TOMI ENVIRONMENTAL SOLUTIONS, INC.
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2016
OR
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to
Commission
File Number 000-09908
TOMI ENVIRONMENTAL SOLUTIONS, INC.
(Exact name of registrant as specified in its
charter)
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FLORIDA
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59-1947988
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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9454 Wilshire Blvd., R-1,
Beverly Hills, California
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90212
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (800)
525-1698
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.01
par value
per share
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OTCQX
Marketplace
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Cumulative
Series
A
Preferred Stock, $
0.01
par value per share
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Cumulative
Convertible Series B Preferred Stock, $1,000 stated
value
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Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.01
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. ☐
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ☐
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large Accelerated
Filer ☐
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Accelerated
Filer ☐
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Non-Accelerated
Filer ☐
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Smaller Reporting
Company ☒
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐ No ☒
As of
June 30, 2016, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates of the registrant
was approximately $32,935,834, based upon a closing price of the
registrant’s common stock as reported on the OTCQX
Marketplace on such date.
As of
March 17, 2017, the registrant had 120,825,134 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TOMI ENVIRONMENTAL SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
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Item
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Page
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PART I
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1.
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Business
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1
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1A.
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Risk
Factors
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10
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1B.
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Unresolved Staff
Comments
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15
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2.
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Properties
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15
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3.
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Legal
Proceedings
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15
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4.
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Mine
Safety Disclosures
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15
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PART II
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5.
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Market
for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
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16
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6.
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Selected Financial
Data
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16
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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7A.
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Quantitative and
Qualitative Disclosures About Market Risk
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25
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8.
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Financial
Statements and Supplementary Data
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25
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9.
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
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25
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9A.
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Controls and
Procedures
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26
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9B.
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Other
Information
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26
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PART III
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10.
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Directors,
Executive Officers and Corporate Governance
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27
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11.
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Executive
Compensation
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30
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12.
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Security Ownership
of Certain Beneficial Owners and Management and Related Shareholder
Matters
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35
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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43
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14.
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Principal
Accounting Fees and Services
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43
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PART IV
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15.
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Exhibits,
Financial Statement Schedules
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44
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Signatures
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45
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Exhibit Index
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46
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Financial Statements
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F-1
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FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and we intend that such
forward-looking statements be subject to the safe harbors created
thereby. For this purpose, any statements contained in this Annual
Report on Form 10-K, except for historical information, may be
deemed to be forward-looking statements. You can generally identify
forward-looking statements as statements containing the words
“will,” “would,” “believe,”
“expect,” “estimate,”
“anticipate,” “intend,”
“estimate,” “assume,” “can,”
“could,” “plan,” “predict,”
“should” or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to projections
of our future financial performance, trends in our businesses, or
other characterizations of future events or circumstances are
forward-looking statements.
The
forward-looking statements included herein are based on current
expectations of our management based on available information and
involve a number of risks and uncertainties, all of which are
difficult or impossible to predict accurately and many of which are
beyond our control. As such, our actual results could differ
materially and adversely from those expressed in any
forward-looking statements as a result of various factors, some of
which are listed under the section “Risk Factors,”
Item 1A of this Annual Report on Form 10-K. Readers should
carefully review these risks, as well as the additional risks
described in other documents we file from time to time with the
Securities and Exchange Commission. In light of the significant
risks and uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that such
results will be achieved, and readers are cautioned not to place
undue reliance on such forward-looking information. Except as
required by law, we undertake no obligation to revise the
forward-looking statements contained herein to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 1.
BUSINESS
Overview
TOMI
Environmental Solutions, Inc. (“TOMI”, the
“Company”, “we”, “our” and
“us”) is a global provider of infection prevention and
decontamination products and services, focused primarily on life
sciences, including healthcare, bio-safety, pharmaceutical,
clean-room and research. We provide environmental solutions for
indoor and outdoor surface decontamination through the sale of
equipment, services and licensing of our SteraMist
™
Binary
Ionization Technology® (“BIT
™
”), which
is a hydrogen peroxide-based mist and fog registered with the U.S.
Environmental Protection Agency (“EPA”). Our mission is
to help our customers create a healthier world through our product
line and our motto is “innovating for a safer world”
for healthcare and life.
Introduced
commercially in June 2013, our current suite of products
incorporates our BIT™ Solution and applicators, including the
SteraMist™ Surface Unit and the SteraMist™ Environment
System. We have expanded our SteraMist™ BIT™ Technology
beyond chemical and biological warfare applications to the
deactivation of problem microorganisms (including spores) in a wide
variety of commercial settings. SteraMist™ BIT™
provides fast-acting biological deactivation and works in
hard-to-reach areas, while leaving no residue or noxious
fumes.
We
currently target domestic and international markets for the control
of microorganisms and the decontamination of large and small indoor
space for biological pathogens and chemical agents including
infectious diseases in hospital, bio-secure labs, pharmaceutical,
biodefense, biosafety including isolation and transfer chambers,
tissue banks, food safety and many other commercial and residential
settings.
Our Technology
BIT
™
was developed
in response to Amerithrax, the weaponized anthrax spore attacks
that occurred in Washington, D.C. shortly after the September 11,
2001 U.S. terrorist attacks. BIT
™
is a patented
process that aerosolizes and activates a low concentration hydrogen
peroxide solution, producing a fine aqueous mist that contains a
high concentration of Reactive Oxidative Species
(“ROS”), mostly hydroxyl radicals. ROS cause damage to
pathogenic organisms, such as bacteria, bacteria spores, molds
spores, other fungi and yeast, via mechanisms such as oxidation of
unsaturated fatty acids such as carbohydrates, lipids and amino
acids, leading to cellular disruption and/or dysfunction. As such,
our BIT
™
is able to
quickly and effectively kill pathogenic organisms in the air and on
surfaces without damaging
delicate
equipment or computers, and the only by-product is oxygen and water
(in the form of humidity)
.
1
Testing
detailed by the Defense Advanced Research Projects Agency (DARPA)
of the U.S. Department of Defense demonstrates these ROS, which
include the hydroxyl ion and hydroxyl radicals, aggressively break
the double bonds in bacterial spores, biological and chemical
warfare agents and neutralize their threat while producing nontoxic
by-products. The unique alteration of the chemistry of our solution
occurs after passing our EPA-registered solution through our high
energy atmospheric cold plasma arc, which causes the breaking of
the double bond of a hydrogen peroxide molecule, the net result of
which is our “OH” hydroxyl radical. This hydroxyl
radical is known as Activated Ionized Hydrogen Peroxide
(“AIHP”). This patented process allows these reactive
oxygen species (“ROS’s”) such as hydroxyl
radicals to exist in high concentrations without rapidly
recombining and losing their reactivity.
BIT™ uses a
low percentage Hydrogen Peroxide as its only active ingredient to
produce a hydroxyl radical (OH ion) and is represented by the
TOMI™ SteraMist™ brand of products, which produce a
germ-killing aerosol that behaves like a gas.
SteraMist™
has been used throughout the world and has been demonstrated to
reduce certain problem organisms, such as bacterial spores,
Vancomycin-resistant Enterococcus (“VRE”), Clostridium
difficile (“C. diff”) spores, Middle East Respiratory
Syndrome (“MERS”) and Ebola Virus Disease
(“Ebola”). In U.S. hospitals where
SteraMist
™
is being used in terminal cleans, evidence has demonstrated a
reduction of C. diff spore rates. SteraMist
™
has reduced
outbreaks of nosocomial MDRO’s (Klebsiella pneumoniae, AB,
pseudomonas aeruginosa) at the largest hospital in Panama,
contributed to the control of MERS in South Korea and, in the
Kingdom of Saudi Arabia, TOMI’s technology passed a
sanctioned test showing six-log reduction against Geobacillus
stearothermophilus. In May 2015, the United States Agency for
International Development (USAID) awarded us a grant in the amount
of $559,000 for the development of SteraMist
™
Mobile
Decontamination Chambers to fight Ebola. In May 2016, upon the
decontamination and decommissioning of an Ebola treatment center in
West Africa, we fully achieved the milestones upon which the grant
was conditioned. Additionally, BIT
™
has also been
shown to effectively decontaminate weaponized biological agents,
including anthrax, chemical agents such as VX (an extremely toxic
organophosphate) and sulfur mustard (otherwise known as mustard
gas) when applied using properly developed international
protocols.
Independent lab
testing, study data from international pharmaceutical companies and
field clinical data have shown six-log efficacy, which is a
99.9999% kill, in both C. diff spores and against Geobacillus
stearothermophilus. Geobacillus stearothermophilus
is a laboratory testing gold standard and is
commonly used as a challenge organism for
sterilization
validation studies and periodic check of
sterilization cycles.
Under the Federal Insecticide, Fungicide, and
Rodenticide Act (“FIFRA”), we are required to register
with the EPA and certain state regulatory authorities as a seller
of pesticides. In June 2015, SteraMist™ BIT™ was
registered with the EPA as a hospital-healthcare disinfectant for
use as a misting/fogging agent. SteraMist
™
BIT
™
holds EPA registrations both as a
hospital-healthcare and general disinfectant (EPA Registration
90150-2) and for mold control and air and surface remediation (EPA
Registration 90150-1). In February 2016, we expanded our label with
the EPA to include the bacterias C. diff and MRSA, as well as the
virus h1n1, which has better positioned us to penetrate the
hospital-healthcare and other industries. We currently have our
EPA-registered label in all 50 states with the addition of
California and New York in July and October 2016,
respectively.
In
September 2016, the Company’s SteraMist™ BIT™
technology passed good laboratory practice (“GLP”)
tests in efficacy against Salmonella and Norovirus. The Company
also passed testing against Tuberculosis (“TB”). The
GLP studies have been submitted to the EPA for addition to our
existing hospital-healthcare disinfectant label.
SteraMist
™
is easily incorporated into current cleaning procedures; is
economical, non-corrosive and easy to apply; leaves no residues;
and requires no wiping. All our SteraMist
™
products are
fully validated to comply with good manufacturing practice
(“GMP”) standard, have received Conformité
Européene (“CE”) marks in the European Economic
Area (“EEA”) and are approved by Underwriters
Laboratory (“UL”). Our solution is manufactured at an
EPA-registered solution blender and our product performance is
supported by GLP efficacy data for Staphylococcus aureus,
Pseudomonas aeruginosa, Mold spores, MRSA, h1n1, Geobacillus
stearothermophilus and C. diff spores. As of January 27, 2017, our
BIT
™
solution and BIT
™
technology is
one of 33 of the EPA’s “Registered Antimicrobial
Products Effective against Clostridium difficile Spores”, as
published on the EPA’s K List.
We
continue to pursue additional opportunities to further expand the
use of BIT
™
in other
applications. In July 2015, we entered into a materials transfer
agreement with the US Agriculture Research Service
(“ARS”) to conduct food safety research using AIHP or
SteraMist
™
BIT
™
.
In 2016, we registered and listed SteraMist
™
as a
disinfectant, medical device with the U.S. Food & Drug
Administration (“FDA”) and are seeking registration
with the U.S. Department of Agriculture (“USDA”) as a
product to be utilized in the medical device sterilization field,
food packaging, preservation and food safety industries.
Additionally, in 2016, we also successfully passed EPA protocols
testing for Salmonella, which we believe will further support our
application for use of SteraMist
™
BIT
™
in food safety applications.
2
Intellectual Property
Our
success depends in part upon our ability to obtain and maintain
proprietary protection for our products and technologies. We
protect our technology and products by, among other means,
obtaining United States and foreign patents. There can be no
assurance, however, that any patent will provide adequate
protection for the technology, system, product, service or process
it covers. In addition, the process of obtaining and protecting
patents can be long and expensive. We also rely upon trade secrets,
technical know-how, and continuing technological innovation to
develop and maintain our competitive position.
As part of our intellectual property protection
strategy, we have registered our BIT
™
solution with the EPA and successfully
obtained a CE mark in the EEA.
As
of December 31, 2016, we held 4 United States patents and 16
foreign patents and had 4 pending United States design patent
applications. Patents for individual products extend for varying
periods according to the date of filing or grant and legal term of
patents in various countries where a patent is obtained. The actual
protection a patent provides, which can vary from country to
country, depends upon the type of patent, the scope of its
coverage, and the availability of legal remedies in each
country.
Our
products are sold around the world under various brand names and
trademarks. We consider our brand names and trademarks to be
valuable in the marketing of our products. As of December 31,
2016, we had a total of 10 trademark registrations in the
United States and in various foreign countries.
We
also maintain internal non-disclosure safeguards, including the
execution of non-disclosure and confidentiality agreements with our
employees, consultants and others.
Our Products and Services
Our
SteraMist™ Surface Unit is a fully portable, fast-acting,
handheld, point and spray disinfection/decontamination system
intended to disinfect and decontaminate facilities, homes and
assets to the maximum extent possible and provide for quick
turnover of the affected space. The single applicator surface unit
enables disinfection of all surfaces, including high touch,
sensitive medical equipment and electronics. With a 5-second
application time and 7-minute contact time, within minutes after
the AIHP mist has been applied, the space is safe to
re-enter.
Our
SteraMist™ Surface Unit is lightweight, easy to transport and
capable of achieving reliable disinfection/decontamination results,
as it is easily incorporated into existing cleaning procedures and
protocols. It can be used as a standalone terminal clean product or
as an adjunct to ultraviolet disinfection. The
SteraMist
™
Surface Unit produces hydroxyl radicals through its plasma science
and does not require heating, ventilation or air conditioning
systems to be shut down. Additionally, it requires no wiping,
leaves no residue and is free of bleach, chlorine, formaldehyde,
glutaraldehyde, titanium dioxide, peracetic acid and silver
ions.
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SteraMist™
Surface Unit
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SteraMist™
Surface Unit
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3
Our
SteraMist™ Environment System is a transportable,
remotely-controlled (robotic) system that provides complete room
disinfection/decontamination of a sealed space up to 103.8
m
3
(3,663
ft
3
).
Individually, each remote applicator can be used to treat a space
of approximately 34.6 m
3
(1,221
ft
3
).
Multiple SteraMist
™
Environment
Systems can be used simultaneously to accommodate larger or
multiple spaces with fast application and minimal down time. Our
hybrid technology applicators can be used in manual and/or fogging
modes.
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SteraMist™
Environment System
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SteraMist™
Environment System
|
We also
offer customized disinfection and decontamination applications in
healthcare, pharmaceutical, vivarium, clean room and bio-safety
facilities throughout the world using our SteraMist™
technology. In these customized, built-in applications, our
SteraMist™ technology is integrated into full rooms,
pass-boxes, chambers, bag in/bag out and other
enclosures.
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Customized Built In
Unit
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Customized Built In
Unit
|
We
offer complete decontamination and disinfection services in
residential and commercial industries through the use of our
SteraMist™ BIT
™
platform of
products, in-house technicians and the TOMI Service Network
(described below). We specialize in providing these customized
services in medical facilities, bio-safety labs, tissue labs, clean
rooms, office buildings, hospitality, schools, pharmaceutical
companies, remediation, companies, military, transportation ,
airports, first responders, single-family homes and multi-unit
residences.
4
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SteraMist™ Service
Technician
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Domestically, we
are focused on the health care and hospital, bio-safety and
pharmaceutical markets, along with other verticals that are covered
through our professional service division. Internationally, we seek
strategic partners, manufacturer representatives or licensed
distribution partners and are currently focused on Asia, the
European Union, the Middle East, Central America and Mexico. In
such international markets, our technologies are used for the
control of microorganisms and the decontamination of large and
small indoor spaces for biological pathogens and chemical agents,
including infectious diseases in hospitals, bio-secure labs and
pharmaceutical manufacturers, biodefense and biosafety facilities
(including isolation and transfer chambers), tissue banks, food
safety and many other commercial and residential settings. Our
marketing and strategic partnership agreements have focused on
Singapore, the Philippines, Taiwan, Hong Kong, South Korea and
Japan, particularly in light of past MERS and severe acute
respiratory syndrome (SARS) epidemics.
Manufacturing
We
outsource the manufacturing of our SteraMist™ line of
equipment. In October 2014, we entered into a manufacturing and
development agreement with RG Group, Inc. (“RG Group”),
which we amended and restated in
November 2016. Our
agreement does not provide for any minimum purchase commitments and
has a two-year term, subject to extensions thereof. Our
agreement provides for a warranty against product defects for one
year from the date we ship the product manufactured
thereunder.
RG Group is an ISO9001 registered company with
facilities in Pennsylvania, New York and New Jersey.
Industries
We
believe that our technology, services and products offer a
significant opportunity to help reduce the spread to patients and
others of Community Associated and Healthcare-Associated Infections
(“HAI”). HAIs are one of the top ten leading causes of
death in the United States. The Centers for Disease Control and
Prevention (“CDC”) has noted
that HAIs are a major, yet often preventable,
threat to patient safety.
As
of
March 2009, HAIs had a direct cost to
the healthcare system of approximately $35 to $45 billion dollars
annually and approximately 10% of inpatients contract infections
from hospitals, resulting in more than 2,000,000 illnesses
and over 100,000 deaths per year (or 1 in every 25
admissions). Further, it has been estimated that approximately 15%
of all discharged hospital patients are readmitted with infections.
Traditional cleaning has been known to leave 30% to 60% of
pathogens behind. Additionally, a well-known study from 55 New
England hospitals concluded that 25% of operating room surfaces are
left unclean. The rapid turnover rate of hospital rooms, treatment
rooms, hotel rooms and mass transportation, combined with the
ability of bacteria to mutate and form drug resistant bacteria,
present a substantial challenge to manual cleaning of such spaces,
such as the use of surface chlorine wipes.
Our
BIT
™
has safely and effectively produced a six-log efficacy, which is a
99.9999% reduction. In comparison to most of its competitors, we
believe that SteraMist
™
technology has
a quicker and higher kill level in a shorter time and leaves no
residue, is not affected by humidity, is not caustic, does not
blister painted surfaces, contains no silver ions, requires no
humidity alteration prior to or after use, has a shorter exposure
time, and is quicker to exhaust due to the production of our
reactive oxygen species (AIHP), “OH”, verses
nebulization of higher concentrates of hydrogen peroxide, such as
vaporized hydrogen peroxide (“VHP”) and hydrogen
peroxide vapor (HPV) type products. Our “OH” is a small
2 to 4 micron particle that contains no bleach, and rooms require
little or no preparation prior to treatment. When our
“OH” is finished killing, inactivating and neutralizing
bacteria, bacteria spores, fungi, viruses and certain chemical
agents, it converts to oxygen and water.
5
Our
SteraMist
™
and
BIT
™
Technology and TOMI’s related service platform are currently
being used in a broad spectrum of industries
including:
●
medical
facilities
●
bio-safety
labs
●
tissue
labs
●
clean
rooms
●
office
buildings
●
hospitality
●
schools
●
pharmaceutical
companies
●
remediation
companies
●
military
●
transportation
●
airports
●
first
responders
●
single-family homes
and multi-unit residences
We also
believe, based on our marketing efforts to date, that other
potential vertical industry applications for our technology,
service and products include:
●
blood
banks
●
food safety
industry
●
athletic
facilities
●
airlines
●
entertainment
●
homeland defense
and border protection
●
control and
containment of pandemic breakouts
We
intend to generate and support research on improving, extending and
applying our patents. We have received interest, both domestically
and internationally, in forming business alliances with major
healthcare companies, biosafety labs, tissue and blood labs,
pharmaceutical companies and food safety companies, as well as
companies in the border protection industry, including homeland
defense companies, construction companies and remediation
companies.
Marketing and Distribution
Through
our sales and services, our business growth objective is to be a
global leader in disinfection and decontamination, including
domestic and international infectious disease control. We hope to
achieve this through our premier platform of hydrogen peroxide
mists and fogs, as well as other infectious control products and
technologies. We intend to continue to expand and support research
and development on other decontamination and remediation solutions,
including hydroxyl radicals and other ROS, and to form more
business alliances. Our strategy involves licensing of our
technology and/or performing decontamination services within
cleanrooms, bio-safety labs, tissue and blood labs, pharmaceutical
labs, kidney dialysis centers, major remediation companies,
construction companies and corporations specializing in disaster
relief.
We sell
our products domestically through our internal sales force, as well
as independent sales and manufacturing representatives.
Internationally, our products are sold through exclusive and
non-exclusive sales representatives and distributors. We have
shipped our BIT
™
Technology
into 20 different countries throughout Europe, North America,
Central America and Asia.
Market
Segments
Hospitals
.
We are seeking to expand our penetration of
the
hospital market segment. Under the
Patient Protection and Affordable Care Act’s (also known as
the Affordable Care Act or ACA) Hospital Readmissions Reduction
Program, hospitals that have high rates of infections and HAIs now
face significant penalties. We believe that our
SteraMist
™
BIT
™
technology reduces the spread of infections and HAIs in patient
rooms, infectious disease rooms and operatory suites, with a
corresponding return on investment to the hospital of up to 20 to 1
in the first year. At this time, we cannot predict the effect of
any potential healthcare reform legislation, including the
potential repeal of the Patient Protection and Affordable Care Act,
on such penalties or our business and prospects in the hospital
market segment.
6
Bio-safety Labs, Tissue and
Blood Labs and Cleanrooms.
Bio-safety labs, tissue and blood labs and
cleanrooms are subject to transfer risks and constantly seek to
reduce the risk of exposure to infectious or potentially infectious
agents or materials. We believe that the use of
SteraMist
™
as a routine decontamination product in all
biosafety levels and microbiological practices may reduce the
risk of such contamination, while also reducing potential negative
effects that can result from other decontamination products, such
as VHP,
formaldehyde, glutaraldehyde and titanium dioxide,
including blistering of paints,
corrosion of metals, lengthy exposure times and potential
carcinogenic exposure.
There
are many requirements and restrictions on the type of
decontamination agents such labs may use to prevent these risks and
remediate adverse incidents. In light of these regulations, we
believe our rapid deployment of effective aerosolized reactive
oxygen species could become the solution to lower risks and perform
decontamination clean-up in these labs. Our product works within
minutes and leaves no noxious chemical
smell behind.
We also believe that our products and
technology can aid in all biosafety levels and microbiological
practices, on all safety equipment, transfer hoods, isolation
chambers, animal cages and other equipment, as well as help prevent
the risks associated with handling infectious microorganisms.
Our BIT
™
technology has recently been successfully
tested to biosafety level 3 (BSL-3) and level 4 (BSL-4)
standards, including animal research cages. Biosafety level 3
(BSL-3) is appropriate for agents with a known potential for
aerosol transmission, for agents that may cause serious and
potentially lethal infections and that are indigenous or exotic in
origin. Exotic agents that pose a high individual risk of
life-threatening disease by infectious aerosols and for which no
treatment is available are restricted to high containment
laboratories that meet biosafety level 4 (BSL-4) standards.
SteraMist
™
not only decontaminates spaces in minutes but also
decontaminates the animal cages in minutes which helps in the
prevention of the spread of diseases that are typically found
within these research animal cages.
Food Safety
Industry.
We believe that SteraMist
™
can also serve
as an effective decontaminant in the food safety industry.
According to the CDC, 80 million people per year in the United
States contract, and 5,000 people die from, food poisoning or other
food-related illnesses. Current food safety cleaning techniques
involve time intensive processes, which can reduce food
manufacturers’ profit. Our AIHP degrades into only harmless
water and oxygen. If we are able to successfully obtain approval by
the FDA and USDA, we anticipate that our solution can be applied to
all foods and all food packing and storage equipment, and believe
it would be safe for use on electronics and kitchenware, along with
high touch surfaces where most pathogens are found (such as phones,
computers and kitchen appliances). We believe that
SteraMist
™
could be
useful for decontamination at all phases of food production, from
the farm, slaughterhouse, packaging and canning
facilities, to the transportation of food and to the restaurants
and grocery stores.
Remediation
Industry
. Generally, a professional, certified remediation
company waits until an emergency or disaster occurs before they can
earn fees. We have implemented and plan to expand our
certification, license and equipment program throughout the United
States, which allows such disaster professionals to earn fees by
performing surface remediation and infectious disease control in
addition to their emergency response-related work. As there are
over 20,000 certified professional remediators in the United
States, we are aggressively targeting this market. Our service
division, the
TOMI Service Network
(“TSN
”), resulted from the demand for our
product nationally. Currently, over 59 national companies are
licensed to use our products and solutions. We recently approved
the design of a TOMI van which has become available to those of our
national service team companies who are licensed TSN
members.
|
|
Biodefense Industry.
Countries around the world, including the United States, need to
protect their borders and cities against a potential terrorist
attack. We believe that our SteraMist
™
line of
products may give governmental bodies an added tool in their
arsenal to mitigate the risk of a weaponized biological attack. In
addition, SteraMist
™
could assist
in mitigating the spread of emerging pandemic viruses, including
strains of Ebola, MERS, h1n1, h5n1, h7n9 and h10n8. In addition, we
believe our SteraMist
™
line of
products may assist border patrol agents in controlling the spread
of infectious disease introduced by foreign individuals by
decontaminating interview rooms, containment rooms and holding
cells after a potential infected carrier’s condition either
improves or the carrier dies.
7
Hospitality
.
Our products can be used for air remediation and surface cleaning,
including remote controls, chairs, telephones, toilet seats and
hard-to-reach areas, which would allow hospitality professionals
(such as hotels and motels) to offer cleaner rooms and common areas
to guests and others.
TOMI Service Network (TSN)
In 2015, we launched the TSN, which allowed us to
enhance our service division by creating a national service network
composed of existing, full service restoration industry
specialists. Since the launch of the TSN, we have recruited and
entered into licensing agreements with 59 geographically and
strategically-placed companies that will become network hubs to
take advantage of our SteraMist
™
platform of products, assist as service
providers for our domestic and international client base and
provide regional, national and international large event
mobilization response. In the first quarter of 2016, we hired a
President and Director of Network Recruitment for the TSN, which
has contributed to the growth of the TSN in
2016.
Competition
The
decontamination and environmental infectious disease control
industry is extremely competitive. Our competitors include
companies that market other hydrogen peroxide-based products, such
as Steris Corporation (“Steris”), Bioquell, Inc.
(“Bioquell”), Sanosil Ltd (“Sanosil”) and
The Clorox Company (“Clorox”), various ultraviolet
companies and quad ammonia-chemical companies.
We believe our SteraMist suite of products have a
competitive advantage in that they have a shorter kill time,
provide a six log kill to a wide variety of pathogens and leave no
residue or unpleasant odor. However,
these competitors may
have longer operating histories, greater name recognition, larger
installed customer bases and substantially greater financial and
marketing resources than us. We believe that the principal factors
affecting competition in our markets include name recognition and
the ability to receive referrals based on client confidence in the
service. There are no significant barriers of entry that could keep
potential competitors from opening similar facilities. Our ability
to compete successfully in the industry will depend, in large part,
upon our ability to market and sell our indoor decontamination and
infectious disease control products and services. There can be no
assurance that we will be able to compete successfully in the
remediation industry, or that future competition will not have a
material adverse effect on our business, operating results and
financial condition.
Competitive Advantages
SteraMist
™
offers the following competitive advantages:
●
Provides a 99.9999%
or six-log kill (i.e. the statistical destruction of all
microorganisms and their spores) on all challenged pathogens,
including Geobacillus stearothermophilus, the spore that is
considered a gold standard for validation of sterilization versus
household/industrial cleaners that offer a 99.9%, or three-log,
kill to 99.99%, or four-log, kill.
●
Kills pathogens
within seconds of application, whereas household/industrial
cleaners often take anywhere from 5 to 30 minutes.
