73,424 at December 31, 2012. Cash was approximately $1.12 million as of July 31, 2013.
- Six-month operating cash use was $390,012; investing cash use was $3.45 million, including $3.28 million for acquired intangibles; financing provided $4.96 million.
- Current assets were $1.57 million versus current liabilities of $11.94 million, a working-capital deficit of $10.37 million. Stockholders’ deficit was $6.32 million.
- The April private placement raised $4.874 million gross through 10% secured convertible notes due July 31, 2015, plus warrants. Notes are convertible initially at $0.29 per share; warrants have an initial $0.30 exercise price. Debt is secured by specified intellectual property and other assets, and the notes provide for a sinking fund funded with 15% of reported quarterly revenue.
- The embedded conversion feature was recorded as a Level 3 derivative liability of $11.43 million at June 30. The notes’ reported net carrying amount was only $8,817 after discounts and amortization; the gross principal was $4.874 million.
Acquisition, outlook and risks
- On April 15, TOMI acquired BIT patents, related assets and inventory from L-3 for a stated $3.5 million cash payment, plus estimated warranty expense, for a stated total purchase price of $3.51 million. The preliminary allocation included $3.288 million of intangibles; final valuation was pending. Patents and trademarks were being amortized over approximately nine years.
- Management’s stated objectives include expanding SteraMist sales and services across healthcare and other markets, pursuing international growth and alliances, and supporting research and development. The filing provides no quantified revenue, earnings, or cash-flow guidance.
- Management cited ongoing losses and negative operating cash flow. The highly variable valuation of the embedded conversion feature depends on unobservable assumptions; changes could materially affect reported results and liabilities. Convertible financing also carries dilution, interest, collateral and sinking-fund implications.
- Rolyn Companies provides support services for $20,000 monthly, payable in common stock at a stated price of $0.261 per share, plus expenses. The filing notes that certain Rolyn officers became TOMI officers in June and July 2013.
- Management said disclosure and internal controls were effective for the quarter and reported no material legal proceedings, contractual obligations, or off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the final acquisition valuation, asset allocation, and expected amortization and commercial contribution of the acquired BIT assets.
- Review the convertible-note and warrant terms, including adjustment provisions, collateral, sinking-fund requirements, and potential dilution. The filing lists 16.8 million potential shares from convertible debt and 18.7 million from warrants at June 30.
- Assess liquidity and funding needs against the $10.37 million working-capital deficit, continuing operating cash use, and significant derivative liability.
- Reconcile the subsequent July financing disclosure: it describes four $25,000 units but reports $200,000 gross proceeds, which does not match the stated unit count.
- Check the filing’s reference to debt charges “subsequently extinguished” against its disclosure of convertible notes outstanding and due in 2015; the text does not clearly reconcile that statement.