Applied UV, Inc. (NASDAQ:AUVI) Q1 2023 Earnings Call Transcript May 23, 2023

Operator: Good day. I would like to welcome everyone to the Q1 2023 Applied UV Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas, Investor Relations from Hayden IR. Thank you. You may begin.

Brett Maas: Thank you. Once again, welcome to Applied UV’s Q1 2023 earnings call. With me on the call today are Max Munn, Founder, CEO, President and Director; and Mike Riccio, Chief Financial Officer. As a reminder, all materials for today’s live presentation are available on the company’s Investor Relations website at applieduvinc.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today’s call, we’ll make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. With that, I’ll turn the call over to Max Munn. Max, the floor is yours.

Max Munn: Thanks, Brett. Good morning, everyone. Our Q1 2023 financial results included revenues of $10.7 million, up 217% over the prior year quarter, with our Hospitality segment growing 332% and our Disinfection and Healthy Buildings Technologies segment growing 135%. As a reminder, Applied UV has 3 portable operating segments — reportable operating segments: the design, manufacture and distribution of disinfecting pathogen elimination systems for use in food preservation, health care, hospitality, education and public spaces as well as cannabis, correctional facilities, commercial, municipal and residential markets; the Disinfection Healthy Buildings Technologies segment; and the manufacturer of funders and custom furniture specifically for the hospitality industry, our Hospitality segment; and lastly, the Corporate segment which includes expenses related primarily to corporate governance, such as Board fees, legal expenses, audit fees, executive management and listing costs.

Now, I’d like to take a deeper dive and review our Hospitality segment. In Hospitality, MunnWorks continues its pre-pandemic growth and the industry continues to show strong growth fueled by the post-pandemic travel surge. This market growth continues to heighten the need for hotels to make capital improvements to facilities to maintain their franchise flag. We’ve had several high-profile hotel operators placing orders with us in the million — multimillion-dollar area. The rising demand for U.S.-based manufacturing which eliminates the 25% tariff on China manufactured goods as well as 6.5% duties, as well as mitigating supply chain disruption, shortening times to delivery of goods, is both driving sales and what we anticipate to be margin expansion, much of which we spoke about in our Q4 call.

We expect this margin expansion and sales growth into Q2 and to continue to improve the remainder of the year. Our sales backlog for Hospitality segment is approximately $10 million at this point. Now let me discuss the Disinfection and Healthy Buildings Technology segment of our business. The UV disinfection market is expected to reach $9 billion in less than 4 years. The CDC expects that 1 in 25 patients have at least one hospital-acquired infection annually, totaling over 3 million serious infections and 100,000 deaths will occur each year. This amounts to losses from contagious infection pathogens and virus which will cost the U.S. economy more than $270 billion per year and includes lost productivity due to absenteeism. Our solutions help to keep people safe and healthy as well as protect and extend the shelf life of high-value agricultural products.

Dr. Maximo Cullen, Chief Economist for Food and Agriculture for the UN, recently spoke about the impact that food spoilage has on our — on the world economy in the form of $400 billion a year in lost fruit and vegetables which equates to approximately 31% of those crops grown and is lost in the supply chain. Because we are leaders in photocatalytic oxidation, PCO which is a proven technology we codeveloped for use by NASA, we plan to leverage our leadership position in post-harvest food security, where our Airocide product line is already demonstrating the reduction of loss, improving yield, requires high-value food, fruit and berries with global — while we’re working with global companies, such as Del Monte, Dole, Whole Foods and others.

With the help of Canon Virginia, we expect to introduce a PCO-based air purification system that would be incorporated into shipping containers’ long-haul refrigerated trucks and distribution centers and is currently underway and we expect a major product launch in early Q4 of this year. Our primary focus will be centered on food security and storage and the company plans to invest heavily in post-harvest facilities, including logistics, transportation and distribution, as — which will improve the yield on high-value food and vegetables, cannabis, wine storage, all of which will be the largest area of growth for our company. Also with the urgency for improvements — to improving indoor air quality within HVA [ph] systems post pandemic is rapidly expanding.