●
Easy to
use.
●
Does not require a
user to mix any chemicals.
●
Does not include
silver ions or peracetic acid.
●
Leaves no
residue.
●
Not affected by
humidity or temperature.
●
Non-corrosive.
●
Does not damage
medical or electronic equipment.
●
By-products
converts to oxygen and water (humidity).
●
When you enter the
room you can “smell the clean”.
8
Research & Development
We are
generating and supporting research on improving, extending and
applying our patents in the field of mechanical cleaning and
decontamination. Research and development expenses for the years
ended December 31, 2016 and 2015, were approximately $184,000 and
$100,000, respectively.
Employees
As of
March 17, 2017, we have 16 full time principally operational and
administrative employees working within the United States. Most of
our sales are conducted by independent sales
representatives.
Government Regulation
Our business is subject to various degrees of
governmental regulation in the countries in which we operate. In
the United States, the EPA, the FDA and other governmental
authorities regulate the development, manufacture, sale, and
distribution of our products and services. Our international
operations also are subject to a significant amount of government
regulation, including country-specific rules and regulations and
U.S. regulations applicable to our international operations.
Government regulations include detailed inspection of, and controls
over, research and development, product approvals and
manufacturing, marketing and promotion, sampling, distribution,
record-keeping, storage, and disposal practices.
Corporate Information
TOMI
was incorporated in the State of Florida in 1979 as “Dauphin,
Inc.” (“Dauphin”). On June 27, 1994, Dauphin,
through an exchange agreement, acquired 100% of the outstanding
common stock of RPS Executive Limousines, Ltd., a privately held
New York Corporation (“RPS Limo”), which transaction
was treated, for accounting purposes, as a reverse acquisition. On
July 19, 1994, Dauphin changed its name to RPS Enterprises, Ltd.
and effected a one-for-three reverse split of its common
stock.
In
August 2002, certain investors purchased the majority of prior
management’s stock and changed the name from RPS Enterprises
Ltd. to RPS Group, Inc. (“RPS Group”). In October 2002,
RPS Group sold back the operating subsidiary, RPS Limo, to prior
management, at which time, RPS Group became a shell company with no
significant assets or operations.
On
September 5, 2007, The Ozone Man, Inc. was incorporated in the
State of Nevada (“Ozone-NV”). On October 15, 2007, RPS
Group changed its name to The Ozone Man, Inc.
(“Ozone-FL”) and effected a one-for-twenty reverse
split of its common stock
.
On
October 17,
2007, Ozone-FL acquired all of the issued and outstanding shares of
common stock of Ozone-NV in a recapitalization transaction pursuant
to which Ozone-NV was treated as the continuing entity. On May 14,
2009, Ozone-FL changed its name to TOMI Environmental Services,
Inc.
Available
Information
Our
electronic filings with the U.S. Securities and Exchange Commission
(“SEC”) (including our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to these reports) are available free of charge
through our website as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC. We will
also provide electronic or paper copies of such reports free of
charge, upon request made to our Corporate Secretary at 9454
Wilshire Blvd., Penthouse, Beverly Hills, CA 90212. All such
reports are also available free of charge via EDGAR through the SEC
website at www.sec.gov. These filings may also be read and copied
at the SEC’s Public Reference Room which is located at 100 F
Street, N.E., Washington, D.C. 20549. Information about the
operation of the Public Reference Room can be obtained by calling
the SEC at 1-800-SEC-0330. Any information found our website is not
a part of, or incorporated by reference into, this or any report of
TOMI filed with, or furnished to the SEC
.
9
Our business routinely encounters and attempts
to address risks, some of which will cause our future results to
differ, sometimes materially, from those originally anticipated.
Below, we have described our present view of certain important
risks. The risk factors set forth below are not the only risks that
we may face or that could adversely affect us. If any of the risks
discussed in this Annual Report on Form 10-K actually occur, our
business, financial condition and results of operations could be
materially adversely affected. If this were to occur, the trading
price of our securities could decline significantly.
In assessing these risks,
investors should also refer to the other information contained or
incorporated by reference in our other filings with the
SEC.
Risk Related to Our Company and Business
We have experienced losses historically, may be required to obtain
additional financing and may never achieve and sustain
profitability.
As of December 31,
2016, we had an accumulated deficit of approximately $34.3 million
and we incurred net losses of approximately $3.2 million and $12.2
million for the years ended December 31, 2016 and 2015,
respectively. We may continue to incur net losses for the
foreseeable future as we continue to develop our products and seek
customers and distribution for our products. Even if we achieve
profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis.
Further, to finance our product
development and grow our business, we may seek funds through
borrowings or through additional rounds of financing, including
private or public equity or debt offerings. We may be unable to
raise funds on commercially reasonable terms or at all. In
addition, the sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders.
If we borrow additional funds or issue debt securities, these
securities could have rights superior to holders of our common
stock, and could contain covenants that will restrict our
operations. If we do not obtain additional resources or achieve and
sustain profitability, our ability to capitalize on business
opportunities will be limited, the growth of our business will be
harmed, our business may fail and investors may lose all of their
investment.
Our operations are subject to environmental laws and regulations
that may increase costs of operations and impact or limit our
business plans.
We
are subject to environmental laws and regulations affecting
many aspects of our present and potential future operations,
including a wide variety of EPA labeling and other state regulatory
agency requirements. Compliance with these laws and regulations may
result in increased costs and delays as a result of administrative
proceedings and certain reporting obligations. Public officials and
entities may seek injunctive relief or other remedies to enforce
applicable environmental laws and regulations. We cannot predict
the outcome of any administrative proceedings that may
arise.
We are subject to risks related to our international operations and
failure to manage these risks may adversely affect our operating
results and financial condition.
A
substantial portion of our sales are made to customers outside the
United States. As such, we may be denied access to our customers as
a result of a closing of the borders of the countries in which we
sell our products due to economic, legislative, political and
military conditions in such countries. International operations are
subject to a number of other inherent risks, and our future results
could be adversely affected by a number of factors,
including:
●
unfavorable
political or economic environments;
●
requirements or
preferences for domestic products or solutions, which could reduce
demand for our products;
●
differing existing
or future regulatory and certification requirements;
●
unexpected legal or
regulatory changes;
●
greater difficulty
in collecting accounts receivable and longer collection
periods;
●
difficulties in
enforcing contracts;
●
an inability to
effectively protect intellectual property;
●
tariffs
and trade barriers, export regulations and other regulatory and
contractual limitations on our ability to sell our products;
and
●
potentially adverse
tax consequences, including multiple and possibly overlapping tax
structures.
If we
are unable to manage the risks inherent in our international
activities, our ability to obtain future revenues may suffer and,
consequently, our business, financial condition and results of
operations could be materially and adversely affected.
10
Our success depends upon third party contractors, suppliers and
manufacturers, the disruption of which could negatively impact our
business.
We rely
upon third parties to supply us with components for our products.
We outsource the manufacturing of our SteraMist
™
line of
equipment to RG Group pursuant to a manufacturing and development
agreement and use contract manufacturers to build our
BIT
™
-based systems,
as we do not maintain our own manufacturing facilities. If we fail
to maintain relationships with our current suppliers, we may not be
able to effectively commercialize and market our products, which
would have a material and adverse effect on our business. Further,
any disruption in the manufacturing process could have a material
adverse effect on our business, financial condition and results of
operations. We cannot ensure that alternative production capacity
would be available in the event of a disruption, or if it would be
available, it could be obtained on favorable terms.
The introduction of new products is often accompanied by design and
production delays, as well as significant cost, which could prevent
us from introducing new products to the market in a timely and
cost-effective manner.
The
development and initial production and enhancement of the
decontamination systems we produce is often accompanied by design
and production delays and related costs. Often, we cannot predict
the time and expense required to overcome such problems. If we are
unable to introduce new products on our anticipated timeframe, our
business, financial condition and results of operations may
suffer.
Our success depends on our ability to adequately protect our
intellectual property.
In
April 2013, we acquired certain assets from L-3 Applied
Technologies, Inc. (“L-3”), including patents,
trademarks and trade secrets related to BIT
™
. Our
commercial success depends, in part, on our ability to obtain,
maintain, defend, file new or enforce our existing patents,
trademarks, trade secrets and other intellectual property rights
covering our technologies and products, including, in particular,
the intellectual property rights we acquired from L-3. We may,
however, be unable to adequately preserve such rights due to a
number of reasons, including the following:
●
our rights could be
invalidated, circumvented, challenged, breached or infringed
upon;
●
we may not have
sufficient resources to adequately prosecute or protect our
intellectual property rights;
●
upon expiration of
our patents, certain of our key technology may become widely
available; or
●
third parties may
be able to develop or obtain patents for similar or competing
technology.
Although we devote
resources to the establishment and protection of our patents and
trademarks, we cannot assure you that the actions we have taken or
will take in the future will be adequate to prevent violation of
our patents, trademarks and proprietary rights by others or prevent
others from seeking to block sales of our products as an alleged
violation of their patents, trademarks and proprietary rights. In
future, litigation may be necessary to enforce our trademarks or
proprietary rights and we may be forced to defend ourselves against
claimed infringement or the rights of others. Any such litigation
could result in adverse determinations that could have a material
adverse effect on our business, financial condition or results of
operations.
We may be unable to enforce our intellectual property rights
throughout the world.
The
laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the United States.
Companies have encountered significant problems in protecting and
defending intellectual property rights in certain foreign
jurisdictions. To the extent that we have obtained or are able to
obtain patents or other intellectual property rights in any foreign
jurisdictions, it may be difficult to stop the infringement of our
patents or the misappropriation of other intellectual property
rights. For example, some foreign countries have compulsory
licensing laws under which a patent owner must grant licenses to
third parties. In addition, some countries limit the availability
of certain types of patent rights and enforceability of patents
against third parties, including government agencies or government
contractors. In these countries, patents may provide only limited
benefit or no benefit.
Proceedings to
enforce our patent rights in foreign jurisdictions could result in
substantial costs and divert our efforts and attention from other
aspects of our business. Accordingly, efforts to protect our
intellectual property rights in such countries may be inadequate.
In addition, future changes in the law and legal decisions by
courts in the United States and foreign countries may affect our
ability to obtain adequate protection for our technology and
products and the enforcement of intellectual property.
We may not be able to manage our growth effectively, create
operating efficiencies or achieve or sustain
profitability.
The
ability to manage and operate our business as we execute our growth
strategy will require effective planning. Rapid growth could strain
our internal resources, which could lead to a lower quality of
customer service, reporting problems and delays in meeting
important deadlines, resulting in loss of market share and other
problems that could adversely affect our reputation and financial
performance. Our ability to manage future growth effectively will
also require us to continue to update and improve our operational,
financial and management controls and procedures. If we do not
manage our growth effectively, we could be faced with slower growth
and a failure to achieve or sustain profitability.
11
We face significant competition in our industry, which could
significantly limit our growth and materially and adversely affect
our financial results.
The
decontamination and environmental infectious disease control
industry is extremely competitive. The competition includes
remediators and disinfection/decontamination companies such as
Steris, Bioquell, Sanosil and Clorox, various ultraviolet companies
and quad ammonia-chemical companies. These competitors may have
longer operating histories, greater name recognition, larger
installed customer bases and substantially greater financial and
marketing resources than us. We believe that the principal factors
affecting competition in our markets include name recognition and
the ability to receive referrals based on client confidence in the
service. There are no significant barriers of entry that could keep
potential competitors from opening similar facilities. Our ability
to compete successfully in the industry will depend, in large part,
upon our ability to market and sell our indoor decontamination and
infectious disease control products and services. There can be no
assurance that we will be able to compete successfully in the
remediation industry, or that future competition will not have a
material adverse effect on our business, operating results and
financial condition.
We are dependent on our key personnel, the loss of whom could
adversely affect our operations, and if we fail to attract and
retain the talent required for our business, we could be materially
harmed.
Our
success is substantially dependent on the performance of our
executive officers, including our Chairman and Chief Executive
Officer, Dr. Halden S. Shane, the loss of whom would have a
material adverse effect on our business. Given our relatively
recent entry into the remediation industry, we depend to a
significant degree on our ability to attract, retain and motivate
quality personnel. We have experienced attrition among our
executive officers in the past and do not carry key man life
insurance on any key personnel. Any future loss of key members of
our organization may delay or prevent us from marketing and
performing our services.
Competition for
highly-skilled personnel is often intense, especially in Southern
California, where we have a substantial presence and need for
highly-skilled personnel. We may not be successful in attracting,
integrating or retaining qualified personnel to fulfill our current
or future needs. Also, to the extent we hire personnel from
competitors, we may be subject to allegations that we have
improperly solicited, or that they have divulged proprietary or
other confidential information, or that their former employers own
their inventions or work product.
Our operations, and those of our suppliers, are subject to a
variety of business continuity hazards and risks, any of which
could interrupt production or operations or otherwise adversely
affect our performance and results.
We
are subject to business continuity hazards and other risks,
including natural disasters, utility and other mechanical failures,
labor difficulties, inability to obtain necessary licenses, permits
or registrations, disruption of communications, data security and
preservation, disruption of supply or distribution, safety
regulation and labor difficulties.
The occurrence of any of these or other events
might disrupt or shut down operations, or otherwise adversely
impact the production or profitability of a particular facility, or
our operations as a whole. We may also be subject to certain
liability claims in the event of an injury or loss of life, or
damage to property and equipment, resulting from such events.
Although we maintain property and casualty insurance, as well as
other forms of insurance that we believe are customary for our
industries, our insurance policies include limits and, as such, our
coverage may be insufficient to protect against all potential
hazards and risks incident to our business. Should any such hazards
or risks occur, or should our insurance coverage be inadequate or
unavailable, our business, prospects, financial condition and
results of operations might be adversely
affected.
Our products are subject to potential product liability claims
which, if successful, could have a material adverse effect on our
business, financial condition and results of
operations.
Certain
of our products may be hazardous if
not deployed properly or if defective. We are exposed to
significant risks for product liability claims if death, personal
injury or property damage results from the use of our products.
While we currently maintain insurance against product liability
claims, we may experience material product liability losses in the
future. Our insurance coverage may not continue to be available on
terms that we accept, if at all, and our insurance coverage also
may not adequately cover liabilities that we incur. A successful
claim against us that exceeds our insurance coverage level or that
is not covered by insurance, or any product recall, could have a
material adverse effect on our business, financial condition and
results of operations. In addition, product liability and other
claims can divert the attention of management and other personnel
for significant periods of time, regardless of the ultimate
outcome. Further, claims of this nature may cause our customers to
lose confidence in our products and us. As a result, an
unsuccessful defense of a product liability or other claim could
have a material adverse effect on our financial condition, results
of operations and cash flows.
12
The requirements of being a public company may strain our
resources, divert management’s attention and affect our
ability to attract and retain executive management and qualified
board members.
We have
and likely will continue to incur significant legal, accounting and
other expenses as a public company subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002
(“SOX”), the Dodd–Frank Wall Street Reform and
Consumer Protection Act and other applicable rules and regulations.
Our management and other personnel devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and
regulations have increased our legal and financial compliance costs
and will make some activities more time-consuming and costly. For
example, applicable rules and regulations could make it more
difficult for us to attract and retain qualified persons to serve
on our Board or as executive officers.
In
addition, SOX requires, among other things, that we maintain
effective internal control over financial reporting and disclosure
controls and procedures. Our testing, or the potential subsequent
testing by our independent registered public accounting firm in
future periods, may reveal deficiencies in our internal control
over financial reporting that are deemed to be material weaknesses.
Our compliance with Section 404 of SOX may require that we incur
substantial expense and expend significant management time on
compliance-related issues. Moreover, if our independent registered
public accounting firm identifies deficiencies in our internal
control over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline and we
could be subject to sanctions or investigations by regulatory
authorities, which would require additional financial and
management resources.
As a
result of disclosure of information in this Annual Report on Form
10-K and in filings required of a public company, our business and
financial condition are more visible, which we believe may result
in threatened or actual litigation, including by competitors and
other third parties. If such claims are successful, our business
and operating results could be adversely affected. Even if the
claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them,
could divert the resources of our management and adversely affect
our business and operating results.
Risk Related to Our Securities
Our stock price is volatile and there is a limited market for our
shares.
The
stock markets generally have experienced, and will probably
continue to experience, extreme price and volume fluctuations that
have affected the market price of the shares of many small-cap
companies. These fluctuations have often been unrelated to the
operating results of such companies. Factors that may affect the
volatility of our stock price include the following:
●
our success, or
lack of success, in developing and marketing our products and
services;
●
our ability to
raise the required capital to fund our business;
●
the announcement of
new products, services, or technological innovations by us or our
competitors;
●
changes in our
executive leadership;
●
quarterly
fluctuations of our operating results;
●
changes in revenue
or earnings; and
●
competition.
Moreover, the OTCQX
Marketplace (“OTCQX”) is a trading platform, and
trading of securities quoted on the OTCQX is often more sporadic
than the trading of securities listed on a national securities
exchange like The NASDAQ Stock
Market
or the New York
Stock Exchange. Even if we were to seek to list our securities on a
national securities exchange, there is no assurance we will be able
to do so, and if we do so, many of these same forces and
limitations may still impact our trading volumes and market price
in the near term. Additionally, the sale or attempted sale of a
large amount of common stock into the market may also have a
significant impact on the trading price of our common
stock.
We do not intend to pay dividends for the foreseeable
future.
We have not paid dividends on our common stock
since inception.
The continued operation and expansion of
our business will require substantial funding. Accordingly, we
currently
intend
to retain earnings, if any, for use in the
business and
we do
not
anticipate
that we will pay
any
cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our Board and
will depend upon results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law
and other factors our Board deems relevant. Investors seeking cash
dividends should not purchase our common stock. Accordingly,
realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never
occur.
13
Our common stock is subject to the “penny stock” rules
of the SEC, and trading in our securities is very limited, which
makes transactions in our common stock cumbersome and may reduce
the value of an investment in our securities.
The SEC has adopted regulations which generally
define a “penny stock” to be any equity security that
is not listed on a qualified national securities exchange and that
has a market price of less than $5.00 per share, or with an
exercise price of less than $5.00 per share, subject to certain
exceptions. Historically, shares of our common stock have traded on
the OTCQX
at a price of less
than $5.00 per share and, as a result, our common stock is
considered a “penny stock” by the SEC and subject to
rules adopted by the SEC regulating broker-dealer practices in
connection with transactions in “penny stocks.” Our
securities are covered by the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell
to persons other than established customers and accredited
investors. For any transaction involving a penny stock, unless
exempt, Rule 15g-9 under the Exchange Act requires that a
broker-dealer must:
●
approve
a person’s account for transactions in penny stocks;
and
●
receive
from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be
purchased.
In order to approve a person’s account for transactions in
penny stocks, the broker or dealer must:
●
obtain
financial information and investment experience objectives of the
person; and
●
make
a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market that:
●
sets
forth the basis on which the broker or dealer made the suitability
determination; and
●
provides
that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Additionally, the investor must receive disclosure
about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered
representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in
penny stock transactions. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the
account and information on the limited market in penny
stocks. Generally, brokers may be less willing to
execute transactions in securities subject to the “penny
stock” rules. This may
discourage investor interest in and limit the
marketability of our securities.
While we intend to apply to list our common stock on a national
securities exchange, the exchange may not approve our listing and,
if approved, our common stock may not continue to trade on such
exchange.
We
intend to apply to list our common stock on a national securities
exchange. As such, we will need to satisfy certain qualitative and
quantitative requirements in order to successfully list our common
stock on such an exchange. We cannot assure you that we will be
able to meet the applicable requirements for such initial listing
or that our application will be approved.
If our
listing application is approved, we will be required to comply with
certain listing requirements of such exchange, which may include
compliance with certain requirements with respect to our corporate
governance, finances, stock trading volume and stock price. If we
fail to meet any of these requirements, such exchange may take
steps to delist our common stock. Such a delisting would likely
have a negative effect on the price of our common stock and would
adversely affect the ability to sell or purchase our common stock.
Further, even if we successfully apply to list our common stock on
a national exchange, we cannot assure you that an orderly and
active trading market in our common stock will ever develop or be
sustained.
We have a substantial number of options and warrants outstanding,
which could give rise to additional issuances of our common stock
and potential dilution of ownership to existing
shareholders.
As
of December 31, 2016, we had outstanding options and warrants to
purchase an aggregate of 36.9 million shares of our common stock at
exercise prices ranging from $0.01 to $2.10 per share. Of these,
200,000 represent shares underlying options with exercise prices
ranging from $0.05 to $2.10 per share and 36.7 million represent
shares underlying warrants at exercise prices ranging from $0.01 to
$1.00 per share. To the extent any holders of options or warrants
exercise same, the issuance of shares of our common stock upon such
exercise will result in dilution of ownership to existing
shareholders. Additionally, as a result of our March 2017
financing, in which we raised $5,300,000 (See Note
15—Subsequent Events), the promissory notes issued are
convertible at $0.54 per share into an aggregate of 9,814,815
shares of common stock, if fully converted. As part of this
transaction, we also issued warrants to purchase up to an
additional 833,333 shares of common stock at an exercise price of
$0.69 per share.
14
Not
applicable.
Our
corporate headquarters, a 300 square foot office space, is located
at 9454 Wilshire Blvd., Penthouse, Beverly Hills, CA 90212. We
lease this space for $22,500 annually on a month-to-month tenancy
in a professional office building.
In addition, we lease 6,000 square feet
of space in Frederick, Maryland, comprised of space for offices,
warehousing, laboratory, training and mock hospital facilities at
$50,400 annually on a three-year term that
expires on
January 31, 2018.
We
currently are not a party to any legal proceedings, the adverse
outcome of which, in management’s opinion, individually or in
the aggregate, would have a material adverse effect on our results
of operations, financial position or cash flows.
Not
applicable.
15
Market Information
Our
common stock is quoted on the OTCQX under the symbol
“TOMZ.” Trading in stocks quoted on the OTCQX is often
thin and characterized by wide fluctuations in trading prices due
to many factors that may have little to do with a company’s
operations or business prospects.
OTCQX
securities are not listed or traded on the floor of an organized
national or regional stock exchange. Instead, OTCQX securities
transactions are conducted through a telephone and computer network
connecting dealers in stocks. OTCQX issuers are traditionally
smaller companies that do not meet the financial and other listing
requirements of a regional or national stock exchange.
Set
forth below are the range of high and low bid quotations for our
common stock from the OTCQX for the periods indicated. The market
quotations were obtained from the OTCQX and reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
|
Period
|
High
($)
|
Low
($)
|
|
Year
ended December 31, 2015
|
|
|
|
First
Quarter
|
1.50
|
0.20
|
|
Second
Quarter
|
0.65
|
0.35
|
|
Third
Quarter
|
0.68
|
0.28
|
|
Fourth
Quarter
|
0.64
|
0.36
|
|
Year
ended December 31, 2016
|
|
|
|
First
Quarter
|
0.60
|
0.46
|
|
Second
Quarter
|
0.55
|
0.34
|
|
Third
Quarter
|
0.47
|
0.25
|
|
Fourth
Quarter
|
0.40
|
0.22
|
Shareholders
As
March 17, 2017, there were approximately
832
record holders of our common
stock. On March 17, 2017, the last reported sale price of our
common stock on the OTCQX was $0.16 per share.
Dividends
We have
not paid and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. Our policy is to retain all
earnings, if any, to provide funds for operation and expansion of
our business. The declaration of dividends, if any, will be subject
to the discretion of our Board, which may consider such factors as
our results of operations, financial condition, capital needs and
acquisition strategy, among others.
Recent Sales of Unregistered Securities
None.
Not
Required.
16
The following
discussion and analysis of our financial condition and results of
operations relates to the years ended December 31, 2016 and 2015.
This discussion and analysis should be read in conjunction with our
financial statements and the notes to those financial statements
that are included elsewhere in this report. As disclosed elsewhere
in this report, we commenced our current operations in the fourth
quarter of 2007 and continue to focus on obtaining high-tech
decontamination technology and developing health and infectious
disease protocols.
Overview
We are
a
global
provider of infection prevention and
decontamination products and services, focused primarily on life
sciences
,
including healthcare,
bio-safety, pharmaceutical, clean-room and research.
We
provide
environmental solutions for
indoor and outdoor surface decontamination through the sale of
equipment, services and licensing of our
SteraMist
™
BIT
™
,
which is a hydrogen peroxide-based mist and fog registered with the
EPA. Our mission is to help our customers create a healthier world
through our product line and our motto is “innovating for a
safer world” for healthcare and life
.
Introduced commercially
in June 2013,
our
current suite of products incorporates
our
BIT™ Solution and
applicators
,
including the
SteraMist™ Surface Unit and the SteraMist™ Environment
System.
We have expanded our
SteraMist™ BIT™ Technology beyond
chemical and biological warfare applications to
the
deactivation of
problem microorganisms
(including spores) in a wide variety of commercial settings.
SteraMist™ BIT™ provides fast
-
acting biological deactivation and works in
hard-to-reach areas
,
while
leaving no residue or noxious fumes.
We
currently
target
domestic and international markets for the control
of microorganisms and the decontamination of large and small indoor
space for biological pathogens and chemical agents including
infectious diseases in hospital, bio-secure labs, pharmaceutical,
biodefense, biosafety including isolation and transfer chambers,
tissue banks, food safety and many other commercial and residential
settings.
Under FIFRA, we are required to register with the
EPA and certain state regulatory authorities as a seller of
pesticides. In June 2015, SteraMist™ BIT™ was
registered with the EPA as a hospital-healthcare disinfectant for
use as a misting/fogging agent. SteraMist
™
BIT
™
holds EPA registrations both as a
hospital-healthcare and general disinfectant (EPA Registration
90150-2) and for mold control and air and surface remediation (EPA
Registration 90150-1). In February 2016, we expanded our label with
the EPA to include the bacterias C. diff and MRSA, as well as the
virus h1n1, which has better positioned us to penetrate the
hospital-healthcare and other industries. We currently have our
EPA-registered label in all 50 states with the addition of
California and New York in July and October 2016,
respectively.
SteraMist
™
is easily incorporated into current cleaning procedures; is
economical, non-corrosive and easy to apply; leaves no residues;
and requires no wiping. All our SteraMist
™
products are
fully validated to comply with good manufacturing practice
(“GMP”) standard, have received Conformité
Européene (“CE”) marks in the European Economic
Area (“EEA”) and are
approved
by Underwriters Laboratory
(“UL”). Our solution is manufactured at an
EPA-registered solution blender and our product performance is
supported by good laboratory practice (“GLP”) efficacy
data for Staphylococcus aureus, Pseudomonas aeruginosa, Mold
spores, MRSA, h1n1, Geobacillus stearothermophilus and C. diff
spores. As of January 27, 2017, our BIT
™
solution and
BIT
™
technology is one of 33 of the EPA’s “Registered
Antimicrobial Products Effective against Clostridium difficile
Spores”, as published on the EPA’s K List
.
In September 2016, the Company’s
SteraMist™ BIT™ technology passed GLP tests in efficacy
against Salmonella and Norovirus. The Company also passed testing
against tuberculosis (TB). The GLP studies have been submitted to
the EPA for addition to our existing hospital-healthcare
disinfectant label.
In September 2016, we also upgraded to the OTCQX
Best Market in effort to elevate the profile of the business among
the financial community.
