TOMI Environmental Solutions, Inc. Q2 FY2022 Earnings Call

Good day, everyone, and welcome to today's TOMI Environmental Solutions, Inc. Second Quarter 2022 Financial Results Conference Call. It is now my pleasure to turn today's conference over to John Nesbett with IMS Investor Relations. Please go ahead.

Thank you for joining us today for the TOMI Environmental Solutions Investor Update Conference Call. On today's call are TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane; and Nick Jennings, TOMI's Chief Financial Officer. Dr. Shane will provide an overview of recent business highlights and financial performance for the most recent quarter and 6 months. Both will be available to address any questions you may have. A telephone replay of today's call will be available through August 29, 2022, the details of which are included in the company's press release today. A webcast replay will also be available on TOMI's website, www.tomimist.com. Please note that information contained within this presentation is relevant only today of which it was recorded, August 15, 2022, and you are therefore advised that time-sensitive information may no longer be accurate at the time of any replay. Certain written and oral statements made by management of TOMI may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements should be evaluated in light of important risk factors that could cause actual results to differ materially from our anticipated results. The information provided in this conference call is based upon the facts and circumstances known at this time. The company undertakes no obligation to update these forward-looking statements after the date of this call. In addition, TOMI will discuss certain non-GAAP financial measures during this call. The company uses non-GAAP measures because it believes they provide useful information about operating performance and should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures, the comparable GAAP measures is included in the earnings release dated August 15, 2022. Okay. I will now like to turn the call over to TOMI's Chairman and CEO, Dr. Halden Shane. Go ahead.

