TOMI Environmental Solutions, Inc. Q1 FY2023 Earnings Call

Good day, ladies and gentlemen. Welcome to the TOMI Environmental Solutions First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. I would now like to turn the call over to your host, John Nesbett with IMS Investor Relations. Mr. Nesbett, you may begin.

Good afternoon, and thank you for joining us today for the TOMI Environmental Solutions investor update conference call. On today's call is TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane; TOMI's Chief Operating Officer, E.J. Shane; and TOMI's Chief Financial Officer, Nick Jennings. Dr. Shane will provide an overview of recent business highlights, E.J. will report on the Company's growth and latest trends, and Nick will review the financial performance for the most recent quarter before addressing any questions you may have. A telephone replay of today's call will be available through May 29, 2023, the details of which are included in the Company's press release dated May 15, 2023. A webcast replay will also be available at TOMI's website, www.tomimist.com. Please note that information contained within this presentation is relevant only to the day of which it was recorded, May 15, 2023. Therefore, we advise 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 any actual results to differ materially from our anticipated results. The information provided in this conference call is based on 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 the operating performance that could be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release dated May 15, 2023. I will now turn the call over to TOMI's Chairman and Chief Executive Officer, Dr. Halden Shane. Please go ahead.

Thank you, John. Hello. Welcome to the TOMI Environmental earnings call. Today, we'll be presenting the Company's operating and financial results for the first quarter of 2023, along with positive updates on our current initiatives. Thank you all for joining us this afternoon. Our first-quarter revenue was impacted by revenue recognition rules and customer-imposed delivery restrictions for equipment and CES orders. Our recognized revenue and customer sale backlog for the three months ended March 31, 2023, together amounted to approximately $3,129,000, which consisted of recognized revenue of $1,582,000 and a customer sales backlog of approximately $1,547,000. We anticipate improved results for the second quarter and the remainder of the year. We are very optimistic about our performance moving forward with our sales backlog, expanding distribution network, and robust sales pipeline, particularly for our CES products. We anticipate reporting improved financial results for the remainder of calendar 2023. Our market positioning and model remain very strong. From a market positioning standpoint, there are some industry trends as well as regulations that are opening up massive market opportunities for the Company. One of the largest opportunities that's unfolding is that the EPA has proposed cutting ethylene oxide emissions by 80% at approximately 86 commercial sterilization locations in the United States. This could create a significant market void for the chemical disinfectant used for sterilizing medical devices and equipment. TOMI's solution utilizing ionized hydrogen peroxide has been identified as a viable alternative that leaves no residue and has decontamination efficacy upwards of 99.9999% compared to ethylene oxide. SteraMist products are non-toxic, non-corrosive, and do not cause temperature damage to medical equipment or devices. SteraMist's Superior Solution offers a perfect alternative giving it is faster, more environmentally sustainable, and has no carcinogenic risk to site workers and those living nearby. From a business model standpoint, our business reported a high gross margin of 59.9%, even with lower than anticipated revenue in the quarter. Finally, while still a relatively low portion of overall sales, higher margin solution sales are growing, and our strong pipeline of CNS solution sales should become increasingly more predictable. We are optimistic about achieving better outcomes for the Company as we have taken several measures to strengthen our market position. One key initiative is that we have proactively expanded our distribution networks and manufacturing representatives. In the first quarter of 2023, we welcomed and executed agreements with JANZ Corporation, PennCare, New England Scientific Associates or NESA by Baker, ARES Scientific, Crow Food Safety, and Technimount System. JANZ, a U.S.-based medical supplier and distributor, holds government contracts to provide medical and health products to various agencies, presenting an opportunity for us to expand our reach into the already familiar government sector. PennCare, an emergency medical service provider, will help us strengthen our presence in state markets throughout the United States. NESA by Baker is a leading manufacturer of biotechnology and research equipment and will act as a new independent manufacturing representative for TOMI, while ARES Scientific has evolved in its service model and now serves as a new distributor of TOMI products. Furthermore, Crow Food Safety will help us expand our global footprint in the food safety and hygiene market with a distribution focus on South Africa and Sub-Saharan Africa, representing our first venture