TOMI Environmental Solutions, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited interim financial statements; comparisons are with the corresponding 2013 periods. TOMI sells equipment, services and licenses for its SteraMist Binary Ionization Technology (BIT) decontamination products.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $416,455 | $172,864 | $689,484 | $212,029 |
| Gross profit | $278,315 | $110,930 | $437,498 | $116,725 |
| Gross margin | 66.8% | 64.2% | 63.5% | 55.1% |
| Operating expenses | $1,002,561 | $503,863 | $2,723,433 | $699,294 |
| Operating loss | $(724,246) | $(392,933) | $(2,285,935) | $(582,569) |
| Net income (loss) | $415,861 | $(7,985,934) | $318,653 | $(8,178,627) |
| Cash used in operations | Not separately stated | Not separately stated | $(388,181) | $(390,012) |
Q2 revenue increased 141%; six-month revenue increased 225%. Six-month product/equipment revenue was $414,000, BIT solution revenue $190,000, services $21,000, maintenance fees $54,000 and training $10,000. International revenue was $137,000, versus none reported in the prior period.
Net income was materially affected by a noncash gain from remeasurement of the embedded conversion-feature derivative: $1.495 million in Q2 and $3.246 million for the six-month period. The six-month 2013 comparison included a $4.556 million derivative loss and $2.868 million of financing costs. TOMI continued to report substantial operating losses.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $209,323, restricted cash was $139,924, current assets were $1.249 million and current liabilities were $5.354 million. Management reported a $4.105 million working-capital deficiency and an $888,000 stockholders’ deficiency.
- Cash and equivalents declined from $706,350 at year-end 2013. Six-month cash used in investing was $39,046; financing used $69,800, primarily for the bond sinking fund.
- Convertible notes had $5.074 million principal, due July 31, 2015, bearing 10% interest. Their reported net carrying amount was $287,896 after a substantial unamortized discount; accrued interest was $211,417. The notes are secured by specified company assets and include a sinking-fund requirement to deposit 15% of reported revenue.
- The Level 3 derivative liability was $4.419 million, down from $7.666 million at December 31, 2013. Its valuation uses a Monte Carlo model and significant unobservable assumptions.
Material changes and management commentary
- Management attributed revenue growth to control of the SteraMist product line and manufacturing after the 2013 L-3 asset acquisition, improved product availability, customer diversification and increased sales, marketing and trade-show activity.
- Operating expenses rose substantially, including $1.406 million of six-month noncash equity compensation, higher payroll and administrative costs, and increased selling and R&D spending. Management also cited higher gross margins from economies of scale.
- Management stated that the company has an immediate and urgent need for additional capital. The filing says substantial doubt exists about TOMI’s ability to continue as a going concern; continued operations depend on profitable operations and/or additional financing, for which availability and acceptable terms are not assured.
- In April 2014, TOMI entered inventory purchase commitments totaling $465,000. It reported no material legal proceedings and no off-balance-sheet arrangements.
Outlook, risks and subsequent events
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects to seek liquidity through product and service sales, licensing, debt financing and/or equity or convertible-note issuance; financing may be unavailable or significantly dilutive.
- Potential dilution is significant: 28.6 million warrants were outstanding, alongside convertible debt and other potential share issuances. The company reported 80.2 million common shares outstanding at June 30 and 80.8 million as of August 12.
- In July, TOMI sold 340,740 shares for approximately $92,000. Its CFO resigned effective July 18, 2014.
- The filing identifies risks from low cash, recurring operating cash use, dependence on external capital, debt and interest obligations, derivative valuation volatility, and possible dilution. Results for the interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether TOMI can raise sufficient capital or generate operating cash to address the disclosed going-concern uncertainty and near-term liquidity needs.
- The terms, repayment capacity and security of the $5.074 million convertible notes, including the sinking-fund deposits and accrued interest.
- Whether revenue growth—particularly international sales and recurring maintenance/service revenue—can continue and support improving operating results.
- The valuation assumptions and potential earnings effects of the Level 3 derivative liability, and the extent of dilution from warrants, convertible notes and other equity awards.
- The effects of the CFO’s departure, the $465,000 inventory commitment and subsequent share issuance on execution and liquidity.