TOMI Environmental Solutions, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. TOMI sells and licenses SteraMist, its hydrogen-peroxide-based disinfection technology, and provides related services and training.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.246 million | $1.380 million | $2.559 million | $2.479 million |
| Gross profit | $689,000 | $867,000 | $1.509 million | $1.550 million |
| Gross margin | 55.3% | 62.9% | 59.0% | 62.5% |
| Operating expenses | $1.555 million | $2.023 million | $2.872 million | $3.317 million |
| Operating loss | $(866,000) | $(1.156) million | $(1.363) million | $(1.767) million |
| Net loss | $(986,000) | $(1.213) million | $(1.549) million | $(1.839) million |
| Loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.01) | $(0.02) |
- For the six months, product revenue rose to $2.110 million from $1.921 million, while service and training revenue declined to $449,000 from $558,000. International revenue increased to $758,000 from $648,000; U.S. revenue was $1.801 million versus $1.831 million.
- Six-month operating cash use was $1.211 million, compared with $1.474 million a year earlier. Investing cash use was $3,604; no financing cash was raised in the 2018 half-year. Cash declined by $1.214 million to $3.336 million.
- At June 30, cash was $3.336 million, current assets $8.962 million, current liabilities $6.344 million, and working capital $2.618 million. Total assets were $11.002 million and shareholders’ equity $4.659 million.
- Convertible notes had $5.3 million principal outstanding, reported net of discount at $5.260 million. The notes bear 4% interest; maturities were extended to April 1, 2019 for $5.3 million and June 8, 2019 for the original $700,000 tranche. In May, $700,000 principal and $5,212 accrued interest converted into 1,877,960 common shares at $0.46; TOMI recorded a $57,201 induced conversion cost.
Changes, outlook and risks
- Q2 revenue fell 10%, which management attributed to the prior-year quarter’s concentration of large equipment orders and emergency service work. Six-month revenue increased 3%, supported by large equipment orders from new customers and repeat solution orders.
- Gross margin declined in both comparison periods; management attributed the decrease to sales mix and higher cost of sales. Lower prior-year legal and professional fees, including fees related to the Astro Pak litigation settled in July 2017, helped reduce operating expenses and reported losses.
- Management said resources were directed to large projects during Q2 and stated that many had been approved and would be made public. It cited encouraging early results from a hospital-cleaning study, growing Life Sciences demand, and plans to develop healthcare sales channels, expand the TOMI Service Network, and build Food Safety activity. Management expected measurable Food Safety revenue by year-end 2018 and planned a base of more than 40 independent healthcare representatives by year-end; these are expectations, not quantified financial guidance.
- Management believed available cash and expected operating receipts would cover operating, working-capital and capital needs for the next 12 months, but cautioned that sales cycles may exceed four to six months and revenue may not cover operating and compliance costs. Additional debt or equity financing may be needed; no assurance was given that financing would be available on acceptable terms or at all. No specific full-year revenue or earnings guidance was provided.
- Concentration risks include one vendor representing 51% of accounts payable and 78% of Q2 cost of goods sold, and two customers representing 32% of receivables at June 30. Two customers accounted for 26% of Q2 revenue. The company also disclosed reliance on product registration and sales expansion to support growth.
- TOMI entered a 10-year lease for a new Frederick, Maryland facility, commencing December 1, 2018, with stated annual rent of $143,460 and a $405,000 tenant-improvement allowance. Disclosed minimum rents total approximately $1.645 million. Management reported no material legal proceedings, no product-liability claims, and effective disclosure controls as of June 30.
- Common shares outstanding were 124,290,418 at June 30, up from 122,049,958 at year-end. The filing lists 35.1 million warrants, 320,000 options, 510,000 Series A preferred shares convertible one-for-one, and potential shares from convertible debt. Separately, 8,625,800 warrants expired on July 31, 2018.
Key facts for investors to verify
- Whether the extended note maturities can be repaid, converted, or refinanced, and the resulting interest and dilution impact.
- Whether cash burn, collections, and working capital support operations through the stated 12-month period, particularly given no financing proceeds in the first half.
- Whether revenue growth can resume and gross margins recover despite Q2 revenue softness, weaker service revenue, and customer and supplier concentration.
- Whether hospital-study results, registrations, new sales hires, the service network, and Food Safety activity produce commercial revenue on management’s expected timetable.
- The effect of the new facility’s lease obligations and the planned 2019 adoption of lease accounting; management had not concluded whether that accounting change would be material.