TOMI Environmental Solutions, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2016. TOMI sells decontamination equipment, services and licensing based primarily on its SteraMist Binary Ionization Technology. The company reported one operating segment and said results for the quarter are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $1.707 million | $676,386; up 152% |
| Gross profit / margin | $959,164 / approximately 56.2% | $397,910 / approximately 58.8% |
| Operating expenses | $1.998 million | $821,919 |
| Operating loss | $1.038 million | $424,009 |
| Net loss | $1.038 million; $0.01 per share | $4.272 million; $0.05 per share |
| Operating cash flow | $(995,376) | $(541,043) |
| Cash and equivalents | $4.624 million at March 31 | $5.916 million at December 31, 2015 |
| Working capital | $7.105 million | $7.880 million at December 31, 2015 |
Cash used in investing was $297,149, chiefly for equipment; financing cash flow was zero. Cash declined by $1.293 million during the quarter. Current and total liabilities were $2.681 million, with no debt reported at quarter-end; convertible notes had been retired in 2015. Total assets were $12.492 million and stockholders’ equity was $9.811 million. Inventory rose to $3.157 million from $1.395 million, while accounts payable and accrued expenses increased to $2.232 million from $1.088 million.
Material changes versus the prior comparable period
- Revenue rose by $1.031 million, which management attributed to market expansion, adequate product supply and a more diversified customer base.
- Gross profit increased by $561,254, but gross margin declined by approximately 2.6 percentage points as cost of sales grew faster than revenue.
- Operating expenses increased by $1.176 million. Significant increases included general and administrative expense, selling expense and non-cash equity compensation.
- Net loss narrowed substantially primarily because Q1 2015 included debt-related charges: $2.673 million for a derivative fair-value adjustment, $963,348 of debt-discount amortization, $84,450 of financing-cost amortization and $126,850 of interest. Those charges did not recur in Q1 2016 after the notes were retired.
- Operating cash use increased by approximately $454,000, which management primarily attributed to higher inventory, partly offset by higher accounts payable.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management said existing cash and anticipated operating cash flows should fund operations, working capital and capital expenditures for the next 18 months, but cautioned that additional financing may be needed and is not assured.
- Management noted a sales cycle that may exceed approximately 4–6 months and said revenue over the next 24 months may not be sufficient to cover operating and compliance costs. It warned that unsuccessful strategies or financing could require cost reductions or project delays.
- Growth initiatives included EPA label expansion to include C. diff, MRSA and H1N1; additions to the sales team; international distribution through TOMI Asia; and expansion of the TOMI Service Network. The USAID grant’s final milestone was completed in May 2016, after quarter-end.
- Customer concentration remains material: two customers represented 52% of Q1 2016 revenue. One vendor represented approximately 83% of accounts payable and 77% of cost of sales.
- The company relies on a manufacturer that supplied substantially all equipment in the period. Its inventory balance increased sharply, and it reported no reserve for slow-moving or obsolete inventory.
- TOMI Asia’s two-year distribution agreement includes a $5.5 million revenue target; its CEO is a principal stockholder of TOMI. The filing also describes related-party transactions and significant executive compensation and equity awards.
- Potential dilution includes 36.0 million outstanding warrants and 200,000 options at March 31. The 2016 Equity Compensation Plan authorizes up to 5.0 million shares and was subject to stockholder approval.
- Management reported no material legal proceedings, product-liability claims or off-balance-sheet arrangements. It stated disclosure controls were effective at a reasonable-assurance level and that no material change in internal control was identified.
Important facts for investors to verify
- Reconcile geographic revenue disclosures: the financial-statement note reports domestic revenue of $978,678 and international revenue of $728,298, while the MD&A geographic table appears to assign those amounts in reverse.
- Check customer concentration and collection risk, including the 52% revenue concentration and the $30,000 Q1 bad-debt expense.
- Assess whether elevated inventory converts into sales and whether the reported increase in accounts payable, including vendor concentration, is sustainable.
- Track cash burn against management’s 18-month liquidity estimate and determine whether additional financing will be required.
- Verify the status and potential dilution of warrants, equity awards, the 2016 plan’s stockholder approval, and the post-quarter issuance of shares and warrants.
- Clarify the Service Network count: the notes report 41 licensing agreements at March 31, while MD&A cites 45 members.