Applied UV Inc. (AUVI) Q1 2022 Earnings Call Transcript

Applied UV Inc.  (NASDAQ: AUVI) Q1 2022 earnings call dated May. 24, 2022

Corporate Participants:

John Andrews — Chief Executive Officer

Mike Riccio — Chief Financial Officer

Analysts:

Chip Moore — EF Hutton — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. I would like to welcome everybody to the Q1 2022 Applied UV Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

With me on the call today are John Andrews, Chief Executive Officer; and Mike Riccio, Chief Financial Officer. As a reminder, all material for today’s live presentation are available on the company’s Investor Relations website at www.applieduv.com.

Before we begin, please take a moment to read the forward-looking statements in the 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 now turn the call over to John Andrews. John, you may begin.

John Andrews — Chief Executive Officer

Thank you and good morning, everyone. It’s a pleasure to be with you to review the highlights of our first quarter. The progress we discussed in our 2021 Q4 year-end call continues to gain traction. The integration of our three strategic acquisitions that diversified our business to create an air and surface pathogen elimination platform is now firmly established, so that as a company we are well positioned to capitalize on increasing market demand for safer environments born out of the devastating impacts of the pandemic, as well as the recently announced U.S. government’s EPA, EA-ENS2 CMS, and the White House’s clean indoor air initiatives, all aiming to improve indoor air quality.

We’re well positioned to serve a global market that is expected to reach $24 billion by 2030 as a leading provider of pathogen elimination offerings that protect businesses, facilities and the people who move through them. Simply put, we are in the business of providing solutions that address the growing demand for pure, cleaner, safer air in any environment where people live, work and play.

We have set the stage for increased organic growth driven by a sophisticated and targeted marketing initiative that we started stated last quarter was the beginning Q2. That initiative was launched in April and includes digital and social media campaigns aimed at the following key vertical markets including cannabis, food preservation, logistics, long-term care, schools, dental, other healthcare facilities, and hospitality.

As we announced recently, the first targeted marketing push was in the cannabis space, which was directed by a recently appointed director Monica Woo. The cannabis market initiative marks the first of many planned marketing investments into our three acquired companies. And we are already seeing strong market interest and expect to announce a significant relationship with one of the world’s largest cannabis growers very soon. The marketing campaign is targeting key prioritized high demand verticals that we expect will increase brand recognition, drive both market share and top-line revenue.

Secondly, for the first time, since many of the countries we serve begin to reopen, we have returned to a number of industry conferences that were shuttered due to the pandemic and we are scheduled to exhibit our platform of mobile and fixed air purification technologies at nine conferences throughout the U.S. and Europe, targeting cannabis, janitorial sanitation, correctional facilities, medical and food preservation. We will continue to expand these marketing initiatives to drive and expand market share in 2022 and beyond.

As we stated last quarter, we still can see a positive and energizing shift in the air purification market, displacing some of the uncertainty that was an overhang for much of last quarter of 2021 and well into Q1 2022 as end users await key policy decisions in funding allocations. On the other hand, we have seen increasing inflationary pressures and the uncertainty and fear related to the Ukraine-Russia war, temporary slowing down our growth in Europe.

As more of the initiatives and commitments to funding by government agencies, including the Centers for Medicare and Medicaid and the Environmental Protection Agency among others are announced, we continue to see the advancement of new business opportunities that we have been pursuing towards contract award. As we recently announced, demand from the non-Public Schools Program is accelerating with our distribution partner in Washington state being awarded a multi-million dollar contract of which a large allocation of those funds are expected be used for the purchase of our air purification solutions.

As we also stated on our Q1 call, we expect to announce several product placement pilot program across long-term Care, urgent care, hospitality and the logistics sectors. We have two of the best class tools available and what the U.S. government detailed announced its potential tools in a toolbox to improve indoor air quality.

Next, I’d like to cover our progress in sales, our product development roadmap and R&D. Clearly, our solutions are scalable, and the list of opportunities for further awards is seemingly endless when you consider all the venues globally of varying sizes that are seeking ways to keep patrons safe from contagions and return to pre-pandemic levels of operations. We are in the process of increasing our headcount to support our growth and expect to add additional seasoned business development professionals before the end of Q2. We also recently added a Senior Vice President of Marketing and Market Development as well as engineering talent.

Before diving deeper, our wholly owned subsidiary MunnWorks recently announced a model room contract for the Renaissance Cleveland Hotel, which upon product approval should lead to a $2 million follow on order. This win is primarily the result of our asset acquisition of VisionMark, which will expand our product offerings to the hospitality industry. VisionMark reported revenues on a pro forma basis of approximately $7 million in their fiscal year ended December 31, 2021.

Our air purification sales pipeline continues to build as we continue to identify attractive opportunities for new business that we believe will provide a positive contribution to financials and build on our 2021 accomplishments. Importantly, our expansion of network of international distributors to increase sales channels and product throughput continues. Our distribution channel includes global leaders such as 3Sixty Biopharma in Africa, Solarius [Phonetic], Lootah Batta Water among others.

