Applied UV Inc. (AUVI) Q2 2022 Earnings Call Transcript

Applied UV Inc. (NASDAQ: AUVI) Q2 2022 earnings call dated Aug. 16, 2022

Corporate Participants:

Brett Maas — Managing Principal, Hayden IR

John F. Andrews — Chief Executive Officer, Director

Mike Riccio — Chief Financial Officer

Analysts:

Chip Moore — EF Hutton — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Applied UV Second Quarter 2022 Financial Results Conference Call. [Operator Instructions].

It is now my pleasure to turn the floor over to your host, Brett Maas of Hayden IR. Sir, the floor is yours.

Brett Maas — Managing Principal, Hayden IR

Thank you. Once again, welcome to Applied UV Second Quarter 2022 Earnings Call.

With me on the call today are John Andrews, Chief Executive Officer, 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.

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 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 John Andrews. John, the floor is yours.

John F. Andrews — Chief Executive Officer, Director

Thank you, Brett, and good morning, everyone. It’s a pleasure to be with you this morning to review the results of our second quarter and provide an update on our business.

I’d like to start by thanking the entire Applied UV team for delivering strong results amidst a confluence of factors including inflationary uncertainty, extended supply chain timelines and overseas market shutdowns due to COVID and the war in Ukraine. Our team’s hard work fueled by our high performance culture resulted in another quarter of solid growth capping a strong first half of the year and creating greater momentum going into the second half of the year.

Our financial results for the second quarter include record revenue of $5.9 million versus $1.9 million in the same quarter last year for a total increase of 213.5%. A portion of this growth was derived from acquisitions, primarily our recent acquisition of VisionMark. Importantly though, on a pro forma basis, we grew our revenue by 39.2%. We continued our investment in marketing, sales, engineering and other growth initiatives in the second quarter while at the same time following a disciplined capital allocation process. We expect our operating margins excluding one-time expenses will improve as we take advantage of synergies between our operating subsidiaries. One-time expenses in the second quarter were approximately $739,000.

Looking ahead, our backlog is considerably higher as compared with the same time last year, indicating a solid foundation for future growth. The opportunities for both our Disinfection and Hospitality segments remain robust. 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 consumer markets. The Hospitality segment includes the manufacture of fine mirrors and furniture, specifically for the Hospitality industry.

In Disinfection, research in markets estimates that the global market for air purification and pathogen elimination will reach $24 billion by 2030, with a compounded average growth rate exceeding 11%. And the air quality is no longer a nice to have as we now know that 90% of all COVID transmission is airborne person to person. Further, traditional HVAC systems neither exchange nor purify the air sufficiently to mitigate risk nor eliminate airborne pathogens. Additionally, recent studies show that cognitive performance for K through 12 students improve with proper air quality.

Our diverse portfolio of patented, proprietary and research-backed air purification solutions address the growing demand for air purification and pathogen elimination across an ever-increasing set of use cases and verticals. Our global use case penetration includes consumer, sports arenas, public spaces, winery, dairy, food preservation, education, cannabis, correctional facilities, dental, long-term care and hospitals.

In Hospitality, the industry is showing clear signs of rebounding from the devastation of the pandemic driven shutdowns in 2020. According to Hotel-Online, a B2B news platform, U.S. hotel occupancy was nearly 70% for the week ending August 6th, and for the month of June, U.S. hotel profitability per available room reached its highest level since October 2019. Hotels have brought back services and amenities, and the outlook is positive for sustained improvement and broadening opportunities for our hospitality offerings.

Turning to new business, our Disinfection segment grew by nearly 90% in the second quarter. Some key wins in the segment include our European distribution partner, Cellarius, which placed a substantial order for Airocide air purification systems, expanding our presence in the wine, cannabis and food preservation verticals in Europe. Cellarius has been one of our European distributors of Airocide for more than eight years selling Airocide to multiple verticals including the aforementioned as well as hospitality and healthcare. M/S Novatek, another one of our trusted international partners, was selected as the sole source provider of Airocide air purification systems for government hospitals throughout the country of Pakistan.

Airocide provides a great value due to its filterless technology and environment-friendly properties as well as its efficacy in pathogen elimination. Furthermore, we expect additional considerable demand for Airocide in the coming months in Pakistan, Indonesia and Vietnam. DA Internationals, one of our U.S. distributor partners, has 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 further 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. And as I cited earlier, clean air has been proven to improve cognitive capacity.

