TOMI Environmental Solutions, Inc. Q2 FY2024 Earnings Call

Good afternoon, everyone, and welcome to the TOMI Environmental Solutions, Inc. Second quarter 2024 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbett of IMS. Sir, the floor is yours.

Thank you for joining us today for TOMI Environmental Solutions' Investor Update Call. On today's call is TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane; TOMI's Chief Operating Officer, EJ Shane; and TOMI's Chief Financial Officer, Joe Rzepka. Dr. Shane will provide an overview of recent business highlights, EJ will report on future plans, Joe will provide the financials, and all will be available for the Q&A. A telephone replay of today's call will be available through August 15, 2024, the details of which are included in the company's press release dated August 1, 2024. A webcast replay will also be available on TOMI's website, www.steramist.com. Please note that information contained within this presentation is relevant only to the date recorded, August 1, 2024, and you are therefore advised that time-sensitive information may no longer be accurate at the time of any replay. Certain written or 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 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 that should be considered by investors in conjunction with GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release dated August 1, 2024. I will now turn the call over to TOMI's Chairman and CEO, Dr. Halden Shane. Please go ahead.

Thank you, John, and good afternoon, everyone. Thank you for joining us today to discuss TOMI Environmental Solutions' second quarter 2024 financial results. Today, I am pleased to announce that TOMI has achieved a significant milestone by returning to profitability in the second quarter of 2024. This achievement is a testament to the resilience and dedication of our team, the support of key long-term partners, as well as the strength of our business model. Our revenue for the quarter exceeded $3 million, representing a 170% sequential increase compared to the previous quarter. This growth was primarily driven by strong demand for our mobile equipment, which accounted for over 60% of our total revenue, an indicator we have not seen since the year 2022. BIT Solutions sales increased by approximately 171% over the first quarter. We also saw strong international sales. The second quarter marks a record-breaking performance, surpassing our previous highs since the outlier year of 2020. Building on this momentum, we have secured approximately $5.6 million in sales year-to-date. This figure combines recognized and reported revenue, delivered orders for Q3, and open bookings for the remainder of the year. We have nearly matched the total number of mobile equipment sales realized through the entire calendar year of 2023. Additionally, we have four active custom installation orders currently underway in our manufacturing, production, and validation service lines, with more projects expected to close soon. These trends position us for continued growth and solidify a strong foundation for the balance of the year. In addition to increased sales of our mobile equipment, our strong financial performance this quarter was driven by several key other factors. First, we partnered with EMAQ, who purchased over $1 million of equipment to be used for SteraMist iHP service. Second, we delivered two custom integrations, a fully installed custom engineered system and a hybrid system to customers this quarter. Third, we continue to expand our global footprint with new customers in Canada, Mexico, the Philippines, and the UAE. Lastly, our focus on cost reduction initiatives has yielded positive results, improving our profitability and allowing us to invest in growth opportunities. We maintained an active focus on digital marketing initiatives and business development plans with existing customers. To optimize our budget, we reduced our participation in trade shows and redirected resources towards more effective lead generation strategies such as referrals and references. In addition, TOMI will discuss certain non-GAAP financial measures during this call.

Thank you, Dr. Shane. Good afternoon, everyone. I will provide a brief overview of our financial results for the second quarter of 2024 compared to the same prior year period, specifically for the three months ended June 30, 2024, compared to June 30, 2023. Our consolidated net revenue was $3.013 million compared to $2.775 million, increasing approximately 9%. Consolidated gross profit was 61.5% compared to 61.3%. The increase in our gross profit was due to our product mix and sales. The consolidated operating profit was $121,000 compared to an $89,000 loss in the prior year, representing an increase of $211,000 or 237%. The increase in our profit was attributable to higher sales and gross profit in the current year period. Our consolidated net profit was $30,000 or $0 per basic and diluted share, compared to a net loss of $89,000 or $0.06 per basic share. Moving on to the balance sheet, as of June 30, 2024, our cash and cash equivalents were approximately $709,000. Working capital was $6.8 million, and shareholders' equity was $7.3 million. Now, I'll turn the call over to EJ Shane to provide insight on the current company activities.