Domestically,
in
2016, we added 68 new customers in the
healthcare, pharmaceutical, vivarium and remediation industries,
which contributed to the growth in revenue during the year ended
December 31, 2016. We received ord
ers
for equipment and solution from the FDA, for use in their
laboratory research group, developed and installed our technology
in the Dana-Farber Cancer Institute, a highly-ranked infectious
disease hospital in the United States, and sold other products to
the Kansas City University of Medicine and Bioscience for use in
its medical laboratories. We also won bids to conduct
decontamination services at five global pharmaceutical companies
and entered into various trial agreements with healthcare and
pharmaceutical facilities, both domestically and
internationally.
17
In
the first quarter of 2016, we hired a Director of Network
Recruitment for the TSN in an effort to grow the network. During
2016, we expanded the TSN by 33 members, which contributed to our
revenue through equipment solution sales. In October 2016, we
hosted a seminar for the TSN members in an effort to provide
additional technical training on how to use and sell equipment in
the hospital-healthcare environment. The seminar was sold out with
members in attendance from many of our national TSN companies. We
feel the growth of the network will assist the Company in better
serving existing and future customers throughout the US. During
2016, our product was successfully registered for sale with
pesticide authorities in all 50 states, which we anticipate will
allow us to better market, sell and distribute our products and
services on a domestic basis.
Internationally,
in 2016, we added 12 customers and our technology is being used and
tested in childcare facilities, clean-rooms and pharmaceutical
facilities in numerous countries. In addition, during both 2015 and
2016, we continued to expand our global presence through the
shipments of goods into Asia, Europe, Mexico, South America and
Australia. In January 2016, we entered into a distributor
relationship with SteraMist Asia to facilitate growth in
Asia.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities. The estimation process requires assumptions to be made
about future events and conditions, and as such, is inherently
subjective and uncertain. Actual results could differ materially
from our estimates.
The SEC
defines critical accounting policies as those that are, in
management’s view, most important to the portrayal of our
financial condition and results of operations and most demanding of
our judgment. We consider the following policies to be critical to
an understanding of our consolidated financial statements and the
uncertainties associated with the complex judgments made by us that
could impact our results of operations, financial position and cash
flows.
Revenue Recognition
For revenue
from services and product sales, we recognize revenue in accordance
with Staff Accounting Bulletin No. 104, “Revenue
Recognition” (SAB No. 104), which superseded Staff Accounting
Bulletin No. 101, “Revenue Recognition in Financial
Statements” (SAB No. 101). SAB No. 104 requires that four
basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) service has been
rendered or delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectability is reasonably assured.
Determination of criteria (3) and (4) are based on
management’s judgment regarding the fixed nature of the
selling prices of the services rendered or products delivered and
the collectability of those amounts. Provisions for discounts to
customers, and allowance, and other adjustments will be provided
for in the same period the related sales are recorded.
Fair Value Measurement
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
Level
1:
Quoted
prices in active markets for identical assets or
liabilities.
Level
2:
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data or substantially the full term of the assets or
liabilities.
Level
3:
Unobservable
inputs that are supported by little or no market activity and that
are significant to the value of the assets or
liabilities.
Our financial
instruments include cash and equivalents, accounts receivable,
accounts payable and accrued expenses. All these items were
determined to be Level 1 fair value measurements.
18
The
carrying amounts of cash and equivalents, accounts receivable,
accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For
purposes of the statement of cash flows, cash and cash equivalents
includes cash on hand held at financial institutions and other
liquid investments with original maturities of three months or
less.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of them and maintain allowances for potential credit
losses as deemed necessary. We have a policy of reserving for
doubtful accounts based on our best estimate of the amount of
potential credit losses in existing accounts receivable. We
periodically review our accounts receivable to determine whether an
allowance is necessary based on an analysis of past due accounts
and other factors that may indicate that the realization of an
account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote.
Inventories
Inventories are
valued at the lower of cost or market using the first-in, first-out
(“FIFO”) method and consist primarily of finished goods
and raw materials.
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Deferred Financing Costs
We
follow authoritative guidance for accounting for financing costs as
it relates to convertible debt issuance cost. These costs are
deferred and amortized over the term of the debt period or until
redemption of the convertible debentures.
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We make an
estimate of expected costs that will be incurred by us during the
warranty period and charge that expense to the consolidated
statement of operations at the date of sale. Our manufacturer
assumes warranty against product defects for one year, which we
extend to our customers. We assume responsibility for product
reliability and results.
Income Taxes
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are, on a more
likely than not basis, not expected to be realized, in accordance
with ASC guidance for income taxes. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized
in the period that such tax rate changes are enacted.
Loss Per Share
Basic
loss per share is computed by dividing our net loss by the weighted
average number of common shares outstanding during the period
presented. Diluted loss per share is based on the treasury stock
method and includes the effect from potential issuance of common
stock such as shares issuable pursuant to the exercise of warrants
and conversions of debentures.
19
Stock-Based Compensation
We
account for stock-based compensation in accordance with Financial
Accounting Standards Board (“FASB”), ASC 718,
“Compensation - Stock Compensation.” Under the
provisions of FASB ASC 718, stock-based compensation cost is
estimated at the grant date based on the award’s fair value
and is recognized as expense over the requisite service period.
During the year ended December 31, 2015, we had one active
stock-based compensation plan, the TOMI Environmental Solutions,
Inc. Stock Option and Restricted Stock Plan (the “2008
Plan”). The 2008 Plan allowed the Company, through a
committee of its Board, to issue up to 2,500,000 shares of
restricted common stock or stock options. The Company generally
issues awards to its employees, consultants and board members.
Stock options are granted with an exercise price equal to the
closing price of our common stock on the date of the grant with a
term no greater than 10 years. Generally, stock options vest over
two to four years. Incentive stock options granted to shareholders
who own 10% or more of our outstanding equity securities are
granted at an exercise price that may not be less than 110% of the
closing price of our common stock on the date of grant and have a
term no greater than five years. On the date of a grant, we
determine the fair value of the stock option award and recognize
compensation expense over the requisite service period, which is
generally the vesting period of the award. The fair value of the
stock option award is calculated using the Black-Scholes
option-pricing model. On August 25, 2015, we terminated the 2008
Plan.
On
January 29, 2016, the Board adopted the 2016 Equity Compensation
Plan (the “2016 Plan”), subject to approval by our
shareholders.
The 2016 Plan authorizes
the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units and performance units/shares. Up to
5,000,000 shares of common stock are authorized for issuance under
the 2016 Plan. Shares issued under the 2016 Plan may be either
authorized but unissued shares, treasury shares, or any combination
thereof. Provisions in the 2016 Plan permit the reuse or reissuance
by the 2016 Plan of shares of common stock for numerous reasons,
including, but not limited to, shares of common stock underlying
canceled, expired, or forfeited awards of stock-based compensation
and stock appreciation rights paid out in the form of cash.
Stock-based compensation will typically be awarded in consideration
for the future performance of services to us. All recipients of
awards under the 2016 Plan are required to enter into award
agreements with the Company at the time of the award; awards under
the 2016 Plan are expressly conditioned upon such
agreements.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and cash
equivalents. We maintain cash balances at financial institutions
which exceed the current Federal Deposit Insurance Corporation
(“FDIC”) limit of $250,000 at times during the
year.
Long-Lived Assets Including Acquired Intangible Assets
We will
review our intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset
may not be recoverable. We will measure recoverability of these
assets by comparing the carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If intangible
assets are considered to be impaired, the impairment to be
recognized equals the amount by which the carrying value of the
asset exceeds its fair market value.
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU
2014-09) “Revenue from Contracts with Customers.” ASU
2014-09 supersedes the revenue recognition requirements in
“Revenue Recognition (Topic 605)”, and requires
entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled to in exchange for those
goods or services. ASU 2014-09 is effective for annual reporting
periods beginning after December 15, 2016, including interim
periods within that reporting period. Early adoption is not
permitted. We are currently in the process of evaluating the impact
of the adoption of ASU 2014-09 on our consolidated financial
statements.
In
November 2015, the FASB issued Accounting Standards Update No.
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes (ASU 2015-17), which simplifies the presentation of
deferred income taxes by requiring that deferred tax assets and
liabilities be classified as non-current. We have retrospectively
adopted this standard as of December 31, 2015, and as a result
there was no impact to the Company as all of the deferred tax
assets for the year ended December 31, 2014 were classified as
noncurrent.
20
In February 2016, the FASB issued Accounting Standards Update No.
2016-02 (ASU 2016-02) “Leases.” ASU 2016-02
provides new lease accounting guidance. ASU 2016-02 is
effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that
reporting period. Early adoption is permitted. We are
currently in the process of evaluating the impact of the adoption
of ASU 2016-02 on our consolidated financial
statements.
In March 2016, the FASB
issued Accounting Standards Update No. 2016-09 (ASU 2016-09)
“Compensation
—
Stock Compensation
(Topic 718).” ASU 2016-09 provides improvements to
employee share-based payment accounting. ASU 2016-09 is
effective for annual reporting periods beginning
after December 15, 2016, including interim periods within that
reporting period. We are currently in the process of evaluating the
impact of the adoption of ASU 2016-09 on our consolidated financial
statements.
Financial Operations Overview
Our
financial position as of December 31, 2016 and 2015, respectively,
was as follows:
|
|
As of December
31,
|
|
|
|
2016
|
2015
|
|
Total
stockholders’ equity
|
$
8,250,063
|
$
10,422,974
|
|
Cash and cash
equivalents
|
$
948,324
|
$
5,916,068
|
|
Accounts
receivable, net
|
$
1,521,378
|
$
1,414,576
|
|
Inventories
|
$
4,047,310
|
$
1,395,175
|
|
Deposits on
merchandise
|
$
147,010
|
$
442,358
|
|
Working
capital
|
$
5,715,516
|
$
7,880,462
|
During
the year ended December 31, 2016, our debt and liquidity positions
were affected by the following:
●
Net cash used in
operations of approximately $4,505,000; and
●
Acquisition of
property plant and equipment of $475,000.
Looking Forward
Certain
key factors will affect our future financial and operating results.
These include, but are not limited to, the following:
●
Our 2017
expectations, particularly with respect to sales volumes may differ
significantly from actual quarter and full year results due to
competition, demand for our products, sales and marketing success,
and our ability to effectively and efficiently manufacture our
products.
Results of Operations for the Year Ended December 31, 2016 Compared
to the Year Ended December 31, 2015
|
|
Year
Ended
|
Year
Ended
|
|
|
December
31,
2016
|
December
31,
2015
|
|
|
|
|
|
Revenues
|
$
6,343,000
|
$
4,192,000
|
|
Gross
Profit
|
$
3,733,000
|
2,548,000
|
|
Total Operating
Expenses
(1)
|
$
7,102,000
|
5,533,000
|
|
Loss from
Operations
|
$
(3,369,000
)
|
(2,986,000
)
|
|
Total Other Income
(Expense)
(2)
|
$
212,000
|
(9,191,000
)
|
|
Net
Loss
|
$
(3,157,000
)
|
$
(12,176,000
)
|
|
Basic (loss) per
share
|
$
(0.03
)
|
$
(0.12
)
|
|
Diluted (loss) per
share
|
$
(0.03
)
|
$
(0.12
)
|
(1)
Includes
approximately $615,000 and $1,706,000 in non-cash equity
compensation expense for the
years
ended December 31, 2016 and 2015,
respectively.
(2)
Includes fair value
adjustment loss on derivative liability of approximately
$3,811,000, amortization of $3,996,000 and induced conversion costs
in the amount of $930,000 for the year ended December 31,
2015.
Sales
During
the years ended December 31, 2016 and 2015, we had net revenue
of approximately $6,343,000 and $4,192,000, respectively,
representing an increase in revenue of $2,151,000 or 51%. The
primary reasons for the increase in revenue
were our expansion into
new markets, an increase in orders filled and continued
diversification of our client base.
21
Net Revenue
Product and Service Revenue
|
|
Year Ended December 31,
|
|
|
|
2016
|
2015
|
|
SteraMist
Product
|
$
5,727,000
|
$
4,056,000
|
|
Service
& Training
|
616,000
|
136,000
|
|
Total
|
$
6,343,000
|
$
4,192,000
|
Revenue by Geographic Region
|
|
Year Ended December 31,
|
|
|
|
2016
|
2015
|
|
United
States
|
$
4,012,000
|
$
2,078,000
|
|
International
|
2,331,000
|
2,114,000
|
|
Total
|
$
6,343,000
|
$
4,192,000
|
Cost of Sales
During
the years ended December 31, 2016 and 2015, our cost of sales were
approximately $2,611,000 and $1,644,000, respectively, representing
an increase of $967,000 or 59%. The primary reason for the increase
in cost of sales was due to sales increasing during the year ended
December 31, 2016 versus the prior year. Our gross profit margins
remained consistent between each period.
Professional Fees
Professional fees
for the year ended December 31, 2016 were approximately $517,000,
as compared to $456,000 during the prior year, representing an
increase of approximately $61,000, or 13%. Professional fees are
mainly comprised of legal, accounting and financial consulting
fees.
Depreciation and Amortization
Depreciation and
amortization was approximately $586,000 and $499,000 for the years
ended December 31, 2016 and 2015, respectively, representing an
increase of $87,000, or 17%. The increase in depreciation expense
is attributable to additional fixed assets acquired in
2016.
Selling Expenses
Selling
expenses for the year ended December 31, 2016 were approximately
$1,513,000, as compared to $704,000 in the year ended December 31,
2015, representing an increase of $809,000 or 115%. These expenses
represent selling salaries and wages, trade show fees, commissions
and marketing expenses.
The
increase was primarily attributable to expanding our internal sales
staff in an effort to increase revenue.
Research & Development
Research and
development expenses for the year ended December 31, 2016 were
approximately $184,000, as compared to $100,000 in the year ended
December 31, 2015, representing an increase of $84,000, or 84%. The
primary reason for the increase was attributable to increased
testing costs incurred related to our international product
registrations. Research and development expenses mainly include
costs incurred in generating and supporting research on improving,
extending and applying our patents in the field of mechanical
cleaning and decontamination.
Consulting Fees
Consulting fees for
the year ended December 31, 2016 were approximately $307,000, as
compared to $477,000 during the year ended December 31, 2015,
representing a decrease of approximately $170,000, or 36%. The
decrease in consulting fees is primarily due to the Company
entering into a consulting agreement in the second quarter of 2015
which was terminated in January 2016.
22
Equity Compensation Expen
se
Equity
compensation expense represents non-cash charges for the year ended
December 31, 2016 and was approximately $615,000, as compared to
$1,706,000 in the year ended December 31, 2015, representing a
decrease of $1,091,000, or 64%. Equity compensation expense is
incurred upon the issuance of warrants and stock options. On the
date of a grant, we determine the fair value of the award and
recognize compensation expense over the requisite service period,
which is generally the vesting period of the award. The fair value
of the award is calculated using the Black-Scholes Method
option-pricing model.
General and Administrative Expense
General
and administrative expense includes salaries and payroll taxes,
rent, insurance expense, utilities, office expense and product
registration costs. General and administrative expense was
approximately $3,380,000 and $1,591,000 for the years ended
December 31, 2016 and 2015, respectively, representing an increase
of $1,789,000 or 112%. The primary reason for the increase in
general and administrative expense can be attributed mainly to
higher salaries and wages due to new hires during the current
period and increased product registration costs incurred both
domestically and internationally.
Other Income and Expense
Amortization of
deferred financing costs was approximately $0 and $200,000 for the
years ended December 31, 2016 and 2015, respectively. This
represents the amortization of costs incurred to raise capital in
relation to the acquisition of the SteraMist
™
line of
products from L-3, which were fully amortized in the second quarter
of 2015 upon retiring the convertible notes.
Amortization of
debt discount was approximately $0 and $3,996,000 during the year
ended December 31, 2016 and 2015, respectively, representing the
amortization of debt discount on the $5,074,000 in convertible
notes issued in 2013. The debt discount was amortized over the life
of the notes utilizing the effective interest method.
The
fair value adjustment of the derivative liability during the year
ended December 31, 2015 was a loss of approximately $3,811,000.
Upon the retirement of the convertible notes in the second quarter
of 2015, the derivative liability was reclassified to additional
paid in capital.
Interest expense
for the years ended December 31, 2016 and 2015 was approximately $0
and $254,000, respectively. This represented the interest incurred
on the $5,074,000 in convertible notes issued in 2013.
Income
recognized from the USAID grant for the year ended December 31,
2016 was $200,000. This represents the amounts advanced to the
Company in excess of the costs incurred.
Gain on
disposition of equipment for the year ended December 31, 2016
amounted to $12,000.
Net Loss
Net
loss for the years ended December 31, 2016 and 2015 was
approximately ($3,157,000) and ($12,176,000), respectively. Net
loss per common share, basic and diluted, for the year ended
December 31, 2016 was ($0.03). Net loss per common share, basic and
diluted, for the year ended December 31, 2015 was ($0.12). The
primary reasons for the decrease in the net loss can be attributed
to:
●
Increase in revenue
of approximately $2,151,000 and overall gross profit of
approximately $1,185,000;
●
Reduced
amortization of deferred financing costs of approximately $200,000
as a result of the convertible notes retired in June
2015;
●
Reduced
amortization of debt discounts of approximately $3,996,000 as a
result of the convertible notes retired in June 2015;
●
Changes in the fair
value of the embedded conversion feature of the convertible notes
of $3,811,000 incurred during the year ended December 31, 2015,
with no such charge in the same period of 2016 as a result of the
convertible notes retired in 2015;
●
Reduced induced
conversion costs related to the retirement of the convertible notes
of $930,000;
●
Reduced interest
expense of approximately $254,000 in connection with the retirement
of the convertible notes in June 2015;
●
Income attributable
to USAID grant of $200,000; and
23
●
Gain on disposition
of equipment of $12,000; offset by:
●
Increased operating
expenses of $1,568,000.
Liquidity and Capital Resources
As of December 31, 2016, we had cash and cash
equivalents of approximately $948,000 and working capital of
$5,716,000.
Our principal capital requirements are to
fund operations, invest in research and development and capital
equipment, and the continued costs of public company filing
requirements. We have historically funded our operations through
debt and equity financings. In June and July 2015, we
completed private placements and received net proceeds of
approximately $8,000,000. In June 2015, we redeemed and converted
all of our outstanding notes by issuing approximately 14,900,000
shares of common stock and repaying $1,300,000 in
cash.
In September 2016,
our common stock was uplisted to the OTCQX Best Market. We intend
to apply to further uplist our common stock to a national
securities exchange. Due to the applicable qualitative and
quantitative standards required to successfully list on a national
securities exchange, we may need to raise additional capital in
order to meet such benchmarks.
In
March 2017, we raised through a private placement transaction gross
proceeds of $5,300,000. We issued senior callable convertible
promissory notes (“the Notes”) maturing on August 31,
2018, unless earlier redeemed, repurchased or converted. The Notes
are convertible at any time by the holder into common stock at a
conversion price of $0.54 per share. Subsequent to September 1,
2017, we may redeem the Notes at any time prior to maturity at a
price equal to 100% of the principal amount of the Notes to be
redeemed plus accrued and unpaid interest as of the redemption
date. Interest on the Notes is payable semi-annually in cash on
February 28 and August 31 of each year, beginning on August 31,
2017, at a rate of 4 percent per annum. In addition, TOMI issued
three-year warrants (the “Warrants”) to purchase up to
an aggregate of 833,333 shares of common stock at an exercise price
of $0.69 per share. If the Warrants are converted in full, TOMI
would receive approximately $575,000 in additional funds. The
proceeds from the private placement will be used for research and
development, international product registration, expansion of our
internal sales force, marketing, public relations, expansions of
our EPA label and for working capital and general corporate
purposes.
For the
years ended December 31, 2016 and 2015, we incurred losses from
operations of approximately $3,369,000 and $2,985,000,
respectively. The cash used in operations was approximately
$4,505,000 and $1,654,000 for the years ended December 31, 2016 and
2015, respectively. We could incur additional operating
losses from lack of revenues and an increase of costs related to
the continuation of product and technology development and
administrative activities.
Management has
taken and will endeavor to continue to take a number of actions in
order to improve our results of operations and the related cash
flows generated from operations in order to strengthen our
financial position, including the following items:
●
Expanding our label
with the EPA to include the bacterias C. diff and MRSA and the
virus h1n1 in the EPA stamped registration;
●
Continued expansion
of our internal salesforce and manufacturer representatives in an
effort to drive domestic revenue in all hospital-healthcare
verticals;
●
Expansion of
international distributors; and
●
Continued growth of
the TSN and new growth in the food safety market including pre and
post harvest.
We
believe that our existing balance of cash and cash equivalents and
amounts expected to be provided by operations will provide us with
sufficient financial resources to meet our cash requirements for
operations, working capital and capital expenditures over the next
twelve months.
However, in the
event of unforeseen circumstances, unfavorable market developments
or unfavorable results from operations, there can be no assurance
that the above actions will be successfully implemented, and our
cash flows may be adversely affected. While we have reduced
the length of our sales cycle, it may still exceed 2–4 months
and it’s possible we may not be able to generate sufficient
revenue in the next twelve months to cover our operating and
compliance costs. We may also need to raise additional debt or
equity financing to execute on the commercialization of our planned
products. We cannot make any assurances that management’s
strategies will be effective or that any additional financing will
be completed on a timely basis, on acceptable terms or at all. Our
inability to successfully implement our strategies or to complete
any other financing may mean that we would have to significantly
reduce costs and/or delay projects, which would adversely affect
our business, customers and program development, and would
adversely impact us.
24
Operating Activities
Cash used in operating activities
during the years ended December 31, 2016 and 2015 was approximately
$4,505,000 and $1,654,000, respectively. Cash used in operating
activities increased $2,851,000 as compared to the year ended
December 31, 2015, primarily due to increased accounts receivables
and inventory compared to the same period ended in the prior
year.
Investing Activities
Cash used in investing activities
during the years ended December 31, 2016 and 2015, amounted to
approximately $463,000 and $80,000, respectively. Cash used in
investing activities increased $383,000 compared to the period in
the prior year, primarily due to service equipment purchased in
2016.
Financing Activities
Cash provided by financing activities
during the year ended December 31, 2016 was $0.
Cash provided by financing activities
during the year ended December 31, 2015 amounted to approximately
$7,490,000, primarily from the proceeds of the issuance of common
stock and warrants of $8,735,000 net of a $51,000 finder's fee,
offset by the repayment of principal for a portion of the
convertible notes of $1,300,000
Contractual Obligations
Our
contractual obligations as of December 31, 2016 are summarized as
follows (in thousands):
|
|
Payments Due by
Period
|
||||
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1–3
Years
|
3–5
Years
|
More
than
5
Years
|
|
Operating
leases
(1)
|
$
58
|
$
53
|
$
5
|
—
|
—
|
|
|
$
58
|
$
53
|
$
5
|
—
|
—
|
(1)
Amounts represent a non-cancelable operating lease for office space
in Frederick, MD that terminates on January 31, 2018. In addition
to base rent, the lease calls for payment of common area
maintenance operating expenses.
Off-Balance Sheet Arrangements
None.
Not
applicable.
The financial
statements required by this item are included in Part IV, Item 15
of this Annual Report on Form 10-K, beginning on page F-1, and are
incorporated by reference herein.
None.
25
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Principal Executive
Officer and Principal Financial Officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this Annual Report on Form 10-K,
as is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act. Our disclosure controls and procedures are intended to ensure
that the information we are required to disclose in the reports
that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) accumulated
and communicated to our management, including the Principal
Executive Officer and Principal Financial Officer, to allow timely
decisions regarding required disclosures.
Based
on that evaluation, of our Principal Executive Officer and
Principal Financial Officer we concluded that, as of the end of the
period covered by this Annual Report, our disclosure controls and
procedures were effective. Our management has concluded that the
financial statements included in this Annual Report on Form 10-K
present fairly, in all material respects, our financial position,
results of operations and cash flows for the periods presented in
conformity with generally accepted accounting
principles.
Management does not
expect their disclosure controls and procedures to prevent all
errors and all fraud and no evaluation of controls can provide
absolute assurance that all control issues and fraud will be
prevented. Additionally, over time, a control may become inadequate
because of changes in conditions, therefore fraud may occur or
misstatements may not be detected.
Management’s Report on Internal Control Over Financial
Reporting
Management is
responsible for establishing and maintaining adequate internal
control over our financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) under the Exchange Act). Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States.
Our
internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors,
and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, with the participation of our Principal Chief Executive
Officer and our Principal Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control
—
Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our Principal
Chief Executive Officer along with our Principal Chief Financial
Officer concluded that, as of the end of the period covered by this
Annual Report on Form 10-K, our internal control over financial
reporting was effective. Our internal control over financial
reporting was not subject to attestation by our independent
registered public accounting as we are a smaller reporting
company.
Changes in Internal Control Over Financial Reporting
During
our most recent fiscal quarter, there have been no changes in our
internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect our
internal control over financial reporting.
None.
26
Our
directors and executive officers and their ages and positions as of
March 17, 2017 are presented below.
|
Name
|
|
Age
|
|
Position
|
|
Halden S. Shane
|
|
72
|
|
Chief
Executive Officer and
Chairman of the
Board
|
|
Nick Jennings
|
|
39
|
|
Chief Financial Officer
|
|
Harold W. Paul
|
|
68
|
|
Director
|
|
Walter C. Johnsen
|
|
66
|
|
Director
|
|
Kelly J. Anderson
|
|
49
|
|
Director
|
Halden S. Shane
: Dr. Shane has been our
Chief Executive Officer and Chairman of the Board since October 15,
2007, when we commenced our current operations. Until 2009, Dr.
Shane also served as President and CEO of Tiger Management
International, a private management company that deals in business
management of private and public companies. Dr. Shane resigned all
positions and closed Tiger Management International in 2009. Dr.
Shane was founder and CEO of Integrated Healthcare Alliance, Inc.
and also founder and General Partner of Doctors Hospital West
Covina, California. Prior thereto, Dr. Shane practiced Podiatric
Surgery specializing in ankle arthroscopy. Dr. Shane received
his Bachelor of Science degree from the University of Miami in
1969, his Bachelor of Medical Science degree from California
College of Podiatric Medicine in 1971, and his Doctor of Podiatric
Medicine Degree from the California College of Podiatric Medicine
in 1973. He is Board Certified by the American Board of Podiatric
Surgery, American Board of Orthopedics, and the American Board of
Quality Assurance and Review. Dr. Shane brings to our Board
experience in in the medical and finance industries.
Nick Jennings
: Mr. Jennings has been
our Chief Financial Officer since October 2014. From July 2014
until his employment by the Company, Mr. Jennings was self-employed
and provided consulting, accounting and tax compliance services to
private-owned companies. From November 2006 until June 2014, Mr.
Jennings was a senior manager at Richardson Kontogouris Emerson
LLP, where he worked with various public and private companies
providing services a variety of business areas including tax
compliance, tax consulting, general accounting, and business
assurance. He is a graduate of Loyola Marymount College with a
degree in accounting and is a member of the American Institute of
Certified Public Accountants.
Harold W. Paul
: Mr. Paul has been one
of our directors since June 2009. He has been engaged in the
private practice of law for more than thirty-five years, primarily
as a securities specialist. Mr. Paul has been company counsel to
public companies listed on the AMEX, NASDAQ and OTC exchanges. He
has served as a director for six public companies in a variety of
industries, including technology and financial services. He holds a
BA degree from SUNY at Stony Brook and a JD from Brooklyn Law
School and is admitted to practice in New York and Connecticut. Mr.
Paul brings to our Board experience as a director of public
companies and with the United States securities laws.
Walter C.
