Earnings Call Transcript - TOMZ Q1 2024

Operator, Operator

Good day, everyone, and welcome to the TOMI Environmental Solutions' First Quarter 2024 Financial Results Conference Call. Our host for today's call is John Nesbett from IMS Investor Relations. I will now turn the call over to Mr. Nesbett to start.

John Nesbett, Investor Relations

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 future plans, Nick will provide the financials, and all will be available for Q&A. A telephonic replay of today's call will be available through May 29, 2024, the details of which are included in the company's press release dated May 15, 2024. A webcast replay will also be available at TOMI's website, www.steramist.com. Please note that information contained within this presentation is relevant only to the day of which it was recorded, May 15, 2024, 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 the operating performance, and should 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, 2024.

Halden Shane, CEO

Thank you, John. Good afternoon, and thank you for joining the TOMI Environmental earnings call. Today, we will provide an update on operations and financials for the first quarter of 2024. This call will be relatively short for those that have joined in the past compared to our previous calls due to the fact that we just had a call 30 days ago, while also providing insight into key current endeavors of the company for the past month and immediate future. During the quarter, due to revenue recognition, we reported only $1.1 million in revenue. This was disappointing and below where we expected it to be. That said, our revenue remains susceptible to the timing of large orders as we scale. So it's important to note that our backlog, which reflects firm orders, was $900,000, much of which was closed during the quarter. So our total sales activity for the quarter, combining sales and backlog, was approximately $2 million, which is about a 27% increase in sales over the first quarter of 2023. Also, we are encouraged by our sales pipeline across multiple end markets given our expanded base of distribution partners. So the sales in the quarter do not fully capture the growing interest in our technology and the flow of sale inquiries and engagements over the past 30 days. It is our expectation that we will see sequential growth and reduced loss in quarter two and are currently laser-focused on driving the business to profitability as soon as the third quarter of this year. We received news from a U.S.-based multinational pharmaceutical customer confirming that two of their CES systems that were installed in September of 2022 are qualified and scheduled to begin use in the fourth quarter of 2024. Once these systems are up and running, we expect annual solution revenue of approximately $250,000. As you know, solution sales are the blade in our razor-razorblade model, and this is a perfect example of the long-term evolution of our economic model. Patience is a virtue in the life science verticals, and probably in all verticals. In addition to our commercial successes, we disclosed two groundbreaking studies showcasing the efficacy of our solution against foot-and-mouth disease virus and African swine flu virus, reinforcing our pursuit of an additional EPA label. We received notification from the Department of Homeland Security that our SteraMist technology has been included in their Science and Technology Directorate Budget overview for the purchase of 16 SteraMist Environment Systems in the amount of approximately $2 million, where our SteraMist technology will be used to support the decontamination of the Plum Island Animal Disease Center. Moreover, our participation at INTERPHEX 2024 in New York City provided the perfect platform to unveil our latest product development. E.J. will go into the specifics of our participation and the innovation showcase during the event. Finally, during the quarter, we were invited to apply for a $3 million grant from the Department of Defense to be used by the Army, Air Force, and Marines, focusing on mitigating ethylene oxide sterilization. In May of 2024, we submitted our proposal and application under the DoD program, and we will keep shareholders informed.

Nick Jennings, CFO

Thank you, Dr. Shane, and good afternoon, everyone. I'll provide a brief overview of our financial results for the first quarter of 2024 compared to the same prior year period. For the three months ended March 31, 2024, compared to March 31, 2023, our consolidated net revenue was $1.114 million compared to $1.582 million. Consolidated gross profit was 60.2% compared to 59.5%. The increase in gross profit was due to our product mix of sales. The consolidated operating loss was $1.226 million compared to $1.188 million. Our consolidated net loss was $1.310 million or $0.07 per basic and diluted share compared to $1.187 million or $0.06 per basic share. Moving on to the balance sheet. As of March 31, 2024, our cash and cash equivalents were approximately $1.1 million. Working capital was $6.6 million and our shareholder equity was $7.1 million. As Dr. Shane mentioned, this is my last call with the company. And I just wanted to take a quick minute to thank Dr. Shane for giving me the opportunity to work here. It's been an honor and a pleasure, and I also wanted to thank the Board, employees, and everyone involved with this company. I wish you all the absolute best moving forward, and I know we'll continue on our mission to make the world a safer place.

