Applied UV, Inc. (AUVI) Q4 2021 Earnings Call Transcript

Applied UV, Inc. (NASDAQ: AUVI) Q4 2021 earnings call dated Apr. 07, 2022

Corporate Participants:

Brett Maas — Investor Relations

Mark LeBeau — Business Strategist

Mike Riccio — Chief Financial Officer

Analysts:

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Chip Moore — — Analyst

Presentation:

Operator

Good day. I would like to welcome everyone to the Q4 and Full-Year 2021 Applied UV Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brett Maas, Investor Relations from Hayden IR. Thank you. You may begin.

Brett Maas — Investor Relations

Thank you. Once again, welcome to Applied UV’s fourth quarter and full-year 2021 earnings call. With me on the call are Mike Riccio, Chief Financial Officer; and Mark LeBeau [Phonetic], who has recently joined the company helping formulate business strategy. As a reminder, all materials for today’s live presentation are available on the Company’s Investors website at Applied digital — 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’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 and future events that are subject to risks and uncertainties. Our most recent Form 10-K and 10-Q list 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 Mark LeBeau. Mark, the floor is yours.

Mark LeBeau — Business Strategist

Thank you, Brett, and good morning, everyone. It’s a pleasure to be with you this morning to review the highlights of our most recent quarter and full year. 2021 was a year of significant accomplishments centered around the closing and integration of three strategic acquisitions that diversified our business [Indecipherable] and surface pathogen elimination platform, and well positioned to capitalize on increasing market demand [Indecipherable] environment born out of devastating impacts of the pandemic as well as the most recently announced US government [Indecipherable] CMS policy initiatives, all aimed to improve indoor air quality.

We are well positioned to serve the global market that is expected to reach $24 billion by 2030, as a leading provider of pathogen elimination offering, tech businesses facility and the people who [Indecipherable] 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.

Throughout the course of 2021, we invested nearly $15 million in three acquisition, build out a portfolio of disinfection asset. Specifically, early in 2021, we acquired substantially all the assets of Akida Holdings [Indecipherable] Airocide System for air purification technologies into our mix of offerings for approximately $7.9 million in cash and equity transaction.

Akida’s 2020 revenue was $4.7 million. Later in that same year in 2021, actually is September, we acquired substantially all the assets of KES for approximately $6.3 million in cash and equity transaction. KES revenue for the 12 months ended October 31, 2020 was approximately $4.5 million These two acquisitions provide us with all the rights idle [Phonetic] and interest to the Airocide system of air purification technologies.

And finally on the acquisition front in 2021, we acquired substantially all the assets of Scientific Air management partners, which owned the line of air purification technologies, enabling so as Scientific Air, and cash and equity transaction. At the time of that closing, the transaction was valued at approximately $11.5 million. The acquisition was complete integrated. We have set the stage for organic growth driven by a large and targeted marketing programs kicking off in mid Q2 and expect to drive and expand market share in 2022 and beyond.

We begin to see positive emerging shift, excuse me, energizing shift in the air purification market as we exited 2021, displacing uncertainty that was an overhang in much of the last quarter of 2021 and in Q1 2022, as end users awaited key policy decisions and funding allocated. Locally, scientists and healthcare experts are navigating for improving their quality to control the transmission of airborne pathogen quite a while, and the pandemic that struck in 2020 further heightened the importance of clean air for our personal health and for the health of the global economy.

In the back half of 2021 and early ’22, there was much uncertainty as to how and when government respond to scientist call for action for policy changes and if funding would be made available to comply those changes. Since then, government initiatives and commitments to funding by governmental agencies, including the centers for Medicaid and Medicare and environment protection aid among others have reignited market activity. We are increasingly encouraged by these development the the advancement of new business opportunities to a contract award, over one strong market headwinds that shifted market tailwinds that were telling opportunities for.

More specifically, the centers for Medicaid and Medicare announced a meeting with stakeholders in February of this year that mobile air cleaners installed in long-term care facilities, LTE visitation [Technical Issues] now beginning to see interest in demand from our exclusive US distribution partner Medline. Likewise, as part of the President’s clean air agenda, UV has recently launched a clean air in buildings challenge, which is called action and it can place certain guiding principles and actions to this building owners and operators, reduced risk of airborne viruses and other contaminants indoors.

