TOMI Environmental Solutions, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited statements are prepared under U.S. GAAP. TOMI sells, licenses and services its SteraMist disinfection technology, based on its Binary Ionization Technology platform.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.948 million | $1.030 million | $4.507 million | $3.509 million |
| Gross profit | $1.035 million | $0.641 million | $2.545 million | $2.191 million |
| Gross margin | 53.1% | 62.2% | 56.5% | 62.4% |
| Operating expenses | $1.349 million | $1.037 million | $4.222 million | $4.354 million |
| Operating loss | $(0.314) million | $(0.396) million | $(1.677) million | $(2.163) million |
| Net loss | $(0.373) million | $(0.457) million | $(1.922) million | $(2.296) million |
| Loss per share, basic and diluted | $(0.00) | $(0.00) | $(0.02) | $(0.02) |
Q3 revenue rose 89%; nine-month revenue rose 28%. Management attributed growth mainly to large equipment orders from new customers and repeat solution orders. Product revenue drove the increase: nine-month SteraMist product sales grew to $3.723 million from $2.713 million, while service and training revenue was $0.784 million versus $0.796 million. U.S. revenue increased, while international revenue declined slightly.
Despite higher sales, gross margin declined year over year in both periods, with cost of sales rising faster than revenue. Q3 operating expenses increased by $312,000, including higher selling and R&D costs; nine-month operating expenses decreased by $133,000, partly reflecting lower professional fees and equity compensation. Nine-month other expense increased, including $57,000 of induced conversion cost and higher interest and debt-discount amortization.
Cash, liquidity and debt
- Cash and cash equivalents were $3.177 million at September 30, 2018, down from $4.550 million at December 31, 2017. Nine-month operating cash use was $1.246 million, compared with $1.718 million in 2017; investing cash use was $127,000. There was no financing cash inflow in the 2018 period.
- Working capital was $2.355 million, versus $9.073 million at year-end 2017. Current liabilities increased substantially because the remaining convertible notes were classified as current.
- Convertible notes totaled $5.3 million principal, reported net of discount at $5.268 million. Their 4% notes were extended to April 1, 2019; $700,000 principal was converted into 1,877,960 common shares in May 2018 at $0.46 per share. The conversion generated a $57,201 induced conversion charge.
- Common shares outstanding were 124,290,418 at September 30. Potentially dilutive securities totaled about 37.0 million shares, including warrants, options, preferred shares and shares underlying convertible debt; they were excluded from diluted loss per share as anti-dilutive.
Outlook, risks and other notable items
- Management said existing cash and expected operating cash flows should cover operating, working-capital and capital-expenditure needs for the next 12 months, but cautioned that additional debt or equity financing may be needed. It warned that sales cycles can exceed four to six months, revenue can fluctuate with order timing and sales expansion, and insufficient funding could force cost reductions or project delays. No numerical revenue or earnings guidance was provided.
- Growth initiatives include expanding sales and distribution, the TOMI Service Network, life-sciences and healthcare markets, and food-safety applications. Applications for expanded labels covering direct food contact and growing crops had been submitted to the EPA and FDA; approvals are not reported in this filing.
- A new 10-year Frederick, Maryland facility lease begins December 1, 2018. Disclosed minimum rents total approximately $1.645 million; the lease includes a $405,000 tenant-improvement allowance and 3% annual rent increases.
- Customer and supplier concentration is significant: three customers represented 47% of receivables; one customer generated 32% of Q3 revenue. One vendor represented 58% of accounts payable and 80% of Q3 cost of goods sold.
- Management reported no material legal proceedings or product-liability claims. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control reported.
Most important facts for investors to verify
- Whether sales growth can continue while restoring gross margins, which fell to 53.1% in Q3 from 62.2% a year earlier.
- How the company will repay, refinance or otherwise address the $5.3 million notes due in 2019, and whether it can fund operations without further financing.
- Whether cash burn, working capital and customer collections remain manageable given customer concentration and the decline in cash.
- Whether reliance on a single manufacturing vendor and the resulting cost-of-sales exposure can be reduced or mitigated.
- The potential dilution from approximately 37.0 million shares underlying outstanding securities, in addition to 124.3 million common shares outstanding.
- Progress on regulatory applications, commercial adoption of new markets and the costs and obligations associated with the new facility lease.