Applied UV, Inc. (NASDAQ:AUVI) Q3 2022 Earnings Call Transcript

Applied UV, Inc. (NASDAQ:AUVI) Q3 2022 Earnings Call Transcript November 15, 2022

Applied UV, Inc. misses on earnings expectations. Reported EPS is $-0.24 EPS, expectations were $-0.17.

Operator: Good morning, ladies and gentlemen, and welcome to the Applied UV 3Q 2022 financial results conference call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brett Maas. Sir, the floor is yours.

Brett Maas: Thank you. Once again, welcome to Applied UV’s third quarter 2022 earnings call. With me on the call today are John Andrews, Chief Executive Officer; Mike Riccio, Chief Financial Officer; and Max Munn, Founder and President, Applied UV, CEO of MunnWorks. As a reminder, all materials for today’s live presentation are available on the company’s Investor Relations website at applieduv.com Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today’s call, we will make certain predictive statements that reflect our current views about future performance and financial results. We make 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 will turn the call over to John Andrews. John, the floor is yours.

John Andrews: Thank you, Brett, and good morning, everyone. It’s a pleasure to be with you today to review the results of our third quarter and provide an update on our business. Our financial results for the third quarter include revenue of $5.9 million, roughly in line with prior quarter and up 65% year-over-year, primarily as a result of our acquisition of the factory operations of a 100,000 square foot manufacturing facility in Brooklyn, New York. We expect our operating margins to improve as we move beyond certain onetime expenses and continue take advantage of synergies and cost reduction measures. We continue to invest in marketing, sales, and other growth initiatives, while at the same time following a disciplined capital allocation process.

Companywide, our pipeline of qualified opportunities continues to increase, and is considerably higher than it was just a quarter ago, indicating a strong foundation for future growth in both the Disinfection and Hospitality segments. The Hospitality segment alone has new purchase orders already on hand for shipment in first half of 2023 exceeding $10 million. As a reminder, the Disinfection segment includes the design, manufacture, assembly, and distribution of air purification and pathogen elimination systems for use in food and beverage, agricultural, education, government, healthcare, and the consumer market. The Hospitality segment includes the manufacturer of fine mirrors and furniture specifically for the hospitality industry. Now, let me turn this call over to Max Munn, Founder and CEO of MunnWorks, to review our Hospitality segment.

Max Munn: Thanks, John. In Hospitality, the industry continues to show strong growth fueled by the post-pandemic travel surge, which all of us are aware of, which has accelerated faster than most forecast. This market growth has heightened the need for hotels to make capital improvements to meet these increasing market dynamics, creating high demand for our Hospitality offering. Additionally, mandatory property renovations were deferred due to the pandemic, but are now contractually required to start. In Hospitality, our revenue grew by more than 145% in the third quarter, which included both contribution from recent factory – from our recent factory acquisition, and organic growth resulting from the fulfillment of orders deferred during the pandemic.

As a reminder, this is a manufacturing facility with state-of-the-art equipment in 100,000 square foot Brooklyn, New York facility that manufactures both wood and metal furniture for the hospitality industry. This acquisition expands our product offering for the hospitality industry, as well as providing us with economies of scale as we integrate this facility into MunnWorks. As part of the acquisition, we inherited a number of lower margin projects, which were paid for in advance of our acquisition, leaving us with the job of fulfilling these major commitments without the benefit of the deposits or the associated cash receipts. We delivered on those commitments, retained the clients, and all of the legacy orders have now been fulfilled. With those orders behind us, we expect gross margins in hospitality to return to more normalized levels beginning this quarter.

This recent factory acquisition provides us with a US-based manufacturing facility, creating strong competitive advantages for us, given the demand for domestic manufacturing in the hotel space. There is increasing concern over the reliability of Chinese suppliers, as evidenced by the recent shutdown of Apple’s factory in China, which makes the iPhone. The cost differential between China and domestic manufacturing has narrowed considerably. The 25% tariff that’s currently in place, is a major factor that leads hotel management to favor US-based manufacturing, and this 25% tariff is not going away, certainly not soon. These factors are driving more hotel operators to domestic manufacturing to mitigate the supply chain delays, and enable hotels to better manage project timelines and ultimately revenue generation.

Our sales pipeline for hospitality, which is more than $10 million today, has increased over 300% in the last 90 days, and includes new projects in Cleveland, Washington, D.C., Indianapolis, Orlando, and Knoxville. Now, let me turn this back over to John, our CEO, to discuss the Disinfection segment. Thank you.

