TOMI Environmental Solutions, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The company provides infection-prevention and decontamination products and services, primarily through its SteraMist Binary Ionization Technology (BIT). This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.092 million | $1.017 million | $4.528 million | $2.433 million |
| Gross profit | $661,000 | $618,000 | $2.642 million | $1.480 million |
| Gross margin | 60.5% | 60.8% | 58.3% | 60.8% |
| Operating loss | $935,000 | $546,000 | $2.763 million | $2.829 million |
| Net loss | $935,000 | $546,000 | $2.549 million | $12.020 million |
| Basic and diluted loss per share | $(0.01) | $(0.00) | $(0.02) | $(0.12) |
- Nine-month revenue increased 86%; Q3 revenue increased 7%. For nine months, domestic revenue was $3.010 million and international revenue $1.518 million. Q3 domestic revenue was $747,000, while international revenue was $346,000.
- Operating expenses were $1.596 million in Q3, up 37%, and $5.405 million for nine months, up 25%. Nine-month selling expense rose 245% to $1.153 million and general and administrative expense rose 123% to $2.506 million. Management attributed these increases mainly to sales and marketing expansion and new hires.
- Nine-month net loss improved substantially, chiefly because 2015 included large noncash debt-discount and derivative-liability charges and costs associated with retiring convertible notes. In 2016, the company recorded $202,000 of grant income and a $12,000 gain on equipment disposition. Operating losses persisted; Q3 net loss widened 71% year over year.
- Cash and cash equivalents were $1.288 million at September 30, 2016, versus $5.916 million at December 31, 2015. Working capital was $6.210 million, down from $7.880 million. Current assets were $7.470 million and current liabilities $1.260 million.
- Operating cash use was $4.180 million for nine months, compared with $1.803 million in 2015; investing cash use was $449,000, mainly for equipment. There was no financing cash inflow in 2016. The $3.163 million inventory increase was a major operating cash outflow; inventory stood at $4.558 million, mostly finished goods.
- The balance sheet reported no convertible debt or other interest-bearing debt at period-end; the prior convertible notes had been retired in 2015. Total liabilities were $1.260 million. Stockholders’ equity was $8.786 million.
Material changes, outlook, and risks
- Management said existing cash and expected operating receipts should fund operations, working capital, and capital expenditures for the next 12 months, but cautioned that sales may not cover costs and that additional debt or equity financing may be needed. The filing provides no quantified revenue or earnings guidance.
- Management cited EPA label expansion, hiring and developing a domestic salesforce, adding international distributors, and growing the TOMI Service Network as priorities. The filing describes EPA label expansion for C. diff, MRSA, and H1N1, testing for additional organisms, and commercial trials and customer activity. These are plans and developments, not assured sales.
- Key exposures include continued operating losses and cash burn, a sales cycle that may exceed four to six months, possible financing needs and dilution, and dependence on a concentrated supplier: RG Group accounted for 76% of nine-month cost of goods sold and 57% of accounts payable at quarter-end. Three customers generated 32% of Q3 revenue; two generated 26% of nine-month revenue.
- Accounts receivable included a $200,000 doubtful-account allowance, up from $45,000 at year-end; one customer represented 12% of receivables. The company had no inventory-obsolescence or warranty reserve. These estimates and concentrations merit monitoring.
- The company had 36.8 million warrants outstanding, compared with 120.8 million common shares outstanding at September 30. Potential exercise could dilute shareholders. The 2016 equity plan authorizes up to 5 million shares.
- After quarter-end, on November 10, 2016, the company entered a restated two-year manufacturing and development agreement with RG Group, with extension provisions, a one-year product-defect warranty, and no minimum purchase commitments. Management reported no material legal proceedings or material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth converts into improved gross margins, lower operating losses, and positive operating cash flow.
- How quickly the expanded sales effort, EPA registrations, healthcare trials, distributor arrangements, and service-network memberships generate recurring, collectible revenue.
- Whether inventory of $4.558 million is supported by firm demand and turns into cash without material write-downs.
- Cash runway and any need, terms, or dilution from future financing; management’s 12-month liquidity expectation is subject to stated operating and market uncertainties.
- Supplier continuity and terms under the RG Group agreement, and the company’s ability to reduce supplier and customer concentration.
- Potential dilution from outstanding warrants and equity awards, and the costs and requirements of any intended national-exchange uplisting.