Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations relates to the years ended December 31, 2023 and 2022. 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 Annual Report on Form 10-K.
Annual and Quarterly Highlights
Business Update
During our 2023 calendar year, we continued to build out our sales infrastructure through the expansion of our distribution network, diversified our product line to support our expanding customer base and the related utilization of our SteraMist technology and delivered multiple custom engineered systems to key customers. Our year-over-year revenue declined due to the timing of customer orders.
In October and November of 2023, we agreed to sell and issue 12% convertible notes in a private placement in one or more closings up to an aggregate principal amount of $5,000,000. As of November 7, 2023, we sold and issued an aggregate of $2,600,000 to certain investors pursuant to a Securities Purchase Agreement, dated November 7, 2023. We are using the net proceeds from this offering for working capital and other general corporate purposes. Management continues to focus on expanding our sales channels through the addition of distributors, outside sale representatives, internal sales staff, and external consultants.
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During 2023, we focused on expanding our network of distributors and sale representative and business development initiatives. We brought on and onboarded 9 distributors and 11 sales representatives, which has expanded our presence domestically and on an international basis. We anticipate the increased bandwidth of our internal and external sales channels will have a positive impact on our revenue in 2024 and beyond. In addition, we entered into a contract with Vizient, Inc. increasing our presence in the U.S. healthcare system. Vizient is the largest GPO in the healthcare industry supplying around $100 billion in annual member purchasing volume. Vizient serves approximately 97% of the nation’s Academic Medical Centers, more than 50% of the nation’s acute care health system, and serves more than 20% of the nation’s ambulatory market. This contract enables us to supply SteraMist systems to a wide range of healthcare providers, including academic medical centers, pediatric facilities, and community health providers, through Vizient’s nationwide network.
Most recently in November 2023, we announced the addition of Sterile Grow, a United States based distributor and consultation company in the food and cannabis market. Sterile Grow, led by Burrell Williamson III and Tri Nguyen, has demonstrated noteworthy achievements in the cannabis and food markets. Williamson, rooted in the greenhouse industry, has expanded into vertical farming, bringing extensive expertise to the food and cannabis sectors. Tri Nguyen specializes in controlled environment agriculture, particularly in integrating systems for large-scale indoor cannabis cultivation. Combining their cultivation knowledge and past success with SteraMist, Sterile Grow has joined forces as a distributor with the purchase of mobile equipment in our current quarter.
In November 2023, we entered into a consulting agreement with BEAMS, LLC to strengthen and expand the TOMI SteraMist Network and increase business development in the commercial market. BEAMS, LLC brings over 20 years’ experience establishing strategic vision and direction of large institutions and companies spanning multiple industries, including higher education, not-for-profit, healthcare, consultancy, hospitality, and pharmaceutical sectors.
We remain actively engaged in marketing and submitting bids for Custom Engineered Systems (“CES”) project as the market continues to shift to fully automatic disinfection and decontamination solutions. We are also diligently working with existing outstanding potential purchasers while simultaneously building a robust pipeline for these long-term installations. Further, we have expanded our bandwidth to meet the increasing demands for the product line, which includes the SteraMist Integration System for enclosures and have successfully navigated the challenges posed by the global supply chain issues.
During 2023, we completed and delivered four CES systems, as follows:
-
During the first quarter, we delivered a CES system to Orna Therapeutics, a leading biotechnology company located in Massachusetts. As we complete each CES project, our iHP technology is becoming widely preferred as a decontamination solution for pharmaceutical and biotech companies. Further, with each new CES installation the product line becomes more of a turnkey solution. We obtained the Orna project through a prior colleague from Dana Farber Cancer Institute who became a spokesperson to the preference of SteraMist iHP for Orna.
-
During the second quarter, we delivered an eleven applicator CES system to Avid Bioservices, Inc. (“Avid”) for implementation in Avid’s new purpose-built viral vector development and manufacturing facility in Costa Mesa, California.
-
During the third quarter of 2023, we delivered a three applicator CES system to Ragon Institute of MGH, MIT and Harvard for implementation in their research and clinical lab located in Cambridge, MA.
-
During the third quarter of 2023, we delivered to a one applicator system Indigo Pharmaceutical, Inc. in Las Vegas, Nevada.
Our patented technology continues to be the answer to cell therapy manufacturing. SteraMist iHP technology brings unparalleled decontamination capabilities, thanks to its small micron particles and speed, which provide distinct advantages in terms of efficacy and safety compared to other commercially available decontamination methods. Our strategic integration plans will only enhance the overall performance and reliability of the Cell Shuttle industry, ensuring comprehensive and efficient decontamination for the end user’s processes.
To date, we have received 16 orders for CES systems. With the successful completion of each project, our iHP technology is rapidly gaining popularity as the preferred decontamination solution for pharmaceutical and biotech companies. Further, as we continue to install our technology in new CES projects, the product line evolves into a comprehensive turnkey solution.
