TOMI Environmental Solutions, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are compared with the same 2019 periods unless otherwise noted. TOMI sells, services and licenses its SteraMist disinfection and decontamination products, based on its Binary Ionization Technology platform. The company identifies COVID-19-related demand as the principal driver of its growth.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.292 million | $1.600 million | $21.374 million | $4.492 million |
| Gross profit | $2.836 million | $1.140 million | $12.889 million | $2.875 million |
| Gross margin | 66.1% | 71.3% | 60.3% | 64.0% |
| Operating income (loss) | $1.096 million | ($0.188 million) | $7.412 million | ($1.591 million) |
| Net income (loss) | $1.019 million | ($0.237 million) | $7.295 million | ($1.756 million) |
| Basic / diluted EPS | $0.06 / $0.05 | ($0.02) / ($0.02) | $0.44 / $0.40 | ($0.11) / ($0.11) |
- Revenue increased 168% in Q3 and 376% for the nine months. SteraMist product revenue rose 296% and 465%, respectively; service and training revenue declined 8% in Q3 but increased 76% year to date.
- Domestic revenue rose 168% in Q3 and 301% year to date; international revenue rose 171% and 828%, respectively.
- Gross margin decreased in both comparison periods. Management attributes the declines to sales mix and says higher volume could improve vendor pricing and unit costs.
- Operating expenses increased 31% in Q3 and 23% year to date, including higher general and administrative costs, professional fees associated with the Nasdaq uplisting, and increased equity compensation. Lower selling expenses partly offset these increases.
- Nine-month operating cash flow was $4.945 million, versus cash used of $0.573 million in 2019. Investing activities used $0.051 million; financing provided $0.094 million. Cash increased by $4.988 million to $5.885 million.
- At September 30, cash was $5.885 million, working capital was $11.691 million, and total liabilities were $4.325 million. Accounts receivable was $3.504 million and inventory was $4.375 million.
- The $5.0 million convertible notes outstanding at year-end were eliminated in March 2020: $4.5 million converted into 1,041,667 common shares and $0.5 million was repaid in cash. The company also received a $410,700 PPP loan, with 1% interest and potential forgiveness; forgiveness status is not provided. Operating lease liabilities totaled $1.053 million.
Changes, outlook and risks
- Material year-over-year change: TOMI moved from losses in 2019 to profitability in the first nine months of 2020, principally on COVID-19-related demand. The filing cautions that this growth and profitability may not be sustainable after the pandemic-driven surge.
- Management outlook: Management expects demand to continue as customers adopt routine disinfection protocols and says it is preparing for post-pandemic opportunities. It also expects more predictable sales as customer adoption matures, but says it cannot determine the frequency or quantities of future solution orders. The filing provides no specific revenue or earnings guidance.
- Execution and supply: The company increased staffing, customer support and production capacity, including engaging a second equipment manufacturer. Risks include supplier dependence, capacity constraints, inventory forecasting, and concentration among vendors: three vendors represented about 56% of accounts payable, and two vendors represented 77% of nine-month cost of sales.
- Demand and customer concentration: One customer represented 11% of nine-month revenue; two customers represented 23% of receivables at quarter-end. TOMI has no long-term customer contracts, and customers generally are not obligated to make minimum purchases.
- Other risks and contingencies: The filing highlights pandemic-related operational and supply-chain uncertainty, competition, regulatory and EPA-labeling requirements, international business and collection risks, reliance on SteraMist, and the possibility that recent profitability will not continue. Management reported no material legal proceedings or product-liability claims, and no long-lived asset impairment charges.
- Notable corporate events: A 1-for-8 reverse stock split took effect September 10, 2020; the shares began trading on Nasdaq on October 1. Subsequent to quarter-end, the CEO and COO received warrants of 375,000 and 93,750 shares, respectively, exercisable at $6.17 per share, under new employment agreements.
Important facts for investors to verify
- Whether post-COVID demand, revenue growth and profitability persist, especially given the filing’s stated uncertainty around future order volumes.
- Whether gross margins recover and whether supplier pricing, production capacity and inventory levels can support growth without impairing cash conversion.
- Collections on rising receivables, the adequacy of the doubtful-account reserve, and the exposure to significant customers and vendors.
- The PPP loan’s forgiveness outcome and any repayment obligations, and the impact of outstanding warrants, options and preferred shares on dilution.
- Progress and regulatory outcomes for product claims, including the proposed 1% solution label, and whether new products and markets convert into recurring sales.