into that part of the region. Lastly, Technimount System, a highly reputable manufacturer and distributor, will serve as an exclusive distributor of our SteraMist iHP technology to the Emergency Medical Service industries throughout Canada, further expanding our presence in this key market. Our expansion efforts in Africa extend beyond our recently added distributor in the food and hygiene market. To establish solid engagement in a larger market such as South Africa, Kenya, Uganda, Ghana, Senegal, Egypt, and Nigeria, we have donated four SteraPaks for various government agency-backed labs in Africa, including the Department of Defense. By partnering with local governments and healthcare organizations, we are working to implement effective and sustainable disinfection protocols to protect vulnerable populations from the spread of diseases such as malaria, Ebola, monkeypox, and tuberculosis. Research universities remain a key stable market for us and have proven to be a faster sales process. We are pleased to have onboarded the University of Hawaii and Oregon State University in the first quarter of 2023. As this is a market space where everyone knows each other, positive references and customer satisfaction are key. The Dana-Farber Cancer Institute, where one of our original CES systems was installed, continues to create referrals and sales opportunities for us in the marketplace. One of these opportunities is Orna Therapeutics, a leading biotechnology company located in Massachusetts, to whom we recently delivered a custom-engineered system for our CES. During the first quarter, we also entered into a service agreement with LFB USA, a subsidiary of LFB Group, a European biopharmaceutical company specializing in the development and manufacturing of innovative biotherapies. The agreement commits LFB to engage TOMI for high-level disinfection of one or more facilities. Ongoing studies remain a focus, as we continue to grow internationally and domestically. For example, we've received final acceptance after executing an extensive material study in Germany to prove the efficacy of SteraMist against all categories of germs—spores, gram-positive bacteria, gram-negative bacteria, and fungi—found directly on specific material in clean rooms and laboratories. All runs showed significant log reduction and were a pass. The German biotechnology sector represents a substantial opportunity for TOMI in the future, and we will keep you appraised. In the United States, we are working with the government and TOMI service network members to prove and demonstrate SteraMist's efficacy against ricin and fentanyl, which is critically needed in this country. It has been publicly announced that SteraMist has proven successful as a direct spray on cannabis flowers to combat common molds and fungi without affecting the quality of the oil or plant. We are in the process of registering SteraMist state by state to ensure that our future customers in this rapidly growing cannabis industry can choose SteraMist as their trusted decontamination solution with confidence. The cannabis opportunities continue to positively evolve for us. Vertical Crop Consultants, an Independent Food Safety Sales Representative partner to TOMI as of late last year, was onboarded as a formal customer during the first quarter of 2023. Vertical Crop has generated interest in the industry during their short time with TOMI and, now as a customer, completed a joint study with an American seed company and head breeder for one of the world's most famous cannabis strains. This third-party study found SteraMist to be effective in eliminating aspergillus and powdery mildew while protecting cannabis growth without affecting quality. Each phase of the study proves SteraMist iHP can be a consistent solution to prevent spores at every stage of the growing process, resulting in huge savings for the industry. Plum Island Animal Disease Center, owned and operated by the USDA, is a high-security laboratory facility that conducts research in animal diseases that pose a threat to agriculture and public health and is one of the few facilities in the world equipped to study highly infectious diseases affecting animals. They have chosen to partner with TOMI in a GLP study on hand, foot, and mouth disease (HFMD), a highly contagious viral infection commonly affecting infants and young children. We anticipate successful results on combating this virus, which can lead to viral meningitis, inflammation of the brain, spinal cord, and even paralysis. TOMI may begin work with the EPA once again to update its label with HFMD, tuberculosis, and other recent claim accomplishments in due time. Finally, we've just launched our new website and domain steramist.com. The TOMI marketing team has been working diligently to create a fresh, modern, and user-friendly online experience that accurately reflects our company's values and mission of innovating for a safer world. This new website will enhance our customers' and partners' ability to engage with us and find the information they need quickly and efficiently. The new site was launched this morning, so please visit steramist.com and share your thoughts with us. At this point, I'd like to hand the call over to TOMI's COO, E.J. Shane, who will provide you with an overview of the Company's upcoming plans and objectives for the rest of the year. Thank you.

