TOMI Environmental Solutions(TOMZ) - 2018 Q4 - Annual Report

Part I Business The company specializes in disinfection and decontamination using SteraMist® products and BIT™ across four key divisions Overview and Technology TOMI specializes in EPA-registered SteraMist® BIT™ technology for broad-spectrum disinfection, achieving a six-log kill of microorganisms - The company's core business is disinfection and decontamination using its SteraMist® brand, based on Binary Ionization Technology® (BIT™)[14] - SteraMist® BIT™ technology achieves a six-log (99.9999%) kill of problem microorganisms, including spores, by aerosolizing a low-concentration hydrogen peroxide solution into a mist of Reactive Oxidative Species (ROS)[16][19] - The technology is registered with the EPA for use against various pathogens, including C. diff spores, MRSA, influenza, Salmonella, and Norovirus, and is included on EPA's K, G, L, and M lists[22] Products and Services The company offers a range of SteraMist® products and services, from portable units to automated disinfection rooms and full-service decontamination - The SteraMist Surface Unit is a portable, handheld system for rapid point-and-spray disinfection of surfaces, including sensitive electronics[26][27] - The SteraMist Environment System is a transportable, remotely-controlled system for complete decontamination of sealed rooms up to 103.8 m³[28] - Custom solutions include permanent iHP disinfection rooms integrated with a facility's HVAC system and iHP Plasma Decontamination Chambers integrated with equipment like cage washers[35][36] - TOMI offers full-service decontamination for rooms, equipment, and entire facilities, aimed at reducing bioburden and preventing outbreaks[37] Industries & Market Segments TOMI operates across Life Sciences, Hospital-HealthCare, TOMI Service Network (TSN), and Food Safety, also targeting cannabis and homeland defense - The company's four main divisions are Life Sciences, Hospital-HealthCare, TOMI Service Network (TSN), and Food Safety[14][39] - The TOMI Service Network (TSN) consists of 88 licensed professional remediation and bio-safety specialists across the United States and Canada[45] - TOMI is exploring the cannabis market to address issues like powdery mildew, pests, and bud rot, and to disinfect facilities between grows[48][51] - The company's products are positioned to assist in Homeland Defense and Border Protection by mitigating biological attacks and controlling the spread of emerging pandemic viruses[52] Business Operations TOMI outsources manufacturing, leverages 34 utility patents and 7 trademarks, and competes on faster kill times and no residue - Manufacturing and solution blending are outsourced to an ISO9001 registered company and an EPA-approved blender, respectively. TOMI maintains sole distribution rights[53][54][55] - The company holds 34 utility patents and 21 design patents globally, along with 7 registered trademarks in the U.S[58][59] - Key competitors include Steris Corporation, Bioquell, Inc., and The Clorox Company. TOMI believes its competitive advantages include quicker kill times, a six-log kill rate, and leaving no residue[64][67][68] Research & Development Expenses | Year | Amount (Approx.) | | :--- | :--- | | 2018 | $916,000 | | 2017 | $454,000 | Risk Factors The company faces risks including net losses, reliance on third-party manufacturers, intense competition, and potential stock dilution Company and Business Risks The company faces business risks from net losses, reliance on third-party manufacturers, competition, and the need for market acceptance - The company has a history of net losses, incurring approximately $3.2 million in 2018 and $3.6 million in 2017, and may require additional financing to sustain operations[73] - TOMI relies on third-party contractors for manufacturing and supplies, and any disruption could negatively impact the business[77] - The company faces significant competition from larger, more established companies such as Steris, Bioquell, and Clorox, which have greater financial and marketing resources[84] - Success is dependent on broad market acceptance of its BIT technology, which is relatively new and must replace long-standing manual cleaning techniques[85] Securities Risks Securities risks include stock price volatility, "penny stock" classification, no dividends, and significant dilution from outstanding equity instruments - The company's common stock is quoted on the OTCQX, which often experiences sporadic trading, and is subject to the