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Indeed, the timing is favorable as the industry is experiencing a shift towards modular cleanroom requirements. The adaptability and efficiency offered by our iHP technology align perfectly with the changing needs of cleanroom setups. This trend allows us to capitalize on the increasing demand for flexible and scalable cleanroom solutions, further enhancing the relevance and value of our products within the industry.
We believe our growing portfolio of CES systems will give us a competitive edge in the Life Sciences market segment improving our brand recognition. This should create new business and sales opportunities for us. In addition, after our installed CES projects are fully qualified and established for use, and our portfolio grows, we anticipate this will have a positive impact on our long-term recurring BIT solution sales thus providing the potential to enhance our operating margins, further strengthening our position in the industry, and supporting sustainable growth.
In 2023, we saw a continued increase in demand for our SteraMist iHP service. For the year ended December 31, 2023 and 2022, our iHP service revenue was $1,660,000 and $1,474,000, respectively, representing a 13% increase.
In August of 2023, Pfizer Rocky Mount engaged our iHP service team to conduct emergency decontamination within their facility, which suffered substantial damage due to a tornado. Pfizer Rocky Mount has been a long-term, loyal client of TOMI, having commenced their utilization of SteraMist iHP Corporate Service in 2014. Since then, TOMI has been performing decontamination service twice a year during their facility’s routine scheduled shutdowns and called on as necessary throughout the years.
On March 7, 2024, announced an expansion in its SteraMist iHP Corporate Service contracts with the addition of new partners including the University of Texas and Rising Pharmaceuticals reaffirming its position as a leading provider of decontamination services to corporate clients in the life sciences industry.
We continued to diversify our base of products in 2023 with the introduction of the SteraMist Hybrid and SteraMist Transport, to support our ongoing commitment to providing superior disinfection decontamination solutions for our growing customer base.
Throughout 2023, we remained active in our marketing initiatives and attended and presented our SteraMist brand of products at various tradeshows, most notable were Interphex, Food Safety Summit, AALAS, ISSA North America, and MJBiz Conference. In the fourth quarter of 2023, we attended and presented at the following shows: Pharma Ed Aseptic, ISPE National, AALAS National Conference, NFMT Remix Conference, Bio Innovation, ISSA North America, and MJBiz Conference.
In June 2023, we launched our updated website, now accessible through our new domain name steramist.com. The refreshed website offers a modern, user-friendly design and streamlined navigation, providing visitors with easy access to essential information about SteraMist products and services.
Business Highlights and Recent Events
Revenues:
Total revenue for the year ended December 31, 2023, and 2022, was $7,355,000 and $8,338,000, respectively, representing a decrease of $983,000, or 12% compared to the same prior year period. The decrease in revenue was attributable to the timing of customer orders.
We believe that we possess the best technologies in the world in the disinfection and decontamination space. The COVID-19 pandemic along with the needs of the pharmaceutical and vivarium space has provided us with the opportunity and experience to implement a clear strategy to develop and manufacture additional products to add to our portfolio. In addition, we continue to move our BIT technology as a standard in disinfection and decontamination globally. This should lead to increased market share, profitability, and capability strength.
Our products are an environmentally friendly solution, and our processes address the concerns of sustainability. Customers are requesting and discussing the positive results of our product and the environmentally friendly results compared to the caustic and environmentally unfriendly results of many other disinfectants.
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SteraMist has established a successful track record in fighting pandemics and outbreaks and implementing SteraMist for emergency preparedness is vital. The COVID-19 pandemic took the world by surprise, and history has shown that other pandemics and viruses are likely to follow. Using a proven and trusted disinfectant for emergency outbreaks and daily for preventative maintenance, such as SteraMist, can alleviate the threat of infections from spreading and could stop a possible outbreak.
2023 Events and Highlights:
On January 17, 2023, we announced National Health Services (NHS) Wales purchased SteraMist ionized Hydrogen Peroxide (iHP) technology further expanding our presence in Great Britain.
On January 25, 2023, we announced that we would present our SteraMist brand of products at three upcoming International Society for Pharmaceutical Engineering (ISPE) Conferences in the first quarter of 2023: The ISPE Facilities of the Future Conference, that was held in Bethesda, MD, January 31 and February 1, 2023; the ISPE-CaSA Life Sciences Technology Conference in Raleigh, NC, held on February 28, 2023; and the ISPE Aseptic Conference in Bethesda, MD, held on March 6 and 7, 2023.
On April 20, 2023, we announced our participation in several upcoming industry tradeshows, including CETA International, RIA International, the Lab Manager Leadership Summit, FDIC International, and the INTERPHEX Conference. The company has showcased its SteraMist products, a proprietary and industry-leading disinfection technology, designed to combat a broad spectrum of viruses and bacteria spores.
