Q3 2022 Applied UV Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the applied U V. Three Q2 thousand 22 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.
Or is yours.
Thank you once again welcome to apply <unk> third quarter 2022 earnings call with me on the call today are John Andrews, Chief Executive Officer, Mike <unk>, Chief Financial Officer, and Max month, founder and President <unk> CEO of mine works.
As a reminder, all materials for today's presentation are available on our company's Investor Relations Web site at applied UV Dot 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 basically statements of certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K with 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 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.
100000 square foot manufacturing facility in Brooklyn, New York.
We expect our operating margins to improve as we move beyond certain one time expenses and continue to 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.
While 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 health care and the consumer market. The hospitality segment includes the man.
Sacha I'll find mirrors and furniture, specifically for the hospitality industry.
Now, let me turn this call over to maximum founder and CEO of <unk> to review our hospitality segment.
Thanks, John .
Fatality the industry continues to show.
Gross.
But he post pandemic travel search.
All of US are aware of which has accelerated faster than most forecast.
Gross 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.
In hospitality revenue grew by more than 145% in the third quarter.
Would you include those contribution from recent factory from a 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 yard equipment and 100 times per 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.
It's providing us with economies of scale as we integrate this facility into one works.
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 retain the clients and all of the legacy orders have now been fulfilled.
Where 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.
<unk> based manufacturing facility, creating strong competitive advantages for us given the demand for domestic manufacturing and the.
Hotel space, there was increasing concern over the reliability of Chinese suppliers as evidenced by the recent shutdown of apples factory in China, which makes.
The cost differential between China, and domestic manufacturing has narrowed considerably.
The 25% tariff that's currently in place.
A major factor.
Leach hotel management to favor U S based manufacturing and there's 25% tariff is not going away certainly not so 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 <unk>.
New projects and Cleveland, Washington, D C Indianapolis Orlando in Knoxville.
Now let me turn this back.
Over to John our CFO or CEO to discuss the disinfection segment. Thank you.
Thanks, Matt.
The global market for air purification and pathogen elimination is estimated to reach 24 billion by 2030.
While we have seen orders temporarily delayed air quality and disinfection remain a priority in our target verticals and it's no longer just a nice to have but a necessity to keep people safe and healthy as well as protect and extend the life and high value agricultural produce including cannabis.
Our diverse portfolio of patented proprietary and research that air purification solutions address the growing demand for air purification and pathogen elimination across ever increasing use cases and 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 and our major verticals, including health care food preservation cannabis education and government <unk>.
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're receiving from these prospects indicates orders are merely being delayed and projects have not been canceled again, we anticipate the sales cycles to close in the <unk>.
Next quarter or two and.
An example of the delayed major purchases with D. A international one of our U S distributor partners, where we have been included in a multi million dollar.
A N S. Two contract, which includes our suite of Aero side Air purification solutions in its offering to 700 nonpublic screws 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 the agitation for improved air quality school closures have had a profound negative impact on students our products provide a pathway in pekin schools open and protecting teachers students and staff.
Importantly, this is a condition we are seeing across 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 recently higher they are building momentum identifying new opportunities managing more prospects and moving sales.
Towards closing in fact, three of the new hires and 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 in cannabis.
<unk> 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 aero side patented photocatalytic oxidation efficacy and completely trapping and destroyed mold.
Pathogens and volatile organic compounds without the emissions of ozone or harmful chemicals. Additionally, one of our largest customers increase their purchases of our proprietary and patented Tcl air purification catalyst's technology by over 40% quarter to quarter three internet.
Lastly, our European distribution partner <unk> placed a substantial order for air side during the third quarter, expanding our presence in wind cannabis and food preservation protocols in Europe .
<unk> has been one of our European distributors of various sites for more than eight years selling aero side to multiple verticals. We also made a significant sales of hospitals in southeast Asia through our distribution partner Air side Air purification systems for hospitals offer great value due to that filter Atlas technology.
An environment friendly properties as well as this efficacy and pathogen elimination using our NASA based PCR technology, We expect continued demand for air side in the coming months in Pakistan, Indonesia and Vietnam.
As another major business development opportunity initiated this corner was with Mount Sinai Medical Center, where we are installing our patented luminous side surface and drain UBC disinfection solutions initially and 16 patient rooms. This initial installation supports a trial that is being conducted to further validate the.
Research previously conducted by resin Melba laboratories, Mount Sinai, a premier globally recognized and respected teaching institution plans to publish the clinical results of the initial installation early next year.
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 surplus and dray disinfection solutions in additional health care and other facilities globally to combat and eliminate surface transmitted viruses such as monkey.
Fox.
As stated earlier, we continue to grow our sales pipeline for the disinfection segment, both domestically and internationally.
Lastly, we invested in talent acquisition of three proven sales executives, who have already generated sales internationally efforts to expand our network of distribution distributor partners to increase sales and product throughput continues.
