TOMI Environmental Solutions, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; filed November 14, 2017.
Business context
TOMI provides infection-prevention and decontamination equipment, services and licensing, primarily through its SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide-based system. Its target markets include healthcare, life sciences, pharmaceutical, clean-room, research and remediation. The company reports one operating segment.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1.03 million | $1.09 million | $3.51 million | $4.53 million |
| Gross profit | $641,000 | $661,000 | $2.19 million | $2.64 million |
| Gross margin | 62.2% | 60.5% | 62.4% | 58.4% |
| Operating expenses | $1.04 million | $1.60 million | $4.35 million | $5.41 million |
| Operating loss | ($396,000) | ($935,000) | ($2.16 million) | ($2.76 million) |
| Net loss | ($457,000) | ($935,000) | ($2.30 million) | ($2.55 million) |
| Loss per share, basic and diluted | ($0.00) | ($0.01) | ($0.02) | ($0.02) |
For the nine months, SteraMist product revenue was $2.71 million versus $3.98 million; service and training revenue increased to $796,000 from $544,000. U.S. revenue was $2.50 million versus $3.01 million, while international revenue was $1.01 million versus $1.52 million.
At September 30, cash and cash equivalents were $5.27 million, current assets $11.57 million, current liabilities $6.85 million, working capital $4.72 million, and shareholders’ equity $6.32 million. Cash was $948,000 and working capital $5.72 million at December 31, 2016. The balance sheet lists $6.0 million face value of convertible notes: $5.3 million due August 2018 and $700,000 due November 2018. Net carrying value was approximately $5.94 million, including debt discount.
Nine-month operating cash use was $1.72 million, compared with $4.18 million in 2016; investing cash use was $8,000 versus $449,000. Financing provided $6.05 million, principally from the note placement. Cash increased by $4.32 million to $5.27 million. The notes bear 4% interest, are convertible at $0.54 per share, and were issued with warrants for 999,998 shares at $0.69 per share.
Changes, outlook, and risks
- Revenue fell 6% in Q3 and 23% for the nine-month period. Management attributed the year-to-date decline primarily to a large distributor order in Q1 2016 that did not recur in 2017; it also cited slower-than-expected TSN network growth and the absence of a 2016 international distributor order.
- Despite lower sales, gross margin improved year to date, which management attributed to sales mix. Operating expenses declined year to date, including lower selling, general and administrative, and equity-compensation costs. Nine-month professional fees rose 97%, principally from intellectual-property protection work.
- Management said current cash and expected operating resources should cover operating, working-capital and capital-expenditure needs for the next 12 months, but cautioned that continued losses, sales-cycle timing and insufficient revenue could require additional financing or cost reductions. Sales cycles may exceed four to six months; additional financing is not assured.
- Management anticipated growth in 2018 from expanded life-sciences sales capacity, service work, TSN development, international registrations and distribution. No quantified revenue, profit or cash-flow guidance was provided. These expectations are forward-looking, not assured results.
- Risks include dependence on distributor order timing, customer concentration (three customers represented 39% of Q3 revenue), supplier concentration (one vendor supplied 72% of Q3 cost of goods sold), and potential dilution. At quarter-end, approximately 47.5 million shares were potentially issuable from debt conversion, warrants, options and preferred stock, in addition to about 122.0 million common shares outstanding.
- Unusual items: operating expenses included a negative “Other” line of $319,388 in Q3 and year to date; the filing text does not clearly explain this line. Equity compensation included a $22,000 reversal after a former employee’s unvested warrant terminated. TOMI disclosed a July 2017 settlement of its Astro Pak intellectual-property litigation, but did not state the cash settlement amount in the provided filing text.
- After quarter-end, the company reported a Premier group purchasing agreement, Canadian product registration and new distribution arrangements. These are developments described by management; their financial contribution was not quantified.
Important facts for investors to verify
- What drove the unexplained negative $319,388 “Other” operating-expense line, and how was the Astro Pak settlement reflected in the accounts?
- Can TOMI convert its sales pipeline, expanded sales force and TSN network into sustained revenue growth and operating cash flow?
- What are the timing and funding plans for the $6.0 million convertible-note maturities, and what dilution could result from conversion and outstanding warrants?
- How exposed are results to major customers and the concentrated manufacturing supplier, and are inventory levels appropriate given the revenue trend?
- Confirm the terms, timing and measurable commercial impact of post-quarter agreements and registrations; the filing provides no quantified forecast.