On April 24, 2023, we announced the addition of four independent manufacturing representatives and distributors to our expanding national and global network. Included in the additions are JANZ Corporation, New England Scientific Associates (NESA) by Baker, Crow Food Safety (Pty) Ltd, and ARES Scientific.
On April 26, 2023, we announced that approximately 20 billion medical devices are sterilized per year with Ethelene Oxide and a proposal restriction restricting its usage could create a significant market void that may be filled with alternative sterilization processes such as TOMI’s patented Binary Ionization Technology ® (BIT™) Technology.
On May 10, 2023, we announced our SteraMist technology was recognized as one of the Top 10 Infection Solution Providers of 2023 in the recent infection control solutions special edition.
On May 11, 2023, we announced the addition of Technimount System (“Technimount”) as an exclusive distributor selling capital equipment to the emergency medical services market throughout Canada.
On May 18, 2023, we announced the launch of our updated website, now accessible through the new domain name steramist.com. The refreshed website offers a modern, user-friendly design and streamlined navigation, providing visitors with easy access to essential information about SteraMist products and services.
On May 31, 2023, we announced the completion of a study conducted in accordance with the U.S. Department of Defense’s Biological Select Agents and Toxins Biorisk Program Office which demonstrated SteraMist iHP as an effective technology for decontamination of biological toxoids.
On June 5, 2023, we announced that the Company has entered a contract with Vizient, Inc., increasing TOMI’s presence in the U.S. healthcare system.
On June 22, 2023, we announced a partnership with I.B.D., as a distributor in Italy.
On August 3, 2023, we announced a collaboration with Cellares to integrate its SteraMist ionized Hydrogen Peroxide (iHP) technology into a cutting-edge new cell therapy manufacturing solution, the Cell Shuttle, designed and produced by Cellares.
On August 14, 2023, we announced that Pfizer Rocky Mount has engaged TOMI’s iHP Corporate Service to conduct emergency decontamination within their facility, which suffered substantial damage due to a recent tornado.
On September 5, 2023, we announced the completion of a study funded by the USDA and NIFA which demonstrated SteraMist iHP as an effective treatment of deformed wing virus (DWV) contaminated hive substrates.
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On September 13, 2023, we announced the expansion of our distribution channels with Avantor ® (NYSE: AVTR), a Fortune 500 company and a leading supplier of mission-critical products and services.
On September 13, 2023, we announced that we partnered with Colcom, Inc. to offer SteraMist iHP products as part of Colcom’s life sciences and healthcare portfolio of products.
On September 29, 2023, we announced the roll out of two new products, the SteraMist Hybrid and SteraMist Transport, to support its ongoing commitment to providing superior disinfection decontamination solutions for its growing customer base.
On November 27, 2023, we announced the addition of Sterile Grow, a United States based distributor and consultation company in the food and cannabis market.
2024 Highlights:
On February 29, 2024, we announced the signing of a new contract for a SteraMist iHP Custom Engineered System (CES) installation with a California-based life sciences company. The contracted iHP Custom Engineered System (CES) is valued at approximately $600,000. This system, featuring six applicators, will be integrated into a clinical suite, and is expected to be fully installed by the end of the third quarter in 2024.
On March 7, 2024, announced an expansion in its SteraMist iHP Corporate Service contracts with the addition of new partners including the University of Texas and Rising Pharmaceuticals reaffirming its position as a leading provider of decontamination services to corporate clients in the life sciences industry.
On March 11, 2024, we announced a new groundbreaking study demonstrating the effectiveness of its solutions against foot-and-mouth disease virus (FMDV). This significant advancement supports the Company’s submission for an additional EPA label.
Research Studies:
TOMI continues to be active in the global market, using registrations to expand sales opportunities. Currently, TOMI is in the registration process for India, and renewal to meet new requirements in the Philippines. Both markets offer excellent potential due to interest in the TOMI suite of decontamination/disinfection solutions.
TOMI is in the annual process of self-audit, where all SOPs are reviewed and updated as needed, and all compliments and complains and requests for changes/new equipment are evaluated.
TOMI has successfully completed a second 24-month storage stability, this one to meet EPA requirements (first one was for EU BPR submission and had different methods/requirements). With the patented 7.8% product, Binary Ionization Technology Solution is safe to ship by air and store under normal ambient conditions. The study will be submitted for EPA review, and expiration date extended going forward upon EPA approval.
The EPA has registered our 0.35% hydrogen peroxide product for the use in greenhouses, pre harvests and post harvests. TOMI is conducting internal studies with the 0.35% on common pathogens in the food safety market to enhance protocols. We continue to pursue acceptance of the additional 1% hydrogen peroxide label with the EPA for direct food application.
