TOMI Environmental Solutions, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. The company sells and provides services using its SteraMist Binary Ionization Technology for environmental disinfection and decontamination. Its primary target markets include healthcare, laboratories, pharmaceuticals and remediation.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $6.34 million | $4.19 million |
| Gross profit | $3.73 million | $2.55 million |
| Gross margin | 58.9% | 60.8% |
| Operating expenses | $7.10 million | $5.53 million |
| Operating loss | $(3.37) million | $(2.99) million |
| Net loss | $(3.16) million | $(12.18) million |
| Basic and diluted loss per share | $(0.03) | $(0.12) |
| Cash used in operating activities | $4.50 million | $1.65 million |
- Revenue rose 51%, reflecting market expansion, more orders and a broader customer base. Product revenue was $5.73 million; services and training contributed $616,000. U.S. revenue increased to $4.01 million from $2.08 million, while international revenue was $2.33 million versus $2.11 million.
- Gross profit increased about 47%, although the calculated gross margin declined about 1.9 percentage points. Management described margins as consistent.
- Operating expenses grew about 28%, including higher selling costs and general and administrative expenses. The operating loss therefore widened despite revenue growth.
- The lower net loss largely reflects the absence of 2015 financing-related charges: debt discount and deferred financing cost amortization, derivative fair-value loss, induced conversion costs and interest. These items totaled about $9.2 million in 2015; the company reported $212,000 of other income in 2016, including about $200,000 of net USAID grant income.
- At year-end, cash was $948,000, working capital $5.72 million, total assets $9.30 million, total liabilities $1.05 million and stockholders’ equity $8.25 million. The company had no debt outstanding at December 31, 2016; its prior convertible notes were retired in 2015.
- Inventory rose to $4.05 million from $1.40 million, while accounts receivable was $1.52 million. Capital expenditures were approximately $475,000. The company reported no off-balance-sheet arrangements.
Changes, outlook and key risks
- In 2016, TOMI expanded EPA product registrations to all 50 states and added label coverage for C. diff, MRSA and H1N1. Efficacy studies for Salmonella, Norovirus and tuberculosis were submitted to the EPA for potential label additions; approval was not reported as complete.
- The company added 68 domestic and 12 international customers, and expanded its TOMI Service Network. It reported 58 licensing agreements in the financial-statement notes and 59 in the business discussion. International distribution growth includes a related-party agreement with SteraMist Asia; no sales were made under that agreement in 2016.
- Management said existing cash and expected operating resources should cover operations, working capital and capital expenditures for the next 12 months. It also cautioned that sales may not cover operating and compliance costs, the sales cycle may exceed two to four months, and additional financing may be needed. No quantified revenue or earnings guidance was provided.
- Operating cash use increased substantially, principally because of working-capital needs, including inventory. The company remains loss-making and reports an accumulated deficit of $34.3 million. Management’s liquidity outlook depends on revenue growth, expense management and successful execution of its commercial plans.
- After year-end, TOMI raised $5.3 million gross in March 2017 through 4% senior callable convertible notes due August 2018. The notes convert at $0.54 per share; the company also issued warrants for up to 833,333 shares at $0.69. The notes could convert into approximately 9.8 million shares, creating potential dilution.
- Other material risks include competition, regulatory approvals and compliance, international-market exposure, reliance on contract manufacturers and suppliers, product liability, intellectual-property protection, customer collection risk and the need for further financing. One vendor represented 78% of 2016 cost of goods sold; the company also reported customer and vendor concentrations.
- As of December 31, 2016, approximately 36.9 million warrants and 200,000 options were outstanding, in addition to 510,000 convertible Series A preferred shares. The company’s common stock trades on OTCQX and may be volatile and thinly traded.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls.
Important facts for investors to verify
- Whether revenue growth converts into improved operating margins and lower operating cash burn; assess the sharp increase in inventory and the adequacy of the doubtful-account allowance.
- How much of the March 2017 financing remains available after operating needs, and the potential dilution, redemption terms and cash interest obligations of the notes and warrants.
- Whether EPA submissions lead to additional approved label claims, and whether regulatory progress produces repeat commercial orders rather than trials or one-time sales.
- Whether customer, distributor and service-network growth translates into revenue, particularly given no 2016 sales under the SteraMist Asia agreement.
- The company’s dependence on RG Group and other concentrated vendors, and its ability to maintain supply, product quality and customer collections.
- The status of the audit committee’s independence after a director resigned in March 2017; the filing said the committee then lacked a majority of independent directors and intended to address the issue.