TOMI Environmental Solutions, Inc. — Q3 2015 Form 10-Q
Business and period: TOMI sells equipment and services and licenses its SteraMist Binary Ionization Technology for decontamination. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the same 2014 periods. Management cautions that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.017 million | $515,465 | $2.433 million | $1.205 million |
| Gross profit | $618,000 | $328,000 | $1.480 million | $765,000 |
| Gross margin | 60.8% | 63.5% | 60.8% | 63.5% |
| Operating loss | $546,000 | $1.422 million | $2.829 million | $3.708 million |
| Net loss | $546,000 | $1.254 million | $12.020 million | $935,000 |
| Loss per share, basic and diluted | $0.00 | $0.02 | $0.12 | $0.01 |
- Q3 revenue increased 97%; nine-month revenue increased 102%. Management attributed growth to new markets, improved product supply, and a broader customer base. Gross margin declined about 2.7 percentage points in both comparisons, though management described margins as consistent.
- Operating expenses were $1.164 million in Q3, down from $1.749 million, largely reflecting lower equity compensation. Nine-month operating expenses were $4.309 million, compared with $4.473 million.
- Nine-month net loss includes substantial non-cash and financing-related charges associated with retiring convertible notes: $3.996 million debt-discount amortization, a $3.811 million derivative fair-value loss, and $930,000 of induced-conversion costs. These items explain why net loss worsened despite improved revenue and operating loss.
- Cash and equivalents were $5.794 million at September 30, versus $161,000 at year-end 2014. Working capital was $7.833 million; total assets were $11.297 million, liabilities $839,000, and stockholders’ equity $10.458 million. Cash used in operations was $1.803 million for the nine months; investing cash use was $54,000. Financing provided $7.490 million.
- All $5.074 million of convertible notes were retired in Q2: $3.774 million converted into 14.9 million shares and $1.3 million repaid in cash. The company reported no debt at September 30 and said the transaction and $8 million equity investment eliminated the going-concern issue discussed in its prior 10-Q.
Material developments, outlook, and risks
- Arise Asset Management invested $8 million in June and July 2015. Nine-month financing cash flows also include issuance of common stock and warrants; common shares outstanding rose from 83.6 million at year-end 2014 to 120.0 million at September 30, 2015. A further 35.6 million warrants were outstanding, creating potential dilution.
- Commercial developments included EPA registration of SteraMist as a healthcare-hospital disinfectant, California registration, new distribution activity in Singapore, and sales into additional international markets. The company reported 23 TOMI Service Network licensees by quarter-end.
- USAID awarded a $559,000 milestone-based grant for mobile decontamination chambers. TOMI received about $348,000 after completing the first two milestones, incurred $220,452 in costs, and reported $127,374 of grant advances as a liability. Management anticipated further milestones in Q4 2015; completion and associated funding remain subject to the grant terms.
- Management expected selling and marketing costs to increase and anticipated significant increases in research and development in Q4 and thereafter. No quantitative revenue or earnings guidance was provided.
- A Q3 order to manufacturer RG Group totaled $5.392 million for inventory; the reported deposit balance was $529,142 at quarter-end. Two customers accounted for 30% of Q3 revenue; three accounted for 34% of nine-month revenue, and two customers represented 32% of receivables. These concentrations and supplier reliance may affect results and working capital.
- Management stated disclosure and internal controls were effective and reported no material legal proceedings, defaults, or off-balance-sheet arrangements. The filing notes that forward-looking statements are subject to uncertainties; it does not provide a detailed updated risk-factor discussion beyond referring investors to the 2014 Form 10-K.
Key facts for investors to verify
- Whether revenue growth converts into improved margins and lower operating cash burn as sales and R&D spending rise.
- Delivery and payment timing for the $5.392 million inventory order, and the company’s ability to manage inventory, receivables, and supplier concentration.
- Progress against USAID grant milestones and the timing and amount of any further grant receipts.
- Current cash runway, customer concentration, and the dilutive effect of outstanding warrants and future equity needs.
- Commercial adoption and regulatory status of SteraMist in target markets, including any required FDA or USDA approvals mentioned by management.