Recent SteraMist food safety customers and partners are conducting further studies to prove SteraMist in the industry. Soli Organic Inc., one of the nation’s largest commercial indoor organic growing companies, obtained multiple SteraMist systems to protect their controlled indoor growing food process from costly fungus, Botrytis. The combination of all SteraMist systems purchased will be used daily, on a continuous cycle, to disinfect everything from seed trays that the soil and plants sit in, and the plants themselves.
Analysis concluded dramatic reduction in fungal growth, mold spores, and yield loss from environmental bio-loads, with notable efficacy against Alternaria, a species causing 20% yield loss in all annual vegetable production. Levels went from high/ medium to non-existent/nondetectable with the following spores: Alternaria (Ulocladium), Aspergillus/Penicillium, Acremonium++, and Botrytis.
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SteraMist is also working with a few partners in the cannabis industry. Enviro-Mist has been testing cannabis flower incubated with Aspergillus flavus, Aspergillus fumigatus, Aspergillus niger, Aspergillus terreus, Escherichia Coli, Shigella Spp, Salmonella, Staphylococcus aureus, yeasts and molds and subsequently treated using ionized Hydrogen Peroxide (iHP) to the dried material. Potency results of the cannabis plant were not affected, and no additional residual solvents were found. The process was successful in complete remediation of all microbial contaminants. Another partner TOMI is working with has proven SteraMist that has reduced microbial count on cannabis flower from 400cfu/g to non-detectable without affecting the level of THC. SteraMist continues to penetrate the market with additional studies and bringing on premier clients.
In August 2023, we announced the completion of a study funded by the USDA and the National Institute of Food and Agriculture (“NIFA”) which demonstrated SteraMist iHP as an effective treatment of deformed wing virus (“DWV”) contaminated hive substrates.
In 2024, we will continue to use research and testing to inform the marketplace of the effectiveness of our products. One goal of TOMI is to make SteraMist a recommended best practice to minimize emergency responder exposures to synthetic opioids, including fentanyl and fentanyl analogs.
We are also investigating whether SteraMist can play a role in controlling the environmental impact from perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA). These substances and group of chemicals have been released to the environment through industrial manufacturing and through the use and disposal of PFAS containing products. As a result, they are found across all trophic levels in the soil, air, and groundwater at sites across the United States and the rest of the world.
On April 26, 2023, we announced that approximately 20 billion medical devices are sterilized per year with Ethelene oxide and a proposal restriction restricting its usage could create a significant market void that may be filled with alternative sterilization processes such as TOMI’s patented Binary Ionization Technology ® (BIT™) Technology.
On March 14, 2024, the New York Times published an article “E.P.A. Sets Limits on Carcinogenic Gas Used to Sterilize Medical Devices” which stated,
The Environmental Protection Agency is imposing new restrictions on the emissions of ethylene oxide, a colorless gas that is widely used to sterilize medical devices and is also a carcinogen.
The regulation, which is expected to be finalized shortly, would force sterilizing plants and other facilities that use ethylene oxide to install pollution controls to reduce emissions of the gas by about 90 percent.
It would mark the first time in 20 years that the government has tightened limits on the amount of the gas permitted to escape from a manufacturing facility.
Ethylene oxide is used in a number of products but is applied to about half the medical equipment made in the United States to reduce the risk of infection.
When inhaled, the gas can irritate the eyes, nose, throat and lungs, and has been linked to lymphoid and breast cancer as well as damage to the brain and nervous and reproductive systems.
It is still very early in the process, but this could open up large manufacturing faculties that would have a need for our custom unit built-ins in the manufacturing of medical equipment to replace ethylene oxide, as SteraMist’s only by-product environmentally is humidity and oxygen.
Product Development:
Our recent products developed and launched are as follows:
SteraMist Engineering continues to make strides collaborating with key manufactures of cleanroom technology and equipment developing a turnkey seamless decontamination integration to chambers, cabinets, passthroughs, isolators, cage washers, heat sterilizers, hot cells and more. TOMI begins this endeavor with a project management, turnkey modular solution, and process design consulting firm that we have partnered with in one of our previous CES projects.
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The SteraMist Hybrid, an integral component of the SteraMist ENV, SteraMist Hybrid is designed with capabilities to communicate with a facility. The system is strategically positioned in a centralized location of the facility through a docking station and features our newly designed permanently mounted stainless steel applicators.
Recently, TOMI successfully installed the first SteraMist Hybrid at Indigo Pharmaceutical, Inc.’s existing research facility, which selected the SteraMist Hybrid because it met the client’s strict delivery timeline while adhering to the facility’s budget constraints. We remain in specification discussions with Indigo for a Custom Engineered System for a future site dedicated to injectables.
The SteraMist Transport has seen positive reception of its SteraMist Transport unit, an all-in-one dual voltage fogging product designed to treat a wide variety of vehicle sizes with an application time of only 20 minutes per 1,000 cubic foot. The initial batch of this innovative product is currently in a soft launch phase and has been sold this quarter for live practical assessment with an existing international customer.