Thank you, Joe, and good afternoon, everyone. This quarter's results are a direct testament to the strategic initiatives we have been implementing, demonstrating their effectiveness in driving growth and market penetration. These strategic moves are consistently strengthening our sales pipeline and backlog, positioning us for sustained growth, and we remain optimistic for the second half of the year. As a result of our efforts to build relationships and increase awareness of scientific studies which validate our technology and test our latest application methods, we have seen a notable increase in demand for SteraMist iHP, and more importantly, we are beginning to grow our market share with strong momentum. Our efforts to expand our market presence will yield substantial returns in the long term. I would like to touch upon the four key initiatives: our sales pipeline for the Custom Engineered System (CES); the progress made regarding the launch of SteraMist Integrated Systems (SIS); performance of iHP service revenue, and the impact of our worldwide distribution network on mobile equipment sales and the plans ahead. For this call, I will begin with our iHP service revenue initiatives. As stated, there is a significant shift in the decontamination service market as a leading competitor dropped out of the market early this year, presenting us with a substantial amount of opportunities to grow our market share, particularly in the Life Sciences sector. Currently, for year-to-date, we have recorded almost $1 million in service revenue alone. Additionally, as Dr. Shane reported, we formalized the partnership with EMAQ to head our West Coast iHP services. The collaboration with EMAQ into our service offerings will significantly expand our geographic reach and operational efficiency. By handling the volume of West Coast iHP service requests, EMAQ allows us to optimize our resources and focus on higher profit margin opportunities. This strategic partnership not only ensures customer satisfaction but also drives increased sales of capital equipment by those who receive our services. We are also pleased to announce that EMAQ has secured a three-year contract with a major pharmaceutical company. This agreement between TOMI and EMAQ not only contributed $1 million in sales for the second quarter but will generate approximately $60,000 in annual BIT Solution sales for TOMI moving forward. It also expands the utilization of our iHP technology within a globally recognized organization. To date, we currently have an in-house sales pipeline amounting to approximately $700,000 for our iHP services. Moreover, our enhanced validation packages are gaining traction within the Life Sciences sector. By offering a comprehensive suite of services that includes validation, we are able to accelerate equipment operation and solidify our position as a preferred partner over other third-party consultants for these services. A full comprehensive validation package service starts at $30,000 for a standard full room area fogging. All of these services typically offer clear revenue forecasts. As a follow-up to our previous call, I am pleased to report that one of the two anticipated CES contracts is now confirmed and is in the design phase. This brings our total current active CES to four. We remain optimistic about closing the second contract this year, which is projected for a Q2 2025 installation. Additionally, we anticipate four more CES contracts in the near future with deliverables at different times. While the CES sales cycles are typically lengthy, our persistence is paying off as reflected by the CES contracts closed this year. We are currently negotiating approximately 50 potential deals, many of which we have been cultivating over the past few years. The difference now is many of these deals are maturing, and we anticipate a more consistent closing rate. Our SteraMist Integration System (SIS) product line is demonstrating a strong launch. As a reminder, the SIS is our enclosure-based CES solution, which offers a shorter sales cycle and streamlined purchasing process compared to traditional CES orders. While still generating the valuable validation service revenue I just mentioned, our proprietary SteraBox is gaining significant traction as well, and we are actively collaborating with key enclosure manufacturers to establish long-term partnerships. Of the four manufacturers reported, one is selling and integrating our cold plasma applicators, two remain in the design phase, and the fourth is about to undergo cycle testing. While this has been a substantial undertaking, we anticipate returns once these partnerships are fully established. A critical component of our SIS launch is our Standalone system, which was introduced at Interphex earlier this year and received praise. Finalizing the delivery system, we are now in full production and have a robust pipeline of potential customers. This versatile system offers significant flexibility for decontamination protocol, catering to both enclosures and smaller rooms while maintaining strict adherence to GMP and Annex 1 guidelines. We are confident about the entry of this specific delivery system into our market base. While TOMI's iHP services, CES, and SIS offerings I just mentioned are primarily focused around our Life Sciences division, we are also strategically investing in our other divisions: food safety, healthcare, and commercial. Notably, our TOMI Service Network (TSN) is being integrated into the commercial division moving forward. To drive company growth and expand our market presence, we are excited to announce the launch of the SteraMist Pro Certified (SPC) program, open to all customer segments globally. This initiative offers significant opportunities for revenue growth and increased market penetration by enhancing our proactive approach to worldwide disinfection. The SPC program, an educational platform mainly for our service providers and healthcare facility departments, aims to expedite the adoption of our technology and resources. By positioning the SPC program as a key component of our growth strategy, we are confident it will expand our market footprint. TOMI is consistently broadening its SteraMist presence and client base within the food industry, challenging traditional methods and introducing innovative disinfection procedures. TOMI penetrated the coffee industry by bringing on Mayorga Coffee and a few others, and onboarded clients such as Lakeview Farms and Crank and Boom in the dip, desserts, and ice cream industry. TOMI has also integrated SteraMist into standard operating procedures in the egg white food manufacturing, pet food production and packaging, meat production, and agribusiness sectors of the market. The SteraPak is their preferred product for becoming accustomed to iHP technology. To further demonstrate the effectiveness of SteraMist in the food industry, TOMI is excited to announce collaborative efforts with several major establishments on new studies that explore the broader applications and benefits that iHP has to offer. We are working with a production company out of Spain directly applying iHP on spices such as pepper, thyme, paprika, and peppercorns to reduce salmonella. A multinational corporation in food and beverage processing is operating iHP at two of their international sites, and preliminary results show no contamination after treatment with iHP. We are hopeful that continued use will lead to company-wide acceptance. These studies have also created further opportunities through introductions to their suppliers. A third new initiative is with a leader in consumer goods production of health, hygiene, and nutrition products. TOMI is developing a specialized application of spraying their conveyor belts, simplifying the decontamination of packaged items against salmonella and listeria. Our key distributors are actively expanding their market presence, and we continue to provide them support. Our distribution network has been instrumental in the successful launch of our SIS product line, contributing significantly to both the integration and standalone system sales pipeline. We are also actively exploring new partnership opportunities in South Africa, Japan, Puerto Rico, and Indonesia to further expand our global reach. In conclusion, we are pleased with our progress across all business segments. Our iHP service continues to expand, and CES and SIS product lines are gaining the traction they deserve, while the SPC program is poised to drive further growth. The foundation built throughout the past few years with our customer relationships and partnerships is propelling us forward. We are optimistic about a strong close to 2024.

