TOMI Environmental Solutions, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The unaudited statements cover TOMI’s infection-prevention and decontamination business, centered on SteraMist Binary Ionization Technology products, services and licensing.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.729 million | $0.740 million | $3.436 million | $1.416 million |
| Gross profit | $1.022 million | $0.464 million | $1.981 million | $0.862 million |
| Gross margin | 59.1% | 62.7% | 57.6% | 60.9% |
| Operating loss | $0.790 million | $1.859 million | $1.828 million | $2.283 million |
| Net loss | $0.575 million | $7.202 million | $1.614 million | $11.473 million |
- Revenue increased 134% in Q2 and 143% for the first half. Management attributed growth to entering new markets, improved product availability and a more diverse customer base. First-half domestic sales were $2.264 million and international sales $1.172 million.
- First-half operating expenses rose 21% to $3.809 million. Selling expense increased to $0.870 million and general and administrative expense to $1.672 million, reflecting sales and marketing investment and new hires. Gross margin declined year over year.
- First-half net loss narrowed substantially, but the comparison is heavily affected by 2015 convertible-debt charges: debt-discount amortization, derivative fair-value losses, induced-conversion costs and interest. Those notes were retired in 2015. In 2016, the company also recognized $202,451 of USAID grant income and a $12,000 equipment-sale gain.
- Cash from operations was negative $3.040 million for the first half, versus negative $0.950 million a year earlier. Investing cash outflow was $0.448 million, primarily equipment purchases; financing cash flow was zero.
- Cash and equivalents were $2.428 million at June 30, down from $5.916 million at December 31, 2015. Working capital was $6.765 million, compared with $7.880 million; current assets were $9.119 million and current liabilities $2.354 million. The company reported no debt outstanding at quarter-end; the prior convertible notes had been retired in 2015.
- Inventory increased to $4.239 million from $1.395 million at year-end, primarily finished goods. Total assets were $11.842 million and stockholders’ equity $9.488 million. Common shares outstanding were 120.489 million at June 30; 120.825 million were reported outstanding as of August 9.
Material developments, outlook and risks
- The EPA expanded SteraMist’s label in February 2016 to include C. diff, MRSA and H1N1. TOMI completed the final milestone of its $559,003 USAID grant in May; cumulative grant-related costs were $356,552.
- The company expanded its sales organization and TOMI Service Network; management reported 52 network members in its discussion. It also entered a TOMI Asia distributor agreement with targets of $5.5 million and $8.5 million in product revenue for 2016 and 2017, respectively. No sales under that agreement had occurred by June 30.
- Management said existing cash and expected operating resources should cover operations, working capital and capital expenditures for the next 12 months, but cautioned that sales may not cover operating and compliance costs and additional financing may be needed. Sales cycles may exceed four to six months. The company’s intended national-exchange uplisting could require additional capital, with no assurance it will qualify or obtain financing on acceptable terms.
- Significant concentration risks include one supplier accounting for approximately 74% of accounts payable and 80% of first-half cost of goods sold. Two customers represented 31% of first-half revenue, and two customers represented 20% of receivables at June 30. The company recorded $105,000 of first-half bad-debt expense and had a $150,000 allowance; no slow-moving inventory reserve was recorded.
- Potential dilution is substantial: 36.6 million warrants and 200,000 options were outstanding at June 30, in addition to 510,000 convertible preferred shares. The 2016 equity plan authorizes up to 5 million shares, subject to stockholder approval. The new CEO agreement provides a $360,000 annual base salary and equity incentives.
- The filing reports no material legal proceedings, product-liability claims, defaults on senior securities or material changes to previously disclosed risk factors. Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Investor verification priorities
- Track operating cash burn, inventory conversion and liquidity, particularly as cash fell by $3.488 million in the first half.
- Assess whether revenue growth translates into sustainable margins and cash generation, given declining gross margin and higher selling and administrative costs.
- Verify customer demand, collection of receivables and progress under the TOMI Asia revenue targets; no agreement sales were reported through June 30.
- Evaluate dependence on the concentrated supplier and the adequacy of inventory and bad-debt reserves.
- Monitor financing needs, exchange-listing requirements, and potential dilution from outstanding warrants, options and equity-plan awards.