The Select Plus (“Select Plus”) is a hybrid product consisting of the Company’s current Surface Select and Environment systems. The unit will provide enhanced flexibility by using a single applicator to decontaminate full-room to small-space volume while maintaining the size of the current Surface Select unit with more robust process controls. The iHP SteraMist Transport System has been designed for the transportation market, specifically ambulances. The iHP SteraMist Transport System is a timer based fogging system that can be installed semi-permanently or permanently and used for any transport and/or cargo vehicle. It will be an easy-to-use turn-key integration system. We expect the implementation of this product and our patented non-corrosive iHP technology to replace the number one competitor in this marketplace, which uses an extremely harsh chemical.
All SteraMist systems will remain important to the marketplace as they are designed for specific needs and budgets. The Select Surface Unit performs most of the functionality that the Select Plus offers and is priced at a lower cost, although Select Plus will provide additional options that are appealing to certain customers, such as laboratory and pharmaceutical companies. The SteraPak is a more cost-effective product and designed for residential and commercial real estate including large buildings and public space, any area that needs quick consistent disinfection. We believe there are many new and existing clients that are interested in the SteraPak due to the cost and mobility.
TOMI recently launched its fourth generation SteraMist ENV. The system will now be 24 volts, allowing for universal outlet usage and convert even more of the hydrogen peroxide BIT Solution to hydroxyl radicals thus lowering H 2 O 2 PPM levels allowing for faster turnaround time. In addition, the unit will have eight outputs where four are dedicated to our regular process of constant or pulse Injection, Dwell, and Aeration along with a light beacon status bar and four are programmable to meet the customer needs for any external equipment they may desire to work with the system. This system is currently on the market, has been implemented by customers, and is receiving praise for its further developments.
Our SteraMist® BIT™ solution product line is currently made up of a 32-ounce bottle for the SteraPak, a ten liter, five gallon, 55-gallon drum for our custom built-ins and our traditional one gallon bottle. This brings the BIT Solution product line to a total of five options provided to our customers, which will benefit our razor/razor-blade business model.
We expect these new products and service introductions will positively impact our net sales, cost of sales and operating expenses during this fiscal year.
Supply Chain:
We have orders for supplies and materials that are required in our equipment and are prepared to continue the manufacturing of all our products. Further, TOMI has multiple suppliers, outsourced engineers, and software programmers to turn to for the manufacturing and installation of its SteraMist products to reduce the risks associated with the current supply chain environment.
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Financial Operations Overview
Our financial position as of December 31, 2023 and 2022, respectively, was as follows:
December 31, 2023
December 31, 2022
Total shareholders’ equity
$ 8,359,000
$ 11,448,000
Cash and cash equivalents
$ 2,339,000
$ 3,867,000
Deferred Revenue
$ -
$ 700,000
Accounts receivable – Current, net
$ 2,430,000
$ 2,772,000
Inventories
$ 4,627,000
$ 4,496,000
Prepaid expenses
$ 371,000
$ 338,000
Vendor Deposits
$ 29,000
$ 447,000
Other Receivables
$ 164,000
$ 164,000
Accounts receivable – Long Term, net
$ 206,000
Current liabilities – Excluding Deferred Revenue
$ 2,058,000
$ 2,591,000
Long-term liabilities – Convertible Notes
$ 2,298,000
$ -
Long-term liabilities – Other
$ 643,000
$ 761,000
Working Capital
$ 7,903,000
$ 8,844,000
During the year ended December 31, 2023, our debt and liquidity positions were affected by the following:
·
Net cash used in operations of approximately $3,599,000.
·
Net cash used in investing activities $217,000.
·
Net cash provided from financing activities $2,288,000.
Results of Operations for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
For The Year Ended December 31,
Change
2023
2022
$
Revenue, Net
$ 7,355,000
$ 8,338,000
$ (983,000 )
Gross Profit
4,290,000
5,060,000
(770,000 )
Total Operating Expenses (1)
7,639,000
7,942,000
(303,000 )
Income (Loss) from Operations
(3,349,000 )
(2,882,000 )
(467,000 )
Total Other Income (Expense)
(53,000 )
2,000
(55,000 )
Provision for (benefit from) Income Taxes
-
-
-
Net Income (Loss)
$ (3,402,000 )
$ (2,880,000 )
(522,000 )
Basic Net Income (Loss) per share
$ (0.17 )
$ (0.15 )
$ (0.02 )
Diluted Net Income (Loss) per share
$ (0.17 )
$ (0.15 )
$ (0.02 )
Sales
During the years ended December 31, 2023 and 2022, we had net revenue of approximately $7,355,000 and $8,338,000, respectively, representing a decrease in revenue of approximately $983,000 or 12%.