SEC's "penny stock" rules, which can hinder marketability[95][97] - The company has not paid dividends and does not intend to for the foreseeable future, meaning returns depend on stock price appreciation[96] - As of December 31, 2018, there were outstanding options and warrants to purchase 26.9 million shares and convertible debt that could convert into 9.2 million shares (or up to 45.5 million shares under certain conditions), posing a risk of significant dilution to existing shareholders[102] Unresolved Staff Comments The company reports no unresolved staff comments - The company reports no unresolved staff comments[103] Properties The company leases its 9,000 sq ft U.S. headquarters in Frederick, MD, and a 300 sq ft sales office in Beverly Hills, CA - The company leases its 9,000 sq. ft. U.S. headquarters in Frederick, MD, under a 10-year lease with an annual rent of approximately $143,000[104] - A 300 sq. ft. sales and executive office is leased month-to-month in Beverly Hills, CA, for an annual rent of $22,500[105] Legal Proceedings The company is not currently a party to any material legal proceedings - As of the report date, the company is not a party to any material legal proceedings[106] Mine Safety Disclosures Mine safety disclosures are not applicable for the company - The company reports that mine safety disclosures are not applicable[107] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on OTCQX, has 771 record holders, and does not intend to pay cash dividends - Common stock is quoted on the OTCQX Best Marketplace under the symbol "TOMZ"[110] - As of March 15, 2019, there were 771 record holders of common stock[111] - The company has not paid and does not intend to pay cash dividends, retaining earnings for operations and expansion[112] Selected Financial Data Selected Financial Data is not required for the registrant - Selected Financial Data is not required for the company[114] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, TOMI's revenue grew 12% to $5.6 million, with narrowed losses, increased R&D, and expanded infrastructure, maintaining sufficient liquidity Business Highlights and Recent Events In 2018, TOMI increased R&D by 102%, expanded its sales force, added 65 new customers, and relocated its headquarters - R&D expenses increased by 102% in 2018, supporting the development of three new product lines: EZ SteraMist® Cart, SteraMist® Select Surface Unit, and the Stainless Steel 90-Degree Applicator[137][138][139] - Participated in a "SHIELD study" at LA Public Health Hospitals, with preliminary results showing SteraMist® significantly decreased pathogen transference compared to manual cleaning[141] - Expanded sales infrastructure in 2018, growing the internal sales force from 2 to 5 and independent U.S. sales representatives from 26 to 56[152] - Relocated corporate headquarters to a new 9,000 sq. ft. facility in December 2018 to accommodate anticipated growth[154] - Added 65 new customers and sold 85 machines in 2018, including two Permanent iHP Complete Disinfection Rooms[155] Critical Accounting Policies and Estimates Key accounting policies include revenue recognition (ASU 2014-09), accounts receivable, inventory valuation, and equity compensation - The company adopted ASU No. 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, on a modified retrospective basis[164][187] - The allowance for doubtful accounts was $300,000 as of December 31, 2018, down from $500,000 in 2017[174] - A reserve for obsolete inventory of $100,000 was established in 2018; there was no such reserve in 2017[176] - The company will adopt new lease accounting standards (ASU No. 2016-02) on January 1, 2019, which is expected to increase both assets and liabilities by approximately $800,000[188] Results of Operations (2018 vs. 2017) In 2018, net revenue increased 12% to $5.6 million, gross profit slightly rose, and operating loss narrowed to $3.1 million due to expense reductions Results of Operations Comparison | | 2018 | 2017 | | :--- | :--- | :--- | | Revenue, Net | $5,585,000 | $4,994,000 | | Gross Profit | $3,117,000 | $3,066,000 | | Total Operating Expenses | $6,188,000 | $6,510,000 | | Loss from Operations | $(3,070,000) | $(3,444,000) | | Net Loss | $(3,230,000) | $(3,640,000) | | Basic & Diluted (loss) per share | $(0.03) | $(0.03) | - Net revenue increased by 12% YoY, primarily due to large equipment orders from new customers and steady repeat solution orders[194] - Cost of sales increased 28% YoY to $2.5 million, attributed to higher revenue, product