Thank you, Dr. Shane, and good afternoon, everyone. I appreciate the opportunity to share a few updates on TOMI's progress and upcoming developments on today's call. I will begin by discussing TOMI's international development and the positive impact they will have on our financial performance. As Dr. Shane mentioned earlier, we have a promising opportunity with a German biotechnology company that has the potential to result in significant orders. I can confirm that our distribution partner in Germany, Universal Disinfection, has done an excellent job of fostering this relationship. We anticipate this company to purchase mobile environments and multiple custom-engineered systems and expect these orders soon as the Company is building the production sites now for SteraMist use. Universal Disinfection has had significant progress helping to expand SteraMist into various industries. They continue to undergo the qualifying process as suppliers for decontamination services among leading pharmaceutical companies in Europe. One of the leading companies in clean room technologies in the dock region is planning to use SteraMist in material chambers, airlocks, cabinets, and containment isolators. Universal Disinfection has also entered the transportation industry by conducting a practical study with the German Red Cross to decontaminate rescue vehicles. Universal Disinfection is very optimistic that their hard work and patience invested in these endeavors will yield fruitful outcomes with significant financial success for both Universal Disinfection and TOMI in Europe. We are actively seeking to establish more partnerships to accelerate our sales and business development efforts, both domestically and internationally. As mentioned by Dr. Shane earlier, the new partners we have onboarded are excellent additions to our sales team and are expected to generate positive returns. We are confident that these will create further opportunities for business development and should create a substantial increase in revenue. We are fully equipped to support these partnerships to ensure success, particularly if they demonstrate the same dedication as Universal Disinfection has done in Germany. We are in negotiations with many other companies worldwide and hope to shortly announce additional distribution partnerships, including a U.S. chemical manufacturer specializing in biosafety management, a local Maryland energy industry expert with substantial working knowledge of regulated technologies, a medical equipment manufacturer in Italy, and a supplier of clean room products in India. While the latter region has been an area in which we have encountered some challenges when considering suppliers and opportunities over the past year, the latest interested party may be suitable. Receiving global acceptance as a provider of decontamination services and equipment represents a major milestone in working with multinational pharmaceutical and biotechnology corporations, as it promises to allow for easier acceptance in future and additional facilities for the corporation and its subsidiaries. As you may know, we have been providing iHP contamination services and selling capital equipment to Pfizer facilities for many years, and they are just the first of many grants for U.S. global acceptance. In June, we will be implementing and qualifying mobile environment systems for a global healthcare company that specializes in medicines and technologies for infusion, transfusion, and clinical nutrition at their facility in Brazil, which purchased their order at the end of last year. This company has been using iHP contamination services in their facility in Chile for the past few years, and one of their contract manufacturing sites in Portugal has a custom-engineered system. I have personally been collaborating with the head of their technology center located in Mexico for the past 18 months, and following the successful implementation and qualification of iHP in Brazil, we expect to explore opportunities to expand into their South African branch. With facilities in 47 countries across Africa, Europe, Latin America, Asia Pacific, and North America, attaining global acceptance with such a large corporation is crucial. While it is a time-consuming process, it is well worth our patience, as it will bring significant growth opportunities in the future. Our iHP service sales strategy continues to be a successful approach in penetrating these large corporations. Catalent, a continuous user of our mobile products and iHP service in both their Maryland facilities, serves as a good referral for our technology. In this quarter, we won and completed an iHP service with another Catalent facility in Kansas City, Missouri for approximately $130,000. We expect to win an Emergent iHP service for approximately $150,000 in Baltimore, Maryland. This win would be a nice addition to other Emergent users of iHP in Canton, Massachusetts, and Rockville, Maryland. Emergent has six other manufacturing and product development sites worldwide. These are just a few examples of how we are fully working towards gaining headquarter acceptance of iHP SteraMist. The timing for custom-engineered systems, iHP corporate services, and the purchase of our mobile systems is subject to change due to customer timelines, but we have maintained a healthy pipeline. By the end of this quarter, we will have 14 fully installed custom-engineered systems, all of which are expected to be qualified and in use by the end of the first quarter of 2024, depending on the end user's production facility, resulting in varying revenues from these solutions and services moving forward. TOMI's SteraMist technology is not limited to full decontamination for the life sciences, but also includes mobile systems that can be customized for packaging, seeding, and selling lines. We continue to work closely with a highly respected indoor farming solutions company on their qualification procedures. Once final approval is received, we will announce this company that is committed to expanding the use of SteraMist through all future facilities. This indoor farming company has broken ground on new buildings and has budgeted for SteraMist expansion. This is a significant opportunity for TOMI to showcase the versatility and effectiveness of iHP in the food safety industry and the potential growth this partnership can bring. Ongoing discussions for custom-engineered systems and upgrades with current and potential new customers have increased from 25% to 36% or 44% since our last call, while we have experienced a loss rate of only 14% when combining with 2021 and 2022 years. This positive trend is highly motivating, and we remain optimistic about our fully automated projects. During our previous call, I shared our vision of streamlined solutions for decontamination chambers, cabinets, cage washers, and modular clean rooms. We have identified seven key partners that will help us in achieving this goal. These partners range from process design consultants to actual manufacturers of cleanroom equipment. A key priority for us is to collaborate with these partners as swiftly as possible to establish sales and manufacturing of this turnkey solution. SteraMist engineering has also been diligently working with a cutting-edge California-based cell therapy manufacturer on a revolutionary game-changing prototype for an industry that is expected to grow to $11.6 billion by 2030. The order received late last year for the two prototypes is currently set to be completed by the end of June 2023, and we look forward to sharing more details about this project once formally released. TOMI is making forward progress in fulfilling its promise of the SteraMist transport, as we are currently in the procurement of materials to support the launch. TOMI Marketing is actively developing and advertising materials. Additionally, the Company's independent sales representative is working closely with the customer who started at all, who is now part of a four-state integrated network of physician clinics, outpatient facilities, and hospitals. This customer continues to show interest in purchasing more than 50 SteraMist transport units, and our TOMI representative is maintaining the relationship to ensure a successful sale. Our team recently showcased the SteraMist brand of products at several industry trade shows, including CETA International, RIA International, the Lab Manager Leadership Summit, FDIC International, and the INTERPHEX Conference. April was a demanding month, meeting with both our existing and potential customers, creating new connections, and strengthening relationships across various industries such as life sciences, environmental testing, chemical manufacturing, and emergency services. We managed to collect around 550 total contacts from these events, bringing our complete collection from trade shows to 770 for the first half of this year. Our sales team is working hard to convert these leads while meeting customer budgetary requirements. I would like to express gratitude to our patient investors who have supported us in this long-term investment journey. I want to reassure you that we are making significant progress in achieving important milestones. We have many positive developments in the pipeline, and we firmly believe they will translate into revenue, growth, and profitability. I thank you for your continued support. Now, I will turn the call over to our CFO, Nick Jennings.