As customers mature through the product and adoption cycle and our sales pipeline converts to revenue, we expect to generate more predictable sales quarter over quarter. Further, as the COVID-19 pandemic has subsided, we expect that the demand for our products and services will continue as we are building a team to address the post COVID-19 pandemic market opportunities.
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Product and Service Revenue
For The Year Ended December 31,
Change
2023
2022
$
SteraMist Product
$ 5,695,000
$ 6,864,000
$ (1,169,000 )
Service and Training
1,660,000
1,474,000
186,000
Total
$ 7,355,000
$ 8,338,000
$ (983,000 )
SteraMist product-based revenues for the years ended December 31, 2023 and 2022, were $5,695,000 and $6,864,000, representing a decrease of $1,169,000 when compared to the same prior year period.
Our service-based revenue for the years ended December 31, 2023 and 2022, was $1,660,000 and $1,474,000, respectively, representing a year over year increase of $186,000.
Revenue by Geographic Region
For The Year Ended
December 31,
Change
2023
2022
$
United States
$ 6,125,000
$ 6,261,000
$ (136,000 )
International
1,230,000
2,077,000
(847,000 )
Total
$ 7,355,000
$ 8,338,000
$ (983,000 )
Our domestic revenue for the years ended December 31, 2023 and 2022, was $6,125,000 and $6,261,000, respectively, a decrease of $136,000 when compared to the same prior year period
Internationally, our revenue for the years ended December 31, 2023 and 2022, was approximately $1,230,000 and $2,077,000, respectively, representing a decrease of $847,000.
Cost of Sales
For The Year Ended
December 31,
Change
2023
2022
$
Cost of Sales
$ 3,065,000
$ 3,278,000
$ (213,000 )
Cost of sales was $3,065,000 and $3,278,000 for the years ended December 31, 2023 and 2022, respectively, a decrease of $213,000, compared to the prior year. The decrease in cost of sales was primarily due to the lower sales. Our gross profit as a percentage of sales for the year ended December 31, 2023 was 58.3% compared to 60.7% in the same prior period, respectively. The lower gross profit is attributable to the product mix in sales.
Professional Fees
For The Year Ended
December 31,
Change
2023
2022
$
Professional Fees
$ 576,000
$ 536,000
$ 40,000
Professional fees are comprised mainly of legal, accounting, and financial consulting fees.
Professional fees were $576,000 and $536,000 for the years ended December 31, 2023 and 2022, respectively, representing an increase of approximately $40,000 in the current year period. The increase is attributable to higher accounting and legal fees in the current year period.
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Depreciation and Amortization
For The Year Ended
December 31,
Change
2023
2022
$
Depreciation and Amortization
$ 367,000
$ 329,000
$ 38,000
Depreciation and amortization were approximately $367,000 and $329,000 for the years ended December 31, 2023 and 2022, respectively, representing an increase of $38,000, or 12%. The increase in depreciation expense is due to a higher amount of fixed assets being depreciated in the current year periods when compared to the same prior year period.
Selling Expenses
For The Year Ended
December 31,
Change
2023
2022
$
Selling Expenses
$ 1,351,000
$ 1,867,000
$ (516,000 )
Selling expenses for the year ended December 31, 2023 were approximately $1,351,000, as compared to $1,867,000 for the year ended December 31, 2022, representing a decrease of approximately $516,000, or 28%. The decline in selling expenses is due to lower advertising costs and sales commission incurred in the current year period due to less sales generated by third party representatives.
Research and Development
For The Year Ended
December 31,
Change
2023
2022
$
Research and Development
$ 492,000
$ 352,000
$ 140,000
Research and development expenses for the year ended December 31, 2023 were approximately $492,000, as compared to $352,000 for the year ended December 31, 2022, representing an increase of approximately $140,000, or 40%. The increase in in research and development expenses is due testing and product development in connection with the SteraMist Hybrid, Transport and Select Plus units.
Consulting Fees
For The Year Ended
December 31,
Change
2023
2022
$
Consulting Fees
$ 283,000
$ 215,000
$ 68,000
Consulting fees were $283,000 and $215,000 for the years ended December 31, 2023 and 2022, respectively, representing an increase of $68,000, or 32%. The increase is due to the timing of certain projects that occurred in the current year that did not occur in the same prior year period. The increase in consulting fees is due to the additional business development related consulting projects which occurred in the current year period that did not occur in the prior year period.
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General and Administrative Expense
For The Year Ended
December 31,
Change
2023
2022
$
General and Administrative
$ 4,571,000
$ 4,643,000
$ (72,000 )
General and administrative expense includes salaries and payroll taxes, rent, insurance expense, utilities, office expense, product registration costs and bad debt expense.
General and administrative expense was $4,571,000 and $4,643,000 for the years ended December 31, 2023 and 2022, respectively, a decrease of $72,000 in the current year period. The decrease in general and administrative expense is primarily attributable to lower equity-based compensation in the current year period.