Thank you, John. Good afternoon, everyone, and thank you for joining the TOMI Environmental earnings call. Today, we will provide operating and financial results for the second quarter of 2022 and an update on our iHP SteraMist product lines and competitive advantages. Before we begin, I wanted to let everybody know that today's presentation will be accompanied by slides, which are available on the webcast. Please refer to the press release dated August 11, 2022, for details of how to join today's meeting through the webcast feature. I'll be presenting, and both Nick Jennings, our CFO, and I will be available for questions and answers after the update. Quarter and year-to-date highlights. In the second quarter, we continued to see increased demand for our Custom Engineered System and mobile equipment, which has led to improved financial results, some of which are not measured in today's filing. Throughout 2022, strong interest in our technology continues, and we received orders for delivery in 2022. We continue to win opportunities for these larger sales for our CES as the product is one of our primary drivers for growth in our current pipeline. During the first 6 months of 2022, we closed $5.6 million in orders, of which we anticipate $2.3 million to be recognized in revenue in our third and fourth quarters for the year. This represents a 35% growth in sales orders received for the 6 months when compared to the same prior year accounting period. We anticipate further growth in sales and the continued build of our pipeline for the remainder of 2022. Interest in SteraMist iHP is robust. Based on our current orders as well as the pipeline and strength of our referral base in the life science sector, we are targeting over $12 million in revenue for 2022. Through June 30 of this year, revenue grew by 6%. The increase was attributable to higher demand for our mobile equipment where we saw growth of 11% and 13% for the 3 and 6 months ended June 30, 2022. While our quarter-over-quarter revenue was flat with last year, our sales pipeline continued to grow in the second quarter with the addition of $900,000 in orders that will be recognized later this year. We drove reduced operating expenses and losses for both periods. We reduced operating expenses by 16% and 21% for the 3 and 6 months ended June 30, 2022, respectively, when compared to the same prior year period. We reduced our loss from operations by 28% and 44% for the 3 and 6 months ended June 30, 2022, when compared to the same prior year period. We also improved liquidity with lower cash used in operations of 82% for the first 6 months of this year when compared to the same prior year period. Inclusion of SteraMist on EPA's List Q for the rare or novel viruses such as Monkeypox virus, SARS-CoV-2 and its variants that causes COVID-19 have been one of the many reasons the sales pipeline is strong. During the first half of the year, orders or bookings increased 35% when compared to the first half of 2021. $4.9 million of the overall orders is attributable to our SteraMist product revenues, which represent our mobile equipment, CES and BIT Solution. There are some substantial global market trends and drivers in the decontamination industry. Global disinfectant spray market size is expected to reach USD 18.6 billion by 2030 and is expected to expand at a CAGR of 8.2% from 2022 to 2030. Sales of disinfectant sprays have risen drastically over the past few years with rising consumer awareness towards the benefit of disinfection. As hospitals are trying to decrease the rate of HAIs, disinfection held more than 65% revenue share in 2021 and demand for HAI control products is predicted to rise in ambulatory surgical care centers at the highest CAGR in the upcoming years. As we continue to market our technology and its competitive advantages provided in our EPA-registered label and develop new products and applications, we are closer than ever having these industry markets select our eco-friendly disinfection decontamination. Our patented atmospheric cold plasma arc, which is the DARPA technology that we inherited, closes hydrogen peroxide in a way that's never been seen, converting the H2O2 compound into hydroxyl radicals. This is the most powerful natural oxidizing mechanism known. Competitively, we outpace every competitor. It destroys proteins and carbohydrates on contact, leaving only oxygen and water in the form of humidity. iHP reacts with chemical agents breaking their double bonds, producing hydrogen, oxygen, and water in the form of humidity, truly an eco-friendly disinfectant decontaminant. TOMI expects to have a prominent role in the food safety industry, a multibillion-dollar market. After attending their most recent annual food production meeting earlier this month, it was confirmed we are not only solving contamination problems in a more efficient way but also solving ongoing issues in the industry that have never been addressed. Of course, further trials and studies are being asked of us, but the industry has shown extreme interest in how our low 7.8% hydrogen peroxide BIT Solution is converted to hydroxyl radicals using our cold plasma science. Like the life science industries, the food industry is impressed with the dispersion of our submicron droplet, this very, very small droplet and the way it disperses as a fog. Speed to the technology helps it kill on contact through cellular oxidation burst and leaves no residue or harmful byproducts behind. In addition to the advantages just stated, we achieved a 6-log kill or higher, which is a very quick validation time on the most challenging of all pathogens. Most of the market, in fact, over 400 disinfectants registered with the EPA, only have a 3- to 4-log kill, which is 99.9% or 99.99%. However, we can kill all challenged pathogens at 6-log or 6 9s. Additionally, validated time and again against these most challenging pathogens, we received many EPA registrations for various upcoming pathogens that the world may face. All our products use the same superior technology. Each is designed and manufactured for specific application solutions. The SteraMist Surface Unit, with the original 5-second per square foot spray, is perfect for high-touch, hard surface areas in almost any industry. The SteraMist Environment System, our 3-applicator full room fogger, is sold based on its capabilities for complete air and surface decontamination. Price tag limits the device to pharmaceutical, government research universities, and larger restoration and cleaning. The Total Disinfection Cart was launched specifically for the health care industry, making SteraMist even easier and faster with the quick turnaround time needed on patient rooms, as it is the only system that can complete a turnover in an ICU room in under 55 minutes, including changing the air. Our SteraPak, launched earlier in the year, is a sleek battery-operated, high-touch, hard-surface spray developed for those who