mix, and a new inventory reserve, which decreased the gross profit margin[197] - Research and development expenses increased 102% YoY to $916,000 due to ongoing studies and product development costs[201] - Equity compensation expense decreased by 88% to $77,000 in 2018 from $649,000 in 2017 due to the timing of certain issuances[202] Liquidity and Capital Resources As of Dec 31, 2018, cash was $2.0 million and working capital $5.5 million, with management expecting sufficient resources for 12 months Financial Position Summary | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,005,000 | $4,550,000 | | Working capital | $5,544,000 | $9,073,000 | | Total shareholders' equity | $2,995,000 | $5,394,000 | - Cash used in operating activities was approximately $1.8 million in 2018, an improvement from $2.4 million in 2017[213][217] - In March 2019, the maturity date for the remaining $5,000,000 in convertible notes was extended to April 3, 2020[212] - Management believes existing cash and expected operational cash flow will be sufficient to meet requirements for the next twelve months, but additional financing may be needed[215] Quantitative and Qualitative Disclosures About Market Risk Quantitative and Qualitative Disclosures About Market Risk are not required for the company - Quantitative and Qualitative Disclosures About Market Risk are not required for the company[221] Financial Statements and Supplementary Data The required financial statements are included in Part IV, Item 15 of the Annual Report on Form 10-K, starting on page F-1 - The financial statements are located starting on page F-1 of the report[222] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - The company reports no changes in or disagreements with its accountants[223] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes - Management concluded that as of the end of the reporting period, the company's disclosure controls and procedures were effective[225] - Management concluded that the company's internal control over financial reporting was effective as of the end of the period covered by the report[229] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[230] Other Information The company reports no other information - The company reports no other information[231] Part III Directors, Executive Officers and Corporate Governance The company's executive team includes CEO Halden S. Shane, COO Elissa J. Shane, and CFO Nick Jennings, with a five-member Board and Scientific Advisory Board - The executive officers are Halden S. Shane (CEO), Elissa J. Shane (COO), and Nick Jennings (CFO). Elissa J. Shane is the daughter of the CEO[235][236][237][242] - The Board of Directors consists of five members: Halden S. Shane, Harold W. Paul, Walter C. Johnsen, Kelly J. Anderson, and Lim Boh Soon[235][243] - A Scientific Advisory Board was formed in February 2017 to provide strategic guidance on technology and regulatory trends[244] - The company reports that all officers, directors, and greater than ten percent beneficial owners complied with Section 16(a) filing requirements for fiscal year 2018[249] Executive Compensation In 2018, CEO Halden S. Shane received $417,932, COO Elissa J. Shane $265,474, and CFO Nick Jennings $165,000 in total compensation 2018 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option/Warrant Awards ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Halden S. Shane, CEO | 2018 | 360,000 | 40,000 | 17,932 | — | 417,932 | | Elissa J. Shane, COO | 2018 | 200,000 | 20,000 | 36,474 | 9,000 | 265,474 | | Nick Jennings, CFO | 2018 | 155,000 | 10,000 | — | — | 165,000 | - CEO Halden S. Shane's employment agreement provides for a $360,000 base salary and performance bonuses, including stock options. It also includes change-in-control provisions[256][257] - COO Elissa J. Shane's employment agreement provides for a base salary of at least $200,000, an annual option grant for at least 250,000 shares, and a $750 monthly vehicle allowance[259] 2018 Director Compensation | Name | Fees earned or paid in cash ($) | Stock awards ($) | Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Harold W. Paul | 40,000 | 7,500 | 60,000 | 107,500 | | Walter Johnsen | 40,000 | 7,500 | — | 47,500 | | Kelly Anderson | 45,000 | 7,500 | — | 52,500 | | Lim Boh Soon | 40,000 | 7,500 | — | 47,500 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CEO Halden S. Shane held 21.6% voting power, with all directors and officers holding 25.7%, and 4.18 million securities available for future issuance - The 2016 Equity Incentive