Other Income and Expense
For The Year Ended
December 31,
Change
2023
2022
$
Interest Income
12,000
2,000
10,000
Interest Expense
(65,000 )
-
(65,000 )
Other Income (Expense)
$ (53,000 )
$ 2,000
$ (55,000 )
Amortization of deferred financing costs was approximately $10,000 and $0 for the year ended December 31, 2023 and 2022, respectively. This represents the amortization of costs incurred in connection with the convertible notes.
Interest income was approximately $12,000 and $2,000 for the years ended December 31, 2023 and 2022, respectively.
Interest expense was $55,000 and $0 for the years ended December 31, 2023 and 2022, respectively. The interest expense is attributable to the convertible notes.
Provision for Income Taxes
For The Years Ended
December 31,
Change
2023
2022
$
Provision for Income Tax Expense (Benefit)
$ -
$ -
$ -
Provision for income tax was $0 for the years ended December 31, 2023 and 2022.
Liquidity and Capital Resources
As of December 31, 2023, we had cash and cash equivalents of approximately $2,339,000 and working capital of $7,903,000. Our principal capital requirements are to fund operations, invest in research and development and capital equipment, and the continued costs of compliance with public company reporting requirements. We have historically funded our operations through funds generated through operations and debt and equity financings. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. We have no plans of incurring any debt or equity financing.
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For the year ended December 31, 2023 and 2022, we incurred losses from operations of ($3,349,000) and ($2,882,000), respectively. Cash used in operations for the year ended December 31, 2023 and 2022, was ($3,599,000) and ($1,234,000), respectively.
A breakdown of our statement of cash flows for the year ended December 31, 2023 and 2022 is provided below:
For the Year Ended December 31,
2023
2022
Net Cash Provided By (Used) in Operating Activities
$ (3,599,000 )
$ (1,234,000 )
Net Cash Used in Investing Activities
$ (217,000 )
$ (241,000 )
Net Cash Provided By Financing Activities:
$ 2,288,000
$ 25,000
Operating Activities
Cash used in operating activities for the year ended December 31, 2023 and 2022 was $3,599,000 and $1,234,000, respectively. The increase was attributable to a higher current year loss, lower deferred revenue and accounts payable.
Investing Activities
Cash used in investing activities for the years ended December 31, 2023 and 2022 was $217,000 and $241,000, respectively. The decrease is attributable to fixed assets purchased in the prior year and capitalized patent and trademark costs.
Financing Activities
Cash provided by financing activities for the years ended December 31, 2023 and 2022 was $2,288,000 and $25,000 respectively. The cash provided by financing activities increased as a result of the proceeds from the convertible notes issued in October and November of 2023.
Liquidity
Our revenues can fluctuate due to the following factors, among others:
·
ramp up and expansion of our internal sales force and manufacturer’s representatives;
·
length of our sales cycle;
·
global and regional response to the outbreak of infectious diseases;
·
expansion into new territories and markets; and
·
timing of orders from distributors.
We could incur operating losses and an increase of costs related to the continuation of product and technology development, sales expense as we continue to grow our sales teams, inventory as we continue to ensure we have products needed and geographic presence, tooling capital expenditures as we ramp up and streamline our production and administrative activities including compliance with the Sarbanes-Oxley Act of 2002 Section 404.
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 further our product registration internationally;
·
continued expansion of our internal sales force and manufacturer representatives in an effort to drive global revenue in all verticals;
·
continue research and development and add new products to our “Stera” product line;
·
source alternative lower-cost suppliers;
·
expansion of international distributors; and
·
continued growth in all of our verticals.
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During 2022 and 2023, we experienced increased demand for our CES where we collect deposits upon the execution of the contract. The deposits we receive fund the production for the CES and improve our overall liquidity through the duration of the project. We believe our sales for our CES will continue to grow in 2024 and improve our financial results from a liquidity perspective as well as improve our operating margins due to the higher recurring solution sales we see for our CES system.
We expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations.
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. We may consider financing transactions to fund our operations if opportunities arise. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures. Debt financing would also result in fixed payment obligations.
We believe strongly that the current and historical trading prices of our Common Stock is depressed and does not reflect the actual valuation of the Company, and that our declining trading price was the result of active short selling and market manipulation at the close using the cross at the end of many days by certain investors in the market that is outside the control of the Company. While short selling may be permitted in some cases under applicable laws, we believe that certain investors, particularly those investing in small and microcap companies like TOMI, may be circumventing regulatory requirements and conducting aggressive short selling that is designed to drive down the trading price of our Common Stock, including naked short selling tactics. These activities have not only depressed our stock price, but also reduced the trading liquidity of our stock and caused damage to our reputation, while making it more difficult for us to secure financing to fund our operations and comply with NASDAQ’s minimum bid price requirements. We believe that the regulatory authorities, such as the SEC and FINRA, should take more aggressive enforcement actions against short selling traders who are undermining the values of microcap companies, and we will continue our various efforts and strategies to ensure that trading price of our stock reflects the true value of TOMI and generates positive returns for our shareholders.