Distribution channels include global leaders, such as 360, Biopharma in Africa, Solari Us Euro and.
In general 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 and having launched an international multi pronged targeted marketing program in the second quarter aimed at key vertical markets initially focused on cannibals food preservation unwind.
We continued a strong marketing push in Q3 with exhibits at a number of major trade shows throughout the U S. Europe and UAE. These included to that focused on food preservation. The feeding America unite trade show in Philadelphia in August on the global produce and 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 MJ Biz in Las Vegas, which kicks off today, MJ biz, calling attracts more than 35000 cannabis executives and staff was from around the world who represent plant growing operations, making it a target rich environment for us to educate industry.
<unk> about our products and generate sales leads for our important cannabis vertical international we just completed exhibiting along with our <unk> partner <unk> technologies at the Gulf food and beverage trade show in Dubai, which includes over 4000 companies for more than 120 countries the rig.
<unk> of this trade show is impressive as we now have well over 150, new end user in distribution partner leads to follow up with this week. We are also exhibiting in the European healthcare Tradeshow medica with our distribution.
Distribution partner medical which kicked off yesterday as the World Forum for medicine being held in Dusseldorf Medicare is a globally, leading medical trade show that we'll host thousands of purchase to learn about trending topics in health care, where our air and surface purification solutions have a strong fit.
From the R&D perspective.
We continue to make substantial improvements to our entire line of mobile and fixed air purification products. Further just differentiating our patented tcl and UBC carbon based systems from that of other technologies.
Transitioned, adding internet of things integration proceeds on plan. Additionally, we are expanding our product portfolio, introducing two new hepa based air purification units, which were already including in multimillion dollar bids. In addition to these new air purification systems, where all also have plans to introduce a luminous.
<unk> surface and dray UBC disinfection solutions following completion of the FERC pilot Mount Sinai Medical Center.
I should also mentioned two other very important field tests, we are getting ready to launch.
The first is with our aerospace products, specifically for the eradication and elimination of Aspen jealous Aspergillus is very prevalent in cannabis facilities and proposes a significant health risk as it can contaminate the cannabis itself make it an unsafe for consumers as well as posing a health problem to staff.
We're bleeding these mold spores.
Second field test is related to carbon dioxide elimination using our scientific air product in wineries, while <unk> is an essential odorless gas for the production of one it also poses a safety hazard for employees to the extreme of being lethal.
Our in house testing has proven to be highly effective in both scenarios as with all our product claims we feel chest thoroughly using third parties. The positive results. We expect from both tests will further expand our use cases for both the Aero side and scientific air products in cannabis one.
Operationally across both business segments, we continue to analyze each of the points in our supply chain to tight integration to optimize inventory improve quality control and mitigate against supply chain chain disruptions that are so prevalent in our world today.
Along those lines, we have signed and we'll be announcing soon a significant strategic manufacturing and supply chain outsourcing agreement with one of the Premier global contract manufacturers.
Agreement makes them the primary manufacturer assembler and logistical authority for applied <unk> suite of Air purification solutions. Additionally, they have offered to finance our supply chain based on purchase orders received.
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 <unk>.
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 run rate for this year of approximately $18 million. Many months of discussion and evaluation had been conducted evaluating the multitude of synergies that will occur.
So 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 be accretive to our goal of being cash flow positive in the near term next.
Next I will turn the call over to Mike <unk>, Our Chief Financial Officer for a review of our financial results Mike.
Thanks, Chuck before I review the results for the quarter I'd like to highlight two items that occurred subsequent to quarter end.
First on October seven 2022.
Company executed an unsecured redeemable promissory note with street, a real capital LLC for a net 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 political 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.
A 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 billion.
An increase of $2 3 million or 65, 4% compared to $3 6 million for the third quarter of 2021.
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 vision Mark acquisition.
Offset by a decrease of $208000 in the disinfection segment, primarily due to the pushout of orders into the next two quarters.
Gross profit decreased by $213000 or 22% to $839000 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 vision Mark acquisition and additional cost to integrate and absorb the vision Mark operations, we expect hospitality pricing and margins to improve in Q4 as we are now focused on new projects with more.
Our 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 operation, 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 $822000 was driven primarily by the expansion of the disinfection segment with the additional acquisitions of <unk> and Sawyer the expansion of.
The hospitality segment with the addition of vision Mark acquisition and corporate segment expenses due to increased consulting legal accounting and infrastructure cost related to the initial integration of the operations of our strategic acquisitions.
SG&A cost decreased $526000 from last quarter, and we anticipate further efficiency gains in the coming year as we fully integrate our acquisitions and levered leveraged synergies where practical.
Net loss for the third quarter of 2022 was $2 7 million.
Compared to a net loss of $1 1 billion 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, a $297000 due to the forgiveness of a payroll protection program loan.
Moving forward, we anticipate improvements in gross profit as the initial vision Mark 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.
A 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 billion at the end of the second quarter and does not include any funding from the two debt transaction financing transactions I mentioned earlier.
