TOMI Environmental Solutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. TOMI sells and services SteraMist disinfection and decontamination products using its Binary Ionization Technology platform. The interim financial statements are unaudited.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.47 million | $1.76 million | $5.83 million | $5.53 million |
| Gross profit | $809,000 | $1.07 million | $3.45 million | $3.41 million |
| Gross margin | 55% | 61% | 59% | 62% |
| Operating expenses | $1.71 million | $1.72 million | $5.63 million | $5.59 million |
| Net loss | $901,000 | $653,000 | $2.18 million | $2.18 million |
| Loss per share, basic and diluted | $(0.05) | $(0.03) | $(0.11) | $(0.11) |
- Revenue mix: Q3 product revenue declined to $953,000 from $1.44 million, while service and training revenue rose to $517,000 from $325,000. For the first nine months, product revenue was $4.50 million and service revenue was $1.33 million.
- Cash flow: Operating activities used $2.36 million in the first nine months, versus $929,000 used in 2022. Investing used $94,000; financing provided no cash. Cash decreased by $2.46 million to $1.41 million.
- Liquidity and obligations: Working capital was $6.92 million, down from $8.84 million at year-end 2022. Current assets were $8.96 million and current liabilities $2.04 million. The company reported no funded debt at September 30; operating lease liabilities totaled $785,000, including $112,000 current.
- Balance sheet: Total assets were $12.19 million and shareholders’ equity was $9.48 million. Inventory was $4.48 million and net accounts receivable $2.37 million.
Changes versus comparable periods
- Q3 revenue fell about 16% year over year, which management attributed primarily to the timing of equipment orders and revenue recognition. Nine-month revenue increased about 5%.
- Q3 gross margin fell to 55% from 61%; management attributed the decline to product mix. Nine-month gross margin also declined, to 59% from 62%.
- Q3 net loss increased by approximately $248,000 year over year, while the nine-month net loss was nearly unchanged. Operating expenses were broadly stable in both comparisons.
- Nine-month operating cash use increased substantially. Management cited lower accounts payable from vendor-payment timing and the reduction in deferred revenue as factors.
- Domestic nine-month revenue increased, while international revenue declined; management cited distributor-order timing and onboarding. The filing’s geographic comparison contains inconsistent figures, noted below.
Outlook, developments and risks
- Management expects expanded sales channels to support revenue growth into year-end and 2024, citing eight new distributors and 11 sales representatives onboarded in 2023. It also describes a pipeline of custom engineered systems (CES) projects and expects installed systems to support recurring solution sales. These are expectations, not quantified guidance.
- During Q3, the company announced product launches, distribution and business-development partnerships, and CES activity, including delivery of a system to the Ragon Institute. It reported 15 CES orders to date. Management also cited new SteraMist Hybrid and Transport products and potential opportunities in life sciences, healthcare, food safety and commercial markets.
- Management said existing cash and expected operating resources would be sufficient for operations, working capital and capital expenditures over the next 12 months, while also noting possible financing needs and dilution risk.
- Subsequent financing: On November 7, 2023, TOMI issued $2.6 million of up to $5 million in convertible notes, before fees and expenses. The unsecured notes are senior, bear 12% annual simple interest payable monthly, mature in five years, and are convertible at the holder’s option at $1.25 per share, subject to a stated $1.55 cap. Additional conversion provisions may apply. Proceeds are intended for working capital, facility expansion and general corporate purposes.
- Risks include sustained operating losses and cash burn, fluctuating order timing, product-mix pressure on margins, customer and vendor concentration, reliance on distributors, and potential dilution or debt-service burden. Three customers accounted for 55% of Q3 revenue; two vendors represented 52% of accounts payable at quarter-end. Management described no material pending legal proceedings. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Most important facts for investors to verify
- Reconcile the MD&A’s nine-month cost-of-sales figure of $2.736 million with the financial statements’ $2.376 million; the MD&A’s stated gross profit and gross margin appear consistent with the financial-statement amount.
- Reconcile geographic revenue disclosures: the note reports nine-month 2022 U.S. revenue of $4.336 million and total revenue of $5.527 million, while the MD&A gives conflicting U.S. and total figures in its table and prose.
- Track cash burn, collections, customer deposits and the timing and terms of any additional note closings against management’s 12-month liquidity assessment.
- Assess the notes’ 12% interest cost, conversion and potential dilution terms, and the extent to which proceeds fund growth versus ongoing operating losses.
- Monitor whether new distributors, sales hires and CES projects convert into recognized revenue and recurring solution sales, and whether product mix supports gross-margin recovery.