TOMI Environmental Solutions, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Interim financial statements are unaudited. TOMI sells equipment and services and licenses its SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide-based decontamination system.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $676,386 | $273,029 | Up 148% |
| Gross profit | $397,910 | $159,184 | Up $238,726 |
| Gross margin | 58.8% | 58.3% | Up about 0.5 percentage point |
| Operating loss | $(424,009) | $(1,561,689) | Improved $1.14 million |
| Net loss | $(4,271,805) | $(97,208) | Worsened $4.17 million |
| Basic and diluted loss per share | $(0.05) | $(0.00) | |
| Operating cash used | $(541,044) | $(386,129) | Use increased $154,915 |
Product and equipment revenue was $563,000, BIT solution revenue $95,000, and maintenance fees $18,000. U.S. revenue was $569,000 and international revenue $107,000. Management attributed revenue growth to expansion into new markets, improved product availability, and a more diverse client base.
The operating-loss improvement primarily reflects equity compensation expense declining to $125,087 from $1.14 million. The net loss instead reflects a $2.67 million noncash loss from revaluing the embedded convertible-note derivative, versus a $1.75 million gain in Q1 2014, and $963,348 of debt-discount amortization versus $74,968. Interest expense was approximately $127,000 in both periods.
Liquidity, debt, and capital
- At March 31, cash and cash equivalents were $173,996; restricted cash was $716. Current assets were $1.89 million and current liabilities $7.30 million, producing a working-capital deficit of approximately $5.41 million. Stockholders’ deficit was $2.57 million.
- Cash used in operations was $541,044; investing activities used $9,793. Financing activities provided $564,273, principally from stock and warrant sales. Cash increased about $13,435 during the quarter.
- Convertible notes had $5.074 million principal, are secured by company assets including intellectual property, and mature July 31, 2015. Their carrying amount, net of $3.03 million unamortized discount, was $2.04 million. Accrued interest on the notes was $84,567.
- The embedded conversion-feature derivative liability, measured using Level 3 assumptions, increased from $1.73 million at year-end to $4.40 million. Changes in its estimated fair value significantly affected reported earnings.
- Quarterly equity-unit sales generated $510,213 gross proceeds; the filing also reports a May 2015 direct common-stock sale of $225,000. Common shares outstanding were 85,526,522 at quarter-end and 85,582,909 as of May 4, 2015.
Material changes, outlook, and risks
- Management states that recurring operating losses, negative operating cash flow, low cash, working-capital and equity deficits, and the need for additional capital raise substantial doubt about TOMI’s ability to continue as a going concern. It warns that unavailable or unacceptable financing could force substantial curtailment or cessation of operations, and that equity financing could materially dilute shareholders.
- The notes require 15% of reported quarterly revenue to be deposited into a sinking fund. TOMI reported depositing approximately $102,000 in May 2015 for Q1 revenue.
- Management plans to fund operations through product and service sales, licensing, debt, and/or equity financing, but provides no quantified forecast or assurance that sufficient funding will be available.
- Potential growth initiatives include international distribution, the TOMI Service Network, and a proposed USAID award for mobile decontamination chambers. The company said it was in the final stages of receiving the USAID contract; the filing does not report that an award was finalized.
- TOMI said it was awaiting a second EPA label for healthcare-hospital disinfectant use and pursuing FDA and USDA approvals for additional applications. Approval timing and outcomes are uncertain.
- In April 2015, TOMI revised the Mexican distributor’s $300,000 licensing-fee payment terms so payment would occur after the distributor sells the relevant product. Revenue and collection timing may therefore depend on downstream sales.
- The company reported no material legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements. Management stated disclosure controls were effective for the quarter and that there were no control changes during the period.
Most important facts for investors to verify
- Whether TOMI obtained sufficient near-term financing and met obligations associated with the July 31, 2015 convertible-note maturity.
- Actual operating cash burn, collections, inventory conversion, and the availability and use of sinking-fund cash.
- Whether revenue growth translated into repeat orders and sustainable margins, and whether reported sales and distributor arrangements are collectible.
- Progress and final status of the USAID contract, EPA label, and FDA/USDA applications.
- Potential dilution from outstanding convertible notes, warrants, options, and further equity financing; the filing lists 32.45 million warrants and 17.50 million potential shares from convertible debentures at March 31, 2015.
- Sensitivity of the $4.40 million Level 3 derivative liability to valuation assumptions and the resulting volatility in reported earnings.