Johnsen
:
Mr. Johnsen has been
one of our directors since January 29, 2016. Since January 1, 2007,
Mr. Johnsen has served as Chairman of the Board and Chief Executive
Officer of Acme United Corporation, a leading worldwide supplier of
innovative branded cutting, measuring and safety products in the
school, home, office, hardware & industrial markets. From
November 30, 1995 to December 31, 2006, he held the titles of
President and Chief Executive Officer at Acme United. Mr. Johnsen
previously served as Vice Chairman and a principal of Marshall
Products, Inc., a medical supply distributor. Mr. Johnsen holds a
Bachelor of Science in Chemical Engineering and a Master of Science
in Chemical Engineering from Cornell University, and a Master of
Business Administration from Columbia University. Mr. Johnsen
brings to our Board experience with business and
operations.
Kelly J.
Anderson
:
Ms. Anderson has been
one of our directors since January 29, 2016. Ms. Anderson is a
partner in C Suite Financial Partners, a financial consulting
services company dedicated to serving private, public, private
equity, entrepreneurial, family office and government-owned firms
in all industries. Between July 2014 and March 2015, Ms. Anderson
was CFO of Mavenlink, a SaaS company, between October 2012 and
January 2014, Ms. Anderson was Chief Accounting Officer of Fisker
Automotive, between April 2010 and February 2012, Ms. Anderson was
the President and Chief Financial Officer of T3 Motion, Inc.,
(“
T3
”), an
electric vehicle technology company. Between March 2008 and April
2010, she served as T3’s Executive Vice President and Chief
Financial Officer, and as a director from January 2009 until
January 2010. From 2006 until 2008, Ms. Anderson was Vice President
at Experian, a leading credit reporting agency. From 2004 until
2006, Ms. Anderson was Chief Accounting Officer for TripleNet
Properties, G REIT, Inc., T REIT, Inc., NNN 2002 Value Fund, LLC,
and Chief Financial Officer of NNN 2003 Value Fund, LLC and A REIT,
Inc., all of which were real estate investment funds managed by
TripleNet Properties. From 1996 to 2004, Ms. Anderson held senior
financial positions with The First American Corp., a Fortune 500
title insurance company. Ms. Anderson is an inactive California CPA
and a 1989 graduate of the College of Business and Economics at
California State University, Fullerton. Ms. Anderson brings to our
Board experience in finance.
27
Family Relationships
There
are no family relationships between or among any of the current
directors, executive officers or persons nominated or charged to
become directors or executive officers. There are no family
relationships among our officers and directors and those of our
subsidiaries and affiliated companies.
Board Composition
Our
Board currently consists of four members. Our bylaws provide that
our directors will hold office until their successors have been
duly elected and qualified. Our Board is responsible for the
business and affairs of our Company and considers various matters
that require its approval. Our executive officers are appointed by
our Board and serve at its discretion.
Scientific Advisory Board
In
February of 2017, the Company approved and announced the formation
of the TOMI Scientific Advisory Board. The Scientific Advisory
Board operates under the terms of a written Advisory Board
Charter.
The role of TOMI's scientific advisory
board will be to:;
(1)
constructively
challenge and help develop proposals on
strategy;
(2)
attend
Scientific Advisory Board
meetings;
(3)
accept
responsibility, publicly and, where necessary, in writing when
required to do so under any act, regulation or code of
conduct;
(4)
scrutinize
the performance of management in meetings, prepare agreed goals and
objectives, and monitor the reporting of performance on
technological and regulatory trends that will impact our
business;.
(5)
set
forth our strategic goals with respect to scientific research and
development and liaise with us to ensure we obtain the necessary
resources to meet our objectives, in scientific research and
development;
(6)
devote
time to developing and refreshing the knowledge of our Company's
technology, products and mission in “Innovating for a Safer
World”; and
(7)
uphold
the highest standards of integrity and probity, and support us in
maintaining the appropriate culture, values and
behaviors.
The
Scientific Advisory Board consists of the following
members:
William M. Brown, PhD, MBA, JD
: William M. Brown, PhD, MBA,
JD is a consultant and advisor to a series of biotech and life
sciences companies. Dr. Brown is a seasoned attorney in
intellectual property with experience in healthcare-related
matters. He is licensed to practice law in several states and is a
registered patent attorney. His consulting experience includes
intellectual property portfolio management, clinical trial
contracts, and patent/business development matters. He holds a PhD
from the University of Southampton, England, an MBA from Fairleigh
Dickinson University, and a JD from New York Law School. Dr. Brown
conducted postdoctoral research at Harvard University, Johnson
& Johnson, the National Institutes of Health
(“NIH”), and Memorial Sloan -Kettering Cancer
Center.
Miguel A. Grimaldo, MEng:
Miguel A. Grimaldo, MEng is an
Assistant Professor in the Department of Pathology, Director of
Institutional Biocontainment Resources at the University of Texas
Medical Branch (“UTMB”) and the Director of the
Biocontainment Engineering Division for the Galveston National
Laboratory. His responsibilities include the review of all design,
construction, commissioning and operation of High and Maximum
containment laboratories as well as to ensure regulatory compliance
and to conduct ongoing evaluation and recertification on all
critical containment features, equipment and operations for
Biosafety Level 3 (BSL
‐
3), Animal Biosafety
Level 3 (ABSL-3) and Biosafety Level 4 (BSL-4) laboratory
facilities at UTMB. He is also a member of the UTMB Institutional
Biosafety Committee. He has served as Committee Member for
development of the ANSI Z9.14
‐
2014
Standard
‐
Testing and Performance
‐
Verification
Methodologies for Ventilation Systems for Biosafety Level 3
(BSL
‐
3) and
Animal Biosafety Level 3 (ABSL3) facilities as well as for the 2016
Edition of the National Institute of Health (NIH)
‐
Design Requirements
Manual (DRM) for Biomedical Laboratories and Animal Research
Facilities. Mr. Grimaldo routinely serves as Biocontainment Advisor
for containment laboratories nationally and internationally on
design, construction and operations and also routinely contributes
to a technical column in the American Biological Safety Association
(ABSA) journal, Applied Biosafety, entitled, “Containment
Talk”. Mr. Grimaldo obtained his Masters of Engineering from
the University of Louisville and Bachelor of Science degrees in
Agricultural Engineering and Agricultural Economics from Texas
A&M University.
28
Dr. Helene Paxton, MS,
MT(ASCP), PhD, CIC
: Dr. Helene Paxton, MS, MT(ASCP), PhD,
CIC, is an Infection Preventionist, owner of Bio Guidance,
LLC, adjunct biology professor at Rowan University and Director of
Infection Prevention at Saint Francis Healthcare. She is Infection
Control Certified (CIC), board certified as an International
Medical Laboratory Scientist and holds a PhD in Epidemiology. Dr.
Paxton has over 40 years of experience in medical devices and
infectious disease consulting. Dr. Paxton obtained her PhD from
Kennedy Western University and her MS from Bowling Green State
University.
Audit Committee
Our
Audit Committee was established in June 2009 and in 2016 was
comprised of Ms. Anderson, Mr. Fred and Mr. Paul.
Ms. Anderson serves as chairperson of the Audit
Committee. The Company relies on the exemption related to Mr.
Paul's lack of standing as a financial expert, since a
majority of the Audit Committee was comprised of financial experts
and does not believe the committee composition materially affects
its ability to act independently
. The Audit Committee
operates under a written charter, which is available at
http://investor.tomimist.com/corporate-governance/audit-committee-charter
.
The purpose of the Audit Committee is to assist the Board in
monitoring the integrity of the annual, quarterly and other
financial statements of the Company, the independent
auditor’s qualifications and independence, the performance of
the Company’s independent auditors and the compliance by the
Company with legal and regulatory requirements. The Audit Committee
also reviews and approves all related-party transactions.
Mr. Fred, one of the independent
directors on the Audit Committee, resigned in March 2017, and thus,
the Audit Committee does not currently have a majority of
independent directors. It is the Company’s intent to remedy
this by adding an independent director to the Audit Committee by
its next annual meeting.
Our Board has determined that Ms.
Anderson is an “audit committee financial expert” as
defined by the regulations promulgated by the SEC.
Code of Ethics
The
Board adopted a Code of Ethics in 2008 applies to, among other
persons, Board members, officers including our Chief Executive
Officer, contractors, consultants and advisors. Our Code of Ethics,
which is available at
http://investor.tomimist.com/corporate-governance/code-of-ethics
,
sets forth written standards designed to deter wrongdoing and to
promote:
1.
honest and ethical
conduct including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships;
2.
full, fair,
accurate, timely and understandable disclosure in reports and
documents that we file with or submit to the SEC and in other
public communications made by us;
3.
compliance with
applicable governmental laws, rules and regulations;
4.
the prompt internal
reporting of violations of the Code of Ethics to an appropriate
person or persons identified in the Code of Ethics;
and
5.
accountability for
adherence to the Code of Ethics.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent of our common
stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock . Officers,
directors and greater than ten percent shareholders are required by
SEC regulations to furnish us with copies of all Section 16(a)
forms they file.
To our
knowledge, based solely on a review of the copies of Section 16(a)
reports furnished to us and a review of the shareholders register,
during the fiscal year ended December 31, 2016, our officers,
directors and greater than ten percent beneficial owners complied
with all Section 16(a) filing requirements.
29
Summary
Compensation Table
The
following table sets forth the total compensation paid to or earned
by our named executive officers for the years ended December 31,
2016 and 2015, respectively:
|
Name
and Principal Position
|
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
|
Option/
Warrant
Awards
($)(1)
|
|
All Other
Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Halden S.
Shane
|
|
2016
|
360,000
|
—
|
—
|
|
355,307
|
(2
)
|
—
|
715,307
|
|
Chairman and
CEO
|
|
2015
|
36,000
(2)
|
—
|
101,250
|
(3
)
|
317,268
|
(4
)
|
—
|
454,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nick
Jennings
|
|
2016
|
135,000
|
—
|
—
|
|
73,636
|
|
—
|
208,636
|
|
CFO
|
|
2015
|
90,000
|
—
|
45,900
|
(5
)
|
29,612
|
(6
)
|
—
|
165,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norris
Gearhart(7)
|
|
2016
|
152,200
|
—
|
—
|
|
—
|
|
—
|
152,200
|
|
COO
|
|
2015
|
132,333
|
—
|
45,000
|
(8
)
|
—
|
|
—
|
177,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Wotzcak(9)
|
|
2016
|
202,205
|
—
|
76,500
|
|
—
|
|
80,000
|
358,705
|
|
President
|
|
2015
|
—
|
—
|
—
|
|
—
|
|
—
|
—
|
(1)
The
amounts shown in this column represent the aggregate grant date
fair value of stock, option and/or warrant award, as applicable,
granted in the year computed in accordance with FASB ASC Topic 718.
See Note 2 of the notes to our audited consolidated financial
statements contained in this Annual Report on Form 10-K for a
discussion of valuation assumptions made in determining the grant
date fair value of the awards.
(2)
On
January 15, 2016, we entered into a new employment agreement with
Dr. Shane, effective January 1, 2016.
The agreement provides for a base annual
salary of $360,000.
The agreement also provides for the
quarterly issuance of an option to purchase 250,000 shares of
common stock in 2016 with an exercise price equal to the three day
trailing volume weighted average price of our common stock. Dr.
Shane is also entitled to performance bonuses, subject to the
achievement of certain objectives, including: (i) a minimum
semi-annual grant of an option to purchase up to 250,000 shares of
common stock and (ii) a cash bonus, determined in the sole
discretion of the Board. Pursuant to his employment agreement,
during the year ended December 31, 2016, we issued Dr. Shane
five-year warrants to purchase an aggregate of 1,000,000 shares of
common stock as executive compensation. The exercise price of the
warrants ranges from $0.27 to $0.50 per share, based on the closing
price of our common stock on the date of issuance. Utilizing the
Black-Scholes pricing model, we determined the fair value of the
warrants issued to Dr. Shane was approximately $355,000, with the
following assumptions: volatility, 146%–162%; expected
dividend yield, 0%; risk free interest rate, 1.17%–1.95%; and
a life of 5 years. The grant date fair value of each share of
common stock underlying the warrants ranged from $0.24–$0.51.
The Company recognized equity-based compensation to Dr. Shane of
approximately $355,000 on the warrants during the year ended
December 31, 2016.
(3)
In
August 2015, the Board approved the issuance of 225,000 shares of
common stock valued at $101,250 as a bonus.
(4)
On
February 11, 2014, the Board approved the issuance to Dr. Shane of
a five-year warrant to purchase 3,000,000 shares of common stock as
executive compensation. The warrant has a term of five years and
vest as follows: 1,000,000 warrants vested upon issuance; 1,000,000
warrants vested as of February 11, 2015, and 1,000,000 warrants
vested as of February 11, 2016. The exercise price of the warrant
is $0.30 per share based on the closing price of our common stock
on the issuance date of $0.32 per share. Utilizing the
Black-Scholes pricing model, we determined the fair value of the
warrants issued to Dr. Shane was approximately $952,000, with the
following assumptions: volatility, 233%; expected dividend yield,
0%; risk free interest rate, 1.54%; and a life of 5 years. The
grant date fair value of each warrant was $0.32. The Company
recognized equity-based compensation to Dr. Shane of approximately
$317,268 with respect to the vested portion of the warrant and the
accrual of the unvested portion of the warrant for the year ended
December 31, 2015.
(5)
The
CFO’s current
agreement provides for a base annual salary of $132,000, which was
increased to $144,000 in October 2016. In August 2015, the
Board approved the issuance of 62,000 shares of common stock valued
at $27,900 as a bonus to Mr. Jennings. In addition, Mr. Jennings
was issued 50,146 shares of common stock valued at $18,000 under
his prior employment agreement.
30
(6)
The
CFO’s prior employment agreement with the Company provided
for a monthly salary of $5,000 to be paid in the form of cash and
$2,000 per month to be paid in common stock. As part of Mr.
Jennings’ agreement, warrants to purchase 300,000 shares of
common stock were issued with a term of five years, vesting 100,000
upon the grant date, 100,000 on October 1, 2015 and 100,000 on
October 1, 2016. The exercise price of the warrant is $0.30 per
share based on the volume weighted average price of the common
stock for the five days prior to the grant date. They were valued
at $89,000 using the Black Scholes model using the following
assumptions: volatility, 221%; divided yield, 0%; discount rate,
1.80%; and a life of 5 years. The Company recognized approximately
$29,612 in compensation charges on the vested warrants and accrual
of unvested warrants for the year ended December 31,
2015.
(7)
Mr.
Gearhart resigned from his position as Chief Operating Officer
effective December 30, 2016.
(8)
In
August 2015, the Board approved the issuance of 100,000 shares of
common stock valued at $45,000 as a bonus to Mr.
Gearhart.
(9)
Mr.
Wotczak resigned from his position as President effective December
2, 2016.
Outstanding Equity Awards at 2016 Fiscal Year-End
The
following table sets forth certain information with respect to
outstanding warrants to purchase common stock previously awarded to
the Company’s named executive officers as of December 31,
2016.
|
|
Option
Awards
|
||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Warrants/
Options
Exercisable
(#)
|
Number
of
Securities
Underlying
Unexercised
Warrants/
Options
Unexercisable
(#)
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Warrants
(#)
|
Warrant
Exercise
Price
($)
|
Warrant
Expiration
Date
|
|
Halden S.
Shane
|
3,500,000
(1)
|
—
|
—
|
$
0.30
|
10/15/2017
|
|
|
3,000,000
(2)
|
—
|
—
|
$
0.30
|
2/11/2019
|
|
|
250,000
(3)
|
—
|
—
|
$
0.50
|
3/31/2021
|
|
|
250,000
(4)
|
—
|
—
|
$
0.42
|
6/30/2021
|
|
|
250,000
(5)
|
—
|
—
|
$
0.32
|
9/30/2021
|
|
|
250,000
(6)
|
—
|
—
|
$
0.27
|
12/30/2021
|
|
|
|
|
|
|
|
|
Nick
Jennings
|
300,000
(7)
|
—
|
—
|
$
0.30
|
10/1/2019
|
|
|
100,000
(8)
|
—
|
—
|
$
0.55
|
1/26/2021
|
|
|
|
|
|
|
|
|
Norris
Gearhart(9)
|
—
|
—
|
—
|
—
|
—
|
|
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
|
Warrants
vested on 10/15/2012 and have a term of 5 years
Warrants
vested in increments of 1,000,000 on 2/11/2014, 2/11/2015 and
2/11/2016 and have a term of 5 years
Warrants
vested on 3/31/2016 and have a term of 5 years
Warrants
vested on 6/30/2016 and have a term of 5 years
Warrants
vested on 3/31/2016 and have a term of 5 years
Warrants
vested on 12/30/2016 and have a term of 5 years
Warrants
vested in increments of 100,000 on 10/1/2014, 10/1/2015 and
10/1/2016 and have a term of 5 years
Warrants
vested on 1/26/2016 and have a term of 5 years
Mr.
Gearhart resigned from his position as Chief Operating Officer
effective December 30, 2016
|
31
Employment Agreements, Termination of Employment and
Change-in-Control Arrangements
Except
as described below, we currently have no employment agreements with
any of our executive officers, nor any compensatory plans or
arrangements resulting from the resignation, retirement or any
other termination of any of our executive officers, from a
change-in-control, or from a change in any executive
officer’s responsibilities following a
change-in-control.
Employment Agreements
We have
entered into employment agreements with each of the named executive
officers and generally include the named executive officer’s
initial base salary and an indication of equity compensation
opportunities.
Halden S. Shane
On
January 1, 2014, we entered into an employment agreement with
Halden S. Shane, our Chief Executive Officer. The term of the
employment agreement extended through December 31, 2016 with
automatic renewal for successive one-year periods unless otherwise
terminated by either party thereunder. Dr. Shane’s annual
base salary was $36,000, which would increase to $120,000 if the
Company’s gross revenues exceeded $5,000,000 on a calendar
year basis and to $175,000 if the Company’s gross revenues
exceeded $10,000,000 on a calendar year basis. Dr. Shane also
received a grant of a five-year warrant to purchase 3,000,000
shares of our common stock at a price of $0.30 per share, which
vested as follows: 1,000,000 shares vested upon issuance, 1,000,000
shares vested on February 11, 2015 and 1,000,000 vested on February
11, 2016. Dr. Shane’s employment agreement includes
restrictive covenants of non-solicitation and confidentiality of
proprietary information. Under the employment agreement, Dr. Shane
assigned any and all of his rights to Company proprietary
information to the Company and agreed that all property created by
him during and in connection with his employment constitutes
“works for hire” as defined in the United States
Copyright Act.
On January 15, 2016, we entered into a new
employment agreement with Dr. Shane, effective January 1,
2016. The agreement provides for a base annual salary of
$360,000. The agreement also provides for the quarterly
issuance of an option to purchase 250,000 shares of
common
stock
in 2016 with an exercise price
equal to the three day trailing volume weighted average price of
our
common stock
. In the event
Dr. Shane is terminated for any reason or becomes disabled or dies,
any options he holds at such time will become cashless and will be
entitled to piggyback registration and exercise immediately. Dr.
Shane is also entitled to performance bonuses, subject to the
achievement of certain objectives, including (i) a minimum
semi-annual grant of stock options to purchase up to 250,000 shares
of
common stock
and (ii) a cash
bonus, determined in the sole discretion of the Board. The
agreement also provides that we will reimburse Dr. Shane for
certain business and entertainment expenses, including the use of
an automobile.
In the event Dr. Shane is terminated as CEO as a
result of a change in control, Dr. Shane will be entitled to a lump
sum payment of two year’s salary at the time of such
termination and will be granted an option to purchase 3,000,000
shares of
common stock
that are
cashless and, when exercised, will have piggyback registration or
demand registration rights, and if applicable, any and all
outstanding stock grants will be accelerated and be fully
vested.
The
Board may terminate Dr. Shane for cause by written notification to
Dr. Shane; provided, however, that no termination for cause will be
effective unless Dr. Shane has been provided with prior written
notice and opportunity for remedial action and fails to remedy
within 30 days thereof, in the event of a termination by the
Company (i) by reason of willful dishonesty towards, fraud upon, or
deliberate injury or attempted injury to, the Company, (ii) by
reason of material breach of his employment agreement and (iii) by
reason of gross negligence or intentional misconduct with respect
to the performance of duties under the agreement. Upon termination
for cause, Dr. Shane will be immediately paid an amount equal to
his gross salary.
The
Board may terminate Dr. Shane other than for cause at any time upon
giving notice to Dr. Shane. Upon such termination, Dr. Shane will
be immediately paid an amount equal to his gross
salary.
Nick Jennings
On
September 30, 2014, we entered into an employment agreement with
Nick Jennings, our Chief Financial Officer, to provide part-time
services. The term of the employment agreement expired in December
31, 2014. Mr. Jennings’ salary was $5,000 per month payable
in cash, paid bi-weekly, and $2,000 per month payable in common
stock, paid quarterly. Mr. Jennings also received a five-year
warrant to purchase up to 300,000 shares of common stock at a price
of $0.30 per share, which represented the volume weighted-average
price per share of our common stock on October 1, 2014, and vested
as follows: 100,000 shares vested upon issuance, 100,000 shares
vested on October 1, 2015, and 100,000 shares vested on October 1,
2016. In connection with the employment agreement, Mr. Jennings
entered into agreements that included restrictive covenants of
non-solicitation and confidentiality of proprietary
information.
32
On
September 2, 2015, we entered into a new employment agreement with
Mr. Jennings, which superseded his prior agreement, pursuant to
which he continues to serve as our Chief Financial Officer. Mr.
Jennings' annual salary is $132,000, which is reviewed annually. On
January 26, 2016, we issued Mr. Jennings a five year warrant to
purchase up to 100,000 shares of common stock at an exercise price
of $0.55 per share. The agreement also provided for the issuance of
an additional five year warrant to purchase 100,000 shares of
common stock in 2016, however, this provision was modified to
grtant a salary increase in lieu of the options. In October 2016,
Mr. Jennings' annual salary was increased to $144,000 per year. Mr.
Jennings is also entitled to additional equity compensation based
upon superior performance of his responsibilities, as determined by
the Board in its sole discretion.
The
agreement also provides that we will reimburse Mr. Jennings for
certain business and entertainment expenses.
In the event of
a change in control of the Company that results in his termination,
Mr. Jennings will be entitled to a lump sum payment of one year's
salary and all equity awards will be accelerated and fully vested.
In the event his employment is terminated other than for cause, Mr.
Jennings will receive an amount equal to his annual salary as of
such termination date after the second employment
anniversary.
Norris Gearhart
On
October 16, 2014, we entered into an employment agreement with
Norris Gearhart pursuant to which he agreed to serve as our Chief
Operating Officer. Mr. Gearhart’s annual salary was $126,000.
Additionally, Mr. Gearhart received 100,000 shares of common stock
upon signing his agreement, a monthly transportation expense of up
to $500 towards a vehicle and the ability to receive an additional
cash or equity bonus upon the achievement of pre-agreed performance
objectives.
On
September 2, 2015, we entered into a new employment agreement with
Mr. Gearhart, which superseded his prior agreement, pursuant to
which he continued to serve as our Chief Operating Officer. Mr.
Gearhart’s annual salary was $145,000. The agreement provides
that Mr. Gearhart will receive annual an annual option grant to
purchase up to 250,000 shares of common stock at an exercise price
equal to the volume weighted average price of the five-day period
prior to the close of the year. Mr. Gearhart is also entitled to
additional equity compensation based upon superior performance of
his responsibilities, as determined by the Board in its sole
discretion.
The agreement also
provides that we will reimburse Mr.
Gearhart
for certain business and entertainment expenses,
including a
monthly transportation expense of up to $600
towards a vehicle
.
In the event
of a change in control of the Company that results in his
termination, Mr. Gearhart is entitled to a lump sum payment of one
year’s salary and all equity awards will be accelerated and
fully vested. In the event his employment is terminated other than
for cause, Mr. Gearhart will receive an amount equal to his annual
salary as of such termination date after the second employment
anniversary. Mr. Gearhart resigned from his position as Chief
Operating Officer effective December 30, 2016.
Robert Wotczak
On
February 8, 2016, we entered into an employment agreement with
Robert Wotzcak pursuant to which he agreed to serve as our
President. Mr. Wotczak’s annual salary is $240,000.
Additionally, on April 19, 2016, in accordance with the terms of
the agreement, we issued him 150,000 shares of common stock. Mr.
Wotczak will also be entitled to (i) an annual grant of an option
to purchase up to 250,000 shares of common stock at market price
under the 2016 Plan, (ii) additional shares of common stock granted
on an annual basis based on achievement of performance objectives,
(iii) an annual raise and/or bonus for meeting or achieving certain
performance objectives, (iv) a vehicle expense up to $750 per month
and (v) health insurance contributions equal to 80% toward the cost
of an individual plan.
The agreement
also provides that we will reimburse Mr.
Wotczak
for certain business and entertainment
expenses
. Mr. Wotczak’s agreement includes restrictive
covenants of non-solicitation and confidentiality of proprietary
information.
In the
event of a change in control of the Company that results in his
termination, Mr. Wotczak will be entitled to a lump sum payment of
one year’s salary and all equity awards will be accelerated
and fully vested.
The
Company may terminate Mr. Wotczak’s employment at any time;
provided, however, that the Company must provide fourteen
days’ notice if it terminates Mr. Wotczak’s employment
as a result of any of the following: (a) the sale of substantially
all of the Company’s assets, (b) the sale, exchange, or other
disposition in one transaction of the majority of the
Company’s outstanding capital stock, (c) the Company’s
decision to terminate its business and liquidate its assets, (d)
the merger or consolidation of the Company with another company, or
(e) bankruptcy or chapter 11 reorganization. Mr. Wotczak resigned
from his position as President effective December 2, 2016. No
options were granted or issued to Mr. Wotzcak during his
employment.
Director Compensation
Each of our non-employee directors receives cash
fees and stock as compensation for their service on the Board and
the committees of the Board on which they are a member. The tables
below set forth
cash and stock
compensation earned by each non-employee director during the fiscal
year ended December 31, 2016.
33
|
Name
|
Fees earned or
paid in cash
($)
|
Stock awards
($)
|
Option awards
($)
|
Other Compensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
Harold
W. Paul (1)
|
—
|
—
|
13,745
|
60,000
|
73,745
|
|
Walter
Johnsen (2)
|
16,667
|
—
|
13,745
|
—
|
30,412
|
|
Kelly
Anderson (3)
|
17,333
|
—
|
13,745
|
—
|
31,078
|
|
Edward
Fred (4)
|
16,667
|
—
|
13,745
|
—
|
30,412
|
(1)
In
February 2016, we issued Mr. Paul an option to purchase 25,000
shares of common stock valued at $13,745. The shares underlying the
option have an exercise price of $0.55 per share and the option
expires in February 2026. The option award was valued using the
Black-Scholes model using the following assumptions: volatility:
224%; dividend yield: 0%; zero coupon rate: 1.47%; and a life of 10
years. Mr. Paul also received $60,000 in cash compensation in
exchange for legal services rendered during 2016.
(2)
Mr. Johnsen was
elected to the Board on January 29, 2016. The term of his agreement
as director commenced on February 1, 2016 for up to two years and
until a successor is elected, or resignation or removal. Our
agreement with Mr. Johnsen provides for an annual fee in the amount
of $25,000 paid on a quarterly basis and an annual grant of an
option to purchase 25,000 shares of common stock. In February
2016, we issued Mr. Johnsen an option to purchase 25,000 shares of
common stock. The shares underlying the option have an
exercise price of $0.55 per share and the option expires in
February 2026.
