TOMI Environmental Solutions, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, compared with FY 2013. This is an annual filing; standalone fourth-quarter financial results are not clearly provided. The company sells SteraMist/Binary Ionization Technology equipment, solution, services and licenses for decontamination.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $2.248 million | $1.166 million |
| Gross profit / margin | $1.374 million / 61.1% | $686,000 / 58.8% |
| Operating loss | $(3.810) million | $(1.448) million |
| Net income (loss) | $268,000 | $(5.658) million |
| Cash used in operations | $1.127 million | $1.306 million |
| Cash and cash equivalents at year-end | $161,000 | $706,000 |
| Working capital | $(1.826) million | $(6.452) million |
| Convertible notes, face value | $5.074 million | $5.074 million |
Revenue rose 93%, mainly following the April 2013 acquisition of the SteraMist product line, improved product availability and expanded sales and marketing. Equipment/product revenue was $1.652 million, BIT solution $432,000, services $31,000, maintenance $105,000 and training $28,000. U.S. revenue was $1.377 million and international revenue $871,000.
Reported net income was substantially affected by a $5.937 million gain from remeasurement of the embedded derivative liability. The company nevertheless recorded a $3.810 million operating loss, and the derivative gain is not operating cash generation. Equity compensation expense increased to $2.565 million, largely because executive resignations accelerated warrant vesting. Basic and diluted net income per share were each reported as $0.00; the filing separately reports operating loss per share of $0.05.
Gross margin improved as sales increased and the company cited economies of scale. Selling expense rose 68% to $380,000 and general and administrative expense rose 155% to $1.084 million; consulting fees declined to $180,000 from $552,000. Investing cash outflow was $82,000. Financing activities provided $663,000, primarily from common-stock issuance. Inventory increased to $773,000 from $408,000, while accounts receivable declined to $441,000 from $806,000.
Liquidity, debt and material changes
- The $5.074 million secured convertible notes mature July 31, 2015 and bear 10% interest; estimated 2015 interest was approximately $507,000. The company stated it did not have sufficient funds to repay the notes at maturity absent conversion, extension or new capital.
- At year-end, the notes’ carrying value net of discount was $1.078 million; this accounting amount is not the principal amount due. The notes are secured by intellectual property and other assets. A sinking-fund provision requires quarterly deposits of 15% of reported revenue.
- The independent auditor’s report and the company’s disclosures identify substantial doubt about its ability to continue as a going concern, citing operating losses, negative operating cash flow and working-capital deficiency. Management expects to rely on product sales, licensing, debt or equity financing, but says additional funding may not be available on acceptable terms.
- During 2014, the company raised $765,000 gross from common-stock and equity-unit issuances. Common shares outstanding increased to 83.6 million at year-end; 85.3 million were outstanding as of March 20, 2015. Further financing could dilute shareholders.
Outlook, commentary and risks
Management said available funds and anticipated product sales were expected to cover cash requirements for the following 12 months, while also warning that unexpected needs could require additional capital. The filing gives no quantified sales or earnings guidance. Management identified competition, product demand, sales and marketing execution, and manufacturing capability as factors that could make 2015 results differ materially from expectations.
The company was awaiting an additional EPA healthcare-hospital disinfectant label after passing required testing protocols; it also sought FDA and USDA approvals for medical-device sterilization and food-related applications. Delays or failure to obtain approvals could constrain market expansion. Manufacturing relies on third parties; RG Group manufactured substantially all equipment in 2014 under an agreement with no minimum purchase commitment. Other disclosed risks include early-stage commercialization, limited trading liquidity, international-market exposure, intellectual-property protection and dependence on key personnel.
Commercial developments included a Mexico distribution and licensing agreement, approximately $301,000 of 2014 revenue associated with that distributor, and fourth-quarter shipments generating approximately $101,000 in South Korea and $24,000 in the Philippines. The filing reports approximately $400,000 of 2014 revenue associated with TOMI Panama. No material legal proceedings were reported. Management stated disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- How the company would repay, convert or extend the $5.074 million notes due July 2015, and whether the required sinking-fund deposits and interest payments were met.
- Whether subsequent financing and cash generation were sufficient to address the going-concern uncertainty, and the resulting dilution or financing terms.
- How much of reported net income depended on the noncash derivative fair-value gain, and the company’s underlying operating losses and cash burn.
- Whether revenue growth, customer reorders and international contracts were repeatable, and whether receivables and inventory were converting to cash.
- The timing and status of EPA, FDA and USDA approvals, plus manufacturing capacity and dependence on contract manufacturers.