Thank you, E.J., and good afternoon, everyone. I'll provide a brief overview of our financial results for the first quarter of 2023, compared to the same prior year period. For the three months ended March 31, 2023, compared to March 31, 2022, our consolidated net revenue was $1,582,000 compared to $2,309,000. Consolidated gross profit was 59.5% compared to 61.4%. The consolidated operating loss was $1,188,000 compared to $660,000. Our consolidated net loss was $1,187,000 or $0.06 per basic and diluted share compared to $659,000 or $0.03 per basic share. Adjusted EBITDA was a loss of $941,000 compared to $280,000. A table reconciling the adjusted EBITDA to the appropriate GAAP financial measure is included with today's press release. Moving on to the balance sheet, as of March 31, 2023, our cash and cash equivalents were approximately $2.5 million, deferred revenue was $600,000, and working capital was $7.9 million, with shareholders' equity at $10.5 million. Now, I'd like to turn the call back over to Dr. Halden Shane.

Thank you, Nick, and I want to thank all of you for joining us today, and for your unwavering support as investors and followers of our company. We firmly believe that the work we are currently undertaking and the initiatives we reported on this call will deliver favorable financial results for the 2023 year and beyond. Thank you again for your time and your support. Operator, let's open the call for any questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Todd Felte of AGES Financial Services. Todd, you may proceed.

I was first wondering how much in recurring revenue are we getting from the BIT solution either on a monthly or quarterly basis, and what are the margins on that?

Well, the margins are very high, Todd.

The margins on the recurring solution sale are higher than what you typically see on our financial statements, which is around 60%. Currently, about 15% of our revenue could be attributed to recurring solution sales.

And I know you've signed a lot of contracts recently, so do you see that number going up dramatically or…

Well, I think what we do is when we see these CES systems put into production and use after validation, they're making large financial commitments to buy them. They're going to be continuing with large financial commitments to use our solution, and that's when we'll see them really go up.

And as a company, are you willing to kind of reaffirm? I know in past calls we had said that the revenue could be lumpy, but that really the second half of this year we were going to see an uptick and that we thought we would achieve profitability for this year. Are you willing to stay with that forecast that we will be profitable for the year 2023?

That's where we're working at right now. We feel we will be profitable. As you know, it is lumpy, and we can't control that part of it. But the second half of the year looks extremely good for us, and we are hoping that we will be profitable soon.

Your next question comes from Alex Stultree of Green Level Capital. Alex, your line is open.

So, you've mentioned, I believe in the past, that growth in the custom engineered systems business over time will drive more predictable solution sales compared to other channels. Could you provide some more color as to why this is the case?

Sure. So, what it is, they tend to buy upfront the equipment that they need and then use solutions more consistently. So, that's basically the reason. Any company that's investing this type of money upfront for our equipment is definitely going to be using it as soon as it's validated and they have the necessary protocols written for long-term usage. So, the shift we're seeing is over the long term; it is beneficial for our current model, which is a razor blade model.

Your next question comes from investor John Nielsen. Mr. Nielsen, your line is open.

Hi, that's Nelson. I have several questions. The first one was related to a Twitter account that was pushing chlorine dioxide from a Swedish company called LifeClean and posturing itself as a competitor to TOMI. They call their product a universal biocide. Are you familiar with it? I've done extensive reading on it, and I don't think there is any comparison, but if you would like to compare it to SteraMist, please go ahead.