Our acquisition of Puro Lighting which announced a partnership with Johnson Controls and USHIO and a leading research institution to test the effectiveness and efficacy of our patented UV [ph] 222-nanometer technology which upon conclusion of late Q3, early Q4 will drive adoption of our unique systems. Our Disinfection and Healthy Buildings Technologies segment reported $4.6 million for the quarter largely attributed to the acquisition of Puro Lighting and LED Supply Co. We are already enjoying the cross-market selling of our heart case goods part of our Hospitality business into projects bid by LED Supply. In fact, there’s approximately $2 million worth of mirrors [ph] that we have confirmation on. We’ll continue to work toward pathogen elimination as an option in both freestanding and to be engineered into hotel guest room furniture.

There’s a great cross-selling opportunity. Our sales backlog for LED Supply is approximately $7 million. As we stated, we are forecasting total revenues for this calendar year of between $45 million and $50 million. And the results we accomplished in Q1 have further strengthened our view in this guidance. This further positions Applied UV as a fully integrated company, providing a broad pathogen elimination platform with leading technology that can be used by consumers, businesses and governments. As we also stated for Q — for 2022, the company plans to continue its return to national, international trade shows representing — and presenting our entire suite of products at leading industry conferences all around the world. These efforts, combined with our planned 2023 marketing initiatives, will have paved the way for an increased pipeline of orders with new and existing client wins throughout the year.

To support those efforts, our Scientific Advisory Board which includes Mark Boehringer from the wine industry; Dr. Mason, who’s an expert on PCO; and Dr. Bernard Cayman from a leading infection prevention renowned expert from Mount Sinai Hospital which each in their respective fields will be representing the company speaking at leading industry conferences and trade shows regarding the efficacy and effectiveness of our pathogen eliminatino products in those proven verticals. With our global distribution which now includes 89 dealers and distributors in 52 countries, including Southeast Asia, with manufacturing reps [ph] and 19 U.S.-based sales reps, along with numerous strategic partnerships firmly in place, we have a leading competitive advantage over our public market peer group with relationships with Canon, Acuity Brands, Johnson Controls, USHIO, Siemens and Grainger, to name just a few.

With both existing and new product offerings under development, we plan to leverage the potential cross-market selling opportunities across all of our brands, offering our global end users a complete suite of research backed and clinically proven best-in-class products that utilizes photocatalytic oxidation, advanced UVC activated carbon, for UV [ph], also known as 222-nanometer devices, indoor air quality monitoring software and LED lighting for smart building products. Our transfer of manufacturing from offshore to Canon Virginia, a wholly owned subsidiary of Canon U.S.A. is progressing on schedule with the first production run complete. We believe this will yield a significant reduction in our fixed G&A expense into a variable G&A expense and believe this partnership will translate into production and logistics cost savings by removing manufacturing execution risk and allowing the company more effectively to scale and focus solely on marketing and sales.

Canon Financial Services has recently completed the first of many anticipated leases with one of our customers. In terms of R&D, the PURONet proprietary software which we’ve developed, will finally allow us to cross the bridge and accelerate our transition to adding Internet of Things integration throughout our entire product portfolio with proven software that continuously will monitor indoor air quality throughout an entire facility. It’s one of the reasons that we’ve got Johnson Controls interested in our proposed joint venture. Additionally, we plan to invest and incorporate machine learning and AI capabilities into our indoor air monitoring software across our product line which will allow us to competitively compete in one of the fastest-growing air pathogen elimination markets, offering complete systems within systems with air monitoring software a growing trend.

We expect to heavily invest in AI in the next 2 quarters to drive our product to the front of the entire competitive field. Let me turn it now over to Mike Riccio, our CFO, for a further review of our financial results. Mike?

Mike Riccio: Thanks, Max. Net sales of $10.7 million represented an increase of $7.3 million or 217.5% for the 3 months ended March 31, 2023, as compared to net sales of $3.4 million for the 3 months ended March 31, 2022. This increase was primarily attributable to the Hospitality segment which increased $4.7 million, largely as a result of the strategic acquisition on March 25, 2022, of the operations of Vision Mark in Brooklyn, New York which contributed $3.9 million of the increase; and also due to the organic growth of our legacy MunnWorks business which contributed $0.8 million of the increase. The Disinfection Healthy Building Technology segment increased $2.6 million primarily due to the acquisition of Puro Lighting and LED Supply Co. on January 26, 2023.