E.J. Shane, COO

Thank you, Nick, and good afternoon, everyone. I would like to provide everyone with some context around our strategic progress. While quarter one revenue was lower than we expected, our pipeline is strong and healthy, and it includes companies across multiple end markets. We are very focused on executing against the key objectives that we laid out in the April call. These objectives include closing more CES sales and ensuring that current custom installations generate the anticipated BIT Solution revenue; driving traction for our SteraMist Integrated Systems; fostering repeat business with OEMs of decontamination enclosures; growing iHP Corporate Service revenues; and expanding sales of our mobile equipment to both existing and new customers and to our worldwide distribution network. Let's please take each of these points separately. In February, we secured a new contract with a California-based life sciences company for the installation of the SteraMist iHP CES valued at approximately $600,000. This system is equipped with six applicators, is slated for integration into a clinical suite by the end of the third quarter in 2024, and the project remains on schedule. Upon full functionality, we anticipate all current CES installations to collectively yield approximately $600,000 in BIT solution revenue. This is based on current customer schedules and assuming these production and manufacturing schedules do not change. In addition, we expect two additional CES contracts to close in the very near future for similar builds as the California company I just referenced, with delivery schedules for the fourth quarter of 2024 and the second quarter of 2025. We have implemented enhanced internal operational methods to monitor and support our customers with these installations, as they require a different level of support than our mobile devices. Obviously, the faster they can get these larger systems installed, the sooner we can support these systems with BIT Solution. The SIS products are, in essence, CES on a smaller scale, the decontamination of enclosures. It's significant in enhancing TOMI's reputation as a versatile and user-friendly decontamination solution technology. The ability to offer quick and effective solutions for biological safety cabinets, decontamination chambers, and various other enclosures will lead to long-term financial rewards. These scalable models are in high demand as we are currently engaged in many communications on this matter, and I do acknowledge the repetition from our previous update in April on our SIS product launch. We must work with many parties. First, in the design and assembly, then in the testing of cycle developments, and finally, the registration procedures to ensure the data and compliance of these solutions. However, I am pleased to announce significant advancements with four distinct manufacturing companies. Our in-house service team is performing extremely well. iHP Service revenue frequently serves as our primary introduction to organizations and leads to repeat orders. As mentioned, service revenue increased by 21% in quarter one of this year. I'm also pleased to report iHP Service opportunities have increased significantly this quarter, some resulting in six-figure sales. These opportunities typically offer clear revenue forecasts and expedited sales cycles, often tied to prompt decontamination needs. More importantly to report is that we are witnessing a significant shift in the decontamination service market, presenting us with a substantial amount of opportunities. As stated throughout last year, we brought a distribution network to the United States to join our worldwide distribution network. Allow me to share an update on some of our partners around the world. ARES Distribution is handling the 2025 CES build opportunity mentioned earlier, along with one of our high-value iHP Service decontamination projects scheduled for this summer. Moreover, they are exploring numerous opportunities for their existing inventory, including potential additional sales to end users in the United States. One of these opportunities will be by an independent agency of the U.S. government, which, once approved to publicly share, will be particularly exciting to announce. Technimount in Canada has a robust pipeline within the EMS industry featuring seven opportunities, each involving purchases of double-digit SteraPak or transport units. The status of these opportunities varies, ranging from budgeting processes to presentations for upper management or the need for contracts to be finalized with current suppliers before proceeding with SteraMist. Emitec in Malaysia remains optimistic about four BIT tailored specifically for SteraMist, with the anticipation of securing the first contract soon. Another international BIT tailored for SteraMist for shipments to Africa via the U.S. Embassy is set to close by the end of this month for ten SteraPak devices and associated accessories. I.B.D. in Italy, having placed their initial order last quarter, engages with us frequently to explore partnerships aligned with our SIS strategy and beyond. Universal Disinfection in Germany continues to cultivate their pipeline. They've also expanded their focus from life sciences and aviation to include the food safety market. We eagerly anticipate formal EU registration, which will unlock significant sales opportunities for our key European distributors. Tecan in Turkey maintains a biannual purchase pipeline with their second order slated for the end of 2024. Additionally, we recently onboarded a new distributor in India, SPS Technocrats, comprised of three directors with 35 years of collective experience in technical consumable sales. Their clientele includes notable names such as Sanofi, Mylan, and Sun Pharma. This overview covers seven of the 30-plus asset partners we collaborate with. Lastly, I'd like to touch upon our confidence in the pipeline, particularly in capital equipment mobile purchases. As Dr. Shane mentioned earlier, our presence at INTERPHEX in April was impactful, facilitating interactions with current and prospective customers leading to hundreds of quality leads as well as valuable face time with our partners, several of whom I provided updates on today. Many of the new leads will lead to future projects and sales while also serving as a platform to introduce our latest products, namely the ISSA standalone and the NV Plus, both of which were well received. While feedback is always wide-ranging, both items have already been quoted to opportunities identified at the show, and they all were in agreement with the necessity of these applications. Remarkably, this is the first time our participation at a trade show resulted in an immediate request for quote, even before dismantling our booth. Some of these budget approvals align with upcoming summer initiatives. Furthermore, in the second half of 2023 and this year, we're intensifying our proactive approach to disinfection in commercial and health care sectors, emphasizing the importance of routine disinfection beyond the lessons of any pandemic. To expedite this process, we're developing an educational platform tailored for all our TOMI Service Network members, as well as service providers and internal departments to health care facilities meeting specified criteria. The SteraMist Pro certified program remains a significant step towards industry excellence. As a recap, our aim is to establish a standard that reflects a commitment to continuous improvement, adherence to evolving disinfection biohazard response norms, and dedication to setting benchmarks in the field. Central to our mission is ensuring that the SPC program resonates with consumers by placing their needs at the forefront, portraying the certification as user-centric rather than SteraMist centric. The program seeks to ensure certified entities worldwide are equipped to deliver disinfection and decontamination while prioritizing public health, safety, and environmental sustainability.

