TOMI Environmental Solutions, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017. TOMI sells and licenses its SteraMist Binary Ionization Technology (BIT) disinfection products and provides related services. The unaudited statements are prepared under U.S. GAAP.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or prior balance-sheet date |
|---|---|---|
| Revenue | $1.312 million | $1.099 million; up 19% |
| Gross profit / margin | $821,000 / approximately 62.5% | $683,000 / approximately 62.1% |
| Operating expenses | $1.317 million | $1.294 million |
| Operating loss | $496,000 | $612,000 |
| Net loss | $563,000; reported loss per share rounded to $(0.00) | $626,000; $(0.01) per share |
| Cash used in operations | $683,000 | $248,000 |
| Cash and cash equivalents | $3.867 million | $4.550 million at Dec. 31, 2017 |
| Working capital | $8.724 million | $9.073 million at Dec. 31, 2017 |
| Convertible notes, net | $5.952 million | $5.944 million at Dec. 31, 2017 |
| Total liabilities | $6.893 million | $7.047 million at Dec. 31, 2017 |
Product sales were $1.092 million, up from $821,000; service and training revenue was $220,000, down from $278,000. U.S. revenue was $945,000 and international revenue was $367,000. No property-and-equipment purchases or financing proceeds were reported in Q1 2018. Cash declined by $683,000 during the quarter.
Material changes versus Q1 2017
- Revenue and gross profit increased, while the gross margin was broadly stable. Management attributed U.S. growth to large equipment orders from new customers and repeat solution orders, and international growth to existing customers in Europe and Asia.
- Professional fees fell to $106,000 from $272,000, largely because the prior-year period included costs related to intellectual-property matters and the Astro Pak lawsuit, settled in July 2017.
- Research and development expense rose to $132,000 from $31,000, primarily for studies and testing of hospital terminal cleaning. Selling expense increased to $204,000 from $179,000; general and administrative expense increased to $664,000 from $610,000.
- Interest expense rose to $60,000 from $14,000. Despite improved net loss, operating cash use increased, mainly reflecting higher receivables and lower accounts payable, partly offset by lower inventory.
Outlook, risks, and notable items
- Management said existing cash and expected operating receipts should cover operations, working capital, and capital expenditures for the next 12 months, but cautioned that results and cash flows are uncertain. It warned that revenue may not cover operating and compliance costs and that additional debt or equity financing may be needed; financing may not be available on acceptable terms or at all. The sales cycle may exceed four to six months.
- The $6.0 million, 4% convertible notes were extended in February and March 2018: $5.3 million principal to April 1, 2019 and $700,000 to June 8, 2019. In May 2018, a holder agreed to convert $700,000 principal at a reduced $0.46-per-share price. The original conversion price was $0.54 per share.
- Potential dilution is significant: at March 31, 2018, approximately 11.1 million shares were issuable on conversion of debt, 35.3 million on warrant exercise, 320,000 on option exercise, and 510,000 on conversion of Series A preferred stock. These were excluded from diluted loss per share as anti-dilutive. Common shares outstanding were 122.35 million at quarter-end.
- Customer and supplier concentrations are notable: three customers represented 33% of Q1 revenue; one vendor accounted for 70% of cost of sales and approximately 35% of accounts payable. Management reported no material legal proceedings or product-liability claims.
- In April 2018 the company signed a 10-year lease for a new 9,000-square-foot Maryland facility, commencing December 1, 2018, with annual rent of $143,460, 3% annual increases, and a $405,000 tenant-improvement allowance. The company expected to adopt the new lease accounting standard in 2019 and was still assessing its impact.
- Management described plans to expand sales, international registrations, marketing, research, and the TOMI Service Network. No quantified revenue or earnings guidance was provided. The filing cites regulatory and product-registration delays in Asia and Europe, variable order timing, sales-cycle length, and possible financing needs as risks.
Most important facts for investors to verify
- Whether revenue growth converts into improved operating cash flow; Q1 operating cash use was $683,000 despite higher sales.
- Cash runway and any subsequent financing, including the status and terms of the agreed $700,000 note conversion.
- Actual dilution from convertible debt, warrants, options, and preferred stock, and the resulting share count.
- Customer and supplier concentration, receivable collection, and the timing and repeatability of equipment orders.
- Costs and financial effects of the new facility lease, and whether international registrations and healthcare studies lead to additional sales.