Advance Beauty College, one of the largest cosmetology schools in the state of California, having graduated over 50,000 students, selected and purchased our air purification solutions for installation at both of its campuses. This sector, with more than 950,000 hair and nail salons, represents a large addressable market opportunity for us.

MedLine, our North American healthcare distribution partner for our Scientific Air mobile solutions, placed another large multi-unit, follow-on order for our patented S200 mobile air purification system. This order is in further support of the Centers for Medicare and Medicaid Services policy that was announced earlier in the year to ease visitation in long-term care facilities. This policy ensures that cost is not a barrier for long-term care providers to ease visitation restrictions and better protect their patients, staff and visitors. Healthcare continues to be a key vertical market for us, and MedLine continues to be a strong partner.

Another key healthcare win in the second quarter was with Mount Sinai Medical Center where we are installing 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 the initial installation later this year. We expect favorable outcomes, which we believe will further validate the previously published independent results and position us for greater adoption of our Surface and Drain UVC Disinfection Solutions in additional healthcare and other facilities globally to combat and eliminate surface-transmitted viruses, such as monkeypox.

Our Hospitality segment grew by more than 300% in the second quarter both organically from base business and a result of our first quarter asset acquisition of VisionMark. VisionMark is a manufacturer with state-of-the-art equipment in a 100,000 square foot Brooklyn, New York facility that manufactures both wood and metal case goods for the hospitality industry. This acquisition expands our product offering with the hospitality industry as well as provides economies of scale as we integrate this facility into MunnWorks. It also provides us the ability to move our manufacturing base to the U.S., a significant positive selling point, as hotels are demanding more domestic manufacturing. The cost differential between Chinese and domestic manufacturing has increased considerably due to tariffs and other factors leading hotel management to favor U.S.-based manufacturing. Additionally, domestic manufacturing mitigates supply chain delays and allows the hotels to better manage project timelines and ultimately revenue generation.

Importantly, this acquisition allows us to leverage our legacy hospitality relationships in MunnWorks and as such, we have already developed a sales pipeline in excess of $10 million for hotels in Cleveland, Washington D.C., Orlando, Boston and Knoxville, which is only subject to sample room approvals, which we expect near-term. With the growth we are experiencing in [Phonetic] forecasting, we expanded our executive management leadership team having hired a seasoned VP of Operations, who will both manage this pipeline and further integrate our operation to increase our operating margins.

We are continuing to build our sales pipeline for the Disinfection segment, both domestically and internationally. Domestically, we have invested in talent acquisition of proven sales executives, growing our direct sales team by 100%. Internationally, efforts to expand our network of distributors to increase sales and product throughput continue. Our distribution channels include global leaders such as 3Sixty Biopharma in Africa, Cellarius in Europe and JARO in Latin America among others. We continue to seek new distribution partners to grow our global distribution beyond our base of 64 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 launched an international multi-pronged targeted marketing program in the second quarter aimed at key vertical markets initially focused on cannabis, food preservation and wine.

Our first campaign, which targets the cannabis space, was launched in April to coincide with 4/20 World Cannabis Day. The campaign included the redesign and launch of the Airoclean 420 website as well as lead generation ads on several digital platforms. Since then, we have been awarded a significant order for our technology from Tru Infusion, one of the largest indoor cultivating companies in the U.S., and further expansion with them is expected in the coming months. Tru Infusion has deployed our air purification solution throughout its 79 facilities.

Fungal free air is a central element in producing high quality cannabis products. We have an ideal solution for the cannabis market as our Airoclean 420 eradicates lethal powdery mildew and other airborne pathogens to protect crops and the personnel working in the growing facilities. In July, we exhibited in Berlin at Europe’s largest cannabis trade show. At the event, we also hosted 24 of our global distributors who traveled to the event to participate in our cannabis training curriculum. We are also exhibiting in our Airoclean 420 at the Cannabis Business Times’ Cannabis Conference in Las Vegas next week.

Beyond cannabis, we have plans for strong marketing push in the second half of 2022 with exhibits at another — a number of other conferences throughout the U.S. and Europe. These include two that are focused on food preservation, the Feeding America Unite Conference in Philadelphia in August and the Global Produce & Floral Show in Orlando in October. Each of these conferences brings together buyers, thought leaders and subject matter experts from around the world making the conferences ideal for sales lead generation. We will also be exhibiting at a large cannabis conference and expo, the MJBiz in Las Vegas this November. 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.