John Andrews: Thanks, Max. The global market for air purification and pathogen elimination is estimated to reach $24 billion by 2030. While we’ve seen orders temporarily delayed, air quality and disinfection remain a priority in our target verticals, and is no longer just a nice to have, but a necessity to keep people safe and healthy, as well as protect and extend the life of high value agricultural produce, including cannabis. Our diverse portfolio of patented, proprietary, and research-backed air purification solutions, address the growing demand for air purification and pathogen elimination across ever-increasing use cases in verticals. In third quarter, we experienced some market weakness due to the current macroeconomic uncertainty, with revenues down 12%, as orders were delayed to the next several quarters in our major verticals, including healthcare, food preservation, cannabis, education, and government.

These prospects are delaying capital expenditures until they get a better sense of the economic situation, both domestically and internationally. Importantly, however, the feedback we are receiving from these prospects indicates orders are merely being delayed and projects have not been canceled. Again, we anticipate these sales cycles to close in the next quarter or two. An example of the delayed major purchase is with DA International, one of our US distributor partners, where we have been included in a multi-million-dollar EANS II contract, which includes our suite of Airocide air purification solutions in its offering to 700 non-public schools throughout the State of Washington. This contract award, as well as other major air purification RFPs we’re participating, demonstrates the growing demand in education for improved air quality.

School closures have had a profound negative impact on students. Our products provide a pathway to keeping schools open and protecting teachers, students, and staff. Importantly, this is a condition we are seeing across the air disinfection industry and is not unique to Applied UV. Despite this headwind, we are highly encouraged by the performance of the new sales professionals we recently hired. They are building momentum, identifying new opportunities, managing more prospects, and moving sales towards closing. In fact, three of the new hires in the Disinfection segment have already generated revenue in the first 60 days of employment. While we have seen a number of orders delayed, we achieved significant growth in two of our target verticals, wine and cannabis.

Wine sales in Q3 were up 95% over Q2, and cannabis sales were up by almost 50% for that same period. This sales growth in two of our target verticals reinforces our Airocide patented photocatalytic oxidation efficacy in completely trapping and destroying mold, pathogens, and volatile organic compounds without the emissions of ozone or harmful chemicals. Additionally, one of our largest customers increased the purchases of our proprietary and patented PCO air purification catalyst technology by over 40% quarter two to quarter three. Internationally, our European distribution partner, Solaris, placed a substantial order for Airocide during the third quarter, expanding our presence in wine, cannabis, and food preservation verticals in Europe. Solaris has been one of our European distributors of Airocide for more than eight years, selling Airocide to multiple verticals.

We also made a significant sale to hospitals in Southeast Asia through our distribution partner. Airocide air purification systems for hospitals offer great value due to its filterless technology and environment-friendly properties, as well as its efficacy in pathogen elimination, using our NASA-based PCO technology. We expect continued demand for Airocide in the coming months in Pakistan, Indonesia, and Vietnam. Another major business development opportunity initiated this quarter was with Mount Sinai Medical Center, where we installed our patented LumiCide surface and drain UVC disinfection solutions, initially in 16 patient rooms. This initial installation supports a trial that is being conducted to further validate the independent research previously conducted by ResInnova Laboratories.

Mount Sinai, a premier globally recognized and respected teaching institution, plans to publish the clinical results of this initial installation early next year. We fully expect very favorable outcomes, which we believe will further validate the previously published independent results, and position us for greater adoption of our patented surface and drain disinfection solutions in additional healthcare and other facilities globally to combat and eliminate surface transmitted viruses such as monkeypox. As stated earlier, we continue to grow our sales pipeline for the Disinfection segment, both domestically and internationally. Domestically, we invested in talent acquisition of three proven sales executives who have already generated sales.

Internationally, efforts to expand our network of distributor partners to increase sales and product throughput continues. Our distribution channels include global leaders such as 3Sixty Biopharma, in Africa, Solaris in Euro, and JARO in Latin America, among others. We continue to seek new distribution partners to grow our global distribution beyond our base of 60 plus distributor partners to enable us to cost effectively increase our global customer footprint beyond the current 52 countries. We continue to make investments in marketing, having launched an international multi-prong targeted marketing program in the second quarter aimed at key vertical market, initially focused on cannabis, food preservation, and wine. We continued the strong marketing push in Q3, with exhibits at a number of major tradeshows throughout the US, Europe, and UAE.

