TOMI Environmental Solutions, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are with FY2016. This is an annual filing, not a standalone fourth-quarter report, and it does not provide clear Q4-only results.
Business context
TOMI sells decontamination equipment and solutions, provides services and training, and licenses its SteraMist Binary Ionization Technology. Its markets include healthcare, life sciences, remediation and food safety. The company reported one operating segment, with revenue primarily from SteraMist products.
Financial performance and liquidity
| Metric | FY2017 / December 31, 2017 | FY2016 / December 31, 2016 |
|---|---|---|
| Revenue | $4.994 million | $6.343 million |
| Gross profit | $3.066 million; 61.4% margin | $3.733 million; 58.9% margin |
| Operating expenses | $6.510 million | $7.102 million |
| Operating loss | $(3.444) million | $(3.369) million |
| Net loss | $(3.640) million; $(0.03) per share | $(3.157) million; $(0.03) per share |
| Cash used in operations | $2.432 million | $4.505 million |
| Cash and cash equivalents | $4.550 million | $0.948 million |
| Working capital | $9.073 million | $5.716 million |
| Convertible notes, net | $5.944 million | None reported |
FY2017 financing cash flow was $6.049 million, principally from a $6.0 million convertible-note placement; investing cash use was $0.015 million. Current assets were $10.175 million and current liabilities $1.103 million at year-end. Total shareholders’ equity was $5.394 million, down from $8.250 million. No dividends were paid, and management stated it did not expect to pay them in the foreseeable future.
Changes versus FY2016
- Revenue fell approximately 21%, primarily because a distributor made a large first-quarter order in 2016 that did not recur in 2017. Product revenue declined to $4.101 million from $5.727 million; service and training revenue rose to $0.893 million from $0.616 million, a 45% increase.
- U.S. revenue decreased to $3.495 million from $4.012 million, and international revenue decreased to $1.499 million from $2.331 million.
- Gross profit fell about 18%, but gross margin improved to approximately 61.4% from 58.9%, which management attributed to customer and product mix.
- Operating expenses declined about 8%, including lower selling and general and administrative costs, but professional fees rose 70% to $0.877 million and research and development rose 147% to $0.454 million.
- Operating loss widened modestly, and net loss increased to $3.640 million. Results also reflected approximately $0.191 million of interest expense in 2017 and $0.200 million of grant income in 2016.
- Operating cash use improved by about $2.073 million, mainly because the prior-year period included a substantial inventory build.
Outlook, risks and unusual items
- Management expected cash on hand and anticipated operating cash to cover operations, working capital and capital expenditures for the next 12 months. It also cautioned that revenue may not cover operating and compliance costs and that additional financing may be needed; no numerical revenue or earnings guidance was provided.
- Management’s growth plans included expanding sales coverage, international registrations and distribution, the TOMI Service Network, hospital and life-sciences business, and food-safety applications. The company reported adding 26 sales representatives to Life Sciences, a Premier group-purchasing agreement, and Canadian product registration. These developments do not establish future sales.
- The $6.0 million notes bear 4% interest, convert at $0.54 per share, and were originally due in 2018. Subsequent to year-end, maturities were extended to April 1, 2019 for $5.3 million and June 8, 2019 for $0.7 million. Noteholders could convert the principal into approximately 11.1 million shares; related warrants covered up to approximately 1.0 million additional shares. The notes are secured by patents and trademarks.
- Potential dilution is significant: at year-end, approximately 35.5 million warrants and 0.2 million options were outstanding, in addition to shares issuable upon note conversion. Common shares outstanding were 122.05 million at year-end and 122.35 million as of March 29, 2018.
- Key risks include continued operating losses and accumulated deficit of approximately $38.0 million; dependence on external financing; revenue and customer concentration; reliance on a contract manufacturer and concentrated suppliers; regulatory and international-market uncertainties; competition; and intellectual-property, product-liability and execution risks. Two customers represented 22% of FY2017 revenue and 24% of year-end receivables; one vendor represented 73% of cost of goods sold.
- The company settled patent litigation with Astro Pak and SixLog in July 2017. The defendants acknowledged TOMI’s ownership of the relevant technology and agreed to cease the challenged conduct, assign the iHP mark and pay a cash settlement; the filing does not state a clear settlement amount.
- The auditor issued an unqualified opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the smaller-reporting-company exemption meant the auditor did not attest to internal-control effectiveness. Management reported no material legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the service-revenue growth and sales-force expansion translate into sustained revenue growth, particularly as product and international revenue declined.
- Cash burn, cash availability and financing needs relative to the extended note maturities, interest payments and planned spending.
- The potential share dilution from warrants, options and convertible notes, including the terms and remaining life of those instruments.
- Customer and supplier concentration, receivable collectability, and the recoverability of the substantial finished-goods inventory.
- Progress in product registrations, hospital adoption and distribution agreements, and whether these produce measurable orders and recurring service revenue.
- The settlement’s financial impact and any material obligations or risks not quantified in the filing.