And finally, we will be exhibiting at the European healthcare show Medica, a world forum for medicine, being held in Dusseldorf this November. 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. Beyond trade shows, another facet of our reinvigorated marketing and sales plan is the aggressive pursuit of a retail partner for distribution of our consumer line of products. We are encouraged by the progress we’re making with several global retailers for securing placements online and in their brick-and-mortar locations.

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 patented PCO and UVC carbon-based systems from that of other technologies. In addition to the ongoing development of our IoT environment systems, we also have plans to introduce several new products this year, including our Lumicide Surface and Drain UVC Disinfection Solutions.

Recently, we were granted a patent related to our system that neutralizes pathogens on ATM services. Globally, consumers interact with ATMs on a daily basis. And according to our internal research, there are about 470,000 ATMs in the U.S. alone. Banks are seeking ways to reduce litigation risk by incorporating the use of the best science available to protect consumers from contracting serious illnesses due to deadly surface pathogens found on ATMs. We see that this UVC surface pathogen elimination pattern further strengthens the credibility of our disinfection capabilities, elevates our business profile and adds value to our intellectual capital. Operationally, across both our 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 the supply chain disruptions that are so prevalent in our world today.

Lastly, with regard to corporate governance, we recently added two distinguished and highly experienced executives, Jos Luhukay and Monica Woo to our Board of Directors. Jos who holds a PhD in Computer Sciences from the University of Illinois has more than four decades of experience leading many of Indonesia’s top financial institutions and is a former Ernst and Young Partner who led its business advisory and risk consulting practice. He has a strong track record of delivering profitable growth for internationally recognized companies. Monica is a seasoned Fortune 100 executive and board member who is known for the strategic insight she has garnered from years of experience, serving in a number of C-suite level roles to include President of 1-800-FLOWERS. She has a proven ability to position new and existing companies for long-term success and extensive network of national and international senior level contracts in business, government and non-profits. Jos and Monica each complement and broaden the expertise of our board and we look forward to leveraging our expertise to help us continue our global market expansion.

Next, I will turn the call over to Mike Riccio, our Chief Financial Officer, for a review of our financial results. Mike?

Mike Riccio — Chief Financial Officer

Thanks, John. Net sales for the second quarter of 2022 were $5.9 million, an increase of $4 million or 214% compared to $1.9 million for the second quarter of 2021. This increase was attributable to both the Disinfection segment, which increased by $819,000 largely as a result of the strategic acquisitions of KES and Scientific Air in the second half of 2021, and the Hospitality segment, which increased by $3.2 million primarily as a result of the fulfillment of orders that were delayed from the first quarter and the addition of orders fulfilled from the recent VisionMark NYC acquisition.

On a pro forma basis, revenue was up 39.2% from $4.2 million in the second quarter of 2021 to $5.9 million in the second quarter of 2022. Gross profit increased by $771,000 or 145% to $1.3 million in the second quarter of 2022, up from $533,000 in the second quarter of 2021. The increase was driven by volume growth from both the Disinfection and Hospitality segments. Gross profit as a percentage of sales decreased by 620 basis points from 28.3% in the second quarter of 2021 to 22.1% in the second quarter of 2022, driven primarily by the initial costs required to complete projects that were in process and to integrate and absorb the VisionMark NYC operations. As we continue to integrate our strategic acquisitions, we are focused on realizing cost synergies from the consolidation and streamlining of the manufacturing and distribution operations.

SG&A expense for the second quarter of 2022 increased to $4 million as compared to $2.7 million in the prior quarter. This increase was driven primarily by the expansion of the Disinfection segment with the acquisition of KES and SciAir, expansion of the Hospitality segment with the VisionMark NYC acquisition and higher 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 includes one-time costs of $739,000 related primarily to the integration of VisionMark NYC operations and the establishment of strategic marketing programs. We anticipate the efficiency gains in the coming year as we fully integrate our acquisitions and leverage synergies where practical.

Net loss for the second quarter of 2022 was $2.9 million, compared to a net loss of $2.1 million for the second quarter of 2021. The increase in net loss was mainly due to the increase in SG&A costs incurred in support of our business acquisitions and for the expansion of both the Disinfection and Hospitality segments. On a non-GAAP basis, adjusted EBITDA was a loss of $2.2 million for the second quarter of 2022, which compares to an adjusted EBITDA loss of $1.5 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 $3 million of unrestricted cash on our balance sheet. This compares to $7.1 million at the end of the first quarter. Cash used in operations during the first six months of 2022 was due in part to the integration of the VisionMark NYC acquisition including cost to expedite completion of projects that were in process and also due to an increase in inventory as we secured parts in advance of production in our Disinfection segment to mitigate potential supply chain disruptions ahead of targeted marketing initiatives planned for the second half of 2022.