(3)
Ms.
Anderson was elected to the Board on January 29, 2016 and serves as
the chairperson of our Audit Committee. The term of her agreement
as director commenced on February 1, 2016 for up to two years and
until a successor is elected, or resignation or removal. Our
agreement with Ms. Anderson provides for an annual fee in the
amount of $26,000 paid on a quarterly basis and an annual grant of
an option to purchase 25,000 shares of common stock. In
February 2016, we issued Ms. Anderson an option to purchase 25,000
shares of common stock. The shares underlying the option have
an exercise price of $0.55 per share and the option expires in
February 2026.
(4)
Mr.
Fred was elected to the Board on January 29, 2016. The term of his
agreement as director commenced on February 1, 2016 for one year
and until a successor is elected, or resignation or removal. Our
agreement with Mr. Fred provides for an annual fee in the amount of
$25,000 paid on a quarterly basis and an annual grant of an option
to purchase 25,000 shares of common stock. In February 2016,
we issued Mr. Fred an option to purchase 25,000 shares of common
stock. The shares underlying the option have an exercise price
of $0.55 per share and the option expires in February
2026.
34
Item
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity Compensation
Plan Information
We
currently maintain one compensation plan: the 2016 Plan. The 2016
Plan was approved by the Board on January 29, 2016, subject to
approval by our shareholders. If the 2016 Plan is approved by our
shareholders, it will authorize the issuance of 5,000,000 shares of
common stock. We intend to submit the 2016 Plan to our shareholders
for approval at our next annual meeting of shareholders. On August
25, 2015, the Board terminated the 2008 Plan, which we had
maintained previously and which our shareholders had approved.
Accordingly, we will issue future awards under the 2016
Plan.
The
following table provides information as of December 31, 2016 with
respect to compensation plans under which equity securities of the
Company are authorized for issuance.
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
|
Weighted-average exercise price of outstanding options, warrants
and rights
|
Number of securities remaining available for future issuance under
equity compensation plans(3)
|
|
Equity
compensation plans approved by security holders
|
100,000
|
(1
)
|
$
0.96
|
—
|
|
Equity
compensation plans not approved by security
holders
|
15,775,000
|
(2
)
|
$
0.36
|
—
|
|
Total
|
15,875,000
|
|
$
0.37
|
—
|
|
(1)
|
Prior
to August 25, 2015, we granted awards under the 2008
Plan.
|
|
(2)
|
Represents
shares of common stock issuable upon the exercise of warrants
issued to executive officers, employees and consultants in exchange
for services rendered.
|
|
(3)
|
On
January 29, 2016, the Board approved the 2016 Plan, subject to
shareholder approval, which permits the grant of awards for up to
5,000,000 shares of common stock.
|
2016
Equity
Compensation
Plan
Shareholder
approval is necessary to provide the Board, or a committee thereof
(collectively, the “Committee”), with the flexibility
to grant certain awards that that are designed to qualify for
special tax treatment under Section 422 of the Internal Revenue
Code (the “Code”) or qualify as
“performance-based compensation” under Section 162(m)
of the Code.
Purpose
Our
success depends, in large measure, on our ability to recruit and
retain the services of individuals with outstanding ability and
experience. We also believe there is a need to align the interests
of our shareholders and such individuals by encouraging such
ownership by such individuals of our stock and to motivate them
with compensation conditioned upon their achievement of our
financial goals. The objectives of the 2016 Plan are to optimize
our profitability and growth through incentives that are consistent
with our goals and that link the personal interests of our 2016
Plan participants to those of our shareholders; to provide our 2016
Plan participants with an incentive for excellence in individual
performance; and to promote teamwork among our 2016 Plan
participants.
Administration
The 2016 Plan is administered by the Board or the
Committee, if designated by the Board. As permitted by law, the
Committee may delegate its authority.
The Committee must
consist of no fewer than two members of our Board who are
non-employee Directors as defined by Rule 16b-3 under the Exchange
Act and meet certain other independence requirements. The Committee
serves at the pleasure of our Board. The Committee acts by majority
vote of all members taken at a meeting of the Committee at which a
quorum of members is present or by the written affirmation of all
of its members without a meeting. A quorum consists of a majority
of the directors being present at the meeting.
35
Except
as otherwise limited by law or by our Restated Articles of
Incorporation or Bylaws, the Committee has full power to select
individuals who will participate in the 2016 Plan; determine the
sizes and types of awards under the 2016 Plan; determine the terms
and conditions of awards in a manner consistent with the 2016 Plan;
and construe and interpret the 2016 Plan and any agreement entered
into under the 2016 Plan. The Committee may permit or require a
participant to defer his or her receipt of the payment of cash or
the delivery of shares of our common stock that would otherwise be
due to that participant by virtue of the exercise of an option or
SAR, the lapse or waiver of restrictions with respect to restricted
stock or RSUs, or the satisfaction of any requirements or goals
with respect to performance units/shares. If a deferral election is
required or permitted, the Committee, in its sole discretion, will
establish rules and procedures for the payment deferrals, provided
that such deferrals will be in compliance with the rules applicable
to non-qualified deferred compensation under Section 409A of the
Code. Further, the Committee may make all other determinations
which may be necessary or advisable for the administration of the
2016 Plan.
All
determinations and decisions made by the Committee under the
provisions of the 2016 Plan and all related orders and resolutions
of the Board will be final, conclusive and binding on all persons,
including our shareholders, Directors, employees, participants and
their estates and beneficiaries, and us.
Eligibility
Officers, employees and directors who are
employees of the Company and its subsidiaries are eligible to
participate in all forms of awards under the 2016 Plan.
The
2016 Plan defines “employee” as any full-time, active
employee of ours or one of our subsidiaries.
Directors
who are not employees of the Company or its subsidiaries and
consultants are eligible to participate in all forms of award under
the 2016 Plan, except for incentive stock options, performance
shares and performance units.
Stock Available for Issuance under the 2016 Plan
The 2016 Plan provides for a number of forms of
stock-based compensation, as further discussed below. Up to
5,000,000 shares of the
common stock
are authorized for issuance under the 2016 Plan.
Shares issued under the 2016 Plan may be either authorized but
unissued shares, treasury shares or any combination thereof.
Provisions in the 2016 Plan permit the reuse or reissuance by the
2016 Plan of shares of
common stock
for numerous reasons, including, but not limited
to, shares of
common stock
underlying canceled, expired, or forfeited awards
of stock-based compensation and stock appreciation rights paid out
in the form of cash. Stock-based compensation will typically be
awarded in consideration for the future performance of services to
the Company. All recipients of awards under the 2016 Plan are
required to enter into award agreements with the Company at the
time of the award; awards under the 2016 Plan are expressly
conditioned upon such agreements.
Description of Awards under the 2016 Plan
Awards
to Company Employees
.
Under the 2016 Plan, the Committee may award to
eligible employees incentive and nonqualified stock options, stock
appreciation rights, restricted stock, restricted stock units,
performance units and performance shares.
Awards
to Non-Employees
.
The Committee may award to non-employees,
including non-employee directors, non-qualified stock options,
SARs, restricted stock and restricted stock
units.
Stock Options
The Committee has discretion to award incentive
stock options (“ISOs”), which are intended to comply
with Section 422 of the Code, or nonqualified stock options
(“NQSOs”), which are not intended to comply with
Section 422 of the Code. The exercise price of an option may not be
less than the fair market value of the underlying shares of
common stock
on the date of
grant.
The 2016 Plan defines “fair market value”
as the closing sale price of our common stock on the national
securities exchange on which the shares are traded or, if the
Shares
are publicly traded but
not listed or admitted to trading on a national securities
exchange, the average of the closing bid and asked prices on the
date of determination as reported by The Wall Street Journal or, if
none of the foregoing is applicable to the valuation in question,
the value will be determined by the Committee in good faith.
If an award of stock options is
intended to qualify as performance-based compensation under Section
162(m) of the Code, the maximum number of shares which may be
subject to stock options granted in any calendar year to any one
participant who is a “covered employee” is
250,000
.
36
Options granted to employees under the
2016
Plan will expire at such times as the
Committee determines at the time of the grant; provided, however,
that no option will be exercisable later than ten years after the
date of grant. Each option award agreement will set forth the
extent to which the participant will have the right to exercise the
option following termination of the participant’s employment
with the Company. The termination provisions will be determined
within the discretion of the Committee, may not be uniform among
all participants and may reflect distinctions based on the reasons
for termination of employment.
Notwithstanding the
foregoing, unless the terms of the award agreement otherwise
provide for a shorter exercise period, ISOs must be exercised
within three months after an employee’s termination of
employment. However, if the termination is due to disability (as
defined under Code Section 22(e)(3)), the ISOs must be exercised
within one year after an employee’s termination of
employment. If the termination is due to death, the ISOs may be
exercised at any time during the option term.
Subject to the specific terms of the
2016
Plan, the Committee will have
discretion to set such additional limitations on such grants as it
deems appropriate. The award agreement will reflect these
limitations.
Upon the exercise of an option granted under
the
2016
Plan, the option price is payable in full to the
Company, either: (a) in cash or its equivalent, (b) if permitted in
the award agreement, by tendering shares having a fair market value
at the time of exercise equal to the total option price (provided
that such shares have been held by the optionee for at least six
months prior to their tender) or (c) by any combination of the
foregoing methods of payment. The Committee may also allow options
granted under the
2016
Plan to be exercised by a cashless exercise
through a broker, as permitted under Federal Reserve Board
Regulation T, or any other means the Committee determines to be
consistent with the
2016
Plan’s purpose and applicable law, including
by cashless exercise directly with the Company whereby the Company,
following its receipt of the participant’s notice of
exercise, would withhold the proper number of Company shares which
would have a fair market value on the date of exercise equal to the
option exercise price.
The Committee may award stock appreciation rights
(“SARs”) under the 2016 Plan upon such terms and
conditions as it may establish.
At the discretion of the Committee, the payment
upon SAR exercise may be in cash, in shares of
common stock
of equivalent value, or in some
combination thereof. The Committee’s determination regarding
the form of payment for the exercised SAR will be set forth in the
award agreement. The Committee may award either (i) freestanding
SARs, which are SARs granted as an independent instrument and are
not granted in conjunction with any stock options, or (ii) SARs in
tandem with stock options (a “tandem SAR”). A tandem
SAR entitles the participant to exercise it as an option or as an
SAR. The election of one type of exercise prevents it from being
exercised as the other type. A tandem SAR may not be granted to a
non-employee Director unless the related option is a NQSO. The
exercise price of a freestanding SAR will equal the fair market
value of a share of
common stock
on the date of grant, whereas the exercise price
of a tandem SAR issued in connection with a stock option will equal
the option price of the related option. If an award of SARs is
intended to qualify as performance-based compensation under Section
162(m) of the Code, the maximum number of shares which may be
subject to SARs awarded in any calendar year to any one participant
who is a “covered employee” is
250,000.
The
Committee will determine in its discretion the term of an SAR
granted under the 2016 Plan.
Each
award agreement will set forth the extent to which the participant
will have the right to exercise the SAR following termination of
the participant’s employment with the Company. The
termination provisions will be determined by the Committee in its
sole discretion, need not be uniform among all participants and may
reflect distinctions based on the reasons for termination of
employment.
The term of an SAR may not exceed ten years from
the date of grant. Therefore, no SAR may be exercisable later than
ten years after the date of award.
Except
as otherwise limited by the 2016 Plan, freestanding SARs may be
exercised upon whatever terms and conditions the Committee, in its
sole discretion, imposes upon them.
The Committee will determine the number of shares
of
common stock
covered by and
the exercise period of the SAR. Upon exercise of a freestanding
SAR, the participant will receive an amount equal to the excess of
the fair market value of one share of
common stock
on the date of exercise over the grant
price, multiplied by the number of shares of stock exercised under
the SAR.
In the case of a tandem SAR, the Committee may
determine the exercise period of the SAR, except that the exercise
period may not exceed that of the related option. The participant
may exercise the tandem SAR when the option is exercisable and
receive on exercise an amount equal to the excess of the fair
market value of one share of
common stock
on the date of exercise over the option purchase
price, multiplied by the number of shares of stock covered by the
surrendered option.
Upon exercise of an SAR awarded in
tandem with a stock option, the number of shares of our common
stock for which the related option was exercisable will be reduced
by the number of shares for which the SAR was
exercised.
Notwithstanding any
other provision of this 2016 Plan to the contrary, with respect to
a tandem SAR granted in connection with an ISO (i) the tandem SAR
will expire no later than the expiration of the underlying ISO;
(ii) the value of the payout with respect to the tandem SAR may be
for no more than 100% of the difference between the option price of
the underlying ISO and the fair market value of the shares subject
to the underlying ISO at the time the tandem SAR is exercised; and
(iii) the tandem SAR may be exercised only when the fair market
value of the shares subject to the ISO exceeds the option price of
the ISO.
37
Restricted Stock
The Committee may impose restrictions and
conditions as to awards of shares of restricted stock as it deems
advisable.
As specified in the relevant award agreement,
restrictions may include a requirement that participants pay a
stipulated purchase price for each share of restricted stock,
restrictions based upon the achievement of specific performance
goals (Company-wide, divisional and/or individual), time-based
restrictions on vesting following the attainment of the performance
goals and/or restrictions under applicable federal or state
securities laws.
We may
retain in our possession the certificates representing shares of
restricted stock until the time when all conditions and/or
restrictions applicable to those shares awarded under the 2016 Plan
have been satisfied. Generally, shares of restricted stock covered
by each restricted stock grant made under the 2016 Plan will become
freely transferable by the participant following the last day of
the applicable period of restriction. However, even after the
satisfaction of the restrictions and conditions imposed by the 2016
Plan and the particular award agreement, shares owned by an
affiliate of the Company will be subject to restrictions on
transfer under the Securities Act of 1933, as amended.
Awards
to Employees
.
The Committee may choose to award shares of
restricted stock under the 2016 Plan upon such terms and conditions
as it may establish. If an award of restricted stock is intended to
qualify as performance-based compensation under Section 162(m) of
the Code, the maximum number of shares which may be granted in the
form of restricted stock in any one calendar year to any one
participant who is a “covered employee” is 250,000. The
award agreement will specify the period(s) of restriction, the
number of shares of restricted stock granted, requirements that a
participant pay a stipulated purchase price for each share,
restrictions based upon the achievement of specific performance
objectives, other restrictions governing the subject award and/or
restrictions under applicable federal or state securities laws.
Recipients may have the right to vote these shares from the date of
grant, as determined by the Committee on the date of award. As
determined by the Committee on the date of award, participants may
receive dividends on their shares of restricted stock. Dividends
accrued on restricted stock will be paid only if the restricted
stock vests.
Each
award agreement for restricted stock will specify the extent to
which the participant will have the right, if any, to retain
unvested restricted stock following termination of the
participant’s employment with the Company. In its sole
discretion, the Committee will make these determinations; these
provisions need not be uniform among all awards of restricted stock
issued under the 2016 Plan and may reflect distinctions based on
reasons for termination of employment. Except in the case of
terminations by reason of death or disability, restricted stock,
which is intended to qualify for performance-based compensation
under Section 162(m) and which is held by “covered
employees” under Section 162(m), will be forfeited by the
participant to the Company upon termination of
employment.
Awards
to
Non-
Employee
Directors
.
Restricted stock awards to non-employee Directors
will be subject to the restrictions for a period (the
“Restricted Period”), which will commence upon the date
when the restricted stock is awarded and will end on the earliest
of the first to occur of the following:
●
the retirement of
the non-employee Director from the Board in compliance with the
Board’s retirement policy as then in effect;
●
the termination of
the non-employee Director’s service on the Board as a result
of the non-employee Director’s not being nominated for
reelection by the Board;
●
the termination of
the non-employee Director’s service on the Board because of
the non-employee Director’s resignation or failure to stand
for reelection with the consent of the Board (which means approval
by at least 80% of the Directors voting, with the affected
non-employee Director abstaining);
●
the termination of
the non-employee Director’s service on the Board because the
non-employee Director, although nominated for reelection by the
Board, is not reelected by the shareholders;
●
the termination of
the non-employee Director’s service on the Board because of
(i) the non-employee Director’s resignation at the request of
the Nominating and Governance Committee of the Board, (ii) the
non-employee Director’s removal by action of the shareholders
or by the Board, or (iii) a Change in Control of the Company, as
defined in the 2016 Plan;
●
the termination of
the non-employee Director’s service on the Board because of
disability or death; or
●
the vesting of the
award.
38
As of the date specified by the Committee, each
non-employee Director will be awarded that number of shares of
restricted stock as determined by the Board, after consideration of
the recommendations of the Committee. A non-employee Director who
is first elected to the Board on a date subsequent to the date so
specified will be awarded that number of shares of restricted stock
as determined by the Board, after consideration of the
recommendations of the Committee. The amount of the award for the
upcoming 2016 Plan year will be disclosed in the Company’s
proxy statement for the Company’s annual meeting of
shareholders. The
2016
Plan
provides that non-employee Directors receiving restricted stock may
have, subject to the provisions of the 2016 Plan, all of the rights
of a shareholder with respect to the shares of restricted stock,
including the right to vote the shares and receive cash dividends
and other cash distributions thereon. If a non-employee Director
ceases to be a member of the Board for any other reason, including
removal or resignation for “Cause,” as defined in the
2016 Plan, the non-employee Director will forfeit to the Company
all restricted stock awarded to him or her for which the Restricted
Period has not ended.
Restricted Stock Units
The Committee may award restricted stock units
(“RSUs”). Each RSU will have a value equal to the fair
market value of a share of our
common stock
on the date of grant. The maximum aggregate award
of RSUs to any one participant who is a “covered
employee” during any one fiscal year will be equal to the
fair market value of 250,000 shares; provided, further, that the
maximum aggregate award of restricted stock and RSUs for any one
fiscal year will be coordinated so that in no event will any one
participant be awarded more than the fair market value of 250,000
shares taking into account all such awards. In its discretion, the
Committee may impose conditions and restrictions on RSUs, as
specified in the RSU award agreement, including restrictions based
upon the achievement of specific performance goals and time-based
restrictions on vesting. As determined by the Committee at the time
of the award, settlement of vested RSUs may be made in the form of
cash, shares of Company stock, or a combination of cash and Company
stock. Settlement of vested RSUs will be in a lump sum as soon as
practicable after the vesting date. The amount of the settlement
will equal the fair market value of the RSUs on the vesting date.
Each RSU will be credited with an amount equal to the dividends
paid on a share of Company stock between the date of award and the
date the RSU is paid to the participant, if at all. Dividend
equivalents will vest, if at all, upon the same terms and
conditions governing the vesting of the RSUs under the 2016 Plan.
Payment of the dividend equivalent will be paid at the same time as
payment of the RSU. The holders of RSUs will have no voting
rights.
Each
award agreement for RSUs will specify the extent to which the
participant will have the right, if any, to retain unvested RSUs
following termination of the participant’s employment with
the Company or, in the case of a non-employee Director, service
with the Board. In its sole discretion, the Committee will make
these determinations; these provisions need not be uniform among
all awards of RSUs issued under the 2016 Plan and may reflect
distinctions based on reasons for termination of employment or, in
the case of a non-employee Director, service with the Board. Except
in the case of terminations by reason of death or disability, RSUs
awarded to participants who are “covered employees” and
which are intended to qualify as performance-based compensation
under Section 162(m), will be forfeited by the participant to the
Company.
The Committee has the discretion to award
performance units and performance shares under the 2016 Plan upon
such terms and conditions as it may establish, as evidenced in the
relevant award agreement. If an award of performance units or
performance shares is intended to qualify as performance-based
compensation under Section 162(m) of the Code, the maximum
aggregate payout for awards of performance shares which may be
granted in any one calendar year to any one participant who is a
“covered employee” will be the fair market value of
250,000 shares, whereas the maximum aggregate payout for awards of
performance units which may be granted in any one calendar year to
any one participant will be $1,500,000. Performance units will have
an initial value as determined by the Committee, whereas
performance shares will have an initial value equal to one share
of
common stock
on the date of
award.
At the time of the award of the performance units or
shares, the Committee in its discretion will establish performance
goals which, depending on the extent to which they are met, will
determine the number and/or value of performance units or shares
that will be paid out to the participant. Under the terms of the
2016 Plan, after the applicable performance period has ended, the
holder of performance units or shares will be entitled to receive
payout on the number and value of performance units or shares
earned by the participant over the performance period.
The payout on the number and value of the
performance units and performance shares will be a function of the
extent to which corresponding performance goals are
met.
Payment of performance shares and performance
units will be made in a single lump sum following the close of the
applicable performance period. Upon satisfaction of the specified
performance goals, the Committee will pay the earned performance
shares in shares of
common stock
. In its discretion, the Committee may pay earned
performance units in cash, in shares of Company stock or in a
combination of cash and stock, which will have an aggregate fair
market value equal to the value of the earned performance share or
performance unit at the close of the applicable performance period.
Participants will not be entitled to dividend or voting rights with
respect to any performance shares or performance units earned but
not yet distributed to a participant. Unless otherwise determined
by the Committee, in the case of death or disability during the
performance period, the participant, or his or her estate, will not
be entitled to receive any payout of the performance shares or
performance units. In the case of any other termination of the
participant’s employment during the performance period, all
performance shares and performance units intended to qualify as
performance-based compensation will be forfeited by the
participant.
39
Performance Measures
The
Committee may grant awards under the 2016 Plan to eligible
individuals, subject to the attainment of certain performance
measures specified in the award agreement. The number of
performance-based awards granted to an individual in any year is
determined by the Committee in its sole discretion, subject to the
maximum awards set forth in the 2016 Plan and as summarized
above.
The
value of each performance-based award will be determined solely
upon the achievement of certain pre-established objective
performance goals during each performance period. The duration of a
performance period will be established by the Committee. The
Committee will establish, in writing, the objective performance
goals applicable to the valuation of performance-based awards
granted in each performance period, the performance measures which
will be used to determine the achievement of those performance
goals, and any formulas or methods to be used to determine the
value of the performance-based awards. The performance measures may
be measured at the Company level, a subsidiary or affiliate level
or an operating unit level. Under the 2016 Plan, the Committee may
utilize any of the following measures of performance: net income
either before or after income taxes, including adjusted net income;
share price; earnings per share (basic or diluted); total
shareholder return; return on assets; return on equity; operating
income; return on capital or investment; cash flow or adjusted cash
flow from operations; economic value added or adjusted cash flow
per share of Company stock (net income plus or minus change in
operating assets and liabilities); debt level; cost reduction
targets, and equity ratios. The value of performance-based awards
may be based on absolute measures or on a comparison of the
Company’s financial measures during a performance period to
the financial measures of a group of competitors.
Following the end of a performance period, the
Committee will determine the value of the performance-based awards
granted for the period based on the attainment of the
pre-established objective performance goals. The Committee will
also have discretion to reduce (but, in the case of awards to
“covered employees” intended to qualify as
performance-based compensation under Section 162(m), not to
increase) the value of a performance-based award. The Committee
will certify, in writing, that the award is based on the degree of
attainment of the pre-established objective performance goals. As
soon as practicable thereafter, payment of the awards to
participants will be made in the form of shares of
common
stock
and/or cash, as
applicable.
Conditions to Award Payments
The
rights of a participant under the 2016 Plan will be governed by the
terms, conditions and requirements of the 2016 Plan and of the
award agreement relating to the participant’s award(s) under
the
2016
Plan.
With respect to participants who are employees, if
such participant terminates employment with the Company for any
reason other than death while any award under the 2016 Plan remains
outstanding, that participant will receive such shares or benefit
only if, during the entire period from his or her date of
termination to the date of such receipt, the participant consults
and cooperates with the Company on matters under his or her
supervision during the participant’s
employment.
Adjustment and Amendments
The 2016 Plan provides for appropriate adjustments
in the number of shares of Company stock subject to awards and
available for future awards in the event of changes in
outstanding
common stock
by
reason of a merger, stock split, stock dividend, or certain other
events.
The
2016 Plan may be modified or amended by the Board at any time and
for any purpose which the Board deems appropriate. However, no such
amendment may adversely affect any outstanding awards without the
affected holder’s consent. No amendment may, without
shareholder approval, (i) materially increase the benefits earned
by participants under the 2016 Plan, (ii) materially increase the
number of shares which may be issued under the 2016 Plan or (iii)
materially modify the requirements for participation in the 2016
Plan.
Change in Control
In
the event of a change in control, as defined in the 2016 Plan,
generally all options and SARs granted under the 2016 Plan will
become immediately exercisable; and restriction periods and other
restrictions imposed on restricted stock and RSUs which are not
intended to qualify as performance-based compensation under Section
162(m) under the Code will lapse. Any award intended to qualify as
performance-based under Section 162(m) must be earned in accordance
with the applicable award agreement.
40
Non-transferability
No
award under the 2016 Plan may be sold, transferred, pledged,
assigned or otherwise transferred in any manner by a participant
except by will or by the laws of descent and distribution; and any
award will be exercisable during a participant’s lifetime
only by the participant or by the participant’s guardian or
legal representative. These limitations may be waived by the
Committee, subject to restrictions imposed under the SEC’s
short-swing trading rules and federal tax requirements relating to
incentive stock options.
Duration of the 2016 Plan
The
2016 Plan will remain in effect until all shares subject to the
2016 Plan have been purchased or acquired under the terms of the
2016 Plan, and all performance periods for performance-based awards
granted under the 2016 Plan have been completed. However, no award
is permitted to be granted under the 2016 Plan on or after January
29, 2026. The Board, upon recommendation of the Committee, may at
any time amend, suspend or terminate the 2016 Plan in whole or in
part for any purpose the Committee deems appropriate, subject,
however, to the limitations referenced in “Adjustment and
Amendments,” above.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information with respect to the
beneficial ownership of our common stock and Series A preferred
stock (together, “Voting Stock”) as of March 17, 2017
for:
●
each person (or
group of affiliated persons) known by us to be the beneficial owner
of more than 5% of our outstanding shares of common stock or Series
A preferred stock;
●
each of our
directors and nominees for election to the Board;
●
each of the
executive officers named in the summary compensation table;
and
●
all of our
directors and executive officers as a group.
We
have determined beneficial ownership in accordance with the rules
of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the persons and
entities named in the following table have sole voting and
investment power with respect to all shares of Voting Stock that
they beneficially own, subject to applicable community property
laws.