Gross profit increased $0.8 million from $1.1 million or 34% versus sales for the 3 months ended March 31, 2022, to $1.9 million or 18% versus sales for the 3 months ended March 31, 2023. The decrease in percent from 34% to 18% was driven primarily by the higher sales mix of our Hospitality segment as compared to the same period last year. For Q1 2023, Hospitality accounted for 57% of total sales for the quarter as compared to 42% in the prior quarter — prior year quarter. The last of the lower-margin projects that we acquired that were in process from the Vision Mark asset acquisition have been substantially completed. Additionally, Q1 was impacted by onetime lower margins in our Disinfection Healthy Building Technology segment as we sold approximately half of our consumer Airocide inventory at special discounted pricing.

Our SG&A expenses for the 3 months ended March 31, 2023, increased $5.3 million as compared to $3.1 million for the 3 months ended March 31, 2022. This increase of $2.2 million was driven primarily by the expansion of the Disinfection Healthy Building Technology segment with the acquisitions of Puro Lighting and LED Supply Co. These acquisitions accounted for $1.4 million of the increase. In Corporate, legal expenses increased $0.6 million primarily as a result of a onetime arbitration case. The company recorded an operating loss of $3.5 million for the 3 months ended March 31, 2023, compared to an operating loss of $3.1 million for the 3 months ended March 31, 2022. The increase of $0.4 million in the operating loss was primarily due to the decrease in the gross margin — in the gross profit percentage year-over-year, as explained earlier and the impairment charge of $1.1 million that was incurred last year.

On a percentage basis, the operating loss improved to 33% in the first quarter of 2023 as compared to 94% for the first quarter of 2022. The company incurred interest expense of $0.4 million due to the borrowings of Streeterville Capital and Pinnacle Capital primarily to help fund the acquisitions of Puro Lighting and LED Supply Co. and to also fund additional working capital requirements. The company incurred a noncash loss on the change in fair market value of contingent consideration of $0.6 million because of the make-whole provision within the PURO and LED Supply Co. merger agreement, the change related to the decrease in our stock price from the date of acquisition of January 26 as compared to March 31, 2023. The company recorded a net loss of $4.5 million for the 3 months ended March 31, 2023, compared to a net loss of $1.6 million for the 3 months ended the prior year quarter.

The increase of $2.9 million in the net loss was mainly due to the $1.4 million increase in SG&A costs incurred as a result of the acquisition of Puro Lighting and LED Supply Co. in support of the expansion of the Disinfection Healthy Building Technology segment and also the $0.6 million ingression corporate legal expenses as a result of the onetime arbitration case and the noncash loss on the change in fair market value of the contingent consideration of $0.6 million. Regarding liquidity, on July 1, 2022, the company filed a $50 million mixed-use shelf registration Form S-3 and entered into an at-the-market sales agreement, or ATM, with Maxim Group for a total of $9 million as a readily available source of funding if needed. During the year ended December 31, 2022, the company sold just under 805,000 ATM shares through the sales agent with gross proceeds of approximately $964,000.

As of March 31, 2023, an additional 1.764 million shares have been sold for gross proceeds of approximately $2.3 million. The — and this leaves a balance of approximately $5.7 million on the ATM facility; this shelf registration will expire on July 12, 2025. The company has also filed a registration statement with the SEC with its plans to commence a public offering of its securities for an amount that satisfies the company’s current working capital needs. The company believes our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy. I will now turn the call back over to Max for closing remarks. Max?

Max Munn: Well, I think we’ve covered everything. I think maybe we should just go, since there’s a limited amount of time, to any questions and answers. Let me just also say, we remain extremely optimistic about the long-term and midterm outlook for both our pathogen elimination, healthy building segment and our Hospitality segment. We now have a portfolio of highly effective product that directly addresses all commercial demands which we believe will continue to be strong levers in the period ahead. Thanks, everyone, for joining the call. We’ll open the call now for questions.

Q&A Session

Operator: [Operator Instructions] Your first question is coming from Chip Moore with EF Hutton.

