TOMI Environmental Solutions, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are with fiscal 2014. This is an annual filing, not a standalone fourth-quarter report. TOMI sells decontamination equipment, services and licenses based primarily on its SteraMist Binary Ionization Technology (BIT); the technology accounts for nearly all revenue.
Key financial results
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Revenue | $4.192 million | $2.248 million | Up 86%, attributed to new markets, product availability and a broader customer base. |
| Gross profit / margin | $2.548 million / 60.8% | $1.374 million / 61.1% | Margin was broadly consistent. |
| Operating expenses | $5.533 million | $5.185 million | Up about 7%. |
| Operating loss | $(2.986) million | $(3.810) million | Improved by about $825,000. |
| Net income (loss) | $(12.176) million | $268,000 | 2015 loss was driven principally by convertible-note accounting and retirement charges. |
| Cash used in operations | $(1.654) million | $(1.127) million | Higher use mainly reflected growth in receivables, inventory and vendor deposits. |
| Cash and working capital at year-end | $5.916 million; $7.880 million | $160,560; working capital deficit of $1.826 million | Liquidity increased substantially after equity financing. |
| Convertible notes | $0 | $5.074 million principal | Retired in 2015 through conversion and cash repayment. |
Net loss per share was $(0.12), versus reported net income per share of $0.00 in 2014. 2015 other expense included a $3.811 million derivative fair-value loss, $3.996 million debt-discount amortization and $930,000 of induced conversion costs. These items were largely non-cash, although the conversion costs were associated with retiring the notes. Equity compensation expense was $1.706 million, down from $2.565 million.
Business developments and material changes
- EPA registered SteraMist BIT as a hospital-healthcare misting/fogging disinfectant in June 2015; the company also held a separate EPA registration for mold control and air and surface remediation.
- TOMI received $8.0 million in equity investment in June and July 2015 and reported $8.735 million of cash proceeds from stock and warrant issuances for the year. It converted approximately $3.774 million of note principal into shares and repaid $1.3 million of principal in cash; related accrued interest was also settled.
- Revenue growth accompanied expansion into markets in Europe and Asia. TOMI launched the TOMI Service Network and had 25 licensed network members by year-end.
- A $559,000 USAID grant supported development of mobile decontamination chambers. TOMI reported receiving $537,272 after meeting the first five milestones; $210,503 of proceeds in excess of costs incurred remained recorded as a liability at year-end.
- At December 31, 2015, common shares outstanding were 120.063 million, compared with 83.646 million a year earlier. The filing reports 35.676 million warrants outstanding, in addition to options and convertible preferred stock.
Outlook, risks and other items
- Management said year-end cash and expected operating resources should fund operations, working capital and capital expenditures for the next 18 months, but cautioned that revenue may not cover operating and compliance costs over the next 24 months and additional financing may be needed. The filing provides no quantified revenue or earnings guidance.
- Management expected higher sales and marketing costs and higher research and development spending in 2016. It cited competition, demand, sales execution and manufacturing capacity as factors that could cause results to differ from expectations.
- Subsequent to year-end, the EPA amended the registration to add specified claims for C. diff, MRSA and H1N1. TOMI also reported 33 Service Network members at the time of the filing and announced sales and leadership hires.
- Key risks include continued operating losses and cash burn, reliance on contract manufacturing (one vendor accounted for 84% of 2015 cost of goods sold), customer concentration (two customers represented 26% of revenue and three represented 42% of receivables), intense competition, regulatory requirements, international-market risks and dependence on key personnel.
- Common stock trades on the OTC Pink, where the company describes trading as thin and volatile. Warrants, options and future equity awards may dilute shareholders. Management stated it intended to seek a national exchange listing, but gave no assurance it would qualify.
- No material legal proceedings or off-balance-sheet arrangements were reported. The independent auditor issued an unqualified opinion on the financial statements; its report did not express an opinion on internal-control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective.
Investor verification priorities
- Reconcile reported cash: the balance sheet gives $5,916,068, while the cash-flow statement gives $5,916,069.
- Review the composition and timing of the large 2015 non-cash note-related charges, and confirm the full settlement of convertible debt and accrued interest.
- Assess whether revenue growth converts into lower operating losses and cash burn, particularly as receivables, inventory and vendor deposits increased.
- Verify customer and supplier concentration, collectability of receivables, and the ability of the contract manufacturer to meet demand.
- Evaluate the dilution and potential share supply from outstanding warrants, options, preferred shares and the proposed 2016 equity plan.