TOMI Environmental Solutions, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 14, 2019. TOMI sells, licenses and services its SteraMist disinfection and decontamination products using its Binary Ionization Technology platform.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1.253 million | $1.312 million |
| Gross profit / margin | $759,000 / 60.6% | $821,000 / 62.5% |
| Operating expenses | $1.627 million | $1.317 million |
| Operating loss | $868,000 | $496,000 |
| Net loss | $935,000 | $563,000 |
| Basic and diluted loss per share | $0.01 | $0.00, rounded |
| Cash used in operations | $649,000 | $683,000 |
- Revenue decreased 4.6%; product sales were $1.029 million versus $1.092 million, while service and training revenue was $224,000 versus $220,000.
- U.S. revenue rose to $1.136 million from $945,000; international revenue fell to $117,000 from $367,000.
- Selling expense more than doubled to $442,000, reflecting sales headcount, commissions, trade shows and marketing investment. Equity compensation expense increased to $81,000 from $13,000. Management attributed the larger net loss mainly to lower revenue and gross profit and higher operating expenses.
Financial position and liquidity
- At March 31, cash and cash equivalents were $1.196 million, down $809,000 from year-end. Working capital was $4.757 million, compared with $5.544 million at December 31, 2018.
- Total assets were $9.643 million; shareholders’ equity was $2.245 million. Current liabilities were $1.308 million.
- Convertible notes were $5.0 million. The remaining notes were extended on March 30, 2019 to April 3, 2020. If not paid by the extended maturity after five days’ written notice, holders may convert at $0.11 per share, potentially into 45,454,545 common shares.
- Investing cash outflow was $160,000, including $126,000 of capitalized software costs and $35,000 of property and equipment purchases. Financing cash flow was zero.
- Operating lease liabilities totaled $1.113 million, including $23,000 current; adoption of ASC 842 brought lease assets and liabilities onto the balance sheet. The company also reported $1.112 million in right-of-use assets? Correction: the filing reports a right-of-use asset of $704,000 at March 31.
Changes, outlook and risks
- Management said sales vary with customer mix, long sales cycles and timing of higher-priced equipment orders; it described customers as early in adoption and said repeat consumables orders were trending positively. It expects more predictable sales as adoption matures.
- Management increased sales and marketing investment and hoped to see revenue benefits in the second half of 2019 from national sales groups onboarded during the first half. No quantified revenue or earnings guidance was provided.
- Management stated that cash and expected operating funds should cover operations, working capital and capital spending for the next 12 months, but cautioned that financing may be needed and may not be available on acceptable terms. It warned that failure to execute its plans or obtain financing could require cost reductions or project delays.
- Customer concentration is significant: two customers generated 45% of Q1 2019 revenue and represented 41% of receivables at March 31. One vendor represented 67% of cost of sales.
- Potential dilution is material: 26.8 million warrants, 620,000 options and 510,000 Series A preferred shares were outstanding, in addition to the conversion exposure under the notes. Common shares outstanding were 124.7 million at March 31.
- Subsequent events included an April Israeli distribution agreement and product registration, and a May sale exceeding $400,000 to the Kansas Department of Health. These were after quarter-end and are not Q1 revenue.
- Management reported no material legal proceedings and no material changes in internal control over financial reporting. The filing identifies no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether the May Kansas sale and expanded distribution and registrations convert into recurring revenue and cash collections.
- Cash runway, operating cash burn and the assumptions supporting management’s 12-month liquidity assessment.
- Repayment or conversion outcome for the $5 million notes, including the potential 45.5 million-share issuance at $0.11.
- Progress in reducing customer and supplier concentration and sustaining gross margins as product mix changes.
- Whether increased selling costs and product-development investment produce the expected sales growth, and whether the software reaches release and begins amortization.