Applicable
percentage ownership is based on 120,825,134 shares of common stock
and 510,000 shares of Series A preferred stock outstanding at March
17, 2017. In computing the number of shares of Voting Stock
beneficially owned by a person and the percentage ownership of that
person, we deemed to be outstanding all shares of Voting Stock
subject to options, warrants or other convertible securities held
by that person or entity that are currently exercisable or
releasable or that will become exercisable or releasable within 60
days of March 17, 2017. We did not deem these shares
outstanding, however, for the purpose of computing the percentage
ownership of any other person. Except as otherwise noted, the
address of each person or entity in the following table is c/o TOMI
Environmental Solutions, Inc., 9454 Wilshire Blvd., Penthouse,
Beverly Hills, CA 90212.
|
|
Shares
Beneficially Owned
|
|
||||
|
|
Common
Stock
|
Series A
Preferred Stock
|
|
|||
|
|
Shares
|
|
% of
Class
|
Shares
|
% of
Class
|
% of
Total
Voting
Power(1)
|
|
Named
Executive Officers and Directors:
|
|
|
|
|
|
|
|
Halden S. Shane,
CEO and Chairman of the Board
|
27,845,048
|
(2
)
|
21.6
%
|
510,000
|
100
%
|
21.9
%
|
|
Harold W. Paul,
Director
|
1,254,774
|
(3
)
|
1.0
%
|
—
|
—
|
1.0
%
|
|
Walter Johnsen,
Director
|
25,000
|
(4
)
|
*
|
—
|
—
|
*
|
|
Kelly Anderson,
Director
|
25,000
|
(5
)
|
*
|
—
|
—
|
*
|
|
Norris Gearhart,
Chief Operating Officer
|
300,000
|
(6
)
|
*
|
—
|
—
|
*
|
|
Nick Jennings,
Chief Financial Officer
|
512,145
|
(7
)
|
*
|
—
|
—
|
*
|
|
All current
directors and executive officers as a group (6
persons)
|
29,961,967
|
(8
)
|
23.3
%
|
510,000
|
100
%
|
23.6
%
|
|
|
|
|
|
|
|
|
|
5%
Beneficial Owners:
|
|
|
|
|
|
|
|
Arise Asset
Management Pte Ltd.
|
17,361,111
|
(9
)
|
14.4
%
|
—
|
—
|
14.4
%
|
|
Ah Kee
Wee
|
7,655,556
|
(10
)
|
6.3
%
|
—
|
—
|
6.2
%
|
41
*
Denotes ownership of less than 1%
(1)
Percentage of total voting
power represents voting power with respect to all shares of our
common stock and Series A preferred stock, as a single class. The
holders of
common stock
and Series A preferred
stock are each entitled to one vote per share.
(2)
Consists of (i)
18,845,048 shares of common stock held of record by Dr. Shane, (ii)
1,500,000 shares of common stock held of record by the Shane Family
Trust, (iii) 1,000,000 shares of common stock held of record by
Belinha Shane and (iv) 7,500,000 shares of
common stock
issuable upon the exercise of warrants to purchase common stock
held by Dr. Shane that are exercisable within 60 days of March 17,
2017. Dr. Shane is a co-trustee of the Shane Family Trust and may
be deemed to share voting and investment power over the securities
held by the trust. Belinha Shane is Dr. Shane’s wife. Dr.
Shane disclaims ownership of such shares held by his wife, except
to the extent of his pecuniary interest.
(3)
Consists of (i) 1,189,774
shares of
common stock
held of record by Mr. Paul
and (ii) 65,000 shares of common stock issuable upon exercise of
stock options that are exercisable within 60 days of
March
17, 2017
.
(4)
Consists of 25,000
shares of common stock issuable upon exercise of stock options that
are exercisable within 60 days of March 17, 2017.
(5)
Consists of 25,000
shares of common stock issuable upon exercise of stock options that
are exercisable within 60 days of March 17, 2017.
(6)
Consists of (i) 300,000 shares of common
stock held of record by Mr. Gearhart.
Mr. Gearhart resigned
from his position as Chief Operating Officer effective December 30,
2016.
(7)
Consists of (i)
112,145 shares of common stock held of record by Mr. Jennings and
(ii) 400,000 shares of
common stock
issuable upon the exercise of warrants to purchase
common stock
held by
Mr. Jennings that are exercisable within 60 days of March 17,
2017.
(8)
Consists of (i)
21,946,967 shares of common stock, (ii) 7,900,000 shares of
common
stock
issuable upon the exercise of warrants to purchase
common stock and (iii) 115,000 shares of
common stock
issuable upon exercise of stock options that are exercisable within
60 days of March 17, 2017.
(9)
Based
on information reported by Arise Asset Management Pte Ltd on
Schedule 13D/A filed with the SEC on July 20, 2015. Of the shares
of common stock beneficially owned, Arise Asset Management Pte Ltd
reported that it has sole dispositive power and sole voting power
with respect to 17,361,111 shares of common stock.
(10)
Based
on information reported by Mr. Wee to the Company. Consists of (i)
4,655,556 shares of common stock and (ii) 3,000,000 shares of
common stock issuable upon the exercise of warrants to purchase
common stock held by Mr. Wee that are exercisable within 60 days of
March 17, 2017.
Changes in Control
We are
unaware of any contract or other arrangement the operation of which
may at a subsequent date result in a change in control of our
Company.
42
Transactions with Related Persons
For the
year ended December 31, 2016, we incurred fees for legal services
rendered by Harold Paul, one of our directors, in the amount of
$60,000, and f
or the year ended
December 31, 2015, we paid Mr. Paul a total of $161,250 as payment
for legal services rendered, comprised of $60,000 cash and 225,000
shares of common stock valued at $101,250.
In January 2016, we entered into a distributor agreement with TOMI
Asia to facilitate growth in Asia. Wee Ah Kee, one of our
principal shareholders, is the Chief Executive Officer of TOMI
Asia. We amended the agreement in August 2016, at which time TOMI
Asia changed its name to SteraMist Asia. The initial term of our
new agreement is three years and the agreement sets revenue targets
of $5.5 million, $8.5 million and $12 million of our products
during 2016, 2017 and 2018, respectively. Our new agreement
includes mainland China and Indochina and excludes South Korea,
Japan, Australia and New Zealand. No sales were made under the
agreement for the year ended December 31, 2016.
Independence of the Board
Based
upon information submitted by Mr. Johnsen and Ms. Anderson, the
Board has determined that each of them is “independent”
for purposes of OTC Governance Guidelines for directors. Messrs.
Shane and Paul are not independent directors. No director will be
considered “independent” unless the Board affirmatively
determines that the director has no direct or indirect material
relationship with the Company.
Our
board of directors has three separate standing committees: the
Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee.
We have
made each of our committee charters available on our website at
http://investor.tomimist.com/.
Accountant Fees
The
following table presents the aggregate fees billed for audit and
other services provided by our independent registered public
accounting firm, Wolinetz, Lafazan & Company, P.C, during the
2016 and 2015 fiscal years:
|
|
For the Fiscal
Years Ended December 31,
|
|
|
|
2016
|
2015
|
|
Audit
Fees(1)
|
$
94,000
|
$
84,000
|
|
Audit-Related
Fees(2)
|
—
|
—
|
|
Tax
Fees(3)
|
—
|
—
|
|
All Other
Fees(4)
|
—
|
—
|
|
Total
|
$
94,000
|
$
84,000
|
(1)
Audit Fees
—Audit fees represent
the professional services rendered for the audit of our annual
financial statements and the review of our financial statements
included in quarterly reports, along with services normally
provided by the accounting firm in connection with statutory and
regulatory filings or engagements.
(2)
Audit-Related Fees
—Audit-related
fees represent professional services rendered for assurance and
related services by Wolinetz, Lafazan & Company, P.C. that were
reasonably related to the performance of the audit or review of our
financial statements that are not reported under audit
fees.
(3)
Tax Fees
— Tax fees represent
professional services rendered by the accounting firm for tax
compliance, tax advice, and tax planning.
(4)
All Other Fees
—All other fees
represent fees billed for products and services provided by
Wolinetz, Lafazan & Company, P.C other than the services
reported for the other categories.
Pre-Approval Policies
and
Procedures of the Audit
Committee
Consistent with the
rules and regulations promulgated by the Securities and Exchange
Commission, the Audit Committee approves the engagement of our
independent registered public accounting firm and is also required
to pre-approve all audit and non-audit expenses. All of the
services described above were approved by the Audit Committee in
accordance with its procedure. We do not otherwise rely on
pre-approval policies and procedures.
43
(a)
Documents filed as part of this report:
(1) Financial
Statements. See Index to Financial Statements and Schedule on page
F-1.
(2) Schedules
to Financial Statements. All financial statement schedules have
been omitted because they are either inapplicable or the
information required is provided in our consolidated financial
statements and the related notes thereto, included in Part II,
Item 8 of this Annual Report on Form 10-K.
(3) The
exhibits listed on the accompanying Exhibit Index are filed (or
incorporated by reference herein) as part of this Annual Report on
Form 10-K.
44
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
DATED:
March 29, 2017
|
|
TOMI
ENVIRONMENTAL SOLUTIONS, INC.
|
|
|
|
|
|
|
|
/s/ HALDEN
S. SHANE
|
|
|
|
Halden S Shane
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
POWER OF ATTORNEY
The
undersigned directors and officers of TOMI Environmental Solutions,
Inc. constitute and appoint Halden S. Shane and Nick Jennings, or
either of them, as their true and lawful attorney and agent with
power of substitution, to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem
necessary or advisable to enable said corporation to comply with
the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K,
including specifically but without limitation, power and authority
to sign for us or any of us in our names in the capacities
indicated below, any and all amendments hereto; and we do hereby
ratify and confirm all that said attorney and agent shall do or
cause to be done by virtue hereof. Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/ HALDEN
S.
SHANE
|
Chairman
of the Board and Chief Executive Officer (Principal Executive
Officer)
|
March
29, 2017
|
|
Halden S. Shane
|
|
|
|
|
|
|
|
/s/ NICK
JENNINGS
|
Chief
Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
|
March
29, 2017
|
|
Nick Jennings
|
|
|
|
|
|
|
|
/s/ HAROLD
W.
PAUL
|
Director
|
March
29, 2017
|
|
Harold W. Paul
|
|
|
|
/s/ WALTER
C.
JOHNSEN
|
Director
|
March
29, 2017
|
|
Walter C. Johnsen
|
|
|
|
/s/ KELLY
J.
ANDERSON
|
Director
|
March
29, 2017
|
|
Kelly J. Anderson
|
|
|
45
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
Form
|
|
File No.
|
|
Date
|
|
Exhibit
|
|
Filed Herewith
|
|
3.1
|
|
Articles of
Restatement of the Registrant, effective October 6,
2009
|
|
S-1
|
|
333-162356
|
|
10/6/09
|
|
3.1
|
|
|
|
3.2
|
|
Articles of
Amendment of Articles of Incorporation of the Registrant, effective
October 24, 2011
|
|
8-K
|
|
000-09908
|
|
10/24/11
|
|
3.1(a)
|
|
|
|
3.3
|
|
Amended Bylaws of
the Registrant, adopted effective November 2, 2007
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
3.2
|
|
|
|
3.4
|
|
Amendment to
Amended Bylaws of the Registrant, adopted effective January 29,
2016
|
|
8-K
|
|
000-09908
|
|
2/1/16
|
|
3.2
|
|
|
|
10.1+
|
|
2016
Equity Incentive Plan, as adopted by the Registrant’s board
of directors on January 29, 2016
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.6
|
|
|
|
10.2+
|
|
Offer
Letter, dated January 15, 2016, by and between the Registrant and
Dr. Halden Shane
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.1
|
|
|
|
10.3+
|
|
Employment
Agreement, dated February 8, 2016, by and between the Registrant
and Robert Wotczak
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.2
|
|
|
|
10.4+
|
|
Offer
Letter, dated September 2, 2015, by and between the Registrant and
Nick Jennings
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.3
|
|
|
|
10.5+
|
|
Offer
Letter, dated September 2, 2015, by and between the Registrant and
Norris Gearhart
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.4
|
|
|
|
10.6+
|
|
Form
of Appointment to the Board of Directors as Independent Director of
the Registrant
|
|
10-Q
|
|
000-09908
|
|
5/16/16
|
|
10.5
|
|
|
|
10.7
|
|
Restated
Manufacturing and Development Agreement, dated November 10, 2016,
by and between the Registrant and RG Group
|
|
10-Q
|
|
000-09908
|
|
9/30/16
|
|
10.1
|
|
|
|
14.1
|
|
Code
of Ethics
|
|
10-K
|
|
000-09908
|
|
3/31/07
|
|
14
|
|
|
|
|
Subsidiaries of
the Registrant
|
|
|
|
|
|
|
|
|
|
X
|
|
|
24.1
|
|
Power
of Attorney (included in signature page)
|
|
|
|
|
|
|
|
|
|
X
|
|
|
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
|
|
X
|
|
|
32.1
#
|
|
Certification of
Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
32.2
#
|
|
Certification of
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
X
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
|
|
X
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
|
|
|
|
X
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
|
|
X
|
|
+
|
Indicates
a management contract or compensatory plan.
|
|
|
|
|
#
|
The
information in Exhibits 32.1 and 32.2 shall not be deemed
“filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, or otherwise
subject to the liabilities of that section, nor shall they be
deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act (including this
report), unless the Registrant specifically incorporates the
foregoing information into those documents by
reference.
|
46
TOMI ENVIRONMENTAL SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting
Firm.
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2016 and
2015
|
F-3
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2016
and 2015
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2016 and 2015
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016
and 2015
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Stockholders
TOMI
Environmental Solutions, Inc. (A Florida Corporation)
We have
audited the accompanying consolidated balance sheets of TOMI
Environmental Solutions, Inc. and Subsidiaries (“the
Company”) as of December 31, 2016 and 2015 and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December
31, 2016. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. Also, an audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TOMI
Environmental Solutions, Inc. and Subsidiaries at December 31, 2016
and 2015, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2016 in
conformity with accounting principles generally accepted in the
United States of America.
|
|
WOLINETZ, LAFAZAN
& COMPANY, P.C.
|
Rockville
Centre, New York
March 29, 2017
F-2
|
TOMI
ENVIRONMENTAL SOLUTIONS, INC.
|
||
|
|
||
|
|
||
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
December
31,
2016
|
December
31,
2015
|
|
Cash and Cash
Equivalents
|
$
948,324
|
$
5,916,068
|
|
Accounts Receivable
– net
|
1,521,378
|
1,414,576
|
|
Inventories (Note
3)
|
4,047,310
|
1,395,175
|
|
Deposits on
Merchandise (Note 11)
|
147,010
|
442,358
|
|
Prepaid
Expenses
|
104,448
|
76,730
|
|
Other
Assets
|
-
|
36,613
|
|
Total
Current Assets
|
6,768,469
|
9,281,519
|
|
|
|
|
|
Property and
Equipment – net (Note 4)
|
611,807
|
250,264
|
|
|
|
|
|
Other
Assets:
|
|
|
|
Intangible Assets
– net (Note 5)
|
1,918,040
|
2,287,548
|
|
Security
Deposits
|
4,700
|
4,700
|
|
Total
Other Assets
|
1,922,740
|
2,292,248
|
|
Total
Assets
|
$
9,303,016
|
$
11,824,031
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable
|
$
735,879
|
$
1,021,883
|
|
Accrued
Expenses and Other Current Liabilities (Note 13)
|
278,413
|
118,815
|
|
Customer
Deposits
|
30,120
|
35,111
|
|
Deferred
Rent
|
8,541
|
14,745
|
|
Advances
on Grant (Note 11)
|
-
|
210,503
|
|
Total
Current Liabilities
|
1,052,954
|
1,401,057
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
1,052,954
|
1,401,057
|
|
|
|
|
|
Commitments
and Contingencies
|
-
|
-
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
Cumulative
Convertible Series A Preferred Stock;
|
|
|
|
par value
$0.01, 1,000,000 shares authorized; 510,000 shares
issued
|
||
|
and
outstanding at December 31, 2016 and December 31, 2015
|
5,100
|
5,100
|
|
Cumulative
Convertible Series B Preferred Stock; $1,000 stated
value;
|
||
|
7.5% Cumulative
dividend; 4,000 shares authorized; none issued
|
||
|
and
outstanding at December 31, 2016 and December 31, 2015
|
-
|
-
|
|
Common stock;
par value $0.01, 200,000,000 shares authorized;
|
||
|
120,825,134 and
120,063,180 shares issued and outstanding
|
||
|
at
December 31, 2016 and December 31, 2015, respectively.
|
1,208,251
|
1,200,632
|
|
Additional
Paid-In Capital
|
41,367,946
|
40,391,216
|
|
Accumulated
Deficit
|
(34,331,234
)
|
(31,173,973
)
|
|
Total
Stockholders’ Equity
|
8,250,063
|
10,422,974
|
|
Total Liabilities
and Stockholders’ Equity
|
$
9,303,016
|
$
11,824,031
|
The
accompanying notes are an integral part of the financial
statements.
F-3
|
TOMI
ENVIRONMENTAL SOLUTIONS, INC.
|
||
|
|
||
|
|
||
|
|
|
|
|
|
For The Year
Ended
|
|
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Sales,
net
|
$
6,343,432
|
$
4,191,783
|
|
Cost
of Sales
|
2,610,500
|
1,644,039
|
|
Gross
Profit
|
3,732,931
|
2,547,744
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
Professional
Fees
|
516,926
|
455,626
|
|
Depreciation
and Amortization
|
586,384
|
499,344
|
|
Selling
Expenses
|
1,512,752
|
704,069
|
|
Research
and Development
|
184,259
|
100,321
|
|
Equity
Compensation Expense (Note 8)
|
614,696
|
1,706,393
|
|
Consulting
Fees
|
307,040
|
476,513
|
|
General
and Administrative
|
3,380,025
|
1,591,102
|
|
Total Operating
Expenses
|
7,102,082
|
5,533,368
|
|
Loss from
Operations
|
(3,369,150
)
|
(2,985,624
)
|
|
|
|
|
|
Other Income
(Expense):
|
|
|
|
Amortization
of Deferred Financing Costs
|
-
|
(199,625
)
|
|
Amortization
of Debt Discounts
|
-
|
(3,996,033
)
|
|
Fair
Value Adjustment of Derivative Liability
|
-
|
(3,810,955
)
|
|
Induced
Conversion Costs
|
-
|
(930,383
)
|
|
Gain
on Disposition of Property and Equipment
|
12,000
|
-
|
|
Grant
|
199,891
|
-
|
|
Interest
Expense
|
-
|
(253,700
)
|
|
Total Other Income
(Expense)
|
211,891
|
(9,190,696
)
|
|
|
|
|
|
Net
Loss
|
$
(3,157,259
)
|
$
(12,176,320
)
|
|
|
|
|
|
Loss Per Common
Share
|
|
|
|
Basic
and Diluted
|
$
(0.03
)
|
$
(0.12
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
Weighted Average Common Shares Outstanding
|
120,557,102
|
102,840,185
|
The accompanying
notes are an integral part of the financial
statements.
F-4
|
TOMI ENVIRONMENTAL SOLUTIONS, INC.
|
|
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
Series A
Preferred
|
Common
Stock
|
Additional
Paid
|
Accumulated
|
Total
Stockholders’
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
in
Capital
|
Deficit
|
Equity
|
|
Balance at December 31,
2014
|
510,000
|
$
5,100
|
83,646,275
|
$
836,462
|
$
19,281,647
|
$
(18,997,655
)
|
$
1,125,555
|
|
|
|
|
|
|
|
|
|
|
Options and Warrants Issued to
Executives for Services
|
|
|
|
|
1,706,393
|
|
1,706,393
|
|
Common stock issued for services
provided
|
|
|
1,319,679
|
13,197
|
542,472
|
|
555,668
|
|
Common stock issued for officer
compensation
|
|
|
437,145
|
4,371
|
187,779
|
|
192,150
|
|
Proceeds from issuance of common
stock and warrants, net
|
|
|
1,760,002
|
17,600
|
441,614
|
|
459,214
|
|
Proceeds from issuance of common
stock
|
|
|
17,986,111
|
179,862
|
8,045,126
|
|
8,224,988
|
|
Conversion of notes payable and
accrued interest into common stock
|
|
|
14,913,968
|
149,140
|
3,748,776
|
|
3,897,916
|
|
Induced conversion
costs
|
|
|
|
|
912,883
|
|
912,883
|
|
Reclassification of derivative
liability
|
|
|
|
|
5,539,838
|
|
5,539,838
|
|
Value of common stock to be issued
as finder’s fee
|
|
|
|
|
(15,312
)
|
|
(15,312
)
|
|
Net Loss for the year ended
December 31, 2015
|
|
|
|
|
|
(12,176,319
)
|
(12,176,319
)
|
|
Balance at December 31,
2015
|
510,000
|
5,100
|
120,063,180
|
1,200,632
|
40,391,215
|
(31,173,974
)
|
10,422,973
|
|
|
|
|
|
|
|
|
|
|
Equity based
compensation
|
|
|
|
|
614,696
|
|
614,696
|
|
Common stock
issued for services provided
|
|
|
761,954
|
7,620
|
362,035
|
|
369,654
|
|
Net Loss for
the year ended December 31, 2016
|
|
|
|
|
|
(3,157,259
)
|
(3,157,259
)
|
|
Balance at
December 31, 2016
|
510,000
|
$
5,100
|
120,825,134
|
$
1,208,252
|
$
41,367,946
|
$
(34,331,233
)
|
$
8,250,064
|
The accompanying notes are an integral part of the financial
statements.
F-5
|
TOMI ENVIRONMENTAL SOLUTIONS, INC.
|
||
|
|
||
|
|
||
|
|
For The
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Cash
Flow From Operating Activities:
|
|
|
|
Net
Loss
|
$
(3,157,259
)
|
$
(12,176,319
)
|
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
Net
Cash Used In Operating Activities:
|
|
|
|
Depreciation
and Amortization
|
586,384
|
499,344
|
|
Amortization
of Deferred Financing Costs
|
-
|
199,625
|
|
Amortization
of Debt Discount
|
-
|
3,996,033
|
|
Fair
Value Adjustment of Derivative Liability
|
-
|
3,810,955
|
|
Equity
Based Compensation
|
614,696
|
1,706,393
|
|
Value
of Equity Issued for Services
|
369,653
|
747,819
|
|
Induced
Conversion Costs
|
-
|
912,883
|
|
Reserve
for Bad Debts
|
255,000
|
7,500
|
|
Gain
on Disposition of Property and Equipment
|
(12,000
)
|
-
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
Decrease
(Increase) in:
|
|
|
|
Accounts
Receivable
|
(361,802
)
|
(980,923
)
|
|
Inventory
|
(2,755,688
)
|
(633,787
)
|
|
Prepaid
Expenses
|
(27,718
)
|
(41,326
)
|
|
Deposits
on Merchandise
|
295,348
|
(442,358
)
|
|
Other
Assets
|
36,613
|
31
|
|
Deposits
|
-
|
1,853
|
|
Increase
(Decrease) in:
|
|
|
|
Accounts
Payable
|
(286,004
)
|
664,226
|
|
Accrued
Expenses
|
159,598
|
(22,829
)
|
|
Accrued
Interest
|
-
|
(87,500
)
|
|
Accrued
Officers Compensation
|
-
|
(41,000
)
|
|
Deferred
Rent
|
(6,203
)
|
(491
)
|
|
Advances
on Grant
|
(210,503
)
|
210,503
|
|
Customer
Deposits
|
(4,991
)
|
15,394
|
|
Net
Cash Used in Operating Activities
|
(4,504,876
)
|
(1,653,972
)
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
Purchase
of Property and Equipment
|
(474,866
)
|
(80,496
)
|
|
Proceeds
on Disposition of Property and Equipment
|
12,000
|
-
|
|
Net
Cash Used in Investing Activities
|
(462,866
)
|
(80,496
)
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
|
||
F-6
|
TOMI ENVIRONMENTAL SOLUTIONS, INC.
|
||
|
CONSOLIDATED STATEMENT OF CASH FLOWS –
CONTINUED
|
||
|
|
||
|
|
For The
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Cash
Flow From Financing Activities:
|
|
|
|
Proceeds
From Issuance of Common Stock and Warrants
|
-
|
8,735,200
|
|
Repayment
of Principal Balance on Convertible Notes
|
-
|
(1,300,000
)
|
|
Decrease
in Bond Sinking Fund
|
-
|
105,776
|
|
Payment
of Finder's Fee
|
-
|
(51,000
)
|
|
Net
Cash Provided by Financing Activities
|
-
|
7,489,976
|
|
Increase
(Decrease) In Cash and Cash Equivalents
|
(4,967,743
)
|
5,755,509
|
|
Cash
and Cash Equivalents - Beginning
|
5,916,068
|
160,560
|
|
Cash
and Cash Equivalents – Ending
|
$
948,326
|
$
5,916,069
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
Cash
Paid For Interest
|
$
-
|
$
341,200
|
|
Cash
Paid for Income Taxes
|
$
800
|
$
800
|
|
Non-Cash
Investing and Financing Activities
|
|
|
|
Common
stock issued as payment
|
|
|
|
of
accrued interest
|
$
-
|
$
123,917
|
|
Reclassification
of derivative liability
|
|
|
|
to
additional paid in capital
|
$
-
|
$
5,539,838
|
|
Issuance
of common stock on conversion
|
|
|
|
of
convertible debt
|
$
-
|
$
3,774,000
|
|
Common
Stock Finder's Fee Accrual
|
$
-
|
$
15,312
|
|
Reclassification
of demo equipment from
|
|
|
|
inventory
to property and equipment
|
$
103,553
|
$
19,615
|
|
Reclassification
of property and equipment to inventory
|
$
-
|
$
8,170
|
The accompanying notes are an integral part of the financial
statements.
F-7
TOMI ENVIRONMENTAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TOMI
Environmental Solutions, Inc. (“TOMI”, the
“Company”, “we”, “our” and
“us”) is a global provider of infection prevention and
decontamination products and services, focused primarily on life
sciences including healthcare, bio-safety, pharmaceutical,
clean-room and research.
TOMI
provides environmental solutions for indoor and outdoor surface
decontamination through the sale of equipment, services and
licensing of its SteraMist
™
Binary
Ionization Technology® (“BIT
™
”),
which is a hydrogen peroxide-based mist and fog registered with the
U.S. Environmental Protection Agency (“EPA”). TOMI's
mission is to help its customers create a healthier world through
its product line and its motto is “innovating for a safer
world” for healthcare and life.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of TOMI, and its wholly-owned subsidiary, TOMI Environmental
Solutions, Inc., a Nevada corporation. The Company’s 55%
owned subsidiary, TOMI Environmental-China, has been dormant since
its formation in April 2011. All significant intercompany accounts
and transactions have been eliminated in
consolidation.
Reclassification of Accounts
Certain
reclassifications have been made to prior-year comparative
financial statements to conform to the current year presentation.
These reclassifications had no effect on previously reported
results of operations or financial position.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions that affect
the amounts reported and disclosed in the accompanying consolidated
financial statements and the accompanying notes. Actual results
could differ materially from these estimates. On an ongoing basis,
we evaluate our estimates, including those related to accounts
receivable, inventory, fair values of financial instruments,
intangible assets, useful lives of intangible assets and property
and equipment, fair values of stock-based awards, income taxes, and
contingent liabilities, among others. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable, the results of which form the basis for
making judgments about the carrying values of our assets and
liabilities.
Fair Value Measurements
The
authoritative guidance for fair value measurements defines fair
value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
the most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to
transact, and (iv) willing to transact. The guidance describes a
fair value hierarchy based on the levels of inputs, of which the
first two are considered observable and the last unobservable, that
may be used to measure fair value, which are the
following:
Level
1:
Quoted
prices in active markets for identical assets or
liabilities.
Level
2:
Inputs
other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or corroborated by observable market
data or substantially the full term of the assets or
liabilities.
Level
3:
Unobservable
inputs that are supported by little or no market activity and that
are significant to the value of the assets or
liabilities.
F-8
Our
financial instruments include cash and equivalents, accounts
receivable, and accounts payable and accrued expenses. All these
items were determined to be Level 1 fair value
measurements.
The
carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximated fair value
because of the short maturity of these instruments.
Cash and Cash Equivalents
For
purposes of the statement of cash flows, cash and cash equivalents
includes cash on hand held at financial institutions and other
liquid investments with original maturities of three months or
less.
Accounts Receivable
Our
accounts receivable are typically from credit worthy customers or,
for certain international customers, are supported by pre-payments.
