TOMI Environmental Solutions(TOMZ) - 2020 Q1 - Quarterly Report

markdown [PART I: FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=5&type=section&id=Item%201%20Financial%20Statements.) The company's financial position improved significantly as of March 31, 2020, compared to December 31, 2019, with increased assets and equity, and a dramatic turnaround to net income in Q1 2020 [Condensed Consolidated Balance Sheet](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheet) As of March 31, 2020, the company's balance sheet strengthened considerably compared to year-end 2019, with total assets growing by **45%** to **$11.9 million** and total shareholders' equity surging to **$8.3 million** due to debt reduction Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $3,755,816 | $897,223 | +318.6% | | Accounts Receivable - net | $3,146,197 | $1,494,658 | +110.5% | | Total Current Assets | $8,974,958 | $5,035,811 | +78.2% | | Total Assets | $11,949,410 | $8,225,467 | +45.3% | | Convertible Notes Payable, net | $0 | $5,000,000 | -100.0% | | Total Liabilities | $3,625,145 | $7,335,924 | -50.6% | | Total Shareholders' Equity | $8,324,265 | $889,543 | +835.8% | [Condensed Consolidated Statement of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statement%20of%20Operations) For the three months ended March 31, 2020, the company reported a significant turnaround in profitability, with net sales surging **463%** year-over-year to **$7.1 million** and achieving a net income of **$2.6 million** Statement of Operations Summary (Unaudited) | Metric | Q1 2020 | Q1 2019 | Change | | :--- | :--- | :--- | :--- | | Sales, net | $7,053,418 | $1,252,658 | +463.1% | | Gross Profit | $4,488,008 | $759,348 | +491.0% | | Income (loss) from Operations | $2,659,409 | ($868,030) | - | | Net income (loss) | $2,619,261 | ($934,532) | - | | Diluted EPS | $0.02 | ($0.01) | - | [Condensed Consolidated Statement of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statement%20of%20Cash%20Flows) For the first quarter of 2020, the company generated **$3.3 million** in cash from operating activities, a significant improvement from the **$0.6 million** used in the prior year, leading to a **$2.9 million** increase in cash and cash equivalents Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Cash Provided By (Used in) Operating Activities | $3,315,678 | ($648,714) | | Net Cash (Used in) Investing Activities | ($14,585) | ($160,286) | | Net Cash Used in Financing Activities | ($442,500) | $0 | | **Increase (Decrease) In Cash** | **$2,858,594** | **($809,000)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail the company's SteraMist® disinfection technology business, significant debt conversion in Q1 2020, increased demand due to the SARS-CoV-2 pandemic, and a subsequent **$410,700** PPP loan - The company provides disinfection and decontamination products through its Binary Ionization Technology® (BIT™) platform, sold under the SteraMist® brand, targeting healthcare, life sciences, and other commercial sectors[26](index=26&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - In March 2020, convertible notes with a principal of **$4.5 million** were converted into **8,333,332** common shares at **$0.54** per share, and the remaining **$500,000** balance was repaid in cash, fully extinguishing this debt[96](index=96&type=chunk) - The SARS-CoV-2 pandemic has materially affected operations by significantly increasing demand for the company's products and services, leading to the company being identified as an essential vendor[117](index=117&type=chunk) - For the three months ended March 31, 2020, one international customer/distributor accounted for **31%** of net revenue[128](index=128&type=chunk) - Subsequent to the quarter end, on April 21, 2020, the company received a **$410,700** loan under the Paycheck Protection Program (PPP)[129](index=129&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management attributes the exceptional Q1 2020 performance to the SARS-CoV-2 pandemic, driving **463%** revenue growth, improved gross margin, and enhanced liquidity through strong operational cash flow and debt elimination [Business Highlights and Recent Events](index=33&type=section&id=Business%20Highlights%20and%20Recent%20Events) The SARS-CoV-2 pandemic significantly boosted business in Q1 2020, leading to a **686%** increase in new customers, expansion of the TSN network, and key product registrations with EPA and China CDC - The SARS-CoV-2 pandemic significantly increased demand for TOMI's products and services, leading to the company being identified as an essential vendor by various agencies[147](index=147&type=chunk) Q1 2020 Customer Growth vs. Q1 2019 | Division | New Customers (Q1 2020) | YoY Increase | | :--- | :--- | :--- | | **Total** | **81** | **686%** | | TSN Division | 36 | 1700% | | Hospital-Healthcare | 18 | 800% | | Life Sciences | 18 | 533% | - In March 2020, SteraMist® was