TOMI Environmental Solutions, Inc. — Q3 2019 Form 10-Q
Business and period: TOMI sells, licenses and services SteraMist, a hydrogen-peroxide-based disinfection and decontamination technology. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.600 million | $1.948 million | $4.492 million | $4.507 million |
| Gross profit / margin | $1.140 million / 71.2% | $1.035 million / 53.1% | $2.875 million / 64.0% | $2.545 million / 56.4% |
| Operating expenses | $1.328 million | $1.349 million | $4.466 million | $4.222 million |
| Operating loss | $(188,000) | $(314,000) | $(1.591) million | $(1.677) million |
| Net loss | $(237,000) | $(373,000) | $(1.756) million | $(1.922) million |
| Net loss per share | $(0.00) | $(0.00) | $(0.01) | $(0.02) |
Revenue mix and trends: Q3 product revenue was approximately $928,000, down from $1.613 million; service and training revenue rose to $672,000 from $335,000, a reported 101% increase. Nine-month product revenue declined to $3.461 million from $3.723 million, while service and training rose to $1.031 million from $784,000. Management attributed lower overall revenue mainly to a large custom-equipment order in the prior-year quarter. Higher gross margins reflected product mix and the absence of that prior-year low-margin order.
Cash flow and liquidity: Cash and equivalents were $1.144 million at September 30, 2019, versus $2.005 million at December 31, 2018. Nine-month operating cash use was $573,000, improved from $1.246 million in 2018, primarily due to receivable collections and lower inventory. Investing cash use was $288,000, including $126,000 of capitalized software development, $22,000 of patent costs and $141,000 of property and equipment purchases. Financing cash flows were zero. Working capital was negative $880,000 including convertible notes; excluding those notes, it was positive $4.120 million.
Debt and balance sheet: The company reported $5.0 million of convertible notes, classified as current and due April 3, 2020. Total liabilities were $7.162 million and shareholders’ equity was $1.431 million at September 30. The company adopted lease accounting in 2019 and reported $1.122 million of operating lease liabilities, including a $684,000 right-of-use asset.
Material changes, outlook and risks
- Q3 revenue declined 18%, but net loss narrowed 36%; nine-month revenue was nearly flat and net loss narrowed 9%. Nine-month operating expenses increased about $244,000, notably as selling expenses rose 27% to $1.274 million, partly offset by lower R&D and general and administrative costs.
- Management described the product adoption cycle as early, citing recurring solution orders, a strong sales pipeline, customer growth and service-revenue gains. It expected more predictable sales as customers adopt the technology, but gave no quantified revenue or earnings guidance. It hoped increased sales-group onboarding would support fourth-quarter revenue.
- Management stated that existing cash and expected operating cash flows should cover operating, working-capital and capital-expenditure needs for the next twelve months. However, the filing says the company lacks sufficient resources to repay the $5.0 million notes at maturity, plans to raise additional capital, and that this creates substantial doubt about its ability to continue as a going concern. Financing may not be available on acceptable terms or at all; equity financing could dilute shareholders.
- If the notes are not paid by maturity and required notice is given, holders may convert at $0.11 per share, potentially into 45,454,545 common shares. Separately, the filing lists 21.34 million warrants, 620,000 options and 510,000 Series A preferred shares convertible into common stock; these securities were excluded from diluted loss per share as anti-dilutive.
- Business risks include revenue volatility from sales-cycle timing, distributor orders and expansion into new markets; customer and vendor concentration; and dependence on successful product adoption, regulatory registrations and additional capital. One customer represented 12% of Q3 revenue; two customers accounted for 22% of receivables. No material legal proceedings or product-liability claims were reported. In November 2019, the company increased authorized common shares from 200 million to 250 million.
Important facts for investors to verify
- Whether TOMI can raise sufficient capital or otherwise repay or refinance the $5.0 million notes before the April 3, 2020 maturity, and the terms and potential dilution of any financing or conversion.
- Cash burn, liquidity and working-capital trends, including whether operating cash flow improves enough to fund operations and debt obligations.
- Whether service growth and recurring solution orders can offset weaker equipment sales and produce sustained revenue growth and improved margins.
- Progress and commercial impact of the stated sales pipeline, customer additions, food-safety opportunities and pending Chinese registration; these are management expectations, not guaranteed outcomes.
- Potential dilution from outstanding warrants, options, preferred shares and the notes’ contingent conversion feature.