Plan has 4,180,000 securities available for future issuance as of December 31, 2018[267] Security Ownership of Major Holders (as of March 15, 2019) | Name | % of Total Voting Power | | :--- | :--- | | Halden S. Shane (CEO & Chairman) | 21.6% | | All current directors and executive officers as a group | 25.7% | | Lau Sok Huy | 13.9% | | Ah Kee Wee | 9.4% | - The company is unaware of any contract or arrangement that may result in a future change in control[272] Certain Relationships and Related Transactions, and Director Independence The company reported no related party transactions, and four of its five directors are deemed independent - The company reports no transactions with related persons[273] - The Board has determined that directors Johnsen, Anderson, Lim, and Paul are independent. CEO Shane is not an independent director[274] Principal Accounting Fees and Services In 2018, the company was billed $108,000 for audit services by Wolinetz, Lafazan & Company, P.C., an increase from $99,000 in 2017 Accountant Fees | Fee Type | 2018 | 2017 | | :--- | :--- | :--- | | Audit Fees | $108,000 | $99,000 | | Audit-Related Fees | — | — | | Tax Fees | — | — | | All Other Fees | — | — | | Total | $108,000 | $99,000 | - All audit and non-audit services provided by the independent registered public accounting firm were pre-approved by the Audit Committee[278] Part IV Exhibits and Financial Statement Schedules This section lists financial statements starting on page F-1 and an index of all exhibits filed with the Form 10-K - The financial statements and schedules are included as part of the report, beginning on page F-1[282] - The Exhibit Index lists all filed documents, including the 2016 Equity Incentive Plan, employment agreements with executive officers, and certifications pursuant to the Sarbanes-Oxley Act[291] Financial Statements The consolidated financial statements for 2018 show a net loss of $3.2 million on $5.6 million revenue, with decreased assets and equity Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on the financial statements, confirming fair presentation in accordance with U.S. GAAP - The auditor, Wolinetz, Lafazan & Company, P.C., expressed an unqualified opinion that the financial statements are fairly presented in accordance with U.S. GAAP[299] - The audit was conducted in accordance with PCAOB standards. As the company is not an accelerated filer, the audit did not include an opinion on the effectiveness of internal control over financial reporting[301] Consolidated Financial Statements The 2018 consolidated financial statements show a net loss of $3.23 million, with total assets at $10.08 million and cash at $2.00 million Consolidated Balance Sheet Data (as of Dec 31) | | 2018 | 2017 | | :--- | :--- | :--- | | Total Current Assets | $7,243,812 | $10,175,255 | | Total Assets | $10,079,614 | $12,441,309 | | Total Current Liabilities | $1,700,216 | $1,102,709 | | Total Liabilities | $7,084,416 | $7,047,084 | | Total Shareholders' Equity | $2,995,198 | $5,394,225 | Consolidated Statement of Operations Data (Year Ended Dec 31) | | 2018 | 2017 | | :--- | :--- | :--- | | Sales, net | $5,584,612 | $4,993,668 | | Gross Profit | $3,117,498 | $3,065,895 | | Loss from Operations | $(3,070,219) | $(3,444,081) | | Net Loss | $(3,230,462) | $(3,639,815) | | Loss Per Common Share | $(0.03) | $(0.03) | Consolidated Statement of Cash Flows Data (Year Ended Dec 31) | | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(1,766,980) | $(2,432,241) | | Net Cash Used in Investing Activities | $(628,085) | $(14,829) | | Net Cash (Used) Provided by Financing Activities | $(150,000) | $6,048,750 | | (Decrease) Increase In Cash | $(2,545,065) | $3,601,679 | | Cash and Cash Equivalents – Ending | $2,004,938 | $4,550,003 | Notes to Consolidated Financial Statements Notes detail accounting policies, $5.0 million in convertible debt, shareholder equity activities, and customer concentration risk - As of Dec 31, 2018, two customers accounted for 37% of accounts receivable, and one customer accounted for 13% of net revenues for the year[332][421] - In March and May 2017, the company raised $6,000,000 through the issuance of convertible notes. As of Dec 31, 2018, the remaining principal balance was $5,000,000[374][380] - As of Dec 31, 2018, there were 26,550,611 warrants and 320,000 options outstanding to purchase common stock[388][399] - Subsequent to year-end, in March 2019, the maturity date for the remaining $5,000,000 in convertible notes was extended to April 3, 2020[379][428]