TOMI Environmental Solutions, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. TOMI sells infection-prevention and decontamination products and services, principally its SteraMist Binary Ionization Technology (BIT), for healthcare, life sciences, and other markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1.099 million | $1.707 million |
| Gross profit | $683,000 | $959,000 |
| Gross margin | 62.1% | 56.2% |
| Operating expenses | $1.294 million | $1.998 million |
| Operating loss | $612,000 | $1.038 million |
| Net loss | $626,000 | $1.038 million |
| Basic and diluted loss per share | $0.01 | $0.01 |
| Cash used in operating activities | $248,000 | $995,000 |
Revenue fell 36% year over year, mainly because a distributor’s large Q1 2016 order had no corresponding order in Q1 2017. Product revenue declined to $821,000 from $1.504 million, while service and training revenue increased to $278,000 from $203,000. U.S. revenue was $848,000 versus $979,000; international revenue was $251,000 versus $728,000. Management said the distributor failed to meet its annual minimum purchase commitment and consequently lost exclusivity.
Gross margin improved, which management attributed to customer and sales mix: the prior-year distributor order had lower gross profit. Operating expenses declined 35%, including lower equity compensation, selling costs, consulting fees, and general and administrative costs. Professional fees and research and development costs increased. Net loss narrowed by 40%.
Financial position, cash flow, and financing
- At March 31, cash and cash equivalents were $5.996 million, versus $948,000 at year-end; working capital was $10.556 million, versus $5.716 million.
- Total assets were $14.490 million; current liabilities were $1.554 million. Shareholders’ equity was $7.693 million.
- The company used $248,000 in operating cash and $5,000 in investing cash. Financing provided $5.300 million from a March private placement.
- The placement comprised senior callable convertible notes with $5.3 million principal, 4% annual interest, and an August 31, 2018 maturity, convertible at $0.54 per share. The notes rank senior to unsecured debt. TOMI also issued three-year warrants for 883,332 shares at $0.69 per share. The notes’ net carrying value was $5.243 million at quarter-end.
- Common shares outstanding were 120.825 million at March 31; the filing reports 121.044 million outstanding as of May 10, 2017. Potentially dilutive securities include convertible debt, 37.585 million warrants, 200,000 options, and 510,000 Series A preferred shares; these were excluded from diluted loss per share as anti-dilutive.
Outlook, risks, and notable items
No formal revenue or earnings guidance is provided. Management said existing cash and expected operating cash flows should fund operations, working capital, and capital expenditures for the next 12 months, but cautioned that further losses, weak sales, or unfavorable developments could require additional debt or equity financing. Management also noted that the sales cycle may still exceed two to four months and that financing may not be available on acceptable terms or at all.
- Revenue can fluctuate with distributor order timing, sales-cycle length, and expansion into new territories. Three customers accounted for 43% of Q1 2017 revenue; one customer represented 11% of receivables.
- Supplier concentration is notable: one vendor accounted for 67% of cost of goods sold and approximately 53% of accounts payable at March 31.
- Management’s stated growth initiatives include expanding the internal sales force and distributor network, growing the TOMI Service Network, pursuing international product registrations, and extending EPA label coverage. The March financing is intended to support these efforts and working capital.
- In May 2017, after quarter-end, TOMI issued an additional $700,000 convertible note at 4%, convertible at $0.54 per share, plus warrants for 116,559 shares at $0.69. It also issued 50,000 shares each to four current or former directors in April, valued at $8,000 per recipient.
- The company reported no material legal proceedings, product-liability claims, or off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue can recover following the distributor’s missed minimum purchase and loss of exclusivity, and how much sales depend on a small number of customers.
- Cash burn and financing needs relative to management’s 12-month liquidity assessment, including the terms and potential dilution from convertible notes and warrants.
- Whether gross-margin improvement is sustainable, given the prior-year comparison and customer mix.
- Execution and costs of sales-force expansion, international registrations, EPA-label expansion, and the TOMI Service Network; the filing gives no quantified outlook for these initiatives.
- Customer and supplier concentration, and the company’s ability to manage its substantial finished-goods inventory and vendor dependence.