TOMI Environmental Solutions, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; this is an annual filing, not a standalone fourth-quarter report. The company sells and provides services using SteraMist Binary Ionization Technology (BIT), a hydrogen-peroxide mist and fog decontamination system. Financial statements were audited, and the auditor issued an unqualified opinion on them.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1.166 million | $564,000 |
| Gross profit / gross margin | $686,000 / 58.8% | $222,000 / 39.4% |
| Operating loss | $1.448 million | $1.451 million |
| Net loss | $5.658 million | $1.750 million |
| Basic and diluted loss per share | $0.07 | $0.02 |
| Cash used in operating activities | $1.306 million | $386,000 |
| Cash and cash equivalents at year-end | $706,350; plus $70,124 restricted cash | $73,424 |
- Revenue rose 107%, primarily from approximately $420,000 of Panama decontamination work and expanded control of the SteraMist product line. Operating loss was essentially unchanged; the larger net loss reflected financing-related charges.
- Year-end assets were $5.733 million, including $3.027 million of net intangible assets. Accounts receivable was $806,000 and inventory $408,000.
- Working capital was negative $6.452 million and stockholders’ equity was a deficit of $2.787 million. The balance sheet reported $5.074 million of convertible note principal, largely offset in carrying value by discounts; net carrying value was approximately $70,000. A separate $7.666 million derivative liability was recorded.
- Investing cash outflow was $3.461 million, mainly for the L-3 technology acquisition. Financing provided $5.400 million, including $5.074 million gross convertible-note proceeds and approximately $1.041 million from common stock issuance, partly offset by financing costs and restricted sinking-fund cash.
Material developments, outlook and risks
- Technology acquisition: In April 2013, TOMI acquired BIT-related assets from L-3 for $3.510 million, including patents and trademarks. The assets secure the convertible notes.
- Panama contract: The initial hospital project generated approximately $420,000 in stated contract value and was completed in October 2013. The maintenance portion is stated as $60,000 monthly for three years, with TOMI receiving a management fee of $9,000 monthly for the first year and $6,000 monthly for the next two years. The company reported that about 2.5 months of maintenance service had been completed by year-end. It also described plans to pursue expansion to more Panamanian hospitals; this is not guaranteed revenue.
- Other sales pipeline: TOMI recorded $99,000 of sales to a Saudi customer and cited a further approximately $356,000 order pending lab results and import approvals. The filing does not establish that the pending order was recognized as revenue.
- Debt and liquidity: The notes bear 10% interest, mature July 31, 2015, and are convertible at an initial $0.29 per share; associated warrants have an initial $0.30 exercise price. The debt includes reset provisions and a sinking-fund requirement to deposit 15% of reported revenue quarterly. Management believed available funds and anticipated sales would cover the following 12 months, but cautioned that additional capital might be needed. It forecast approximately $507,000 of interest payments in 2014 and $5.074 million principal repayment in 2015.
- Unusual accounting effects: FY 2013 net loss included approximately $3.199 million of financing charge associated with the convertible notes, $349,000 derivative fair-value expense, and $234,000 amortization of deferred financing costs. These significantly affected reported earnings and were largely non-cash.
- Concentration and execution risks: One international customer represented 40% of 2013 sales, and one supplier represented about 85% of year-end inventory value. TOMI relies on third-party manufacturers and contractors, faces established competitors, and disclosed risks involving product acceptance, IP protection, international regulation, financing needs, and its ability to achieve profitability.
- Related-party arrangement: Rolyn provided support services in exchange for monthly common shares; TOMI recorded $332,000 expense and used Rolyn as a Panama subcontractor for $168,000. Rolyn officers also became TOMI officers during 2013. Assess the related-party terms and governance implications.
- Post-year-end dilution: In February 2014, the board approved warrants for executive officers, including 3 million each for the CEO, president and COO and 300,000 for the CFO, generally at a $0.30 exercise price. The filing estimated grant-date fair value of approximately $952,000 for the executive grants and $95,000 for the CFO grant.
- Management said disclosure controls and internal control over financial reporting were effective. The auditor did not attest to internal-control effectiveness. The filing also identifies limited trading liquidity and penny-stock status; common shares outstanding were 80.2 million as of March 1, 2014.
Important facts for investors to verify
- Collections, aging and subsequent receipt of the $806,000 year-end receivables, especially given customer concentration.
- Whether the Panama maintenance contract is being performed and paid as scheduled, and whether the prospective hospital expansion or Saudi order has converted to contracted, recognized revenue.
- Cash runway after operating outflows, required sinking-fund deposits, interest payments and the July 2015 note maturity; determine whether further financing is likely.
- The convertible-note terms, derivative valuation assumptions and potential dilution from conversion and warrants; reconcile the $5.074 million principal with the low net debt carrying value and large derivative liability.
- Supplier continuity and inventory availability, as well as manufacturing capacity and product demand needed to support management’s growth expectations.
- Related-party payments and share issuance to Rolyn, executive warrant awards, and the resulting dilution and governance oversight.