TOMI Environmental Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. TOMI sells and services SteraMist disinfection and decontamination products, including equipment, custom engineered systems (CES), solution and services.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.760 million | $2.205 million | $5.527 million | $5.744 million |
| Gross profit / margin | $1.071 million / 60.9% | $1.314 million / 59.6% | $3.413 million / 61.8% | $3.491 million / 60.8% |
| Operating loss | $654,000 | $487,000 | $2.176 million | $3.190 million |
| Net loss | $653,000 | $487,000 | $2.175 million | $2.776 million |
| Loss per share | $(0.03) | $(0.03) | $(0.11) | $(0.17) |
- Q3 revenue fell 20% year over year; nine-month revenue fell 4%. Management attributed the declines primarily to customer delivery restrictions and timing of revenue recognition on equipment and CES orders.
- Nine-month product revenue increased about 3% to $4.448 million, while service and training revenue declined 24% to $1.079 million. International revenue rose to $1.191 million from $727,000, while U.S. revenue declined.
- Nine-month operating expenses decreased 16% to $5.589 million, helping improve the operating loss by about 32%. The prior-year nine-month net loss included a $415,000 debt-extinguishment gain; there was no such gain in 2022.
- Cash used in operations was $929,000 for the nine months, compared with $3.823 million in 2021. Investing used $78,000; financing provided $25,000. Cash declined to $4.335 million from $5.317 million at year-end 2021.
Financial position and liquidity
- At September 30, 2022, total assets were $15.645 million, shareholders’ equity $11.797 million, and working capital $9.319 million. Current assets were $12.382 million and current liabilities $3.063 million, including $1.155 million of deferred revenue.
- The filing reports no conventional borrowings; long-term obligations shown are operating lease liabilities of $885,000, including $100,000 current. The company also reported a $543,000 operating lease right-of-use asset.
- Management stated existing cash and anticipated operating cash flows should cover operations, working capital and capital expenditures for the next 12 months. This expectation is subject to continued losses, cash burn and the timing of customer orders and collections.
Changes, outlook and risks
- Management reported 20% sequential revenue growth versus Q2 2022 and a 24% sequential reduction in operating loss. It also cited increased customer orders and a September 30 backlog of approximately $2.659 million, with $1.434 million expected to be recognized in Q4 2022 and $1.225 million in 2023. The backlog included $1.155 million in customer deposits.
- For the first nine months, TOMI reported approximately $7.9 million of sales orders, which management said was 25% growth versus the comparable prior-year period. Orders are not recognized revenue; delivery, customer timelines, supply availability and installation may affect conversion and timing.
- Management cited demand for CES and mobile equipment, expanded manufacturing capacity and sales staffing, and new product development. It expected two CES installations under manufacture to generate about $250,000 in annual BIT Solution revenue beginning at the end of 2023. No formal full-year revenue or earnings guidance was provided.
- Management said reduced post-pandemic spending weakened demand for disinfection products. Other cited uncertainties include customer budgets, sales-cycle and installation length, supply-chain or vendor constraints, and regulatory approval timing. The company said it had not been significantly affected by global supply-chain issues to date.
- Disclosure controls were not effective at the reasonable-assurance level because of a previously disclosed material weakness in internal control over financial reporting. Remediation, including tighter review and approval procedures for bad-debt reserves, was ongoing; management anticipated completion before year-end 2022 but gave no assurance.
- Management reported no material pending legal matters and no product-liability claims. One customer represented 20% of Q3 revenue; three customers represented 35% of accounts receivable at quarter-end.
- After quarter-end, on November 9, 2022, the board approved extending the expiration dates of three CEO-held warrants, covering 593,750 shares in total, by ten years. The filing says a disinterested majority approved the amendment.
Important facts for investors to verify
- Whether the $2.659 million backlog converts on the stated schedule, and whether delivery or installation delays change revenue timing or customer deposits.
- Cash runway and the assumptions behind management’s statement that resources are sufficient for the next 12 months, given operating losses and continued cash use.
- Progress and testing of remediation for the material weakness, particularly controls over receivables and bad-debt reserves.
- Potential dilution from outstanding options and warrants and the economic terms and governance review of the CEO warrant extensions.
- Share-count reconciliation: the balance sheet reports 16,761,513 common shares at December 31, 2021, while the equity statement reports 19,680,955 at January 1, 2022. The filing text does not clearly reconcile this difference. Investors should also check reported revenue-detail figures where the MD&A contains apparent inconsistencies with the financial statements or notes.