Thanks, John. There really is no comparison. I mean, we're like a perfect 10 out of 10 on efficacy, speed, lack of corrosiveness, and no residue, and being eco-friendly in relation to only having oxygen and humidity or water as byproducts—chlorine has been around forever. A lot of these companies with these chemicals—there are over 450 registered products—many are finding themselves in trouble, as the environment is speaking up and saying that we want a product that won't be damaging to the environment, equipment, labs, etc. So, I think your assessment is absolutely correct.

Thank you. Any update on a shield study?

Not really. It's in the hands of the authors, and I think what I always say is the results are phenomenal. However, they pushed it down the pipeline to be finished. I'm trying not to comment on it, but I'm going to meet with them in July and go over something. So hopefully, I'll have something to say by the next quarter.

Thank you. Also, I think you were working with Vertical and had mentioned in the past a large seed company, which could be a potential user. Any progress on that?

Yes. We are having good progress with all our food safety partnerships, in fact, the users and a host of new individuals conducting testing have had some real positive results regarding viruses and bacteria in seeds. This is a market that we are actively pursuing as they recognize how easy and quickly effective our technology is, especially in a market where we need safe and quick food safety verification.

Have you approached any semiconductor companies with existing plants here in the U.S. or plans to build new operations on the potential use of SteraMist in clean rooms or general plans?

We've done some research on it. There aren't really that many in the United States, but some will be starting in the next year or two. We are looking for an employee specializing in that industry. It's not that big of an industry in this country, but we're hoping it will grow, and we're doing our best. We've got numerous pipeline opportunities across multiple verticals within the Company, and that's one of them we plan to approach soon.

Can you delve into a bit more detail on the revenue recognition item? Was any part of the $1.54 million not recognized in the first quarter due to timing issues?

It's complicated. According to SEC and accounting standards, revenue has to transfer out of your hands before the quarter closes. We do our best, and sometimes the customer says they want to wait a couple of weeks or need another month. That's why I indicated earlier that the second half of the year is typically our strongest, and we expect the same this year. We're observing significant year-over-year growth in the amount of employees we have, and the revenue that each of them brings in is extremely high, as we are still a growing company.

Are you comfortable with your current cash position?

Yes, we're comfortable with it. Looking 15 months out, but we are dependent on receiving deposits for the CES systems, which should bolster the cash in the Company moving forward.

The baby formula industry had a significant national problem over the last year. Have you explored any potential use of SteraMist in baby formula facilities in the U.S.?

I would look at it through the lens of food safety, particularly concerning potential contamination risks during manufacturing. I am not aware of any direct contact with baby formula companies, but they have recently made significant strides to improve the situation.

Very good; I look forward to continued progress.

I do too, and I thank you for your support as always.

Your next question comes from Sameer Joshi of H.C. Wainwright. Sameer, your line is open.

I was having some technical difficulties, so maybe some of the questions may be repetitions of whatever has been already asked. One of the curious questions I had was: The PennCare relationship that you have established, what kind of revenue potential should we expect from that particular relationship?

I think it's really too early to tell in the relationship. We’ve just brought them on, and I mean all of these new manufacturing reps and partnership agreements are so new that a couple have made significant purchases. I did a press release on one, and they're all looking very favorable, but predicting is challenging.

Okay, so for clarification on the revenue that was not recognized, I think it was the $1.54 million that was not recognized in the first quarter; would it have been completely recognized? Or would part of it have been recognized in one queue?

Probably some of it will be recognized now that we understand when they want it. We didn't pressure these clients to accept the product for the sake of showing revenue. We are essentially at their mercy for acceptance. They want it; we could have produced it, but we prioritized the timing.

Got it. So, if we say that the potential revenue from the first quarter could have been nearly $3 million, do you have visibility over the next two to three quarters that revenues will be sequentially higher from that number, or how should we think about the cadence of revenues in the coming quarters?

We spoke about it in our last call, and we are still prepared to at least beat that number at the end of this year.

Thanks for taking my question. I will take my other questions offline.

Thank you very much. Thanks, Sameer.

At this time, it appears there are no further questions. I'd like to turn the call back over to Dr. Halden Shane for any closing remarks.

Once again, I want to thank everybody for spending part of their afternoon or early morning with us. Thank you for following the Company, and I will be talking to you at the end of the next quarter during the next earnings call, so have a great day or evening. Operator, this call is over.

This concludes today's TOMI Environmental Solutions Investor Update. Thank you, everyone, for attending.