TOMI Environmental Solutions, Inc. annual report, FY2018

TOMI Environmental Solutions, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; separate Q4 financial results are not provided in the filing text. TOMI develops, sells, licenses, and services SteraMist disinfection and decontamination products based on its hydrogen-peroxide BIT technology.

Financial performance and position

MetricFY 2018FY 2017Change
Revenue$5.585 million$4.994 million+12%
Gross profit$3.117 million$3.066 million+2%
Gross margin55.8%61.4%Down 5.6 percentage points
Operating expenses$6.188 million$6.510 million−5%
Loss from operations$(3.070) million$(3.444) millionImproved
Net loss$(3.230) million$(3.640) millionImproved
Basic and diluted loss per share$(0.03)$(0.03)Unchanged as reported
Cash used in operating activities$(1.767) million$(2.432) millionUse decreased
  • Product revenue was $4.652 million and service and training revenue was $0.933 million. U.S. revenue rose to $4.197 million from $3.495 million; international revenue declined to $1.388 million from $1.499 million.
  • Cost of sales increased 28% to $2.467 million. Management attributed the lower gross margin to sales mix and a $100,000 inventory reserve recorded in 2018.
  • Research and development spending more than doubled to $916,000. Selling expense rose 8% to $1.360 million, while professional fees fell to $330,000 from $877,000, largely because 2017 included costs related to a lawsuit that was settled.
  • Cash and cash equivalents were $2.005 million at year-end, versus $4.550 million; working capital was $5.544 million, versus $9.073 million. Total assets were $10.080 million and shareholders’ equity was $2.995 million.
  • Capital expenditures and other investing cash outflows were $628,000, mainly associated with the new facility. Cash declined by $2.545 million during the year.
  • Convertible notes had $5.0 million principal outstanding and a $4.982 million net carrying value at year-end. The notes bear 4% interest and ordinarily convert at $0.54 per share. In March 2019, holders extended the $5.0 million maturity to April 3, 2020; if unpaid after the specified notice period, holders may convert at $0.11 per share.

Changes, outlook, and material considerations

  • Growth reflected equipment orders from new customers and repeat solution purchases. TOMI reported 65 new customers and 85 machines sold in 2018; recurring BIT solution sales increased 14% year over year.
  • Management expanded sales and staffing, launched the E-Z SteraMist Disinfection Cart and other product offerings, increased R&D and marketing, and moved operations into a new 9,000-square-foot facility. The new lease is for ten years; reported annual rent is approximately $143,000 before escalations and applicable lease terms.
  • Management said available cash and expected operating receipts should fund operations, working capital, and capital expenditures for the next 12 months. This is not a guarantee: the company remained loss-making and cash-consuming, and it warned that further financing may be needed and may not be available on acceptable terms.
  • Growth initiatives include expanding sales and distribution, regulatory registrations, the TOMI Service Network, and food-safety applications. Direct food and crop applications require regulatory approvals; the filing gives no quantified revenue or earnings guidance.
  • Notable items affecting reported results included a $150,000 gain from redeeming $300,000 principal of convertible debt for $150,000 cash, and $57,000 of induced conversion costs related to converting $700,000 principal and accrued interest into shares. A $100,000 inventory reserve also affected cost of sales.
  • Key risks include ongoing losses and financing needs; potential shareholder dilution from warrants, options, and convertible notes; dependence on third-party manufacturers and suppliers; customer and vendor concentration; competition; regulatory and market-acceptance uncertainty; and product-liability and intellectual-property risks. Two customers represented 37% of year-end receivables, and one customer generated 13% of 2018 revenue. One vendor accounted for 70% of cost of sales.
  • The company reported no material legal proceedings, no off-balance-sheet arrangements, and no product-liability claims at year-end. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

  • Whether revenue growth can continue and improve margins, particularly given the 2018 gross-margin decline and reliance on equipment sales and repeat solution orders.
  • Cash burn and financing runway, including the terms and repayment or conversion outcome of the $5.0 million notes due April 3, 2020.
  • Potential dilution from outstanding securities: the filing reports 26.6 million warrants and 320,000 options at year-end, in addition to debt-conversion and preferred-stock shares; the notes could convert into 45.5 million common shares at $0.11 if the stated conditions apply.
  • Customer and supplier concentration, collectability of receivables, and the basis for the inventory reserve.
  • Progress and required approvals for food-safety and other expansion initiatives, as well as evidence supporting expected customer adoption and commercial returns.