TOMI Environmental Solutions(TOMZ) - 2020 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The company's financial statements for the period ended September 30, 2020, reflect significant growth, with total assets doubling and a shift from net loss to net income Condensed Consolidated Balance Sheet Highlights | Balance Sheet Items | September 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $14,631,624 | $5,035,811 | | Total Assets | $17,576,549 | $8,225,467 | | Total Current Liabilities | $2,940,142 | $6,301,511 | | Total Liabilities | $4,325,153 | $7,335,924 | | Total Shareholders' Equity | $13,251,396 | $889,543 | Condensed Consolidated Statement of Operations Highlights | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Sales, net | $4,291,589 | $1,600,387 | $21,373,504 | $4,491,719 | | Gross Profit | $2,836,021 | $1,140,379 | $12,888,924 | $2,875,039 | | Income (loss) from Operations | $1,096,328 | $(187,586) | $7,412,397 | $(1,590,948) | | Net Income (loss) | $1,019,300 | $(236,813) | $7,295,478 | $(1,756,050) | | Diluted EPS | $0.05 | $(0.02) | $0.40 | $(0.11) | Condensed Consolidated Statement of Cash Flows Highlights (Nine Months Ended) | Cash Flow Activity | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $4,944,535 | $(572,533) | | Net Cash Used in Investing Activities | $(50,574) | $(288,331) | | Net Cash Provided by Financing Activities | $94,200 | $0 | | Increase (Decrease) In Cash and Cash Equivalents | $4,988,160 | $(860,864) | - In March 2020, convertible notes with a principal balance of $4,500,000 were converted into 1,041,667 shares of common stock, and the remaining $500,000 was repaid in cash[108] - On September 10, 2020, the company effected a 1-for-8 reverse stock split of its common and Series A Preferred Stock, with all share and per-share amounts retroactively restated[112] - Subsequent to the quarter end, on October 1, 2020, the company's stock commenced trading on the NASDAQ Capital Market[158] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes significant revenue growth to increased global demand for SteraMist® products, driven by the COVID-19 pandemic, leading to improved financial position Results of Operations Total revenue surged by 376% to $21.4 million for the nine months ended September 30, 2020, driven by product sales, leading to a significant turnaround in operating income Revenue Performance (Nine Months Ended Sep 30) | Revenue Category | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | SteraMist Product | $19,557,000 | $3,461,000 | $16,096,000 | 465% | | Service and Training | $1,817,000 | $1,031,000 | $786,000 | 76% | | Total Revenue | $21,374,000 | $4,492,000 | $16,882,000 | 376% | Geographic Revenue (Nine Months Ended Sep 30) | Region | 2020 | 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | United States | $15,437,000 | $3,852,000 | $11,585,000 | 301% | | International | $5,937,000 | $640,000 | $5,297,000 | 828% | | Total | $21,374,000 | $4,492,000 | $16,882,000 | 376% | - Gross profit margin for the nine months ended September 30, 2020, was 60.3%, down from 64.0% in the prior year period, attributed to product mix in sales[212] - Selling expenses for the nine months decreased by 23% to $980,000, primarily due to a revision of the sales department and reduced tradeshow costs from the COVID-19 pandemic[219][220] Liquidity and Capital Resources As of September 30, 2020, the company's liquidity significantly improved, with cash and working capital increasing, driven by operational cash flow and debt conversion Working Capital Comparison | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,885,000 | $897,000 | | Working Capital | $11,691,000 | $(1,266,000) | - For the nine months ended September 30, 2020, the company generated $4.9 million in cash from operating activities, a significant reversal from the $573,000 used in operations during the same period in 2019[238][240] - Financing activities provided $94,000 in cash, resulting from a $411,000 PPP loan and $184,000 from warrant/option exercises, offset by a $500,000 repayment of a convertible note[242] - Management believes that existing cash balances and cash generated from operations will be sufficient to cover capital expenditures and operational needs for the next twelve months[246] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, TOMI Environmental Solutions, Inc. is exempt from the requirement to disclose quantitative and qualitative information about market risk[283] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2020, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[284] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[286] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings that would adversely affect its financial condition - As of the filing date, the company is not involved in any material legal proceedings[290] Item 1A. Risk Factors The company faces multiple risks including sustainability of recent profitability, product dependence, supply chain issues, and intense competition - The company has a history of net losses, and its recent profitability, largely due to increased demand from the COVID-19 pandemic, may not be sustainable[291][298] - The business is almost completely dependent on the success of its SteraMist® family of products[301] - The company relies on a few key customers for a significant portion of its revenue; one customer accounted for 11% of net revenue for the nine months ended September 30, 2020[303] - Reliance on third-party contractors for manufacturing increases risks related to supply, cost, and quality control[311] - The company faces significant competition from larger, more established companies in the disinfection and decontamination industry, such as Steris, Bioquell (Ecolab), and Clorox[321] Item 5. Other Information The company entered new three-year employment agreements with its CEO and COO, effective October 1, 2020, including base salaries and warrant bonuses - A new three-year employment agreement with CEO Halden S. Shane, effective October 1, 2020, provides an annual base salary of $500,000 and a signing bonus of 375,000 warrants exercisable at $6.17 per share[359] - A new three-year employment agreement with COO Elissa J. Shane, effective October 1, 2020, provides an annual base salary of $270,000 and a signing bonus of 93,750 warrants exercisable at $6.17 per share[360] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including employment agreements for the CEO and COO, and required certifications - The exhibits filed with this report include new employment agreements for the CEO and COO, along with required SOX 302 and 906 certifications[362][368]