These included two that focused on food preservation, the Feeding America Unite Trade Show in Philadelphia in August, and the Global Produce & Floral Trade Show in Orlando in October. Each of these trade shows brings together buyers, thought leaders, and subject matter experts from around the world, making these ideal for sales lead generation. Warm sales leads generated from these two food-related trade shows exceeded 75. We are also exhibiting at the large cannabis trade show and Expo MJBiz in Las Vegas, which kicks off today. MJBizCon attracts more than 35,000 cannabis executives and staffers from around the world who represent plant-growing operations, making it a target-rich environment for us to educate industry professionals about our products and generate sales leads for our important cannabis vertical.

Internationally, we just completed exhibiting along with our distributor partner, Bada technologies, at the Gulf Food and Beverage Trade Show in Dubai, which includes over 4,000 companies from more than 120 countries. The results of this trade show is impressive as we now have well over 150 new end user and distribution partner leads to follow up with. This week, we are also exhibiting in the European Healthcare Trade Show MEDICA with our distribution partner. MEDICA, which kicked off yesterday, is a world forum for medicine being held in Dusseldorf. MEDICA is a globally leading medical trade show that will host thousands of participants to learn about trending topics in healthcare, where our air and surface purification solutions have a strong fit.

From an R&D perspective, we continue to make substantial improvements to our entire line of mobile and fixed air purification products, further differentiating our patent PCO and UVC carbon-based systems from that of other technologies. Our transition to adding internet of things integration proceeds on plan. Additionally, we are expanding our product portfolio, introducing two new HEPA-based air purification units, which we are already including in multimillion dollar bids. In addition to these new air purification systems, we also have plans to introduce our LumiCide surface and drain UVC Disinfection solutions following completion of the current pilot at Mount Sinai Medical Center. I should also mention two other very important field tests we are getting ready to launch.

The first is with our Airocide products, specifically for the eradication and elimination of aspergillus. Aspergillus is very prevalent in cannabis facilities, and poses a significant health risk as it can contaminate the cannabis itself, making it unsafe for consumers, as well as posing a health problem to staff when breeding these mold spores. The second field test is related to carbon dioxide elimination using our scientific air product in wineries. While CO2 is an essential odorless gas for the production of wine, it also poses a safety hazard for employees to the extreme of being lethal. While our in-house testing has proven to be highly effective in both scenarios, as with all our product claims, we field test thoroughly using third parties.

The positive results we expect from both tests, will further expand our use cases for both the Airocide and scientific air products in cannabis and wine. Operationally, across both business segments, we continue to analyze each of the points in our supply chain to tighten integration, to optimize inventory, improve quality control, and mitigate against supply chain disruptions that are so prevalent in our world today. Along those lines, we have signed and will be announcing soon, a significant strategic manufacturing and supply chain outsourcing agreement with one of the premier global contract manufacturers. The agreement makes them the primary manufacturer, assembler, and logistical authority for Applied UV’s suite of air purification solutions.

Additionally, they have offered to finance our supply chain based on purchase orders received. Our joint teams are executing an accelerated plan, so the transfer of the majority of these responsibilities occur before year end, and allow us to close our internally operated manufacturing and distribution. We believe this partnership will translate into production and logistics cost savings, and accelerated development of our next-generation products, removing manufacturing execution risk and allowing the company to more effectively scale and focus solely on marketing and sales. Another major positive strategic action we’ve taken is entering into a non-binding LOI with a privately held strategic acquisition target with a current revenue runway for this year of approximately $18 million.

Many months of discussion and evaluation have been conducted evaluating the multitude of synergies that will accrue to the combined entity. The teams have engaged in integration planning and due diligence, including all required audits. We expect the combined entity will substantially increase revenues approaching $50 million in 2023. Additionally, we will gain distribution and sales capabilities, while also expanding our product lines, which will allow us to increase our addressable market. These synergies will accretive to our goal of being cash positive in the near term. Next, I will turn the call over to Mike Riccio, our Chief Financial Officer for a review of our financial results. Mike?