We continue to seek new distribution partners and growing our global distribution beyond our base of 52 distributor partners, and increasing our presence beyond the current 52 countries. In fact, we will be hosting our African partners this month, as they are beginning to see increased demand for the Airocide product offering related to cannabis in the continent of Africa.

As we stated in Q4, our domestic and international distributor partners are key to companies scaling our global market share and reach, a clear differentiation between us and our competition. We expect to see our first stocking order from our recently announced Finnish based distribution partner, Plandent Division in late Q3.

Operationally, 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, including exploring the use of large globally recognized contract OEMs, and leasing companies.

From an R&D perspective, we’re beginning to formulate our new product roadmap, and making substantial improvements to our entire line of mobile and fixed air purification products, further differentiating our patented PCO and UVC-carbon based solutions from that of our competitors, as well as the creation of our SteriLumen app, which we believe will both set a standard as well as set the stage for all our devices to join the IoT ecosystem.

As we stated in our Q4 call from a strategic transaction perspective, we continue to explore joint venture and other Airocide product placement pilot programs, with established leaders to include Big Box Retailers in the consumer market and hospitality verticals to further increase market penetration and adoption of our air purification products into new markets and expect to announce some strategic wins in the near term.

Let me close by saying that the last 12 months has been about laying a foundation for the business we plan to build upon going forward. 2022 will be a year of execution. We plan to meet performance obligations for existing contracts, sign new business with existing contracts and new opportunities, continue to develop and enhance our product capabilities to meet the growing demands and needs of the market, continue to further our market expansion into adjacent market opportunities and invest in internal operations to optimally capitalize on all these global opportunities.

As of today, our business is performing at its highest level in the past year, the results of which will begin to show in the latter half of 2022 and into 2022.

Next I’ll turn the call over to Mike Riccio, our Chief Financial Officer who will walk us through the financial results of the quarter. Mike?

Mike Riccio — Chief Financial Officer

Thanks, John. Net sales of approximately $3.3 million, representing an increase of $1.0 million or 45.1%, for the three months ended March 31, 2022, as compared to net sales of approximately $2.3 million for the three months ended March 31, 2021, [Technical Issue] to the disinfection segment, which increased $1.2 billion, largely as a result of the strategic acquisitions of KES Science in Q3 and Q4 of 2021 respectively. [Technical Issue] decreased approximately $159,000, primarily due to supply chain disruptions with multiple order fulfillment delay into Q2 of 2022.

As a reminder, the disinfection segment includes the design, manufacture, assembly and distribution of disinfecting segments for use in healthcare, hospitality, and commercial municipal and residential markets. The hospitality includes the design and manufacture of fine mirrors and furniture, specifically for the hospitality industry.

Gross profit increased approximately $225,000 or 24.3%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, driven primarily by volume growth from the disinfection segment. However, gross profit as a percentage of sales decreased approximately [Technical Issue] in Q1 of 2021 to [Technical Issue] sales, an increase in factory overhead absorption and higher logistical costs in the hospitality segment.

As the company continues to integrate their strategic acquisitions, the focus will be on realizing cost synergies from the consolidation and streamlining of the manufacturing and distribution operations. SG&A costs for the three months ended March 31, 2022, increased to approximately $3.1 million as compared to $1.6 million for the three months ended March 31, 2021. This increase of approximately $1.4 million was driven primarily by the expansion of total equity [Technical Issue] increased $0.3 million year-over-year as headcount increased from 31 at March 31, 2021, to 89 at March 31, 2022. Consulting accounting and legal costs increased $0.3 million and amortization expense, mostly related to the intangible [Technical Issue] with our acquisitions.

Additionally, advertising and promotional expenses due [Technical Issue] in the coming year, as we fully integrate our acquisitions and leverage synergies where possible.

During the quarter ended March 31, 2022, the company determined that a triggering event had occurred as a result of a settlement agreement with Scientific Air, a quantitative impairment test on goodwill determined that the fair value was below the carrying value. And as a result, the company recorded a full goodwill impairment charge of approximately $1.1 million on the condensed consolidated statements of operations during the three months ended March 31, 2022.

Also as a result of this settlement agreement, the previous owners of Scientific Air agreed to [Technical Issue] shares that were part of the original [Technical Issue] 2022 the company recorded a loss on change in fair market value of restoration of [Technical Issue] result of the settlement agreement, the company recorded a gain on the settlement of contingent consideration of $1.7 million.

The company recorded a net loss of approximately $1.6 million for the three months ended March 31, 2022, compared to a net loss of approximately $1.0 million for the three months ended March 31, 2021. The increase of $0.6 million in the net loss was mainly due to the increase in SG&A costs incurred in support of the expansion of the disinfection site.

On a non-GAAP [Technical Issue] EBITDA was a loss of approximately $1.2 million for the three months ended March 31, 20 2, which was an increase of approximately $0.8 million as compared to the three months ended March 31, 2021. We use adjusted EBITDA to assist in analyzing our operating performance by removing the impact of certain key items that we believe do not reflect 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 $7.1 million of unrestricted cash available on our balance sheet.