need quicker disinfection without the hassle of an AC power outlet. The SteraBox, our decontamination chamber, is a pass-through depending on customer requirements and uses a 90-degree stainless steel applicator, while the environment system provides a cycle time in just 40 minutes. Industries requiring smaller size-sensitive or medical equipment tools, injectables may have these made to order. The Custom Environment developed with Sloan Kettering in New York is used in radioactive cells as a device similar to the standard full room fogger but in an enclosure made of stainless steel, provided with modified applicators for permanent fitting. The SteraMist Custom Engineered System, referred to as CES, is a fully automatic product engineered and programmed to fit all facility specifications. Available features include remote start, HVAC utilization, downloadable data, security features, visual and audible alarms, and it is multi-room scalable. Every new installation includes the latest software and hardware components. TOMI's tech team has installed 6 of these systems by 2021. This year alone, we completed 1 installation, have 5 currently being designed or manufactured, 3 waiting on purchase orders, and an additional 8 in the final stages of customer approval. With the trend of automated disinfection and decontamination continuing to rise, as we have seen, the interest in our CES line has grown. With the production of our SteraMist Transport and the SteraMist Select Plus, they will provide the solutions and answers needed for markets facing decontamination requirements that have not been met until now. The transportation industry will utilize the SteraMist Transport, which is a permanently mounted ready-to-use non-corrosive technology and solution that will provide a quick remote-controlled disinfection fog for vehicles in industries such as emergency response, health care, education, and public transportation. The SteraMist Select Plus provides health care facilities, smaller clean rooms, research labs, and classrooms with an easy-to-use product that delivers all the desired applications using our superior iHP SteraMist technology at a reasonable cost. The Select Plus is a one-applicator remote start, full-room, stainless steel fogging device that sits on an open stand with wheels and adjustable height settings, making it versatile for spaces with high ceilings. This system is projected to be one of our highest sellers, and it will not only meet facility requirements while providing the necessary reporting features, but it also fits many budgets, thus outperforming the current available competition in this market. There is a demand for every SteraMist product line in the life sciences, from utilizing TOMI's mobile SteraPak pack to the intelligent permanently mounted Custom Engineered System to having our iHP Corporate Service deployed at their facilities. Our recent focus has been mainly in life science areas, which is a marketplace that tends to be less volatile during times of recession due to the constant need to continue research, manufacturing pharmaceutical products, and meeting mandatory FDA documentation and decontamination standards. To date, our iHP Corporate Service team has delivered approximately $850,000 in revenue for services this year. iHP technology adheres to the pharmaceutical FDA requirements for decontamination. SteraMist has been validated and verified and will continue to be a game-changer in the industry with its innovative and versatile products, applications, and services. It's important to understand how our product performs, hence the competition. We are simply the best and better than all the rest, whether you compare us to other hydrogen peroxide solutions that rely on chemicals for their efficacy, manual wiping that leaves a residue, requires mixing, and still carries a risk of cross-contamination, or UV light, which has its efficacy kill rate impeded by obstructions. Finally, the most inexpensive electrostatic sprayers produce large particles and utilize extremely harsh chemicals. At the end of the day, SteraMist outperforms the competition. TOMI's iHP technology is the only perfect 10, with the market trends provided at the beginning of the call, to the applications of our original, current, and upcoming devices we will offer. SteraMist customers, representatives, and partners continue to grow throughout the world, currently operating in 38 countries. Our portfolio of customers, just to list a few, continues to consist of some of the most profitable and successful companies globally. Many of them have become huge supporters of the technology and promote not only our equipment but also our support team to their associates. With all that has happened in the world over the last few years, I would also like to take some time on today's call to look at some of the key areas of our business that compare our status today in 2022 to where we were pre-COVID in 2019. We've grown substantially over the last 3 years as we've expanded our customer base and total cumulative machines sold. In 2022, we have approximately 709 customers compared to 308 in 2019. Through June of 2022, our cumulative machines sold is now at 1,548 compared to 582 in 2019. Since 2019, we've added over 10 new SteraMist products and expanded our IP portfolio with 28 new patents and 115 trademarks, providing protection of the superior game-changing technology to TOMI until the year 2038. From a revenue generation and gross profit margin perspective, our orders or bookings have grown 94% over the pre-pandemic level of 2019, and our gross profit margins have improved by 2.21% to 62.2% compared to 59.9% through June 2019. We have strengthened our balance sheet since 2019 as our cash working capital and inventory has improved over the last 3 years as follows: our cash balance as of June 30, 2022, was $4.8 million compared to $1.6 million as of June 30, 2019. Our current working capital as of June 30, 2022, was $9.9 million compared to a $775,000 deficit on June 30, 2019. We feel the company is in a far better position now compared to 2019 and before COVID-19. Also, our inventory was $4.8 million, compared to $2.5 million in June of 2019. From a balance sheet perspective, our cash used in operations during the first half of 2022 has declined by $2.061 million when compared to the same prior year, primarily due to lower reported loss and the customer deposits of $607,000 received on sales generated in 2022. Slide 20 profiles the income statement. I will not go through this line by line, but what is important to point out is that revenues were up slightly in the first half of the year and we have a robust backlog. We have kept a keen eye on expenses and saw reduced losses for each period. Looking forward, we are able to drive revenue, manage expenses and drive the razor/razor blade model with continued increases in solution sales. This should bode well for future profitability.

