TOMI Environmental Solutions, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Financial statements are unaudited.
Business context
TOMI provides infection-prevention and decontamination products and services, primarily for life-sciences markets. Its SteraMist Binary Ionization Technology (BIT) is a hydrogen-peroxide-based decontamination system. The company reports one business segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.380m | $1.729m | $2.479m | $3.436m |
| Gross profit | $0.867m | $1.022m | $1.550m | $1.981m |
| Gross margin | 62.9% | 59.1% | 62.5% | 57.7% |
| Operating expenses | $2.023m | $1.811m | $3.317m | $3.809m |
| Loss from operations | $(1.156)m | $(0.790)m | $(1.767)m | $(1.828)m |
| Net loss | $(1.213)m | $(0.575)m | $(1.839)m | $(1.614)m |
| Basic and diluted loss per share | $(0.01) | $(0.00) | $(0.02) | $(0.01) |
- Q2 revenue fell 20%; SteraMist product revenue declined to $1.099m from $1.630m, while service and training revenue rose to $0.281m from $0.099m.
- Six-month revenue declined 28%. Management attributed much of the decrease to a large distributor order in Q1 2016 that did not recur. The distributor missed its 2017 minimum purchase commitment and lost exclusivity.
- Six-month U.S. revenue was $1.831m versus $2.263m; international revenue was $0.648m versus $1.172m. Management reported activity in pharmaceutical facilities and new distributor or sales-representative agreements in Chile, Brazil and Portugal.
- Gross margin improved in both comparison periods, which management attributed to sales mix. In Q2, operating expenses increased 12%, including higher professional fees related to intellectual-property protection and litigation; for the first half, operating expenses decreased 13%.
- Q2 net loss more than doubled year over year, reflecting lower revenue and gross profit, higher operating expenses, $57,000 of interest expense, and the absence of prior-year grant income and equipment-disposition gain. First-half net loss increased 14%, as lower gross profit and new interest expense outweighed lower operating expenses.
Cash flow, liquidity and debt
- Cash and cash equivalents were $5.468m at June 30, 2017, compared with $0.948m at December 31, 2016. Working capital was $10.435m, versus $5.716m; current liabilities were $1.110m.
- For the six months, operating cash use was $1.474m, compared with $3.040m in 2016; investing cash use was $6,000, compared with $448,000. Financing provided $6.000m from convertible notes. Ending cash was $5.468m.
- The company issued $6.000m of senior callable convertible notes in March and May. The notes bear 4% interest, with principal due in August and November 2018, and are convertible at the holder’s option at $0.54 per share. They were accompanied by three-year warrants for 999,998 shares at $0.69. Net carrying value at June 30 was $5.939m.
- Management said cash and expected operating resources should cover operations, working capital and capital expenditures for the next 12 months, but cautioned that additional financing may be needed if revenue or other developments are unfavorable. The company reported no off-balance-sheet arrangements.
Outlook, notable items and risks
- No quantified revenue, earnings or margin guidance was provided. Management’s stated priorities include expanding sales capacity and international distribution, pursuing product registrations and EPA-label expansion, and growing the TOMI Service Network and food-safety activity.
- Management cited sales-cycle length, distributor order timing, market expansion and sales-force ramp-up as factors that can cause revenue to fluctuate. It warned that the sales cycle may exceed four to six months and that revenue may not cover operating and compliance costs.
- In July 2017, TOMI settled its intellectual-property litigation with Astro Pak and SixLog. They agreed TOMI is the sole owner of the specified ionized hydrogen peroxide technology and related patents and products, to cease challenged conduct, and to pay a cash settlement; the filing text does not provide a clear settlement amount.
- In August 2017, the EPA label was expanded to include efficacy against Salmonella and Norovirus. Also in August, 975,000 warrants were exercised for gross proceeds of $48,750.
- Potential dilution is significant: at June 30, the company disclosed approximately 49.9m potential common shares from convertible debt, warrants, options and preferred stock; these were excluded from diluted loss per share as anti-dilutive. Common shares outstanding were 121.044m at June 30.
- Concentration exposures include one vendor representing 68% of first-half cost of goods sold and two customers representing 24% of first-half net revenue. One customer accounted for 11% of accounts receivable at June 30.
- The company reported no material legal proceedings as of filing and no product-liability claims. Management stated disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether product sales and international revenue recover after the distributor’s missed minimum purchase and loss of exclusivity.
- Whether operating cash use can be sustained against the stated 12-month liquidity expectation, and whether further financing will be required.
- The conversion, redemption and maturity terms of the $6.0m notes, and the potential share dilution from notes and warrants.
- The value and collection status of the Astro Pak settlement, and whether the settlement produces measurable commercial benefits.
- How vendor and customer concentration, along with the timing of large distributor orders, affect revenue and gross margins.