Halden Shane, CEO

Thank you, E.J., and Nick. Very good. We continue to think outside the box and find new markets for our SteraMist iHP technology. I encourage the company itself to think further outside the box because there are plenty of these opportunities available. The biofuel industry is just one sector that has a high incentive to obtain better alternative biofuel. iHP is known to be the fastest and the second strongest oxidizer known to man, which may be able to be applied in the conversion of cellulose in biofuels. We're also in the early stages of marketing our SteraMist technology to be used in the decontamination process in the server farm industry and data centers. One of the largest areas of new infrastructure spending over the next one to five years is data centers. Major tech companies are pouring $1 trillion into data centers over the next five years. Third-party data center operators are one of the many beneficiaries of this AI boom. These data centers will need high-level disinfection to maintain the cleanliness levels needed to sustain their center's equipment. We will keep our shareholders updated on our endeavors to spread the applications across as many verticals as possible. Thank you for your time today. Stay tuned. I'll open the call to questions and answers.

Unknown Analyst, Analyst

Regarding the $2 million allocation from the Department of Homeland Security for the purchase of the 16 systems. Can you clarify the expected timeline for revenue recognition from the contract?

Halden Shane, CEO

Sure. They're going to decontaminate Plum Island. I believe it has to be performed in the first or latter end of the first or second quarter of '25. So I would have to think that the budget itself and the purchase order would come in somewhere in our fourth quarter of this year.

Unknown Analyst, Analyst

Got it. And then just one more. Can you provide a bit more color on the growth in the CES business and how that impacts the razor-razorblade model? Is it true that kind of the CES customers are more dependent on the uses of the high-margin BIT Solution?

Halden Shane, CEO

Yes. Once we're in this marketplace where we are building these devices for lots of money for major players in life sciences and pharmaceutical companies, even though the usage of the solution in this space isn't as great as, for example, if you're out spraying it every day in a hospital, it's consistent, and we can start going ahead and putting together reports on what we anticipate our solution orders to be going forward. I think that's a breakthrough for the company, and we have a tremendous pipeline and interested life science professionals, companies, and universities in these areas that we are very happy about.