TOMI Environmental Solutions, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. TOMI sells and services SteraMist disinfection and decontamination products using its Binary Ionization Technology platform.
Financial performance and liquidity
- Revenue: $2.309 million, up 11% year over year. Product revenue was $1.886 million (+14%); service and training revenue was $423,000 (+3%). International revenue rose 60% to $430,000, while U.S. revenue increased 4% to $1.879 million.
- Profitability: Gross profit was $1.421 million, up 15%; gross margin improved to 61.5% from 59.6%, which management attributed to sales mix. Operating loss narrowed to $660,000 from $1.510 million; net loss was $659,484, or $0.03 per share, versus $1.511 million, or $0.09 per share.
- Expenses: Operating expenses declined 24% to $2.081 million. General and administrative expenses fell 20%, selling expenses 28%, and R&D 81%; equity compensation expense increased to $352,000 from $228,000.
- Cash flow: Operating activities provided $27,000, compared with $1.225 million used in Q1 2021. Investing activities used $14,000; financing activities were zero. Cash increased $13,000 to $5.330 million. Management attributed the operating cash improvement partly to customer deposits and lower expenses.
- Balance sheet: Working capital was $10.797 million, down from $11.077 million at year-end. Current assets were $13.866 million and current liabilities $3.069 million. Total liabilities were $3.906 million, including $932,000 of operating lease liabilities; the filing reports no interest-bearing borrowings at quarter-end. Shareholders’ equity was $13.288 million.
Changes from the comparable period and quarter-end
- Revenue growth was driven by higher demand for mobile equipment and iHP corporate services; Q1 revenue was also 15% above Q4 2021.
- Losses narrowed substantially, reflecting higher sales and lower operating expenses. Gross margin improved by 1.9 percentage points.
- Accounts receivable increased to $2.500 million and inventory to $5.100 million from year-end. Customer deposits rose to $607,000 from $6,000.
- Common shares outstanding increased to 19.733 million from 16.762 million at December 31, 2021. The company issued 51,750 shares for director services and granted 270,000 options during the quarter.
Outlook, commentary and risks
- Management reported approximately $3.5 million of Q1 orders and expected about $3.2 million to be recognized as revenue during 2022. Several Custom Engineered Systems orders were expected to be delivered in 2022 and early 2023; timing and conversion remain uncertain.
- Management said it expects existing cash and anticipated operating cash flows to cover operating, working-capital and capital-expenditure needs for the next 12 months. It also plans higher 2022 capital and operating expenditures, including for product development and service expansion.
- COVID-19-related demand has declined from its 2020 peak; management said the effect of the pandemic and customer spending patterns for the remainder of 2022 are difficult to predict. Revenue may fluctuate with sales-cycle length, distributor order timing, new-market expansion and sales-force development.
- Three customers represented 41% of Q1 revenue. One vendor represented approximately 52% of accounts payable, and two vendors represented 69% of cost of sales.
- Controls: Management concluded disclosure controls were not effective because of an unremediated material weakness in bad-debt reserve controls, including review and segregation-of-duties deficiencies. Management said the weakness did not cause a Q1 2022 misstatement and is developing remediation measures.
- Nasdaq listing: The company disclosed that it received an April 14, 2022 deficiency notice for failing to maintain a $1.00 minimum bid price. It had until October 11, 2022 to regain compliance, subject to possible extension; delisting was a risk if compliance was not regained.
- Management reported no material legal proceedings or product-liability claims. No income-tax provision was recorded; a valuation allowance was maintained against deferred tax assets.
Important facts for investors to verify
- Whether the reported $3.5 million of orders convert to revenue on the anticipated schedule, and whether customer deposits are recognized as revenue upon delivery.
- Whether operating cash flow remains positive without relying on customer deposits, given continuing net losses and planned higher spending.
- Whether the bad-debt reserve control weakness is remediated and controls are tested as effective.
- Whether TOMI regained and maintained Nasdaq’s minimum bid-price and other continued-listing requirements.
- How customer and supplier concentration, inventory growth, and the increase in outstanding shares affect execution, cash needs and shareholder dilution.