qualified to meet the EPA Emerging Viral Pathogen Guidance and was added to the EPA's List N for use against SARS-CoV-2[159](index=159&type=chunk)[165](index=165&type=chunk) - In February 2020, SteraMist equipment and BIT solution were registered with the Chinese Center for Disease Control and Prevention (China CDC), making it an industry standard for disinfection in China[163](index=163&type=chunk) [Results of Operations](index=37&type=section&id=Results%20of%20Operations) Comparing Q1 2020 to Q1 2019, net revenue increased by **$5.8 million** (**463%**) to **$7.1 million**, driven by global pandemic demand, resulting in a swing from an operating loss to a **$2.7 million** operating income Revenue Breakdown (Q1 2020 vs Q1 2019) | Revenue Category | Q1 2020 | Q1 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$7,053,000** | **$1,253,000** | **+463%** | | SteraMist Product | $6,638,000 | $1,029,000 | +545% | | Service and Training | $415,000 | $224,000 | +85% | | United States | $3,569,000 | $1,136,000 | +214% | | International | $3,484,000 | $117,000 | +2,878% | - Gross profit as a percentage of sales improved to **63.6%** in Q1 2020 from **60.6%** in Q1 2019, attributed to the product mix in sales[172](index=172&type=chunk) - Operating expenses increased by **$202,000** (**12.4%**) to **$1.83 million**, a relatively small increase compared to the **463%** revenue growth, demonstrating significant operating leverage[167](index=167&type=chunk)[183](index=183&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity strengthened significantly, with cash reaching **$3.8 million** and working capital at **$6.4 million** as of March 31, 2020, driven by strong operational cash flow, debt conversion, and new customer deposit policies - As of March 31, 2020, the company had cash of approximately **$3.8 million** and working capital of **$6.4 million**[184](index=184&type=chunk) - In March 2020, **$4.5 million** of convertible notes were converted to common stock and the remaining **$0.5 million** was repaid with cash, eliminating this long-term debt[185](index=185&type=chunk) - The company modified customer payment terms to require a **50%**-**100%** deposit on most equipment orders, which improved cash flow and resulted in approximately **$1,017,000** in customer deposits as of March 31, 2020[187](index=187&type=chunk) - Management believes that cash generated from operations will be sufficient to cover future capital expenditures and meet cash requirements for the next twelve months[194](index=194&type=chunk)[195](index=195&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) The company is a smaller reporting company and is therefore not required to provide the information for this item - As a smaller reporting company, TOMI is not required to disclose information regarding market risk pursuant to Item 305(e) of Regulation S-K[234](index=234&type=chunk) [Item 4. Controls and Procedures](index=46&type=section&id=Item%204%20Controls%20and%20Procedures.) Management concluded that the company's disclosure controls and procedures were effective as of the end of the quarter, with no material changes to internal control over financial reporting identified - Based on an evaluation as of the end of the period, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[235](index=235&type=chunk) - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[237](index=237&type=chunk) [PART II: OTHER INFORMATION](index=48&type=section&id=PART%20II%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=48&type=section&id=Item%201%20Legal%20Proceedings.) The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its financial condition, results of operations, or cash flows - The company is not currently a party to any legal proceedings that would have a material adverse effect on its results of operations, financial position, or cash flows[241](index=241&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A%20Risk%20Factors.) As a smaller reporting company, TOMI is not required to provide risk factors in its Form 10-Q and directs investors to its Annual Report on Form 10-K for the year ended December 31, 2019 - As a smaller reporting company, the registrant is not required to provide the information for this item and refers to the risk factors in its Annual Report on Form 10-K for the year ended December 31, 2019[242](index=242&type=chunk) [Other Part II Information](index=48&type=section&id=Other%20Part%20II%20Information) The company reported no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and no other information requiring disclosure under Item 5 for the reporting period - There were no unregistered sales of equity securities (Item 2), defaults upon senior securities (Item 3), or other material information to report (Item 5)[243](index=243&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk) Mine safety disclosures (Item 4) were not applicable[247](index=247&type=chunk)