For those customers to whom we extend credit, we perform periodic
evaluations of them and maintain allowances for potential credit
losses as deemed necessary. We have a policy of reserving for
doubtful accounts based on our best estimate of the amount of
potential credit losses in existing accounts receivable. We
periodically review our accounts receivable to determine whether an
allowance is necessary based on an analysis of past due accounts
and other factors that may indicate that the realization of an
account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. Bad debt expense for the years ended December
31, 2016 and 2015 was $285,030 and $39,081,
respectively.
At
December 31, 2016 and 2015, the allowance for doubtful accounts was
$300,000 and $45,000, respectively.
As of December 31, 2016, one customer accounted for 10% of net
accounts receivable. One customer accounted for 10% of net revenues
for the year ended December 31, 2016.
As of December 31, 2015, three customers accounted for 42% of net
accounts receivable. Two customers accounted for 26% of net
revenues for the year ended December 31, 2015.
Inventories
Inventories are
valued at the lower of cost or market using the first-in, first-out
(“FIFO”) method. Inventories consist primarily of
finished goods and raw materials
. At
December 31, 2016 and 2015, we did not have a reserve for
slow-moving or obsolete inventory.
Deposits on Merchandise
Deposits
on merchandise primarily consist of amounts paid in advance of the
receipt of inventory. (See note 11)
Property and Equipment
We
account for property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Depreciation for equipment, furniture and
fixtures and vehicles commences once placed in service for its
intended use. Leasehold improvements are amortized using the
straight-line method over the lives of the respective leases or
service lives of the improvements, whichever is
shorter.
Deferred Financing Costs
We
follow authoritative guidance for accounting for financing costs as
it relates to convertible debt issuance cost. These costs are
deferred and amortized over the term of the debt period or until
redemption of the convertible debentures. Amortization of deferred
financing costs amounted to approximately $0 and $200,000 for the
years ended December 31, 2016 and 2015, respectively.
Accounts Payable
As of December 31, 2016 and December 31, 2015, two vendors
accounted for approximately 49% and 75% of total accounts payable,
respectively. One vendor accounted for 78% and 84% of
cost of goods sold for the years ended December 31, 2016 and 2015,
respectively.
F-9
Accrued Warranties
Accrued
warranties represent the estimated costs, if any, that will be
incurred during the warranty period of our products. We make an
estimate of expected costs that will be incurred by us during the
warranty period and charge that expense to the consolidated
statement of operations at the date of sale. Our manufacturer
assumes warranty against product defects for one year which we
extend to our customers. We assume responsibility for product
reliability and results. As of December 31, 2016 and 2015, the
Company did not establish a warranty reserve.
Income Taxes
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are, on a more
likely than not basis, not expected to be realized in accordance
with ASC guidance for income taxes. Net deferred tax benefits have
been fully reserved at December 31, 2016 and 2015. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are
enacted.
Loss Per Share
Basic
loss per share is computed by dividing the Company’s net loss
by the weighted average number of common shares outstanding during
the period presented. Diluted loss per share is based on the
treasury stock method and includes the effect from potential
issuance of common stock such as shares issuable pursuant to the
exercise of warrants and conversions of debentures.
Potentially
dilutive securities as of December 31, 2016, consisted of
36,701,413 shares of common stock from outstanding warrants,
200,000 shares of common stock from options and 510,000 shares of
common stock from convertible Series A preferred stock. Diluted and
basic weighted average shares are the same, as potentially dilutive
shares are anti-dilutive.
Potentially dilutive securities as of December 31, 2015, consisted
of 35,676,413 common shares from outstanding warrants, 100,000
common shares from options and 510,000 common shares from
convertible Series A preferred stock. Diluted and basic
weighted average shares are the same, as potentially dilutive
shares are anti-dilutive.
Revenue Recognition
For
revenue from services and product sales, we recognize revenue in
accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition” (SAB No. 104), which superseded Staff Accounting
Bulletin No. 101, “Revenue Recognition in Financial
Statements” (SAB No. 101). SAB No. 104 requires that four
basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) service has been
rendered or delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectability is reasonably assured.
Determination of criteria (3) and (4) are based on
management’s judgment regarding the fixed nature of the
selling prices of the services rendered or products delivered and
the collectability of those amounts. Provisions for discounts to
customers, and allowance, and other adjustments will be provided
for in the same period the related sales are recorded.
Stock-Based Compensation
We
account for stock-based compensation in accordance with Financial
Accounting Standards Board (“FASB”), ASC 718,
“Compensation - Stock Compensation.” Under the
provisions of FASB ASC 718, stock-based compensation cost is
estimated at the grant date based on the award’s fair value
and is recognized as expense over the requisite service period.
During the year ended December 31, 2015, we had one active
stock-based compensation plan, the TOMI Environmental Solutions,
Inc. Stock Option and Restricted Stock Plan (the “2008
Plan”). The 2008 Plan calls for the Company, through a
committee of our board of directors, to issue up to 2,500,000
shares of restricted common stock or stock options. We generally
issue grants to our employees, consultants, and board members.
Stock options are granted with an exercise price equal to the
closing price of our common stock on the date of the grant with a
term no greater than 10 years. Generally, stock options vest over
two to four years. Incentive stock options granted to shareholders
who own 10% or more of our outstanding equity securities are
granted at an exercise price that may not be less than 110% of the
closing price of our common stock on the date of grant and have a
term no greater than five years. On the date of a grant, we
determine the fair value of the stock option award and recognize
compensation expense over the requisite service period, which is
generally the vesting period of the award. The fair value of the
stock option award is calculated using the Black-Scholes
option-pricing model. On August 25, 2015, the 2008 Plan was
terminated.
F-10
On
January 29, 2016, the board of directors adopted the 2016 Equity
Compensation Plan (the “2016 Plan”) subject to its
approval by shareholders.
The 2016
Plan authorizes the grant of stock options, stock appreciation
rights, restricted stock, restricted stock units and performance
units / shares. Up to 5,000,000 shares of common stock are
authorized for issuance under the 2016 Plan. Shares issued under
the 2016 Plan may be either authorized but unissued shares,
treasury shares, or any combination thereof. Provisions in the 2016
Plan permit the reuse or reissuance by the 2016 Plan of shares of
common stock for numerous reasons, including, but not limited to,
shares of common stock underlying canceled, expired, or forfeited
awards of stock-based compensation and stock appreciation rights
paid out in the form of cash. Stock-based compensation will
typically be awarded in consideration for the future performance of
services to the Company. All recipients of awards under the 2016
Plan are required to enter into award agreements with the Company
at the time of the award; awards under the 2016 Plan are expressly
conditioned upon such agreements. For the year ended December 31,
2016, there were 100,000 stock options issued out of the plan. As
of December 31, 2016, the 2016 Plan had not been approved by our
shareholders.
Concentrations of Credit Risk
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash and cash
equivalents. We maintain cash balances at financial institutions
which exceed the current Federal Deposit Insurance Corporation
(“FDIC”) limit of $250,000 at times during the
year.
Long-Lived Assets Including Acquired Intangible Assets
We
assess long-lived assets for potential impairments at the end of
each year, or during the year if an event or other circumstance
indicates that we may not be able to recover the carrying amount of
the asset. In evaluating long-lived assets for impairment, we
measure recoverability of these assets by comparing the carrying
amounts to the future undiscounted cash flows the assets are
expected to generate. If our long-lived assets are considered to be
impaired, the impairment to be recognized equals the amount by
which the carrying value of the asset exceeds its fair market
value. We base the calculations of the estimated fair value of our
long-lived assets on the income approach. For the income approach,
we use an internally developed discounted cash flow model that
includes, among others, the following assumptions: projections of
revenues and expenses and related cash flows based on assumed
long-term growth rates and demand trends; expected future
investments to grow new units; and estimated discount rates. We
base these assumptions on our historical data and experience,
industry projections, micro and macro general economic condition
projections, and our expectations. We have had no long-lived asset
impairment charges for the years ended December 31, 2016 and
2015.
Advertising and Promotional Expenses
We
expense advertising costs in the period in which they are incurred.
Advertising and promotional expenses for the years ended December
31, 2016 and 2015, were approximately $130,000 and 52,000,
respectively.
Research and Development Expenses
We expense research and development expenses in the period in which
they are incurred. For the years ended December 31, 2016 and 2015,
research and development expenses were approximately $184,000 and
$100,000, respectively.
Shipping and Handling Costs
We include shipping and handling costs relating to the delivery of
products directly from vendors to the Company in cost of sales.
Shipping and handling costs, which include third-party delivery
costs relating to the delivery of products to customers, are
classified as a general and administrative expense. Shipping and
handling costs included in general and administrative expense were
$143,000 and $61,000 for the years ended December, 31, 2016 and
2015, respectively.
Business Segments
We
currently have one reportable business segment due to the fact that
we derive our revenue primarily from one product. A breakdown of
revenue is shown below:
F-11
Net Revenue
Product and Service Revenue
|
|
Year Ended December 31,
|
|
|
|
2016
|
2015
|
|
SteraMist
Product
|
$
5,727,000
|
$
4,056,000
|
|
Service
& Training
|
616,000
|
136,000
|
|
Total
|
$
6,343,000
|
$
4,192,000
|
Revenue by Geographic Region
|
|
Year Ended December 31,
|
|
|
|
2016
|
2015
|
|
United
States
|
$
4,012,000
|
$
2,078,000
|
|
International
|
2,331,000
|
2,114,000
|
|
Total
|
$
6,343,000
|
$
4,192,000
|
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU
2014-09) “Revenue from Contracts with Customers.” ASU
2014-09 supersedes the revenue recognition requirements in
“Revenue Recognition (Topic 605)”, and requires
entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflect the consideration
to which the entity expects to be entitled to in exchange for those
goods or services. ASU 2014-09 is effective for annual reporting
periods beginning after December 15, 2016, including interim
periods within that reporting period. Early adoption is not
permitted. We are currently in the process of evaluating the impact
of the adoption of ASU 2014-09 on our consolidated financial
statements.
In
November 2015, the FASB issued Accounting Standards Update No.
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes (ASU 2015-17), which simplifies the presentation of
deferred taxes by requiring that deferred tax assets and
liabilities be classified as non-current. We retrospectively
adopted this standard as of December 31, 2015. As a result, there
was no impact to the Company’s results of
operations.
In February 2016, the FASB issued Accounting Standards Update No.
2016-02 (ASU 2016-02) “Leases.” ASU 2016-02
provides new lease accounting guidance. ASU 2016-02 is
effective for annual reporting periods beginning
after December 15, 2018, including interim periods within that
reporting period. Early adoption is permitted. We are
currently in the process of evaluating the impact of the adoption
of ASU 2016-02 on our consolidated financial
statements.
In March 2016, the FASB issued Accounting Standards Update No.
2016-09 (ASU 2016-09) “Compensation – Stock
Compensation (Topic 718).” ASU 2016-09 provides
improvements to employee share-based payment accounting. ASU
2016-09 is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within that
reporting period. We are currently in the process of evaluating the
impact of the adoption of ASU 2016-09 on our consolidated financial
statements.
|
Inventories
consist of the following at:
|
|
|
|
|
|
|
|
|
December
31,
2016
|
December
31,
2015
|
|
Raw
materials
|
$
13,031
|
$
13,024
|
|
Finished
goods
|
4,034,279
|
1,382,151
|
|
|
$
4,047,310
|
$
1,395,175
|
F-12
Property
and equipment consists of the following at:
|
|
December
31,
|
December
31,
|
|
|
2016
|
2015
|
|
Furniture and
fixtures
|
$
91,216
|
$
79,743
|
|
Equipment
|
926,979
|
421,442
|
|
Vehicles
|
56,410
|
44,344
|
|
Software
|
39,999
|
34,999
|
|
Leasehold
Improvements
|
15,554
|
15,554
|
|
|
1,130,158
|
596,082
|
|
Less: Accumulated
depreciation
|
518,350
|
345,818
|
|
|
$
611,808
|
$
250,264
|
For the
years ended December 31, 2016 and 2015, depreciation was $216,876
and $129,836, respectively.
Intangible assets
consist of Patents and Trademarks related to our Binary Ionization
Technology. All of these assets were pledged as collateral for the
convertible notes as described below in Note 6. The patents are
being amortized over the estimated remaining lives of the related
patents. The trademarks have an indefinite life. Amortization
expense was $369,508 and $369,508 for the years ended December 31,
2016 and 2015, respectively..
Definite life
intangible assets consist of the following:
|
|
December
31,
2016
|
December
31,
2015
|
|
|
|
|
|
Intellectual
Property and Patents
|
$
2,848,300
|
$
2,848,300
|
|
Less: Accumulated
Amortization
|
1,370,260
|
1,000,752
|
|
Intangible Assets,
net
|
$
1,478,040
|
$
1,847,548
|
Indefinite life
intangible assets consist of the following:
|
Trademarks
|
$
440,000
|
$
440,000
|
|
Total Intangible
Assets, net
|
$
1,918,040
|
$
2,287,548
|
Approximate
amortization over the next five years is as follows:
|
Twelve Month
Period Ending December 31,
|
Amount
|
|
|
|
|
2017
|
$
370,000
|
|
2018
|
370,000
|
|
2019
|
370,000
|
|
2020
|
368,000
|
|
2021
|
-
|
|
|
$
1,478,000
|
F-13
In
November 2012, we initiated a private placement offering a maximum
of 240 Units (as defined below) of our securities at a price of
$25,000 per Unit or $6,000,000.
The initial closing of
the offering occurred in April 2013 as the bulk of the net proceeds
of the offering were to be allocated for the asset purchase from
L-3 Applied Technologies, Inc., which was finalized April
2013.
Each Unit consisted of $25,000 par amount of a 10%
Senior Secured Callable Convertible Promissory Note due and payable
on July 31, 2015 (the “Notes”) and 37,500 warrants each
of which allows the investor to purchase one share of common stock
and expires on July 31, 2018. Interest was payable on the Notes at
a rate of 10% per annum, and payable on July 31
st
and January
31
st
.
The Notes were secured by our
intellectual property such as the patents, royalties, receivables
of the Company and all equipment except for the new equipment
acquired with the proceeds from any future financing that is
initially secured by this new equipment. The Notes called for the
establishment of a sinking fund. Within 45 days of each calendar
quarter 15% of the Company’s reported revenue was required to
be deposited into the Company’s escrowed sinking fund
account.
We sold
202.96 Units for gross proceeds of $5,074,000 and issued warrants
to purchase up to 7,611,000 shares of common stock in connection
with the Units. Net proceeds amounted to $4,462,693 after expenses
of offering totaling $611,307. In addition, the placement agent
received warrants to purchase up to 1,014,800 shares of common
stock valued at $165,180.
The
Notes were convertible, at the option of the note holder, into
shares of our common stock at an initial conversion price of $0.29
(which conversion price is subject to adjustment upon the
occurrence of events specified in the Notes, including stock
dividends, stock splits, certain fundamental corporate
transactions, and certain issuances of common stock by the
Company).
The
warrants are exercisable into shares of common stock (the
“Warrant Shares”) at an initial exercise price of $0.30
(which may be subject to certain adjustments as set forth in the
warrants).
We
evaluated the warrants under ASC 815-40-15 due to the exercise
price being adjustable upon certain events occurring. We determined
that the warrants are considered indexed to our own common stock
and thus meet the scope exception under FASB ASC 815-10-15-74 and
are therefore not considered a derivative. The estimated fair value
of the warrants, which contain reset provisions, were calculated
using the Monte Carlo valuation model. We recorded the
warrants’ relative fair value of $956,712 as an increase to
additional paid in capital and a discount against the related
debt.
The
Notes contained a provision whereby the conversion price is
adjustable upon the occurrence of certain events, including the
issuance of common stock or common stock equivalents at a price
which is lower than the current conversion price. Under FASB ASC
815-40-15-5, the embedded conversion feature was not considered
indexed to the Company’s own common stock and, therefore, did
not meet the scope exception in FASB ASC 815-10-15 and thus needed
to be accounted for as a derivative liability. The initial fair
value of the embedded conversion feature was estimated at
$7,316,092 and recorded as a derivative liability, resulting in an
additional discount of $4,117,288. The fair value of the embedded
conversion feature was estimated at the end of each quarterly
reporting period using the Monte Carlo model.
Inherent in the
Monte Carlo Valuation model are assumptions related to expected
volatility, remaining life, risk-free rate and expected dividend
yield. For the Notes using a Monte Carlo model, we estimate the
probability and timing of potential future financing and
fundamental transactions as applicable. We applied various
assumptions into the Monte Carlo Valuation models to determine the
change in the fair value of the derivative liability as of the
retirement dates of the Notes.
The
debt discount was amortized over the life of the convertible note
using the effective interest method and was fully amortized upon
the retirement of the convertible notes during the quarter ended
June 30, 2015.
In June
2015, we offered the noteholders options to convert to cash or at a
reduced conversion price on the Notes from $0.29 per share provided
the conversion feature was exercised prior to June 30, 2015.
If the noteholder agreed to lock up
the converted shares for six (6) months or an uplist to a market on
the NYSE or NASDAQ Stock Market, LLC, whichever is shorter, the
conversion price was reduced to $0.26 per share. Absent the lock
up, the noteholder could convert at $0.275 per share. All
noteholders except two converted at $0.26.
Pursuant to the
terms of the conversion offer, an aggregate of $3,774,000 of the
Notes and $124,000 of accrued interest were converted into
14,913,968 shares of our common stock. We recognized an induced
conversion cost of $930,383 related to all conversions and
retirements.
In
addition, during the quarter ended June 30, 2015, an aggregate of
$1,300,000 of the Notes and $87,500 in accrued interest were repaid
in the form of cash.
F-14
Convertible
Notes
The
assumptions used in the Monte Carlo Models are as
follows:
|
|
June 30,
|
|
|
|
2015
|
Inception
|
|
Closing
stock price
|
$
0.55–0.64
|
$
0.13–0.55
|
|
Conversion
price
|
$
0.29
|
$
0.29
|
|
Expected
volatility
|
125
%
|
185
%–190%
|
|
Remaining
term (years)
|
0.09–0.11
|
2.30–2.07
|
|
Risk-free
rate
|
0.00
%
|
0.25
%–0.43%
|
|
Expected
dividend yield
|
0
%
|
0
%
|
Warrants
|
|
Inception
|
|
Closing
stock price
|
$0.13–0.55
|
|
Conversion
price
|
$0.30
|
|
Expected
volatility
|
250%
|
|
Remaining
term (years)
|
5.30–5.09
|
|
Risk-free
rate
|
0.76%–(1.61%)
|
|
Expected
dividend yield
|
0%
|
Level 3
financial instruments consist of certain embedded conversion
features. The fair value of these embedded conversion features that
have exercise reset features are estimated using a Monte Carlo
valuation model. We adopted the disclosure requirements of ASU
2011-04,
“Fair Value
Measurements.”
(See note 6) The unobservable input
used by us was the estimation of the likelihood of a reset
occurring on the embedded conversion feature of the Convertible
Notes. These estimates of the likelihood of completing an equity
raise that would meet the criteria to trigger the reset provisions
are based on numerous factors, including the remaining term of the
financial instruments and the Company’s overall financial
condition.
The
following table summarizes the changes in fair value of the
Company’s Level 3 financial instruments for the years ended
December 31, 2016 and 2015. Upon the retirement of the Notes in
June 2015, the fair value of the derivative liability was
$0.
|
|
December
31,
|
December
31,
|
|
|
2016
|
2015
|
|
Beginning
Balance
|
$
-
|
$
1,728,883
|
|
Change
in fair value
|
-
|
3,810,955
|
|
Reclassification
to additional paid in capital due to retirement of convertible
notes
|
-
|
(5,539,838
)
|
|
Ending
Balance
|
$
-
|
$
-
|
Changes
in the unobservable input values would likely cause material
changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable input used in the fair
value measurement is the estimation of the likelihood of the
occurrence of a change to the conversion price based on the
contractual terms of the financial instruments. A significant
increase (decrease) in this likelihood would result in a higher
(lower) fair value measurement. As of December 31, 2016 and 2015,
the balance of derivative liability was $0 as the Notes were
retired during the second quarter of 2015.
F-15
Our
board of directors may, without further action by our stockholders,
from time to time, direct the issuance of any authorized but
unissued or unreserved shares of preferred stock in series and at
the time of issuance, determine the rights, preferences and
limitations of each series. The holders of such preferred stock may
be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any
payment is made to the holders of our common stock. Furthermore,
the board of directors could issue preferred stock with voting and
other rights that could adversely affect the voting power of the
holders of our common stock.
Convertible Series A Preferred Stock
Our
authorized Convertible Series A Preferred Stock, $0.01 par value
consists of 1,000,000 shares. At December 31, 2016 and 2015, there
were 510,000 shares issued and outstanding, respectively. The
Convertible Series A Preferred Stock is convertible at the rate of
one share of common stock for one share of Convertible Series A
Preferred Stock.
Convertible Series B Preferred Stock
Our
authorized Convertible Series B Preferred Stock, $1,000 stated
value, 7.5% Cumulative dividend, consists of 4,000 shares. At
December 31, 2016 and 2015, there were no shares issued and
outstanding, respectively.
Common Stock
During
the year ended December 31, 2015, we issued 1,094,679 shares of
common stock valued at approximately $454,418 for services rendered
(Note 11). In addition, we issued 225,000 shares
of common stock valued at $101,250 to Harold Paul as payment for
legal services rendered (Note 9).
During
the year ended December 31, 2015, our Board of Directors approved
the issuance of 225,000 shares of common stock from the 2008 Plan
valued at $101,250 as a bonus to Halden Shane, CEO, in August 2015
(Note 9).
During
the year ended December 31, 2015, we issued 50,146 shares of common
stock valued at $18,000 to Nick Jennings, CFO, as part of his
annual compensation from the Company. In addition, our
Board of Directors approved the issuance to Mr. Jennings of 62,000
shares of common stock under the Company’s 2008 Plan valued
at $27,900 as a bonus in August 2015 (Note 9).
During
the year ended December 31, 2015, our Board of Directors approved
the issuance of 100,000 shares of common stock from the 2008 Plan
valued at $45,000 as a bonus to Norris Gearhart, COO, in August
2015 (Note 9).
During
the year ended December 31, 2015, we sold, 1,760,002 equity
units. Each unit consisted of 1 share of common stock
and 2.5 warrants. The warrants have an exercise price of
$0.29 per share and a term of seven years. We received gross
proceeds of $510,213. In connection with the sale, we
incurred a cash finder’s fee in the amount of $51,000 in
addition to a finder’s fee to be paid in common stock of
52,800 shares valued at $15,312.
During
the year ended December 31, 2015, we issued 14,913,968 shares of
common stock in connection with the conversion of the convertible
notes and the related accrued interest amounting to $3,897,916
(Note 6).
During
the year ended December 31, 2015, we directly sold to two
investors, 17,986,111 shares of common stock. Gross
proceeds to the Company in connection with the shares sold amounted
to approximately $8,225,000.
During
the year ended December 31, 2016, we issued 761,954 shares of
common stock valued at $369,654 for professional services
rendered.
Stock Options
We
issued 40,000 options valued at $10,798 to two directors in January
2015. The options have an exercise price of $0.27 per share. The
options expire in January 2025. The options were valued using the
Black-Scholes model using the following assumptions: volatility:
237%; dividend yield: 0%; zero coupon rate: 1.61%; and a life of 10
years.
We
issued 100,000 options valued at $54,980 to four directors in
February 2016. The options have an exercise price of $0.55 per
share. The options expire in February 2026. The options were valued
using the Black-Scholes model using the following assumptions:
volatility: 224%; dividend yield: 0%; zero coupon rate: 1.47%; and
a life of 10 years.
F-16
The
following table summarizes stock options outstanding as of December
31, 2016 and 2015:
|
|
December 31,
2016
|
December 31,
2015
|
||
|
|
Number of Options
|
Weighted Average Exercise Price
|
Number of Options
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
100,000
|
$
0.96
|
60,000
|
$
1.42
|
|
Granted
|
100,000
|
0.55
|
40,000
|
0.27
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Outstanding,
end of period
|
200,000
|
$
0.76
|
100,000
|
$
0.96
|
Options
outstanding and exercisable by price range as of December 31, 2016
were as follows:
|
Outstanding
Options
|
Average
Weighted
|
Exercisable
Options
|
||
|
Range
|
Number
|
Remaining
Contractual
Life in
Years
|
Number
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$
2.10
|
40,000
|
3.01
|
40,000
|
$
2.10
|
|
$
0.05
|
20,000
|
4.02
|
20,000
|
$
0.05
|
|
$
0.27
|
40,000
|
8.02
|
40,000
|
$
0.27
|
|
$
0.55
|
100,000
|
9.10
|
100,000
|
$
0.55
|
|
|
200,000
|
7.16
|
200,000
|
$
0.76
|
Stock Warrants
For the
year ended December 31, 2015, we recognized equity based
compensation of approximately $316,000 on the warrants issued to
the CEO in connection with his previous employment agreement. In
addition, we recognized approximately $10,800 for director options
(See Note 8-Stock Options), $1,350,000 to consultants (Note 11),
and $30,000 on the vesting of warrants issued to the CFO on October
1, 2014 (Note 11).
During
the year ended December 31, 2015, we issued 4,400,005 warrants in
connection with the equity units sold to investors. See note 8
(common stock) for additional details. In addition, we issued
3,225,000 warrants to two consultants during the year ended
December 31, 2015. See note 11 (contracts and agreements) for
additional details.
For the
year ended December 31, 2016, we recognized total equity based
compensation of approximately $394,000 on warrants issued to the
CEO in connection with his current and previous employment
agreements (Note 9). For the year ended December 31, 2016, we
recognized $39,000 in stock compensation expense for the warrants
issued to the CEO in February 2014 that vested in February 2016. In
addition, on March 31, 2016, we issued warrants to purchase up to
250,000 shares of common stock to the CEO with a term of five years
that vest upon issuance and have an exercise price of $0.50 per
share. We utilized the Black-Scholes method to fair value the
warrants to purchase up to 250,000 shares of common stock received
by the CEO totaling approximately $129,000 with the following
assumptions: volatility, 162%; expected dividend yield, 0%; risk
free interest rate, 1.47%; and a life of 5 years. The grant date
fair value of each warrant was $0.51. On June 30, 2016, we issued
warrants to purchase up to 250,000 shares of common stock to the
CEO with a term of five years that vest upon issuance and have an
exercise price of $0.42 per share. The Company utilized the
Black-Scholes method to fair value the warrants to purchase up to
250,000 shares of common stock received by the CEO totaling
approximately $99,000 with the following assumptions: volatility,
157%; expected dividend yield, 0%; risk free interest rate, 1.17%;
and a life of 5 years. The grant date fair value of each warrant
was $0.40. On September 30, 2016, the Company issued warrants to
purchase up to 250,000 shares of common stock to the CEO with a
term of five years that vest upon issuance and have an exercise
price of $0.32 per share. We utilized the Black-Scholes method to
fair value the warrants to purchase up to 250,000 shares of common
stock received by the CEO totaling approximately $66,000 with the
following assumptions: volatility, 155%; expected dividend yield,
0%; risk free interest rate, 1.27%; and a life of 5 years. The
grant date fair value of each warrant was $0.27. On December 31,
2016, we issued warrants to purchase up to 250,000 shares of common
stock to the CEO with a term of five years that vest upon issuance
and have an exercise price of $0.27 per share. We utilized the
Black-Scholes method to fair value the warrants to purchase up to
250,000 shares of common stock received by the CEO totaling
approximately $61,000 with the following assumptions: volatility,
146%; expected dividend yield, 0%; risk free interest rate, 1.95%;
and a life of 5 years. The grant date fair value of each warrant
was $0.24. (See note 11 for additional details)
F-17
For the
year ended December 31, 2016, we recognized total equity based
compensation of approximately $73,000 on warrants issued to the CFO
in connection with his current and previous employment agreements
(Note 11). For the year ended December 31, 2016, we recognized
$22,000 in stock compensation expense for the warrants issued to
the CFO under his previous agreement with the Company. In addition,
on January 26, 2016, we issued warrants to purchase up to 100,000
shares of common stock to the CFO with a term of five years that
vest upon issuance and have an exercise price of $0.55 per share.