Mike Riccio: Thanks, John Before I review the results for the quarter, I’d like to highlight two items that occurred subsequent to quarter end. First, on October 7, 2022, the company executed an unsecured redeemable promissory note with Streeterville Capital LLC for an end amount of $2.5 million, maturing in 18 months and bearing interest at 8% per annum. Second, on October 28, 2022, the company was fully vetted and approved by Pinnacle Bank for a $5 million non-dilutive asset-based line of credit. We anticipate closing subject to customary negotiations and conditions either later this week or early next week. I highlight these items because they improve our liquidity position after the end of the third quarter, and provide us with the runway to continue to pursue our growth objectives.

Having said that, net sales for the third quarter of 2022 were $5.9 million, an increase of $2.3 million or 65.4% compared to $3.6 million for the third quarter of 2021. This increase was attributable to the Hospitality segment, which increased by $2.5 million, primarily as a result of the fulfillment of orders that were delayed from Q2, plus the addition of the orders fulfilled from the VisionMark acquisition, offset by a decrease of $208,000 in the Disinfection segment, primarily due to the pushout of orders into the next two quarters. Gross profit decreased by $213,000 or 20.2% to $839,000 in the third quarter of 2022, down from $1.1 million in the third quarter of 2021. The reduction was driven by the decrease in sales in the Disinfection segment, and the higher sales mix of the Hospitality segment at a lower gross profit.

The lower Hospitality gross profit is driven primarily by the cost required to complete projects that were in process from the VisionMark acquisition and additional cost to integrate and absorb the VisionMark operations. We expect hospitality pricing and margins to improve in Q4, as we are now focused on new projects with more attractive margin profiles. Furthermore, we continue to integrate our strategic acquisitions and capturing cost reduction synergies from the consolidation and streamlining of the manufacturing and distribution operations, which we believe will drive further improvement in margins going forward. SG&A expense for the third quarter of 2022 increased to $3.5 million as compared to $2.7 million in the prior quarter. This increase of $822,000 was driven primarily by the expansion of the Disinfection segment, with the additional acquisitions of KES and SciAir, the expansion of the Hospitality segment with the addition of VisionMark acquisition, and corporate segment expenses due to increased consulting, legal, accounting, and infrastructure costs related to the initial integration of the operations of our strategic acquisitions.

SG&A costs did decrease $526,000 from last quarter, and we anticipate further efficiency gains in the coming year as we fully integrate our acquisitions and leverage synergies where practical. Net loss for the third quarter of 2022 was $2.7 million, compared to a net loss of $1.1 million for the third quarter of 2021. The increase in net loss was mainly due to the reduction in gross profit and the increase in SG&A costs as mentioned earlier. Additionally, the company had realized the gain last year of $297,000 due to the forgiveness of a payroll protection program loan. Moving forward, we anticipate improvements in gross profit as the initial VisionMark projects are now completed, and also as the disinfection sales pipeline accelerates revenue realization.

On a non-GAAP basis, adjusted EBITDA was a loss of $2.1 million for the third quarter of 2022, which compares to an adjusted EBITDA loss of $1.0 million in the year ago quarter. We use adjusted EBITDA to assist in analyzing our operating performance by removing the impact of certain key items that we believe do not directly reflect our underlying operations. Adjusted EBITDA is defined as operating profit or loss, excluding depreciation and amortization, and excluding stock-based compensation and loss on impairment of goodwill. Lastly, we ended the quarter with approximately $1.1 million of unrestricted cash on our balance sheet. This compares to $3.1 million at the end of the second quarter, and does not include any funding from the two debt financing transactions I mentioned earlier, as these will both strengthen our liquidity position in Q4.

I will now turn the call back over to John for closing remarks.

John Andrews: Thank you, Mike. We will continue to invest in our strategic priorities, while at the same time tightening expenses across the rest of our business, aligning our resources with the current market demand. We’re optimistic about the long-term outlook for both our Disinfection and Hospitality businesses. We have a portfolio of highly effective products that directly address commercial demands, and we believe will be strong growth levers in the periods ahead. Thank you again, everyone, for joining our call today. This concludes our prepared remarks. Operator, we can open the call for questions.

Q&A Session

Operator: First question is coming from Chip Moore with EF Hutton. Please proceed.

Chip Moore: Morning. Hey, thanks for taking the question, everybody. I guess I want to start, just Disinfection segment, so some of the order delays you talked about, maybe if you could expand on what you’re seeing there. Is this – I know you called out sort of macro uncertainty. Is this a situation where maybe we need to get through year end budgetary cycles? Sounds like the pipeline is strong and you’re probably confident there, but just curious when you might get better visibility on sort of order timing in that segment.