Looking ahead, we expect further efficiency gains during our fiscal year ending December 31, 2022, as we increase momentum with the integration of our acquisitions, and leverage targeted synergies.

This concludes our prepared remarks. Operator, we can open the call for questions.

Questions and Answers:

Operator

Thank you, Mike. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Thank you. Your first question is coming from Chip Moore of EF Hutton. Chip, please, can you ask your question?

Chip Moore — EF Hutton — Analyst

Hi, good morning. Thanks. Wondering, maybe first, if you could just expand a bit on the marketing initiatives? You’ve talked about, launching a cannabis in April start. I think you referenced the potential for a nice win there, maybe give us a sense of the potential size there. And I guess just more broadly, how to think about the rollout of some of these efforts over the next few quarters, and the initial sort of feedback?

John Andrews — Chief Executive Officer

Sure, Chip. Thanks for the question. We’re very excited about the marketing initiative we launched in April. The initiative really is a sophisticated, expansive approach to driving leads. And our cost per customer acquisition down. As I mentioned earlier, we’ve launched our first initiative and targeted at cannabis. And the early results are very, very good. We’ve seen good traction in terms of what we’re doing with social media, as well as other digital forms of marketing.

And as I said earlier, we are going to convert several of the leads that we’ve gotten. And one of those leads, which I can’t disclose at this time, is one of the largest cannabis producers on the globe. And we’re very close to that deal. And we will announce it we think in the next month or two. We’re going to — once we’re done with cannabis, we’ll probably move to food preservation and/or processing, post-harvest. And then we have three other verticals that we’ll also migrate towards.

Chip Moore — EF Hutton — Analyst

Got it. That’s helpful enough, I think, to the large cannabis producer with the right way to think about that, assuming you convert that sort of an initial site, and then the potential to grow from there, or how should we think about that?

John Andrews — Chief Executive Officer

Yes, I would think about it that that way, with initial site with large expansion capabilities following.

Chip Moore — EF Hutton — Analyst

Got it. Okay. And then, specifically on the dealer award in Washington, I think it’s about 700 buildings is sort of the addressable opportunity. What sort of that initial contract? I know they’ve got some money to spend. And again, sort of similar happening about the timeframe sort of initial site versus multisite?

John Andrews — Chief Executive Officer

Correct. Correct. How many facilities did you mention?

Chip Moore — EF Hutton — Analyst

I thought it was something like 700.

John Andrews — Chief Executive Officer

Yeah, that’s correct Chip. So the award is a multi-million dollar award. We can’t disclose any further numbers, but it’s multiple millions of dollars. And there is a large allocation of that award that will go towards our air purification solutions. And the implementation of those facilities is expected to begin next month.

Chip Moore — EF Hutton — Analyst

Yeah, okay. And another for me if I can sneak one in just supply chain, I know you called out in the Q, some unfulfilled orders. Were those — I guess, can you give us a sense of the magnitude? And were those recognized in Q2? And then is that a trend, we should expect to continue given some of the supply chain challenges that are ongoing?

John Andrews — Chief Executive Officer

Hard to answer that question just simply, because the supply chain is an issue that no one can really predict right now at this stage. But we’re most likely planning for some delays, and building that into our financial model so that our financial model is rigorous in terms of being accurate. But we do plan for supply chain issues going forward in 2022.

Chip Moore — EF Hutton — Analyst

Got it. Sorry, one last one, before I hop off. The goodwill write down, and settlement with Scientific Air, just maybe a little more color there. I think sounded like Mike was cutting out a little bit, just but some of the mechanics as well.

Mike Riccio — Chief Financial Officer

Sorry, I realized I was cutting out. But yeah, there was a settlement agreement with Scientific Air. And so — and then basically, that is considered a triggering event as well. So as part of the settlement was to give back of the 400,000 shares, that was part of the original asset acquisition of Scientific Air. And when you do that, there’s a kind of a mark to market that we have to do. So there’s an initial accounting for that stock, where basically contingent consideration that was done through the first quarter. And then, as a result of the settlement agreement, we were able to record a gain of $1.7 million. And that in a sense offset, although that’s non-operating offset the operating expense of the goodwill write down. So because of that triggering event, we just had to reevaluate the purchase price allocation and the approximately $1.1 million of goodwill was then written down. So the net impact really is the write-down of the goodwill offset by the net gain on the contingent consideration for the quarter. Does that help?

Chip Moore — EF Hutton — Analyst

Yeah, that’s helpful. Appreciate it. Okay, I’ll hop back in queue. Thanks.

Operator

Thank you. [Operator Instructions] Your next question is coming from Simeon Gutman of Morgan Stanley. Simeon, over to you. Simeon, you might be on mute. I don’t think we have Simeon’s line. Okay, there appears to be no further questions in the queue. I will now hand back over to John.

John Andrews — Chief Executive Officer

Thank you. Again, I want to thank everyone for joining us on today’s call. Should anyone have any additional questions, please do not hesitate to contact me directly. Thank you again.

Operator

[Operator Closing Comments]