We utilized the Black-Scholes method to fair value the warrants to
purchase up to 100,000 shares of common stock received by the CFO
totaling approximately $51,000 with the following assumptions:
volatility, 164%; expected dividend yield, 0%; risk free interest
rate, 1.47%; and a life of 5 years. The grant date fair value of
each warrant was $0.51. (See note 11 for additional
details)
For the
year ended December 31, 2016, we recognized equity compensation
expense of approximately $92,000 related to the vested and accrual
of unvested warrants contracted to an employee pursuant to his
employment agreement with the Company that were issued in April
2016. We utilized the Black-Scholes method to fair value the
300,000 warrants received by the employee totaling approximately
$139,000 with the following assumptions: volatility, 159%; expected
dividend yield, 0%; risk free interest rate, 1.47%; and a life of 5
years. The grant date fair value of each warrant was
$0.46.
The
following table summarizes the outstanding common stock warrants as
of December 31, 2016 and December 31, 2015:
|
|
December 31,
2016
|
December 31,
2015
|
||
|
|
Number of Warrants
|
Weighted Average Exercise Price
|
Number of Warrants
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning of period
|
35,676,413
|
$
0.30
|
28,051,408
|
$
0.23
|
|
Granted
|
1,400,000
|
0.42
|
7,625,005
|
0.58
|
|
Expired
|
(375,000
)
|
0.05
|
-
|
-
|
|
Outstanding,
end of period
|
36,701,413
|
$
0.31
|
35,676,413
|
$
0.30
|
F-18
Warrants
outstanding and exercisable by price range as of December 31, 2016
were as follows:
|
Outstanding Warrants
|
|
Exercisable Warrants
|
||
|
Range
|
Number
|
Average
Weighted
Remaining
Contractual
Life in Years
|
Number
|
Weighted
Average
Exercise Price
|
|
$
0.01
|
1,575,000
|
0.53
|
1,575,000
|
$
0.01
|
|
$
0.05
|
600,000
|
1.00
|
600,000
|
$
0.05
|
|
$
0.15
|
7,750,000
|
0.80
|
7,750,000
|
$
0.15
|
|
$
0.26
|
100,000
|
1.49
|
100,000
|
$
0.26
|
|
$
0.27
|
250,000
|
5.00
|
250,000
|
$
0.27
|
|
$
0.29
|
10,125,613
|
3.81
|
10,125,613
|
$
0.29
|
|
$
0.30
|
11,925,800
|
1.75
|
11,925,800
|
$
0.30
|
|
$
0.32
|
250,000
|
4.75
|
250,000
|
$
0.32
|
|
$
0.33
|
75,000
|
1.75
|
75,000
|
$
0.33
|
|
$
0.42
|
250,000
|
4.50
|
250,000
|
$
0.42
|
|
$
0.50
|
625,000
|
3.93
|
425,000
|
$
0.50
|
|
$
0.55
|
100,000
|
4.08
|
100,000
|
$
0.55
|
|
$
0.62
|
75,000
|
1.55
|
75,000
|
$
0.62
|
|
$
1.00
|
3,000,000
|
3.34
|
3,000,000
|
$
1.00
|
|
|
36,701,413
|
2.26
|
36,501,413
|
$
0.31
|
Unvested warrants
outstanding as of December 31, 2016 were as follows:
|
Unvested
Warrants
|
|
|
|
Weighted
Average
Exercise
Price
|
Number
|
Average
Weighted
Remaining
Contractual
Life in
Years
|
|
$
0.50
|
200,000
|
5.00
|
As of
December 31, 2016 and December 31, 2015, we had accounts receivable
balances from three entities under common control and owned by an
employee aggregating $129,802 and $210,686, respectively. For the
years ended December 31, 2016 and 2015, there were sales made to
these three entities in the amounts of $9,402 and $256,285,
respectively. As of December 31, 2016 and 2015, we had accounts
payable and accrued expenses due to the employee and the three
entitites in the amounts of $21,072 and $30,594, respectively. For
the years ended December 31, 2016 and 2015, we incurred fees in
connection with service work to the employee and the three
companies in the amounts of $21,072 and $30,594, respectively. The
individual was a consultant for TOMI in 2015 and became an employee
in 2016.
For the
year ended December 31, 2016, we incurred fees for legal services
rendered by Harold Paul, one of our directors, in the amount of
$60,000. F
or the year ended
December 31, 2015, we paid Mr. Paul a total of $161,250 as payment
for legal services rendered, comprised of $60,000 cash and 225,000
shares of common stock valued at $101,250.
In January 2016, we entered into a distributor agreement with TOMI
Asia to facilitate growth in Asia. Wee Ah Kee, one of our
significant shareholders, is the Chief Executive Officer of TOMI
Asia. We amended the agreement in August 2016, at which time TOMI
Asia changed its name to SteraMist Asia. The initial term of our
new agreement is three years and the agreement sets revenue targets
of $5.5 million, $8.5 million and $12 million of our products
during 2016, 2017 and 2018, respectively. Our new agreement
includes mainland China and Indochina and excludes South Korea,
Japan, Australia and New Zealand. No sales were made under the
agreement for the year ended December 31, 2016.
F-19
Lease Commitments
In
September 2014 we entered into a lease agreement for office and
warehouse space in Frederick Maryland. As part of the lease
agreement, we received a rent holiday in the first 5 months of the
lease. The lease also provides for an escalation clause where the
Company will be subject to an annual rent increase of 3%, year over
year. The lease expires on January 31, 2018. The Company accounts
for the lease using the straight line method and recorded $45,709
in rent expense for the years ended December 31, 2016 and 2015.
Approximate minimum annual rents under the lease are as
follows:
|
Twelve Month
Period Ending December 31,
|
Amount
|
|
|
|
|
2017
|
$
53,000
|
|
2018
|
5,000
|
|
|
$
58,000
|
Legal Contingencies
We may become a party to litigation in the normal
course of business. In the opinion of management, there
are no legal matters involving us that would have a material
adverse effect upon our financial condition, results of operations
or cash flows.
In addition, from time to time, we may have
to file claims against parties that infringe on our intellectual
property.
Product Liability
As
of December 31, 2016 and 2015, there were no claims against us for
product liability.
Employment Agreements
On
January 1, 2014, we entered into an employment agreement with
Halden S. Shane, our Chief Executive Officer. The term of the
employment agreement extends through December 31, 2016 with
automatic renewal for successive one-year periods unless otherwise
terminated by either party thereunder. Dr. Shane’s annual
base salary was $36,000, which would increase to $120,000 if the
Company’s gross revenues exceeded $5,000,000 on a calendar
year basis and to $175,000 if the Company’s gross revenues
exceeded $10,000,000 on a calendar year basis. Dr. Shane also
received a grant of a five-year warrant to purchase 3,000,000
shares of our common stock at a price of $0.30 per share, which
vested as follows: 1,000,000 shares vested upon issuance, 1,000,000
shares vested on February 11, 2015 and 1,000,000 vested on February
11, 2016. Dr. Shane’s employment agreement includes
restrictive covenants of non-solicitation and confidentiality of
proprietary information. Under the employment agreement, Dr. Shane
assigned any and all of his rights to Company proprietary
information to the Company and agreed that all property created by
him during and in connection with his employment constitutes
“works for hire” as defined in the United States
Copyright Act.
On January 15, 2016, we entered into a new
employment agreement with Dr. Shane, effective January 1,
2016. The agreement provides for a base annual salary of
$360,000. The agreement also provides for the quarterly
issuance of an option to purchase 250,000 shares of
common
stock
in 2016 with an exercise price
equal to the three day trailing volume weighted average price of
our
common stock
. In the event
Dr. Shane is terminated for any reason or becomes disabled or dies,
any options he holds at such time will become cashless and will be
entitled to piggyback registration and exercise immediately. Dr.
Shane is also entitled to performance bonuses, subject to the
achievement of certain objectives, including (i) a minimum
semi-annual grant of stock options to purchase up to 250,000 shares
of
common stock
and (ii) a cash
bonus, determined in the sole discretion of the Board. The
agreement also provides that we will reimburse Dr. Shane for
certain business and entertainment expenses, including the use of
an automobile.
In the event Dr. Shane is terminated as CEO as a
result of a change in control, Dr. Shane will be entitled to a lump
sum payment of two year’s salary at the time of such
termination and will be granted an option to purchase 3,000,000
shares of
common stock
that are
cashless and, when exercised, will have piggyback registration or
demand registration rights, and if applicable, any and all
outstanding stock grants will be accelerated and be fully
vested.
F-20
The
Board may terminate Dr. Shane for cause by written notification to
Dr. Shane; provided, however, that no termination for cause will be
effective unless Dr. Shane has been provided with prior written
notice and opportunity for remedial action and fails to remedy
within 30 days thereof, in the event of a termination by the
Company (i) by reason of willful dishonesty towards, fraud upon, or
deliberate injury or attempted injury to, the Company, (ii) by
reason of material breach of his employment agreement and (iii) by
reason of gross negligence or intentional misconduct with respect
to the performance of duties under the agreement. Upon termination
for cause, Dr. Shane will be immediately paid an amount equal to
his gross salary.
The
Board may terminate Dr. Shane other than for cause at any time upon
giving notice to Dr. Shane. Upon such termination, Dr. Shane will
be immediately paid an amount equal to his gross
salary.
On
February 8, 2016, we entered into an employment agreement with
Robert Wotzcak pursuant to which he agreed to serve as our
President. Mr. Wotczak’s annual salary is $240,000.
Additionally, on April 19, 2016, in accordance with the terms of
the agreement, we issued him 150,000 shares of common stock valued
at $76,500. Mr. Wotczak will also be entitled to (i) an annual
grant of an option to purchase up to 250,000 shares of common stock
at market price under the 2016 Plan, (ii) additional shares of
common stock granted on an annual basis based on achievement of
performance objectives, (iii) an annual raise and/or bonus for
meeting or achieving certain performance objectives, (iv) a vehicle
expense up to $750 per month and (v) health insurance contributions
equal to 80% toward the cost of an individual plan.
The agreement also provides that we will reimburse
Mr.
Wotczak
for certain
business and entertainment expenses
. Mr. Wotczak’s
agreement includes restrictive covenants of non-solicitation and
confidentiality of proprietary information.
In the
event of a change in control of the Company that results in his
termination, Mr. Wotczak will be entitled to a lump sum payment of
one year’s salary and all equity awards will be accelerated
and fully vested.
The
Company may terminate Mr. Wotczak’s employment at any time;
provided, however, that the Company must provide fourteen
days’ notice if it terminates Mr. Wotczak’s employment
as a result of any of the following: (a) the sale of substantially
all of the Company’s assets, (b) the sale, exchange, or other
disposition in one transaction of the majority of the
Company’s outstanding capital stock, (c) the Company’s
decision to terminate its business and liquidate its assets, (d)
the merger or consolidation of the Company with another company, or
(e) bankruptcy or chapter 11 reorganization. Mr. Wotczak resigned
from his position as President effective December 2,
2016.
On
September 30, 2014, we entered into an employment agreement with
Nick Jennings, our Chief Financial Officer, to provide part-time
services. The term of the employment agreement expired in December
31, 2014. Mr. Jennings’ salary was $5,000 per month payable
in cash, paid bi-weekly, and $2,000 per month payable in common
stock, paid quarterly. Mr. Jennings also received a five-year
warrant to purchase up to 300,000 shares of common stock at a price
of $0.30 per share, which represented the volume weighted-average
price per share of our common stock on October 1, 2014, and vested
as follows: 100,000 shares vested upon issuance, 100,000 shares
vested on October 1, 2015, and 100,000 shares vested on October 1,
2016. In connection with the employment agreement, Mr. Jennings
entered into agreements that included restrictive covenants of
non-solicitation and confidentiality of proprietary
information.
On
September 2, 2015, we entered into a new employment agreement with
Mr. Jennings, which superseded his prior agreement, pursuant to
which he continues to serve as our Chief Financial Officer. Mr.
Jennings' annual salary is $132,000, which is reviewed annually. On
January 26, 2016, we issued Mr. Jennings a five year warrant to
purchase up to 100,000 shares of common stock at an exercise price
of $0.55 per share. The agreement also provided for the issuance of
an additional five year warrant to purchase 100,000 shares of
common stock in 2016, however, this provision was modified to
grtant a salary increase in lieu of the options.
In October 2016, Mr. Jennings' annual
salary was increased to $144,000 per year. Mr. Jennings is also
entitled to additional equity compensation based upon superior
performance of his responsibilities, as determined by the Board in
its sole discretion.
The agreement
also provides that we will reimburse Mr. Jennings for certain
business and entertainment expenses.
In the event of a
change in control of the Company that results in his termination,
Mr. Jennings will be entitled to a lump sum payment of one year's
salary and all equity awards will be accelerated and fully vested.
In the event his employment is terminated other than for cause, Mr.
Jennings will receive an amount equal to his annual salary as of
such termination date after the second employment
anniversary.
On
October 16, 2014, we entered into an employment agreement with
Norris Gearhart pursuant to which he agreed to serve as our Chief
Operating Officer. Mr. Gearhart’s annual salary was $126,000.
Additionally, Mr. Gearhart received 100,000 shares of common stock
upon signing his agreement, a monthly transportation expense of up
to $500 towards a vehicle and the ability to receive an additional
cash or equity bonus upon the achievement of pre-agreed performance
objectives.
On
September 2, 2015, we entered into a new employment agreement with
Mr. Gearhart, which superseded his prior agreement, pursuant to
which he continued to serve as our Chief Operating Officer. Mr.
Gearhart’s annual salary was $145,000. The agreement provides
that Mr. Gearhart will receive annual an annual option grant to
purchase up to 250,000 shares of common stock at an exercise price
equal to the volume weighted average price of the five-day period
prior to the close of the year. Mr. Gearhart is also entitled to
additional equity compensation based upon superior performance of
his responsibilities, as determined by the Board in its sole
discretion.
The agreement also
provides that we will reimburse Mr.
Gearhart
for certain business and entertainment expenses,
including a
monthly transportation expense of up to $600
towards a vehicle
.
In the event
of a change in control of the Company that results in his
termination, Mr. Gearhart is entitled to a lump sum payment of one
year’s salary and all equity awards will be accelerated and
fully vested. In the event his employment is terminated other than
for cause, Mr. Gearhart will receive an amount equal to his annual
salary as of such termination date after the second employment
anniversary. Mr. Gearhart resigned from his position as Chief
Operating Officer effective December 30, 2016.
F-21
Manufacturing Agreement
In November 2016 we entered into a new manufacturing and
development agreement with RG Group Inc. The agreement does not
provide for any minimum purchase commitments and is for a term of
two years with provisions to extend. The agreement also provides
for a warranty against product defects for one year.
As of December 31, 2016 and December 31, 2015,
balances due to RG Group, Inc. accounted for approximately 31% and
75% of total accounts payable,
respectively.
At
December 31, 2016 and 2015, we maintained required deposits with RG
Group, Inc. in the amounts of $147,010 and $442,358,
respectively.
For
the years ended December 31, 2016 and 2015, RG Group, Inc.
accounted for 78% and 84% of cost of goods sold,
respectively.
Consulting Agreement
In January 2015, we entered into a consulting agreement (which has
since been terminated) that provided for a fee based on revenue
received from existing and prospective clients assigned and revenue
from sales related to customers the consultant finds for the
Company. The agreement also provided for the issuance of
100,000 shares of our common stock that were issued in February
2015 and valued at $25,000. In addition, the agreement
provided for the issuance of 75,000 common stock warrants on a
quarterly basis that vest upon issuance with a strike price equal
to the volume weighted average price for the 5 day period prior to
the close of the quarter with a term of 3 years. The exercise
price for the warrants issued was $0.50, $0.62 and $0.33. During
the year ended December 31, 2015, we utilized the
Black-Scholes method to fair value the warrants to purchase up to
225,000 shares of common stock with the following range of
assumptions: volatility, 157%-174%; expected dividend yield, 0%;
risk free interest rate, 1.01%-1.42%; and a life of 3 years. The
grant date fair value of the warrants issued was $0.37, $0.54 and
$0.30. For the year ended December 31, 2015, we recognized
approximately $68,000 in equity based compensation on the issuance
of the warrants. This consulting agreement was terminated October
1, 2015 when the consultant accepted a full time employment
position with the Company.
In May
2015, we entered into a consulting agreement that provides for the
issuance of 600,000 shares of restricted common stock which was
issued in July 2015 and valued at $264,000. In addition, the
agreement provides for the issuance of 3,000,000 common stock
warrants that vest upon issuance with an exercise price of $1.00
and have a term of 5 years. We utilized the Black-Scholes method to
fair value the 3,000,000 warrants with the following assumptions:
volatility, 191%; expected dividend yield, 0%; risk free interest
rate, 1.49%; and a life of 5 years. The grant date fair value of
each warrant was $0.42. For the year ended December 31, 2015, we
recognized approximately $1,259,000 in equity based compensation on
the warrants issued. The agreement was terminated in January
2016.
Agreements with Directors
Mr.
Johnsen was elected to the Board on January 29, 2016. The term
of his agreement as director commenced on February 1, 2016 for up
to two years and until a successor is elected, or resignation or
removal.
Our
agreement with Mr. Johnsen provides for an annual fee in the amount
of $25,000 paid on a quarterly basis and an annual grant of an
option to purchase 25,000 shares of common stock. In February
2016, we issued Mr. Johnsen an option to purchase 25,000 shares of
common stock. The shares underlying the option have an
exercise price of $0.55 per share and the option expires in
February 2026.
Ms.
Anderson was elected to the Board on January 29, 2016 and serves as
the chairperson of our Audit Committee. The term of her
agreement as director commenced on February 1, 2016 for up to two
years and until a successor is elected, or resignation or
removal. Our agreement with Ms. Anderson provides for an
annual fee in the amount of $26,000 paid on a quarterly basis and
an annual grant of an option to purchase 25,000 shares of common
stock. In February 2016, we issued Ms. Anderson an option to
purchase 25,000 shares of common stock. The shares underlying
the option have an exercise price of $0.55 per share and the option
expires in February 2026.
Mr.
Fred was elected to the Board on January 29, 2016. The term of
his agreement as director commenced on February 1, 2016 for one
year and until a successor is elected, or resignation or
removal. Our agreement with Mr. Fred provides for an annual
fee in the amount of $25,000 paid on a quarterly basis and an
annual grant of an option to purchase 25,000 shares of common
stock. In February 2016, we issued Mr. Fred an option to
purchase 25,000 shares of common stock. The shares underlying
the option have an exercise price of $0.55 per share and the option
expires in February 2026.
F-22
The
Company issued 25,000 options to Harold Paul in February 2016. Mr.
Paul is a director of the Company. (See note 8 - Stock
Options)
Other Agreements
In May
2015, we were awarded a grant by the United States Agency for
International Development (“USAID”) in the amount of
$559,000 for the development of SteraMist
™
Mobile
Decontamination Chambers to fight the Ebola epidemic. The grant is
based on milestones set forth in the agreement between the Company
and USAID. In May 2016, we completed the USAID grant by completing
the sixth and final milestone and received gross proceeds in the
amount of $559,003 during the period of the agreement. The Company
incurred costs in connection with the grant through December 31,
2016 in the amount of $359,112. The proceeds received as part of
the grant in excess of the costs incurred has been presented on our
statement of operations in the amount of $199,891 for the year
ended December 31, 2016.
In June
2015, we launched the TOMI Service Network (“TSN”). The
TSN is a national service network composed of existing full service
restoration industry specialists that have entered into licensing
agreements with us to become Primary Service Providers
(“PSP’s”). The licensing agreements grant
protected territories to PSP’s to perform services using our
SteraMist
™
platform of
products and also provide for potential job referrals to
PSP’s whereby we are entitled to referral fees. Additionally,
the agreement provides for commissions due to PSP’s for
equipment and solution sales they facilitate to other service
providers in their respective territories. As part of these
agreements, we are obligated to provide to the PSP’s various
training, ongoing support and facilitate a referral network call
center. As of December 31, 2016, we had entered into 58 licensing
agreements in connection with the launch of the TSN. The licensing
agreements contain fixed price minimum equipment and solution
orders based on the population of the territories granted pursuant
to the licensing agreements.
|
The Company’s income tax expense consisted of:
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Current:
|
|
|
|
United
States
|
$
-
|
$
-
|
|
Foreign
|
-
|
-
|
|
|
-
|
-
|
|
Deferred:
|
|
|
|
United
States
|
-
|
-
|
|
Foreign
|
-
|
-
|
|
|
-
|
-
|
|
Total
|
$
-
|
$
-
|
|
The Company’s net income (loss) before income tax consisted
of:
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
|
|
|
|
United
States
|
$
(3,157,259
)
|
$
(12,176,319
)
|
|
Foreign
|
-
|
-
|
|
Total
|
$
(3,157,259
)
|
$
(12,176,319
)
|
F-23
Our
income tax expense differed from the amounts computed by applying
the United States statutory corporate income tax rate for the
following reasons:
|
|
For the Year Ended
|
|
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
|
|
|
|
Loss
before income tax
|
$
(3,157,259
)
|
$
(12,176,319
)
|
|
US
statutory corporate income tax rate
|
39.45
%
|
39.45
%
|
|
Income
tax expense computed at US statutory corporate income tax
rate
|
|
|
|
Income
tax expense computed at US statutory corporate income tax
rate
|
(1,245,539
)
|
(4,803,558
)
|
|
Reconciling
items:
|
|
|
|
Change
in valuation allowance on deferred tax assets
|
1,258,389
|
592,550
|
|
Provision to prior
year tax return
|
(250,994
)
|
-
|
|
Incentive stock
options and warrants
|
242,498
|
673,172
|
|
Finance
charges related to convertible notes
|
-
|
1,776,059
|
|
Amortized
debt discount
|
-
|
269,787
|
|
Meals
and Entertainment
|
8,595
|
5,527
|
|
Change
in fair value of derivative liability
|
-
|
1,503,422
|
|
Other
|
(12,949
)
|
(16,958
)
|
|
Income
tax expense
|
$
0.00
|
$
0.00
|
|
|
|
|
Components of our
deferred income tax assets (liabilities) are as
follows:
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Reserve
for Bad Debt
|
$
118,000
|
$
17,750
|
|
Inventory
Capitalization
|
152,000
|
51,000
|
|
Accrued
Vacation
|
8,700
|
-
|
|
Deferred
Rent
|
3,400
|
5,800
|
|
Intangible
Assets
|
237,000
|
229,000
|
|
Net
operating losses
|
4,380,000
|
3,392,000
|
|
Valuation
Allowance
|
(4,893,700
)
|
(3,634,550
)
|
|
Deferred
Tax Assets
|
5,400
|
61,000
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Property
Plant and Equipment
|
$
(5,400
)
|
$
(61,000
)
|
|
|
|
|
|
Net Deferred Tax Assets and
Liabilities
|
$
-
|
$
-
|
Deferred income tax
assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits, which are, on a more
likely than not basis, not expected to be realized; in accordance
with ASC guidance for income taxes. As of December 31,
2016
, we recorded a
valuation allowance of $4,893,700 for the portion of the deferred
tax assets that we do not expect to be realized. The valuation
allowance on our net deferred taxes increased by $1,259,150 during
the year ended December 31,
2016
, primarily due to
additional U.S. deferred tax assets incurred in the current year
that cannot be realized. Management believes that based on the
available information, it is more likely than not that the U.S.
deferred tax assets will not be realized, such that a valuation
allowance is required against U.S. deferred tax assets. The effect
on deferred income tax assets and liabilities of a change in tax
rates is recognized in the period that such tax rate changes are
enacted.
F-24
For
income tax purposes in the United States, we had available federal
net operating loss carryforwards ("NOL") as of December 31, 2016
and 2015 of approximately $11,395,000 and $9,355,000 respectively
to reduce future federal taxable income.
For income tax purposes
in the United States, we had available state NOL carryforwards as
of December 31, 2016 and 2015 of approximately $9,284,000 and
$7,243,000 respectively to reduce future state taxable
income.
If any of the NOL's are not utilized, they will
expire at various dates through 2036. There may be certain
limitations as to the future annual use of the NOLs due to certain
changes in our ownership.
We
record uncertain tax positions in accordance with ASC 740 on the
basis of a two-step process whereby (1) we determine whether it is
more likely than not that the tax positions will be sustained on
the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition
threshold, we recognize the largest amount of tax benefit that is
more than 50 percent likely to be realized upon ultimate settlement
with the related tax authority. As of December 31, 2016 and 2015,
the management of the Company determined there were no reportable
uncertain tax positions.
|
Accrued
expenses and other current liabilities consisted of the following
at:
|
||
|
|
|
|
|
|
December 31,
|
December 31,
|
|
|
2016
|
2015
|
|
Commissions
|
$
172,735
|
$
17,657
|
|
Payroll
and related costs
|
40,264
|
14,917
|
|
Other
accrued expenses
|
65,414
|
86,241
|
|
Total
|
$
278,413
|
$
118,815
|
We had
certain customers whose revenue individually represented 10% or
more of our total revenue, or whose accounts receivable balances
individually represented 10% or more of the Company’s
accounts receivable.
As of December 31, 2016, one customer accounted for 10% of net
accounts receivable. One customer accounted for 10% of net revenues
for the year ended December 31, 2016.
As of December 31, 2015, three customers accounted for 42% of net
accounts receivable. Two customers accounted for 26% of net
revenues for the year ended December 31, 2015.
We have
evaluated subsequent events through the date the financial
statements were issued and up to the time of filing of the
financial statements with the Securities and Exchange
Commission.
Effective March 14,
2017, Mr. Edward J. Fred resigned from his position as
director.
In
March 2017 we issued senior callable convertible promissory notes
(the “Notes”) with an aggregate principal amount of
$5,300,000. The Notes mature on August 31, 2018, unless earlier
redeemed, repurchased or converted. The Notes are convertible at
any time by the holder into common stock at a conversion price of
$0.54 per share. Subsequent to September 1, 2017, TOMI may redeem
the Notes at any time prior to maturity at a price equal to 100% of
theprincipal amount of the Notes to be redeemed plus accrued and
unpaid interest as of the redemption date. Interest on the Notes is
payable semi-annually in cash on February 28 and August 31 of each
year, beginning on August 31, 2017, at a rate of 4 percent per
annum. In addition, TOMI issued three-year warrants to purchase up
to an aggregate of 833,333 shares of common stock at an exercise
price of $0.69 per share.
F-25
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1. Description Of BusinessNote 2. Summary Of Significant Accounting PoliciesNote 3. InventoriesNote 4. Property and EquipmentNote 5. Intangible AssetsNote 6. Convertible DebtNote 7. Fair ValueNote 8. Stockholders EquityNote 9. Related Party TransactionsNote 10. Commitments and ContingenciesNote 11. Contracts and AgreementsNote 12. Income TaxesNote 13. Accrued Expenses and Other Current LiabilitiesNote 14. Customer ConcentrationNote 15. Subsequent Events