Splendid. Thank you, EJ and Joe. As we reflect on our accomplishments this quarter, it is clear that TOMI is well positioned for sustained growth and continued market expansion. Our return to profitability this quarter, strong revenue growth, and strategic initiatives underscore our ability to adapt and thrive in a dynamic market environment. Given our relatively small size, our historical results have been inconsistent. This is not lost on us. We are laser-focused on capturing the very real market opportunities in front of us and scaling the business to drive more sustained revenue growth, realize the power of our razor/razor blade model with growing high-margin BIT sales, and delivering to shareholders consistent and growing profitability. The team has made great progress laying the groundwork for this, and we saw some of the fruits of our strategy come through this quarter. We are on the way to building a larger and more valuable business for stakeholders. Since the founding of this business, I have never been more excited about the prospects for TOMI. Thank you for your continued support and confidence in TOMI Environmental Solutions. Operator, let's open it up to questions.

Your first question is from Amit Dayal from H.C. Wainwright. Your line is live.

Thank you. Good afternoon, everyone. With respect to the mobile equipment sales, I wanted to see how you get visibility for this segment. Do you get orders during the quarter that you can fulfill, or are these part of your pipeline and the orders are placed in advance, and then you fulfill those accordingly?

EJ, do you want to take that?

Yes, of course. For mobile equipment sales, it is more of an immediate delivery for all our handheld and full room area fogging. The order comes in, and we're able to deliver those immediately to our customers.

Understood. In that context, I'm just trying to get a sense of how much inventory you need to keep and whether the balance sheet at this point supports all of these initiatives that you have going on to match orders that come in on the spot.

I'm sorry, you broke up a little bit on our end.

