TOMI Environmental Solutions, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. TOMI sells, licenses and services its SteraMist disinfection and decontamination products, based on its Binary Ionization Technology platform. The company attributed sharply higher demand to the COVID-19 pandemic; its products were included on EPA List N for use against SARS-CoV-2.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 | Prior-year comparable |
|---|---|---|---|
| Revenue | $10.03 million | $17.08 million | $1.64 million and $2.89 million, respectively |
| Gross profit | $5.56 million | $10.05 million | $0.98 million and $1.73 million |
| Gross margin | 55.5% | 58.9% | 59.5% and 60.0% |
| Operating income (loss) | $3.66 million | $6.32 million | Losses of $0.54 million and $1.40 million |
| Net income (loss) | $3.66 million | $6.28 million | Losses of $0.58 million and $1.52 million |
| Diluted earnings (loss) per share | $0.02 | $0.04 | Loss of approximately $0.00 and $0.01 |
- Q2 revenue rose 512% year over year; first-half revenue increased 491%. Product revenue was $9.24 million for Q2 and $15.88 million for the first half; service and training revenue was $0.79 million and $1.20 million, respectively.
- Q2 U.S. revenue was $8.39 million and international revenue $1.64 million. First-half amounts were $11.96 million and $5.12 million. One customer/distributor represented 13% of first-half 2020 revenue.
- Operating expenses increased 26% in Q2 to $1.91 million and 19% for the first half to $3.74 million. Higher general and administrative, research and development, consulting and equity compensation costs were partly offset by lower selling expenses.
- First-half operating cash flow was $5.39 million, versus cash used of $0.12 million in 2019. Investing used $0.05 million; financing provided $0.03 million. Cash increased to $6.27 million from $0.90 million at year-end. Receivables rose to $4.59 million from $1.49 million, a significant working-capital use of cash.
- At June 30, cash was $6.27 million, current assets $14.45 million, current liabilities $3.86 million, and working capital $10.58 million. Total liabilities were $5.27 million and shareholders’ equity $12.16 million.
- The $5.0 million convertible note balance at year-end was eliminated in March: $4.5 million converted into 8.33 million common shares and $0.5 million was repaid. The company also received a $410,700 PPP loan, at 1% interest and with a two-year term; forgiveness is not reported as determined. Lease liabilities totaled $1.07 million.
- Common shares outstanding increased from 124.70 million at December 31, 2019 to 133.75 million at June 30, 2020. Warrants and options add potential dilution; diluted weighted-average shares were 148.56 million for Q2 and 145.19 million for the first half.
Material changes, outlook and risks
- Management linked the revenue surge to pandemic-related demand and said it expected demand to continue as customers incorporated disinfection into regular protocols. It also cautioned that order frequency and quantities were difficult to predict in a rapidly changing market.
- Management said existing cash and expected operating cash flow should meet operating, working-capital and capital-expenditure needs for the next 12 months. No quantified revenue or earnings guidance was provided.
- Management reported 87 new customers in Q2, sold 250 machines, and expanded the TOMI Service Network to 167 providers. A second manufacturer was added to increase production capacity; the new manufacturing agreement has no minimum purchase commitments.
- Q2 gross margin declined year over year, which management attributed to sales mix. The company said margins could benefit from more favorable supplier pricing, but gave no quantified outlook.
- COVID-19 increased demand but could also disrupt employees, customers and suppliers through quarantines or travel restrictions. Other cited uncertainties include sales-cycle timing, distributor orders, expansion execution, supplier costs and potential future operating expenses.
- Customer and supplier concentration merit attention: two vendors represented approximately 64% of accounts payable at June 30, and two vendors accounted for 80% of first-half cost of sales.
- Management reported no material legal proceedings or product-liability claims. It concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing refers investors to the 2019 Form 10-K for risk factors.
Important facts for investors to verify
- Whether pandemic-driven orders and recurring solution sales persist, and how much revenue reflects one-time equipment demand.
- Collection and aging of the sharply higher accounts receivable balance, customer concentration, and the effect of deposits and payment terms on cash conversion.
- Whether the lower gross margin persists as product mix and supplier costs change, and whether expanded manufacturing capacity can meet demand.
- PPP loan forgiveness status and repayment requirements if any amount is not forgiven.
- Potential dilution from outstanding warrants, options and preferred shares, in addition to shares already issued upon debt conversion.
- Progress and regulatory outcomes for new markets and products, including the proposed food-safety label expansion and SteraBot initiatives; later developments described in the filing are not guarantees of commercial success.