On November 7, 2023, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (collectively, the “Investors”) pursuant to which we agreed to sell and issue to the Investors in a private placement transaction (the “Private Placement”) in one or more closings up to an aggregate principal amount of $5,000,000 (the “Notes”). As of November 7, 2023, we issued and sold an aggregate of $2,600,000 of Notes to certain Investors pursuant to the SPA.
The gross proceeds from the transaction are approximately $2,600,000, before deducting the placement agent’s fees and other estimated offering expenses. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. The initial closing of the Private Placement occurred on November 7, 2023.
The Notes are due on the fifth anniversary of the issuance date of the Notes and bear simple interest at a rate of 12% per annum, payable in equal monthly installments. The Notes are convertible into shares of our Common Stock, at the option of the holder, at a conversion price of $1.25 per share, which shall not exceed $1.55 per share. In addition, we can require Investors to convert the Notes at the then current conversion price at any time after 90 days from the issue date if the Common Stock has a closing bid price of $1.55 per share or higher on any twenty days within a thirty day period of consecutive trading days, or if a “fundamental change” occurs (as defined in the SPA). The Notes are unsecured and senior to other indebtedness subject to certain exceptions.
Critical Accounting 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.
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The SEC defines critical accounting estimates 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 estimates 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
We recognize revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation(s). At contract inception, we assess the goods or services promised within each contract, assess whether each promised good or service is distinct and identify those that are performance obligations.
We must use judgment to determine: a) the number of performance obligations based on the determination under step (ii) above and whether those performance obligations are distinct from other performance obligations in the contract; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above.
Title and risk of loss generally pass to our customers upon shipment. Our customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Shipping and handling costs charged to customers are included in Product Revenues. The associated expenses are treated as fulfillment costs and are included in Cost of Revenues. Revenues are reported net of sales taxes collected from customers.
Product revenue includes sales from our standard and customized equipment, solution and accessories sold with our equipment. Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products.
Service and training revenue include sales from our high-level decontamination and service engagements, validation of our equipment and technology and customer training. Service revenue is recognized as the agreed upon services are rendered to our customers in an amount that reflects the consideration we expect to receive in exchange for those services.
Estimated allowances for sales returns are recorded as sales are recognized. We use a specific identification method based on subsequent product return activity and historical average calculation to estimate the allowance for sales returns.
Costs to Obtain a Contract with a Customer
We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling expenses.
Contract Balances
As of December 31, 2023, and December 31, 2022 we did not have any unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. We enter into contracts that can include various combinations of products and services, which are primarily distinct and accounted for as separate performance obligations.
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Significant Judgments
Our contracts with customers for products and services often dictate the terms and conditions of when the control of the promised products or services is transferred to the customer and the amount of consideration to be received in exchange for the products and services.
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.
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 credit losses 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 net realizable value using the first-in, first-out (FIFO) method. Inventories consist primarily of finished goods. We expense costs to maintain certification to cost of goods sold as incurred.
We review inventory on an ongoing basis, considering factors such as deterioration and obsolescence. We record an allowance for estimated losses when the facts and circumstances indicate that particular inventories may not be usable.
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 had no long-lived asset impairment charges for the years ended December 31, 2023 and 2022.
Recently issued accounting pronouncements not yet adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment’s profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is also permitted. This ASU will likely result in us including the additional required disclosures when adopted. We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.
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In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted.
Recently adopted accounting pronouncements
In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020. This ASU also enhances the disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the ASU amends the guidance on vintage disclosures to require entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted the ASU prospectively on January 1, 2023. This ASU did not have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this ASU prospectively on January 1, 2023. This ASU did not have a material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock and improves the disclosures for convertible instruments and related earnings per share guidance. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance. For public entities that qualify as a filer with the SEC, excluding entities eligible to be smaller reporting companies, ASU 2020-06 is effective for fiscal annual periods beginning after December 15, 2021, including interim periods within those fiscal years. For nonpublic entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption was permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ASU 2020-06 must be adopted as of the beginning of a company’s annual fiscal year. ASU 2020-06 may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. The Company adopted ASU 2020-06 on January 1, 2021. The adoption did not have an impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”), which provides new authoritative guidance with respect to the measurement of credit losses on financial instruments. This update changes the impairment model for most financial assets and certain other instruments by introducing a current expected credit loss (“CECL”) model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted ASU 2016-13 on January 1, 2023. The adoption did not have an impact on our consolidated financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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Item 8. Financial STATEMENTS AND SUPPLEMENTARY DATA
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.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.