TOMI Environmental Solutions, Inc. quarterly report, Q2 FY2019

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TOMI Environmental Solutions, Inc. — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. TOMI sells, licenses and services SteraMist products based on its Binary Ionization Technology for disinfection and decontamination across healthcare, life sciences, service-network and food-safety markets.

Financial performance and position

  • Q2 revenue: $1.639 million, up 32% from $1.246 million. Product revenue rose to $1.504 million from $1.018 million; service and training revenue fell to $135,000 from $228,000.
  • Six-month revenue: $2.891 million, up 13% from $2.559 million. Product revenue increased to $2.533 million from $2.110 million, while service and training declined to $358,000 from $449,000.
  • Geography: U.S. revenue increased to $1.428 million in Q2 from $850,000; international revenue decreased to $211,000 from $396,000.
  • Gross profit and margin: Q2 gross profit was $975,000, with a 59.5% margin versus $689,000 and 55.2%. Six-month gross profit was $1.735 million, with a 60% margin versus $1.509 million and 59%.
  • Operating results: Q2 operating loss narrowed to $535,000 from $866,000, and net loss narrowed to $585,000 from $986,000. Six-month operating loss was $1.403 million versus $1.363 million; net loss was $1.519 million versus $1.549 million. Basic and diluted loss per share was $0.00 in Q2 (rounded) and $0.01 for the six months.
  • Cash flow: Cash used in operations was $120,000 for the six months, compared with $1.211 million a year earlier. Investing activities used $253,000, primarily for software development and equipment. Financing cash flow was zero. Cash declined by $373,000 to $1.632 million.
  • Liquidity and debt: Current assets were $5.792 million and current liabilities $6.566 million, including $5.0 million of convertible notes classified as current and due April 3, 2020. Working capital was negative $775,000 including the notes, but positive $4.225 million excluding them. The notes bear 4% interest.
  • Balance sheet: Total assets were $9.306 million, total liabilities $7.638 million and shareholders’ equity $1.668 million. The new operating-lease liability was $1.132 million, split between current and long-term portions.

Changes versus the comparable period

  • Q2 revenue growth and improved product/customer mix lifted gross margin and reduced the quarterly net loss. Management attributed Q2 sales growth to larger equipment orders from new customers and repeat solution orders.
  • For the six months, increased gross profit and lower other expense were offset by higher operating expenses; the net loss improved only 2%. Selling expense rose 51% to $960,000, reflecting sales hiring, representative onboarding, marketing and trade shows. General and administrative expense declined 7% to $1.303 million.
  • Six-month U.S. revenue rose to $2.563 million from $1.801 million, while international revenue fell to $328,000 from $758,000.
  • TOMI adopted ASC 842 on January 1, 2019, recognizing a right-of-use asset and lease liability. The filing says this materially affected the balance sheet but did not materially affect operating results or cash flows. It also capitalized $126,000 of software development costs in the first half.

Outlook, risks and notable items

  • Going concern: Management states the company does not have sufficient resources to repay the $5.0 million notes when due; the working-capital deficit raises substantial doubt about its ability to continue as a going concern. Management plans to raise additional capital. Although it expects cash and operating receipts to meet needs over the next 12 months, it cautions that financing may not be available on acceptable terms or at all.
  • If the notes are not paid by maturity, after five days’ written notice holders may convert them at $0.11 per share, potentially issuing 45,454,545 common shares. This presents material dilution risk.
  • Management expects sales initiatives and newly onboarded sales groups to support revenue in the second half, but provides no quantified financial guidance. Revenue may fluctuate with sales-cycle length, territory expansion and distributor-order timing.
  • Management cited a Q2 order exceeding $400,000 from the Kansas Department of Health, new customer wins, and increased activity in healthcare and the TOMI Service Network. It also reported that early-third-quarter service revenue had already exceeded full-year 2018 service revenue; these are management statements, not reported-period results.
  • Growth opportunities discussed include food safety, international distribution and product development. Some depend on regulatory approvals, market adoption and completion of testing or customer proposals; the filing does not quantify expected revenue from them.
  • Customer concentration remains notable: one customer represented 26% of Q2 2019 revenue, and two represented 29% of first-half revenue. One vendor represented 79% of Q2 cost of sales and 74% of first-half cost of sales; one vendor accounted for about 45% of accounts payable at June 30.
  • Common shares outstanding were 124.7 million at June 30. Approximately 37.2 million potential shares from debt conversion, warrants, options and preferred stock were excluded from diluted loss per share as anti-dilutive.
  • The company reported no material legal proceedings, product-liability claims or off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.

Investor verification priorities

  1. Confirm the company’s plan and funding capacity to repay, refinance or otherwise address the $5.0 million notes before April 3, 2020, and assess the going-concern disclosure.
  2. Track cash use, collections and the gap between working capital with and without the notes; assess whether operating cash generation can improve sustainably.
  3. Verify whether revenue growth continues and is diversified, particularly given lower service revenue, declining international sales and customer/vendor concentration.
  4. Assess the likelihood and dilution impact of note conversion at $0.11, alongside outstanding warrants, options and other potential share issuance.
  5. Monitor whether proposed market expansions, regulatory steps and product-development investments produce commercial revenue, and whether higher selling costs translate into profitable growth.