Chip Moore: Wanted to — I wonder if maybe you could expand on this food preservation opportunity. It sounds very interesting. Obviously, you’ve played there quite a while with your technology. Maybe just how you’re attacking that and with some of the newer solutions you talked about, I think, a major product launch that you got planned out of the Canon production. Just maybe fill us in on some more of the details and if you can leverage some of those…

Max Munn: Sure. Mike, let me take that question. This is Max Munn. We entered into an agreement with Canon. They have a 2 million square foot facility in Virginia, where they’ll be manufacturing our devices on a variable G&A expense basis. They have been instructed by their parent company in Tokyo to invest heavily in food security over the next decade. All of us feel — Canon and AUVI feel that this is the — going to be a main driver for the growth of our company. It’s a field and a problem that’s worldwide, that doesn’t have easy solutions, that’s impacted by climate change, the lack of energy and electricity in much of the third world. We think that the technology that we have which we developed for NASA which is the only air-disinfecting technology on the International Space Station, is ideal for addressing this problem.

The main source of food degradation is excessive ethylene in the atmosphere. Food, especially high-value food, such as fruit and berries, as they ripen, they generate ethylene. And ethylene in a closed loop accelerates its own fruit and vegetable degradation. The trick is to remove ethylene effectively with the use of a minimal amount of energy. We’ve developed a device which we expect to file patents on very soon which will go into long-haul refrigerated trucks and sea containers. We’ve just gone through the first phase of testing which will remove ethylene effectively. We’ve retained a PhD in this particular chemical field who will be monitoring a test at Canon and AUVI will jointly undertake. We’ve contracted to put 2 sea containers in the parking lot of Canon’s Newport News, Virginia facility.

One of the containers will have our device in it to remove ethylene. The other container will be a standard sea container without our device. Both of them will have time lapse cameras and both of them will have testing equipment which will continually monitor, record and transmit ethylene levels. We’ll be able to see how a banana overripens or an avocado degrades or blueberries become useless in time-lapsed photography. We expect to introduce this device at the International Food Exhibition conference on the West Coast in early October of this year. Canon is extremely excited about it. We are as well. The early indications are that the science not only is proven but is highly effective. So we expect to release an academic paper for the trade show.

We expect to have — we expect we will have Canon exhibiting with us. We’ve expanded the — our presence at that trade show. There’s not much else to say except that the — we’ll have a dual PCO removal system which will be highly effective. It’s — the science is proven. The device has been tested. Now we have to put it in the field and confirm what all of us expect. Chip, I hope I’ve answered your question.

Chip Moore: Yes. No, Max, that’s great color and it sounds very compelling. I guess, I think you sort of answered it there around sales cycle. You’ll introduce it later this year. It sounds that the right way to think about that is incremental to growth for next year. I just want to make sure I’m thinking about…

Max Munn: We already have our PCO standard device in several large facilities at Dole, Del Monte and Whole Foods refrigeration units. Refrigeration only slows down the degradation. It doesn’t remove the ethylene. We remove the ethylene. With or without the refrigeration, our system is highly effective and is proven in large facilities. Now we want it proven in the transit mode where most of the degradation occurs.

Chip Moore: Yes, that was sort of my original — one of my original questions was around that. You’ve proven your value proposition, right, with those type of customers in the larger facilities. Is it a similar — does that accelerate the sales cycle, you think, on the distribution side where they’ve seen that proven value?

Max Munn: Absolutely. We expect to take orders in the fourth quarter of this year.

Chip Moore: Perfect. Perfect. And then my other question would be around cross-selling just more broadly. You talked about it, I think, on call laid out some of the success you’ve had, like how to think about some of those initiatives going forward. And particularly, Max, on the hospitality side, it still seems very strong. But just given some of the macro stuff, any concerns there on the hospitality side?

Max Munn: No. In fact, the stress between China and Southeast Asia and the U.S. is only going to increase and exacerbates the supply chain issues. We have one of the few large domestic facilities to supply the resort industry, hotels and other resort and leisure facilities with case goods and mirrors. In fact, the problem we have right now is getting sufficient qualified labor to work in our 100,000 square foot facility. In so far as cross-training is — cross-selling is concerned, the PURO team of sales executives have signed up, I believe, somewhere between 12 and 15 agencies across the country to sell the MunnWorks electrified mirrors to both general contractors and electrical contractors for installation in multifamily rentals and condos, verticals that MunnWorks is currently not in, in the slightest.