We have two best of class tools available with the government detail and announced the potential tools in a consumer and business tool box. Together as part of the American rescue plan, the emergency assistance for non-COVID program [Indecipherable] the government has made available over $3.5 billion in funding to address the education and business disruption caused by COVID-19 pandemic, which includes improving ventilation system, including mobile and air, air purification systems to ensure healthy air in non-public schools and workplace.

With regards to competitive landscape, the air purification market remains highly fragmented and we are well positioned to tackle head on. As a note, [Indecipherable] for $72 million and a cash transaction effectively as air purification capabilities [Technical Issues] This market transaction in our opinion brings the opportunity in the space for further validate our business plan and model.

Over the course of the last year, we had a number of high-profile installations in large venues and facilities at service prime examples of our capability that we hold up as referenceable [Indecipherable] Tennessee Department of Corrections which houses 10,000 inmates, the armed forces research institute, the US Army Aberdeen Proving Grounds and the list goes on. Clearly, our solutions are scalable and list of opportunities for further awards [Indecipherable] and consider all the venue globally [Indecipherable] and return to pre-pandemic levels of operation.

Our sales pipeline is building as we continue to identify attractive opportunities for new businesses and we believe will provide a positive contribution to our financials and build on our 2021 accomplishments. Importantly, the standard of network of international distributors increased sales channels and product throughput. Our distribution channels include global leaders such as 3Sixty Biopharma in Africa, [Indecipherable] Scandinavia [Indecipherable] for the Middle East, among others.

We closed out 2021 with the global distribution base of 52 distributors and dealers now have presence in more 52 countries. Our domestic and international distributors and dealers are key to the company expanding our global market share and reach, a clear differentiation in our company and our competition. From a marketing perspective in 2022, we are preparing to launch a number of targeted initiatives that include digital, radio social media campaign, all being that the following verticals including cannabis for long-term care, schools, dental and other healthcare facilities and hospitality.

Operationally, we are also analyzing each of the points in our supply chain with heightened integration to optimize inventory, improve quality control, mitigate against supply chain disruption that is so prevalent in our world today, including exploring the use of large globally recognized contract [Indecipherable] From a strategic transaction perspective, we’re also currently exploring joint venture and other Airocide products, placing pilot programs, establish leaders in the long-term care, the veterans administration and hospitality verticals to further increase market penetration and adoption of air purification model.

We also continue to seek out low-cost opportunity in both of our legacy hospitality business, such as the recent [Indecipherable] acquisition that we completed in late March of this year. This acquisition expands our reach into the luxury hospitality space of new construction remodeling of hotels beyond our core Munnworks business, while also potentially contributing to our topline earnings.

And lastly, I’d like to provide you all of the Group update on our senior executive search [Indecipherable] than an announcement regarding our permanent CEO’s and we’re also interviewing other senior executives, who we expect to join the team and further strengthening it.

Next, I’d like to turn the call over to Mike Riccio, our Chief Financial Officer for a review of our financials. Mike?

Mike Riccio — Chief Financial Officer

Thanks, Mark. Looking at the fourth quarter first. Our fourth quarter net sales increased by $2.9 million to $3.9 million, up from $1 million in the fourth quarter of 2020. The majority of this growth was driven by the three strategic acquisitions that essentially established our disinfection segment during 2021.

Our fourth quarter net sales increased by 10.3% sequentially when compared to $3.6 million in the third quarter of 2021. This increase was the result of our efforts to continually integrate the operations of these three strategic acquisitions. Gross profit for the fourth quarter of 2021 was $1.6 million or 40.3% of revenue when compared to $106,000 [Phonetic] in the year ago quarter, primarily as a result of the addition of the Disinfection segment. Sequentially, gross profit was up over $529,000 as compared to the third quarter gross profit of $1.1 million, primarily due to improved product mix.