Let's open the call to questions. We'll take our first question from Sameer Joshi with H.C. Wainwright.

So the first question is it's good to see that your annual outlook remains $12 million. What gives you the confidence in achieving that? Do you have visibility in the pipeline with pending orders that you can announce in the next few months? Can you provide some insight into that?

Yes, I think I touched on that earlier. We are currently waiting for purchase orders on three projects, and we have eight others pending approval. The challenge we face is that these are very high-profile clients who typically do not allow us to issue press releases. We make every effort to publicize our announcements, but as I mentioned with our tombstones, these are substantial companies.

Yes, it's really impressive. Regarding the three purchase orders and the eight that are in final stages, will those timelines fall within the next two quarters, or should we expect a longer-term outlook for them?

No. We're hoping that the majority of them are in the next two quarters. Delivery on some of the larger ones in our pipeline, depending on product availability, which I think we've improved on, may occur in the first quarter. However, we still expect to meet and exceed this $12 million by the end of the year due to our other products, including the SteraPak Surface Unit, Environment Unit, and all the other equipment we've been developing, which has proven to be very beneficial for the company moving forward.

Yes, that was going to be my next question. When you mentioned CES and mobile equipment, does the mobile equipment refer to the SteraPak or to some other products as well?

It's all of it. The Surface Unit, SteraPak, they're all mobile equipment versus the fixed, which is the CES equipment, and the Transport will be fixed in vehicles, and things like that.

Got it. Understood. And then moving on to expenses. Nice to see expenses lower. Should we expect this trend for the next 6 months? Or do you expect to have additional resources to meet the top line growth that you're expecting?

We are doing our best. Our team is working very hard, and we are quite small. We are in the process of expanding and are actively seeking qualified and dedicated employees, similar to many other companies. This could result in growth for us. Our focus with new hires is on customer service and supporting revenue generation, so we believe this will significantly benefit us.

Yes, I understand. As sales grow, there may be some additional expenses, but the leverage will outweigh those costs. I have a question about the orders you are receiving and those pending. Are these repeat customers ordering additional equipment for different locations, or are they new customers?

Many of them are customers, repeat large Fortune 500 or the top 10 pharmaceutical companies that are ordering for various other facilities. And because of the word and the standardization that we're creating, they're new pharmaceutical life science customers, universities that are hearing about our product and are ordering also. So it's a blend, but we're most impressed with the repeat business from these large pharmaceutical customers.

Yes. No, that's good to know. It's a blend of both sources. So just one last one. You mentioned the competitive landscape and your superiority in various respects. But when you are looking at the bids that are out there and your conversion rate from bids to orders in terms of some of the competitors taking some business away from you, can you just give us some insight into that?

Yes, I don't see our competitors securing any projects. This is reflected in our substantial pipeline of purchase orders, some of which are awaiting approval from various departments. It's a complex process, but we believe we will successfully win these bids. We envision our technology progressing in the way I have always expected it to, becoming a standard in these markets. With the new types of equipment and products we've introduced, we are addressing everything from laboratory equipment to entire rooms and large facility decontamination. This positions us well in the market moving forward.

I just said it was going to be my last question, but I have one more. You mentioned food safety. Have you already made any inroads into that? Are you making the outreach into that sector? If you could give us some high level insight into that.

Sure. We recently presented at a food safety conference, and there was a lot of enthusiasm. Similar to what happened with Corteva, Dow, and DuPont in the past, there's a desire for more testing and independent evaluations. We are supporting and progressing in that area. We are also continuing our efforts with the EPA regarding registration. We have achieved the 0.35% registration and are now working towards the 1% registration for direct food application. Although these processes can be frustrating and time-consuming for both me and the team, we are making progress. The interest in our solutions has grown significantly; we started with about two food safety clients and now have around eight or nine, plus an additional six clients with whom we're preparing proposals to introduce our products. So, while it can be slow and frustrating, we are steadily moving forward in that market.