In fact, there’s about $2 million of orders that we’ve been informed will be getting the first $0.5 million order. We’ve finished sampling. We’re actually going to have a draft of the purchase order. That will be for backlit electrified mirrors that go in above the vanities in these residential buildings. In addition to the backlit, there is — our Brooklyn facility also manufactures vanities with and without stone tops for bathrooms. Every bathroom, whether it’s a rental or a condo has to have a vanity and most likely a backlit mirror. Additionally, these agencies, some of which have as many as 60 employees, will be selling to not only the contractors but directly to the ownership group. For example, we just received and are starting to ship a $400,000 order for backlit medicine cabinets going into a high-end rental facility owned and being developed by the related companies which is the largest real estate developer in the country right now.

And this is in South Florida. So we’ve got unique product manufactured in the United States for use in 2 verticals that we’re currently not in which we expect will yield enormous opportunities for the second half of this year and for all of — at least into 2024 that we foresee. We expect not only the political situation to play in our favor but there’s a shortage of capacity in this country. And there’s a huge need for multifamily development in this country because of roughly 2.5 million units shortfall that — for buyers and renters which the industry will have a hard time catching up on. And if the developers want to meet that demand and deal with that shortfall, they’re going to need to buy domestically. The lead times for buying in China right now is 16 to 18 weeks to put it on the water.

We’re delivering in 8 to 10 weeks. Chip, I hope I’ve answered that question.

Chip Moore: Yes. No, that’s great color, Max. I appreciate it. Maybe Mike, just one for you on sort of margins and the cadence there. Obviously, you worked off, it sounds like, the last of those lower-margin projects for Vision Mark. I think you figured out a little bit of inventory. Just help me think about the margin ramp. It sounds like a sequential improvement in Q2. But kind of more substantial in back half with Canon and some of those initiatives. But anyway, can you help…

Mike Riccio: Exactly what will happen. This was I’ll call this our lower-margin quarter just because of what you said about the Vision Mark projects and that’s behind us. And we had an opportunity to move 2 large chunks of our consumer product to 2 different customers. These are like spot buys and we just took advantage of it. And that’s — so those are kind of out of the norm, let’s say. And so we’ll get back on to the higher margins going forward. As a matter of fact, we’re just revising our forecast now for our Board meeting tomorrow. So I’m liking what I see; and so yes, that will improve.

Max Munn: Mike, let me give Chip some more flavor on that — on the 2 sales. One was to South Korea and the other — I forgot where it was. Those 2 sales were…

Mike Riccio: Dubai.

Max Munn: Dubai, thank you. Those 2 sales were for consumer products that we’re deemphasizing in terms of future sales. There’s too much competition on the low end of the consumer market for a product that is not as effective as ours and consequently, cheaper, none of which uses PCO. Our consumer product did. We determined that the investment required for us to make consumer market large and viable for us, didn’t give us the ROI that food preservation and hospitality would give us. So we are moving away from that vertical because not only is it lower margin, very competitive but the market itself isn’t informed as to why they would pay more for an Airocide product versus a low-end PURO filtration product versus a PCO product. So we had an opportunity to recover some costs that prior management early in 2022 invested in and caused us some margin degradation but we’re substantially behind that now.

Chip Moore: Perfect. Yes. Hopefully, the market recognizes that. And then just last one, just around working capital, I guess. Like inventories were up just with some of the acquisitions. And obviously, the Canon outsourcing arrangement, just how you’re feeling there around working capital and inventory management?

Max Munn: You want to take that, Mike?

Mike Riccio: Yes. Sure. So, yes — so you’re right, Chip. You’re seeing the impact of some of the acquisitions and then — but we’re going to get into a better business cycle now, moving that inventory and collecting on the ARR, et cetera. So I’m feeling better about working capital going forward. And as a matter of fact, while you were speaking with Max, I — an e-mail did cross my outlook here that Pinnacle Bank has increased our working capital line and with favorable terms and allows us the flexibility because there are some longer lead site lead time business cycles, as we discussed earlier, especially in Hospitality segment. And so this expanded facility with Pinnacle will allow us the flexibility to kind of max that going forward. So I’m feeling more comfortable about working capital from the liquidity aspect as well. So I just want to keep you up to date.

Chip Moore: Yes. No, that’s awesome, real time.

Mike Riccio: Yes. Yes.

Operator: [Operator Instructions] There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Max Munn for any closing remarks.

Max Munn: Well, we’re — as I said, we’re extremely optimistic about the recent acquisitions and the cross-selling opportunities and margin growth. I’m here, if any of you have any questions. You can contact Mike or myself. We’re always available.

Operator: Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.