Net loss for the fourth quarter of 2021 was $3.1 million compared to a net loss of $2.4 million last year in the fourth quarter. This loss was primarily due to the build-out of our infrastructure to support the Disinfection segment and the integration of the acquisitions. For the full-year of 2021, net sales increased by 103.5% to approximately $11.7 million, up from $5.7 million in 2020. Again, the majority of this growth was driven through the addition of the Disinfection segment through the acquisitions mentioned previously.

2021 net sales for disinfection — from the Disinfection segment were $5.7 million compared to zero in 2020. The Hospitality segment began to rebound from the slowdown caused by the pandemic, reporting $5.9 million in net sales for 2021, an increase of nearly 4% when compared to $5.7 million in 2020. Net loss for 2021 was approximately $7.4 million compared to a net loss of $3.4 million in 2020. The increase in net loss in the 2021 was primarily due to the costs associated with the build-out of the Disinfection segment, specifically related to personnel costs due to the increased headcount, consulting costs and legal expenses related to the three strategic acquisitions, additional amortization expenses, increased advertising, product certification and testing, and corporate governance and public listing expenses. Almost half of the expense increase is related to what’ll call one-time expenses. Looking ahead, we expect efficiency gains in 2022 as we increase momentum with the three fully integrated acquisitions and leverage target synergies.

On a non-GAAP basis, adjusted EBITDA was a loss of $4.8 million in 2021 compared to a loss of $2.6 million in 2020. We use adjusted EBITDA to assist in analyzing our operating performance by segment, 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.

In closing, we ended the year with $7.9 million of unrestricted cash, cash available on our balance sheet. Our balance sheet is strong with ample cash on hand to support our growth initiatives, and we just recently announced — and we just recently announced that our Board of Directors has approved a $1 million share repurchase program of our common stock in open market transactions that will remain in effect until September of this year.

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

Questions and Answers:

Operator

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question for today is coming from Jeffrey Cohen. Please announce your affiliation, then pose your question.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Hey, good morning, how are you.

Mike Riccio — Chief Financial Officer

Good morning, Jeff.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

So I wanted to get little more information as far as revenue composition by segment. If you could provide a little clarity from ’21 as far as Munnworks, Airocide and anything from Lumicide and then maybe give us some thoughts as far as ’22 and revenues and segmentation of those revenues.

Mike Riccio — Chief Financial Officer

As far as the revenues for ’21, the, as I mentioned, so hospitality or Munnworks approximately $5.8 million — $5.9 million in 2021, and our Disinfection segment was $5.7 million for 2021, again as opposed to zero in the prior year. And our Disinfection segment, as you may know is made up of our Airocide products and our Scientific Air Products. Scientific Air was only — both, KES acquisition, two to three acquisitions, KES and Scientific Air occurred basically in Q4, one late in Q3, one in Q4, so there was some contribution from them. But primarily the Disinfection segment is due to the — from the key acquisition of our Airocide product.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Okay, got it. Could you talk a little bit about margins from current levels and how you’re thinking about what they may look like going forward from the current, call it mid ’30s?

Mike Riccio — Chief Financial Officer

Yeah, as I mentioned, you saw the Q4 margins tremendous increase from the previous quarter, just as we start to sell the higher margin KES and Scientific Air product. So from top to bottom, our Air Products are the higher margin contribution products followed by KES and then Akida. So as we blend in these — the newer or the later acquisitions based on some of the initiatives that Mark had discussed earlier, you’re going to see improved margins going forward. The mix, the mix is much stronger now with those two — the two most recent acquisitions on the disinfection side.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Okay, that’s, that’s perfect. And then as far as ’22 on a sequential basis, any, any guidance or thoughts there as far as how the year may look sequentially through the quarters.

Mike Riccio — Chief Financial Officer

I’m not prepared to give guidance today. However, I will tell you that as we, as we fully integrate, as we continue to fully integrate the acquisitions you will see improved sales obviously, but also you will see improved margins from the improved mix that I — that I just discussed. So, and we’re just finishing up Q1 now. Still Q1 was I would say, still in the process of integrating these acquisitions and coupled within the initiatives that Mark described earlier, you’re going to see some improvement in Q2 and beyond that, that’s the anticipation. But again, not prepared — not prepared to give guidance at this stage, but the — the framework or the foundation has been laid from which we’re going to continue to grow.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Got it. And one more if I may, the — the SG&A expense from Q4. Should we think of that as the new baseline or were there some one-time charges in that?