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

John F. Andrews — Chief Executive Officer, Director

Thank you, Mike. In summary, second quarter was a solid quarter with steady progress made towards executing operational initiatives to grow our business, integrate recent acquisitions and increase awareness of our brand to drive future growth. The market opportunities in each of our two business segments are enormous, and recently announced new business wins demonstrate that we are gaining momentum. We are increasingly encouraged by our progress and where we are headed. We look forward to updating you again during our third quarter call in November.

Thank you again, everyone, for joining our call today. This concludes our prepared remarks. Operator, we can open the call for questions.

Questions and Answers:

Operator

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

Chip Moore — EF Hutton — Analyst

Good morning. Hey, thanks, guys. I wanted to ask about the backlog. You talked about it being up nicely. Just curious about composition, hospitality versus infection and how we should think about revenue recognition there and any implications for margins near-term?

John F. Andrews — Chief Executive Officer, Director

Yeah. I can jump in first, Mike. Relative to backlog between the business segments, the backlog is considerably higher for both segments at this point in time versus this point in time last year. And I am talking in the hundreds of percent higher, so considerably higher. The margins that we are seeing on the Disinfection side are tracking with our projections, and Mike can talk to that. And then Mike, you can talk more to the margins on the Hospitality side and where you see those going.

Mike Riccio — Chief Financial Officer

Sure. Yes. John mentioned on the Disinfection side of the business. The margins are holding strong. On Hospitality, as I explained, we had some expediting costs in this quarter, and — including securing parts and overtime costs that dragged down the margin for this quarter. But that pretty much — I think, there are just a few remaining projects, and then we will be able to then execute on the new pipeline, where the margins will get back into the normal level for our Hospitality segment. So, this quarter was kind of an aberration. Higher sales volume, as you can see, but slightly lower margins in Hospitality, but that’s pretty much behind us now.

Chip Moore — EF Hutton — Analyst

Got it. Okay. Thanks for that. And then on SG&A sort of the run rate, I guess if we take out the one-timers in the quarter, is that a good way to think about that? Are there any more sort of acquisition costs near-term, and then we think about streamlining with them — with a good sort of run rate on SG&A?

John F. Andrews — Chief Executive Officer, Director

Yes. Chip, you could definitely take out the $739,000. The actual — that’s a solid number. And then there are additional one-time costs. And barring additional acquisitions, that number is actually closer to $900,000. But I hesitated to use that number publicly only because it could be repeated depending on our strategy in the second half as it relates to potential acquisitions. But we are not really — right now we are focused on executing on the tremendous pipeline that we’ve built. And you are probably going to ask, so I will just tell you anyway, the use of the cash was really to be able to execute on that pipeline, because we were finding the supply chain disruptions affecting us. So, we secured inventory for our targeted marketing launches to fulfill primarily the Disinfection side of the pipeline. And as I have mentioned in previous discussions, we are looking to bring the manufacture more onshore to avoid this occurrence. But for now, we wanted to be safe to make sure that we were poised for a strong second half. So, that would have kind of answered a couple of questions there.

Chip Moore — EF Hutton — Analyst

Yeah. That’s good. [Speech Overlap] I appreciate that. And then just one more, and then I will hop back into the queue. I wanted to ask about IP [Phonetic] you guys have filed a claim. So, just curious about the steps there and any incremental costs there are not too expensive to defend the IP?

Mike Riccio — Chief Financial Officer

Yeah. We don’t see it being overly expensive to defend the IP. And we think it’s a very important situation that we address as it infringes upon our trademarks and potentially patents. We think it’s confusing to the market and our brand. And so we decided to take those actions to protect our shareholders and to ensure that moving forward that the market confusion [Indecipherable] for the benefit again of our shareholders.

Chip Moore — EF Hutton — Analyst

Understood. All right. Thank you.

Mike Riccio — Chief Financial Officer

You are welcome.

Operator

[Operator Instructions]. There appear to be no further questions in queue at this moment. Do you have any closing comments you wish to finish with?

John F. Andrews — Chief Executive Officer, Director

No, just to again thank everyone for their time today. And we look forward to speaking to you in November for our third quarter results.

Operator

[Operator Closing Remarks].