No, Amit, I got it. We have an inventory of a little over $4 million, and it's composed mostly of mobile equipment.

Okay. Perfect. Thank you, Shane. And then with respect to the food safety opportunity, you highlighted a whole spectrum of potential customers. Is there any particular segment within that industry, like grocery chains or closer to the agricultural value chain that you are seeing faster adoption for this?

I don't know if faster, but I think they are all in play. I think anything from grocery markets to the transportation of groceries to market, to storage of produce and various other foods, along with the use in the production line, the possibilities of what our product can do in the food safety end are endless. As we all know, because of the high cost of food that we're currently experiencing, it becomes more in demand each day, especially in the preservation, storage, and transportation of food.

Understood. That all makes sense. And then you highlighted sort of the lumpiness in the past. With all of these initiatives now in play, should we expect at least for the remainder of 2024 sequential improvements? I don't know if you have that level of visibility, but just trying to get a sense of how the next two quarters might shape up for you?

We're very encouraged with what we have in our pipeline and what we have on the drawing boards for units, especially custom units. It's hard, and I don't want to get boxed in again, but I mean, I think we're going to have a really strong second half of this year, and we see it going further into 2025 and 2026.

Understood. Just one last question from me. With all of the bird flu-related headlines over the last quarter, has that helped create a bit more awareness about your products and more visibility in the industry?

I think the professionals in the industry are slowly becoming more aware of the product, and we're getting a lot of questions. But I'm not too sure the general public yet is over the emotional and stress results of the pandemic. We're hearing different things about the specific bird flu and how it relates to human transmission, but it is moving on into other animal kingdoms, including squirrels and raccoons and things that you usually don't hear about. So it's here, and it could potentially increase product usage going forward in the right situations.

Understood. That’s all I have, guys. Thank you so much.

Thank you. Your next question is coming from Jack Longo from Longo Capital Management.

Hi, thanks for taking the question. Could you talk a little bit more about the growth in BIT Solutions sales? This was a higher-margin portion of business and saw good performance in the quarter. Could you kind of talk a bit more about how this plays into the model as the business scales?

Sure. The concept and the model for the company is razor/razor blade or printer/printer cartridge. The more razors we get out and the more printers we get out, the more utilization of those cartridges or blades. I think that we're starting to see some return on some of these large units that we've put in within the last couple of years. They've spent a long time through the validation process, and now they're starting to utilize them consistently. I think this will be good for financial projections going forward. The more equipment we get out there, the greater usage and because they are high margin to the company, it will lead to much better profitability going forward. So, more pieces of equipment, more solutions, and greater profit.

Got it. Sounds good. Thank you. That’s all for me.

Thank you. Your next question is coming from John Nelson. Your line is live.

Congrats to you, Halden and the team on reaching profitability. I'm very impressed with the results to date. Thank you.

Thank you for that. We are...

I have a first question on the ethylene oxide market. I know you've applied for a DoD grant. Is there any progress on that?

No, we didn't receive the grant because we are competing against people aligned with VHP who are on the committee. It's not that we aren't better or faster, but rather it's a political issue. Nonetheless, this situation is opening up different opportunities with companies that are using it privately, and I believe we will be able to advance our project more quickly than if we had relied on this grant.

Yes, I've seen articles on a growing number of lawsuits from the release of gas during production, storage, and transport. So I was curious if you were getting more inquiries on substituting SteraMist for ethylene oxide?

Yes, I think everybody is concerned, especially since the EPA is marketing it as a carcinogenic material. I think that in the future there should be a lot more interest. The problem I see initially was, and which was part of the grant, was we couldn't give a substitute for ethylene oxide. They wouldn't allow that. So what they wanted was just somebody to come in after they use ethylene oxide to mitigate it. But they spend millions of dollars on these sterilizers in buildings in large hundreds of thousands of square feet. They don't want to throw out their equipment, even though we could retrofit our product into it, which I'm hoping some of these private companies realize in the future.

Okay. Understood.

And Dr. Shane if I may add.

Sure.