Mike Riccio — Chief Financial Officer

There are one-time charges in there. I think roughly half of that increase is related to one-time charges. So you can use that as a guide. So there is a baseline, but the baseline would be slightly below that because of these one-time charges. I’m not counting them going forward.

Jeffrey Cohen — Ladenburg Thalmann — Analyst

Okay, perfect. That those were for us. Thanks for taking the questions.

Mike Riccio — Chief Financial Officer

Sure. Thanks, Jeff.

Mark LeBeau — Business Strategist

Thanks, Jeff.

Operator

[Operator Instructions] Your next question is coming from Chip Moore. Please announce your affiliation, then pose your question.

Chip Moore — — Analyst

Good morning. Hey, thanks for taking the question, guys. Wanted to circle back to margin that look like, I think Disinfection segment margins were about 50% in the quarter. Just wondering, you talked about Scientific Air and KES coming on and being accretive to margins. So is that, should we think about that 50% margin as a reasonable run rate on the Disinfection segment? But how should we think about that?

Mike Riccio — Chief Financial Officer

Yeah, the Disinfection segment, I’d say, again it depends on the mix, is definitely a larger margin — higher margin structure than hospitality, no question. And as I said, Scientific Air being the larger contributor in terms of margin and KES not far behind. If we continue with the same mix in sales, you will see approximately the same margin in that segment. But again, it’s all going to depend on the mix of sales. But it is a healthier margins without question.

Chip Moore — — Analyst

And any, we didn’t talk about supply chain at all, but any impacts there or anything we should take into account on either side of the portfolio?

Mike Riccio — Chief Financial Officer

Well, the one initiative we have the China tariff reduction coming, so that will help for products that are imported from China, and we do qualify. So there’ll be — there is — I haven’t done the calculations completely yet, but there are, there are retroactive adjustments as well as on a go-forward basis. So from a supply chain logistics perspective you will see some improvement there. Also there are some synergies that are occurring with the integration of these acquisitions as we look at the landscape of manufacturing and distribution. So we’re going to start to enjoy those somewhat in 2022 as well.

Chip Moore — — Analyst

Got it. That’s helpful. And then in terms of the CEO search, it sounds like you’ve got something coming very soon. Just how should we think about timing on that and they had a search firm, maybe just update us on the process there.

Mike Riccio — Chief Financial Officer

There will be an announcement in the very, very, very short-term.

Chip Moore — — Analyst

Okay. We’ll stay tuned for that. And I know your not jut giving guidance, obviously for the year, but I think in the past we talked about Scientific Air and KES being ort of $10 million to $14 million contribution this year. Is that still reasonable or how should we think about that.

Mike Riccio — Chief Financial Officer

I’m sorry, could you repeat that again, Chip?

Chip Moore — — Analyst

So I think, I think in the past we’ve talked about Scientific Air and KES both contributing, I think it was $5 million to $7 million in ’22, is that still a reasonable expectation?

Mike Riccio — Chief Financial Officer

Again, we’re not, we’re not, we’re not, I’m not in a position to give guidance. But however, the overall contribution from those, you will see — you will start, obviously you’re going to see that now in the coming quarters because you saw, you saw a bit of it in Q4, but it’s going to become more clear in Q1 and Q2 and onwards. So yeah, I mean that’s — I’d say that’s the floor and then the number that you see there and then we want to build from that, from that. So I’m bullish, but not numerically bullish today.

Chip Moore — — Analyst

Fair enough, understood. Okay. I will hop back in queue and let someone on. Thank you.

Mike Riccio — Chief Financial Officer

Thank you.

Operator

There appear to be no further questions in queue. I would like to turn the floor back over to management for any closing remarks.

Mark LeBeau — Business Strategist

Thanks again for everyone joining our call today and should anyone have any additional questions, everyone has our contact information. Please do not hesitate to contact either of us directly. Thanks again for your time. Thank you.

Operator

[Operator Closing Remarks]