John Andrews: Good question, Chip. Thanks for the question. What we’ve seen with a number of prospects across multiple verticals – it hasn’t been focused just on one vertical. I mentioned one client in education. We had another $600,000 client move an order into Q1 just because of their capital budgeting process. So, we’re seeing it both domestically and internationally. In fact, internationally, we have seen in Europe, almost $7.5 million of bids and orders moved out into next year. And part of the reason why we can’t tell you exactly when those orders are going to be booked is, it’s going to all hinge on how fast Europe recovers from both the Ukraine situation, as well as the economy. But what we’re really enlightened by and confident by is, these orders are just being pushed and delayed. They’re not being canceled. And so, we think that quarter one, quarter two, many of these orders will be fulfilled.

Chip Moore: Got it. That’s very helpful. And then if I could ask and switch up to Hospitality, nice to see this sort of snap back and demand accelerating. Just curious, you talked about obviously VisionMark and having to sort of eat some margin there and doing the right thing. How do we think about margins kind of normalized moving forward particularly with that Brooklyn facility, since that’s new? And it sounds like you have some other things you’re working on. Just if you could kind of remind us how we should think about that.

Max Munn: Would you – this is Max Munn. Let me respond to that. The normalized budgets that we’re looking for, the margins that we’re looking for rather, are in the high 20s and low 30s. We’re seeing enormous demand, and the struggle that we have, frankly, is that we can’t get enough labor right now. That’s the constraining factor. It’s not capital. It’s not demand. We’ve got – we’re now starting to put feelers out to schools and technical institutions that might assist us in getting labor. So, that’s the constraining factor right now. Even with that, we expect the $6 million quarterly run rate to continue to increase, primarily because we’re raising our pricing, because if we can’t meet all of our demand, we might as well offset some of that by increasing margin and increasing pricing.

The concern that hospitality hotel developers have is for example, a typical 200-room hotel, three-star hotel, might cost $10 million to $12 million to get above the ground. The furniture, fixtures, equipment, the case goods, the furniture, might constitute $1.5 million of that. So, it’s maybe 15% or 20% at most. So, even with higher pricing in the US, which is – the gap is narrowing, as I explained earlier, you’re talking about a let’s say 20% difference between landed China and US shipment on maybe $1.5 million worth of case goods. You’re talking about a $200,000, $300,000 differential. That’s 2% or 3% on a $10 million project. So, a hotel developer’s not going to put the opening of a hotel at risk or the quality of what he’s getting at risk to save $200,000 or $300,000 on a $10 million, $12 million project.

That’s what we’re seeing more and more of. The reason that switch to domestic manufacturing hasn’t happened earlier is, there’s no manufacturing base for hotel furniture in this country. There’s maybe four or five guys and they’re all as booked as we are. And the lead time to build a facility, get the equipment, much of it coming from Europe, and get the trained staff is north of two years. So, we’ve got a long road in front of us that looks extremely promising. I hope I’ve answered your question, Chip.

Chip Moore: Yes, no, that’s helpful, Max. Appreciate it. And maybe one last one. The LOI you talked about, I think it was a $18 million run rate. Any more detail you can give us on where that target might play and how we should think about potential timing and financing. Is that covered with some of the moves you made post-quarter, or how we should we think about that? Thanks, everybody.

Max Munn: Sure. John, let me answer that, if you don’t mind. Chip, we are scheduled to close, barring something unforeseen, prior to year-end. The audits are on their way to completion. We haven’t seen any speed bumps. The two raises that Mike Riccio – debt raises that Mike Riccio outlined, are not earmarked for this acquisition. The two debt raises are for giving us the runway we need and the certainty that we need to execute on our organic growth. The acquisition will be funded substantially by seller paper. So, we don’t expect any significant dilution or issuance of common to finance this. And by the way, it’s highly synergistic. It’s in the disinfection space. They’ve got distribution to verticals that SteriLumen and Applied UV are not in.

Chip Moore: Got it. Perfect. That’s what I was looking for. Okay. I’ll take the rest of mine offline. Thanks, everybody.

Operator: . We currently have no questions in queue. I’d like to turn it back to management for closing remarks.

John Andrews: Again, we’d just like to thank everyone for your attendance today and all your support moving forward. Thank you again, and have a great day.

Operator: Thank you. Ladies and gentlemen, 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.