This will both strengthen our liquidity position in Q4.
I will now turn the call back over to John for closing remarks.
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 are 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 demand 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.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your Touchtone phone at this time.
Star two were removed from the queue should your question to be answered.
And lastly, while posing your question. Please pickup your handset up listing on speaker phone to provide optimum sound quality. Please hold while we poll for questions. Once again Thats star one if you have a question or comment.
First question is coming from Chip Moore with E F Hutton.
Please proceed.
Good morning, Hey, Thanks for taking the question everybody.
I guess wanted to start just disinfection.
Segment so.
Some of the order delays you talked about maybe if you could expand on.
What youre seeing there is this I know you called out sort of sort of macro uncertainty is this.
Situations, where maybe we need to get through.
Year end budgetary cycles.
It sounds like the pipeline is strong.
You're fairly confident there, but just curious when you might get better visibility on sort of order timing in that segment.
Good question chip. Thanks for the question the what we've seen with <unk>.
A number of prospects across multiple verticals there hasnt been focused just on one vertical I mentioned one client in education, we had another $600000 clients.
Move in 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.
Seven and a half million dollars.
Bids and.
Orders moved out into next year and part of that.
Reason why we can't.
Tell you exactly when those orders are going to be booked as it's been all hinge on how fast Europe recovers from both Europe , Ukraine situation as well as the economy, but what we're what we're really enlightened by and confidence by is these orders are just being pushed and delayed theyre not being.
Canceled and so we think that quarter one quarter two many of these orders will be fulfilled.
Got it Thats very helpful.
And then if I, if I could ask in switch up.
The hospitality nice to see this sort of.
Snapback in.
Demand accelerating.
Just curious.
You talked about obviously vision, mark and having to sort of EBITDA margin, there and doing the right thing how.
How do we think about margins.
Kind of normalized moving forward, particularly with that Brooklyn facilities since that's new and it sounds like you have some other other things you're working on just kind of remind us how we should think about that.
Would you.
This is Max from a let me respond to that.
Normalized budgets that we're looking for the margins that we're looking for rather are in the high <unk> low.
<unk>.
We are.
We're seeing enormous demand.
In the struggle that we have frankly is that we can't get in.
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 <unk>.
<unk> technical institutions that might assist us in getting labor.
The constraining factor right now.
Even with that we expect.
The six.
Million quarterly run rate.
Two to continue to increase.
Primarily because we are raising our pricing because if we cant meet all of our demand we might as well.
Some of that.
Increased margin and increasing.
Pricing.
The concern that hospitality.
Hotel developers has half is.
For example, a typical 200 room hotel three store my cost $10 million to $12 million.
To get above the ground.
The furniture fixtures and equipment the case goods furniture.
Might constitute a million and a half.
Maybe 15 or 20% of most so even with higher pricing in the U S which is.
The gap is narrowing as I explained earlier.
Youre talking about.
So, let's say, 20% difference between land to China, and you were shipment.
Maybe $1 million worth of case goods can you talk about a two to $300000 differential that's two or 3% on the $10 million project.
Hotel developers not going to put the opening of a hotel at risk.
Or the quality of what he's getting at risk to save two or $300000 on a $10 million to $12 million project. That's what we're seeing more and more of the reason that <unk>.
Switch to hospital to domestic manufacturing Hasnt happened earlier is there is no.
Manufacturing base for hotel furniture in this country.
Maybe four or five guys in there.
Booked as we are in the lead time to build a facility.
Get the equipment much of it coming from Europe .
Get the trained staff.
Is north of two years, we've got a long road in front of us that looks extremely promising.
Promising I hope I've answered your question Chip Yeah, No that's helpful. Max.
Appreciate it.
Maybe one last one.
The LOI you talked about I think it was $18 million run rate anymore.
Detail you can give us on.
Where that that target.
Might play out and how we should think about potential.
Potential timing and financing is that covered with some of the moves you made post quarter or how should we think about that thanks, so much John .
John Let me answer that.
Mike.
Chip.
It's we're scheduled to close borrower.
Barring something unforeseen prior to year end.
The audits are on they're on their way.
To completion, we haven't seen any speed bumps.
Two raises that Mike <unk>.
That raises that Mike Rick you outlined.
Im not earmarked for this acquisition.
Two debt raises or 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 of issuance.
Common.
To finance this.
And by the way, it's highly synergistic it's in the disinfection space.
Got distribution to verticals that.
Alumina and apply to we are not in.
Got it perfect. That's what I was looking for Okay I'll take the rest of mine offline. Thanks, everybody.
Thanks Chip.
Once again, if you have a question or a comment please press star one on your Touchtone phone at this time.
At Star one if you have a question or comment.
Okay. We currently have no questions in queue I'd like to turn it back to management for closing remarks.
Again, we just like to thank everyone for your attendance today and all your support moving forward. Thank you again and have a great day.
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.