We will take our next question from Carter Management.

One of the more interesting aspects of your business is the ability to sell higher-margin solutions across your installed base. I see solution sales were up a bit in the quarter. But could you provide any additional color as to how we should think about the revenue composition going forward?

Sure. I mean from a percentage standpoint, if we want to use the 2019 to today, we're probably up somewhere between 40% to 50% in solution uses. Going forward, the more pieces of equipment we get out there, especially these larger CES units that use 55-gallon drums of solution will create consistent use of our solution on a daily, weekly, bimonthly basis. In the past, we've always depended on it being used in health care or being used in service or service providers, which is still the case. In many of them, this is the only tool they have. So as pandemics come and go and the extreme paranoia that the country has or the world has in relationship to them, of course, solution sales will increase in those verticals. But the key is to get more pieces of equipment out there and for our customer service to be on top of them and reordering, which we are seeing. And we're hoping that you'll see more data pertaining to solution usage going forward.

We'll take our next question from an unidentified analyst.

Halden, I have several questions. First, any comments you can make on timetable to potential profitability?

Well, if things go the way they're supposed to, it's going to happen this year.

Okay. That would be terrific.

3 or 4 months.

And any update that you can provide us with on the SHIELD study? And maybe you should mention briefly what the SHIELD study is and what the potential is if it turns out favorably.

The SHIELD study was a government-branded study comparing manual cleaning to using our technology or mechanical cleaning, and we were the only technology. It was a 5-year study, and we completed the 3 years of data development, followed by another year of various researchers, independents that reviewed the data. The paper has been written or is being written. I'm waiting to get updates. However, these authors are directors of a lot of the public health venues in L.A. County, and they've been quite busy with the variants, the pandemic, and now Monkeypox. So I don't want to push them, but I hope that it should come out relatively soon.

You mentioned earlier, and it was also on the slides, that one of your customers is ServiceMaster. Has the relationship with ServiceMaster expanded over the last quarter to include more locations? Any details on that?

That, I would have to personally get back to you on. I know that there are a number of these large service providers that are all merging and among our 208 service providers, a lot of them have sold or merged with operations like ServiceMaster represents. So we're trying to work with them to ensure they utilize our technology as the only tool in their toolbox. They would certainly be throwing out a lot of other items, saving long-term costs, and delivering the best to their clients. But give me some time to research the numbers, and I'll try to include that in my next call.

Okay. In the last call, you mentioned something, possibly in the press release, about a health care organization's orders for ambulance installations. Have there been any new orders from other customers for ambulance installations?

So we've just recently developed. In fact, I want to say I just got the first video of the first install of this SteraMist Transport device. It was created with them in mind, and I know they budgeted for this next year. It could be a very significant order for the company. Once we get this validated and into their hands for testing, I think at that point, we'll start marketing it. We haven't really marketed it outside of working development for this 1 large order.

Okay. I just wanted to share a general thought. I've always found your product to be exceptionally impressive, so I’m curious about your plans to increase awareness more than in the past. In my view, the product would be very appealing to various organizations, and I believe that the lack of awareness among potential customers is somewhat of a barrier.

So the answer is yes, there are plans in the game plan, and I've been telling other executives within the company that we must start bringing on a lot more customer service, a lot more salespeople. We are negotiating with large companies to take the product on, but it's a time-consuming process. Being as small as we are with the funds that we have with developing new products, moving forward with all the patents and everything, we're really stretched. We see what's happening in the pipeline and how large these orders are. So that's why I'm comfortable discussing what we anticipate for the year. However, the challenge of creating a standard when companies need to replace their old norms has proven to be a very frustrating and lengthy process. Fortunately, we are on the bright side of this and can see a future where they learn and grow with us. We hope to bring on knowledgeable salespeople who understand the technology in various industries and can effectively apply it to those verticals. This will promote a collaborative environment that fosters good earnings and success. Well, thank you for the call. Operator, are there any other calls or questions?

It appears that we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks.

Well, thank you all that joined us and for listening. Stay tuned. We will speak next quarter. Have a good evening or day, wherever you might be. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.