The company I referenced that we're working with on conducting the studies with spice production, their main goal is to replace ethylene oxide. We're gathering the formal studies to be able to share that with the public and move forward with other facilities in doing so.

Thank you. My second question is about your efforts in the ambulance market. Can you update me on any progress in that area?

There is. We continue to work with our group in Technimount in Canada on BMS. They have quite a few large manufacturers of ambulances where we're trying to become a full turnover package of ambulance and decon system. It's a long-term process, of course. We just had to start at the education process, and now we are running the tests and finding ways to work with them in using our transport. So it is in process and still very active.

Okay, great. I have a brother who is a doctor who talked to the ambulance crew at his hospital. They sounded very enthusiastic about some type of product like that being available. So I hope it comes to fruition for your company.

Yes, it will, John. If you send any information, we'll be more than glad to have our sales team contact them. Thank you.

Definitely.

Okay, great. Third question is, you had a big jump in accounts receivable this quarter. Are the receivables turnover cycle fast, slow? Can you give me some indication of how soon you expect to, on average, realize the receivables?

I'm going to defer that to Joe. It depends, I think, on the receivable in the market. But Joe, go ahead.

Yes, I mean, the big spike in revenue resulted in the large increase in receivables for the quarter. Some customers had upfront payment terms we've already collected, and most others are either net 30 or net 60. So we should realize the collection of those receivables this quarter.

There has been a significant recall from Boar's Head in the deli meats section of the food industry. I am curious if you have been considering that situation or if you believe they could be a potential business contact, especially considering the financial impact of the lawsuits they may face. Can you share your thoughts on this?

Well, I mean, we would be good in different areas of that, but the listeria that they're having the recall over is the reason why none of us can find Boar's Head in the deli counter. I think, I don't know if EJ has any update. Have we reached out to Boar's Head?

They have investigated us. They were certainly on our website, and we've reached out to a few parties in the company hoping to hear back, but we are on top of it. We heard the same news, and we do have current users on our backpack in the meat production to be able to get on the phone with them as referrals. So we are on top of that.

Just be careful with the liverwurst.

Good one. My next question is, you mentioned in the prior quarter transcript that the biofuel industry was also an area to target. IHP is known to be the fastest and second strongest oxidizing agent known to mankind. Have there been any new developments in that particular area?

Not yet. We are looking at some grant proposals, which I think we could possibly qualify for. Again, being so busy and being a small company, there's just so many applications for this product worldwide. We’ve been handling calls from the ones I think are going to be immediate utilizers and long-term clients. This is a great opportunity in biofuels, and it’s going to take time and some research. We do have identified a partner that is willing to do the research. It’s just getting the parties together and having that time which we’ve been focusing on revenue production.

Okay. Good. And data centers, any update there?

The same thing there; with the amount of new data centers being built, they're a little hesitant to use a product like this because they don't truly understand the fact that we are non-caustic and we don't cause damage. But it's going to require some testing on a smaller scale first to make sure and long-term testing. It’s going to be essential that we find the right partner to attempt it and test it and validate the positive effects of using a product like iHP that doesn’t have the caustic nature and has phenomenal material compatibility.

Okay. Thanks. On the SIS products, that's fairly new and the market for those kinds of products, especially in biological safety and other decontamination chambers, seems to be enormous. How are you getting the word out on this newer area of your product line?

I'm going to let EJ answer that.

Yes, Dr. Shane. It's truly a very exciting project. We have established relationships with enclosure manufacturers through multiple shows and just throughout the years. It's now moving very fast with a lot of them to kind of turn over this package. Once we can use their customer base in selling enclosures with iHP, it provides us an entry into a wide range of facilities that get familiar with it and then want our other systems for further area decon. That’s starting to come to light and more frequently each time, so it's now turning into a turnkey integration and a quick sale after that. We have some very familiar and recognized partners in the industry.

Okay, very good. That’s all I have. Thanks very much.

Thank you. There are no further questions in the queue. I'll now hand the conference back to management for closing remarks. Please go ahead.

I just want to thank everybody once again for joining. I hope you all, wherever you are in the world, have a pleasant day or evening, and tune in for our next conference call coming up at the end of the quarter. Thank you all. Be safe.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.