Earnings Call Transcript - TOMZ Q3 2022

Operator, Operator

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

John Nesbett, Investor Relations

Good afternoon. Thank you for joining us today for the TOMI Environmental Solutions 3Q Earnings 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. I'll remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the Securities and Exchange Commission. We assume no obligation to update the information provided in today's call. In addition, in this conference call, we will discuss certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. I will now give the call over to TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane. Go ahead.

Halden Shane, CEO

Thank you, John. Good afternoon, everyone, and thank you for joining the TOMI Environmental earnings call. Today, we'll provide operating and financial results for the third quarter of 2022, along with a favorable update on a few key current focuses for the company. The last time we met, I reiterated how TOMI's patented iHP SteraMist technology is the only perfect 10 out of 10 in the disinfection and decontamination manufacturing world. Our process not only meets standards in the industry but surpasses customer expectations by providing all the necessary competitive advantages. With the current market trends for the application of our original, current, and upcoming product lines, we believe our production and pipeline have revenue poised to end the fourth quarter profitably, along with meeting our expectations for the year. This year, TOMI has seen an increase in our customer sales backlog, or rather pending sales orders, where revenue has not yet been recognized, but purchase orders or contract bids have been received or won. We believe analyzing and reporting this metric is worthwhile when measuring our overall sales and business development performance, as it gauges the overall volume of sales and business development activities. This is largely attributable to the increased demand for our Custom Engineered System, CES, as well as routine and new iHP Service engagements. Our iHP Service revenue for the current year has already surpassed all of 2021. A key driver for our longer-term growth is strengthening demand for our CES by referrals to the product line, hosting churns of current installed systems, continuing brand awareness via our domestic independent manufacturing sales representatives, and growing the network of international partners. Avid Bioservices is a good new example of our current CES in the design phase and set for implementation in Avid's new purpose-built viral vector development and manufacturing facility in Costa Mesa, California, next year. To properly promote state-of-the-art iHP permanent and fully automated integrated decontamination system, TOMI has begun entering into marketing agreements with customers such as Abbott to assist in the continued brand awareness. This year, we have completed one complete installation for Fresenius Kabi internationally, and five additional systems are being designed to manufacture for Merck and Orna, with three of the five on schedule for delivery by the end of the year. We are waiting on the purchase orders for another four systems set to close. The revenue will be recognized throughout 2023 and 2024 upon the delivery of those orders. As we install CES units, we can expect to see increased solution sales as these units are contracted to be used on a set regular schedule. For example, two of the installs currently being manufactured are expected to generate $250,000 in BIT Solution revenue annually by the end of the fourth quarter of 2023. For the nine months ended September 30, 2022, we have received $7.9 million in sales orders, of which revenue recognition will be upon delivery throughout this year and next. This represents 25% growth when compared to the first half of last year. And for the three months ended September 30, 2022, we received approximately $2.3 million in sales orders and/or winning contract bids, which represent a 5% growth compared to the same prior year period. Due to the increase in demand for our mobile SteraMist product, TOMI's revenue increased by 20% over what was reported for the second quarter of this year. Our financial operating results also showed sequential quarterly improvement compared to the second quarter of 2022, with a 24% reduction in our loss from operations due to higher revenue, gross profit, and lower operating expenses. As our customer base grows, we continue to address the need for timely responses to inquiries, questions, orders, and support. During the third quarter, we increased our employee headcount in our customer experience, sales, and technology departments in response to our growing customer base and backlog. With the addition of two direct hire engineers, our enhanced technology department will accelerate R&D initiatives and streamline internal production as we take on larger CES products. Thus, our manufacturing capacity not only improved in the first half of 2022 with the addition of ARM EnerTech Associates, who can manufacture our CES in their Pennsylvania facility, but now the added staff to our technology department can assist in research and development, prototype testing, and assembly of our products. We anticipate all these developments will reduce our overall cost and manufacturing leads. TOMI hired a sales director with significant sales experience in the clinical healthcare industry. Part of this background includes using TOMI SteraMist systems during his emergency medical EMS service for the past seven years. As a professional sales leader with an extensive record of success developing, supporting, and implementing strategic plans to increase market share and penetration, TOMI expects to increase the use of SteraMist in many of its commercial industries, schools, emergency services, and transports, for example. An additional sales director at TOMI has years as an independent manufacturing representative for SteraMist, with a focus on the life sciences and vivarium market. Since his tenure with TOMI, he has expanded into the food safety industry and is working on some great opportunities with the addition of two new independent TOMI manufacturing representatives. TOMI launched the SteraMist support portal, which is now available on desktop as well as via a mobile app, providing ease of use for sales support, branding, and assistance to our TOMI Service Network or TSN providers, sales representatives, international distributors, and end users. We anticipate further growth in sales and the continued build of our pipeline for the remainder of 2022. We see sizable sequential increases in profitability in the fourth quarter. We are also encouraged that we will see continued momentum into 2023 and 2024. Our last statement is based on a very strong interest in SteraMist and pending negotiations and opportunities along with a growing strong referral base from our existing customers. With the increase in TOMI personnel, I believe we will exceed analyst expectations in 2023 and 2024. The third quarter confirmed our belief that SteraMist will play a very prominent role in the food safety industry, a multibillion-dollar market. It has been established that we are not only solving contamination problems in a more efficient way, but we are solving ongoing issues in the industry that have never been solved before. With the global population explosion and continued concern over food safety, we anticipate an increase in demand for a mechanical way to disinfect our food supply. Every day, there are news articles around the world pertaining to the contamination of food. The many published food safety articles from the USDA demonstrate that our technology offers a consistent alternative to the decades-old chemical disinfection process. Earlier in the year, Indoor Environmental Solutions and Consultants, or IESC, completed their forensic, architectural, and engineering investigation and decontamination report with Kalera indoor farms. IESC acts as an independent sales representative to TOMI. The report demonstrated the efficiency of SteraMist in a large-scale EA vertical farm, dramatically reducing fungal growth, mold spores, and yield loss from environmental bioloads, with notable efficacy against the species causing 20% yield loss in all annual vegetable production. It outlined decontamination protocols while calculating long-term savings in using SteraMist as their decontamination solution. Italia reports structured the pathway to Soli Organic Incorporated, one of the nation's largest commercial indoor organic growing companies. Soli is now a proud owner of multiple SteraMist systems across two locations. Soli is expected to implement SteraMist in an additional eight locations. The TOMI team continues to work with a few partners in the cannabis industry. Biomist, a legacy TSN member, has been testing cannabis flower incubated with multiple species of Aspergillus, E. coli, Salmonella, yeast, and other molds, followed by a treatment with SteraMist on the dried material. Potency results of the cannabis plant were not affected, and no additional residual solvents were found. The process was successful in completing remediation of all microbial contaminants, while another partner in the cannabis industry has proven that SteraMist reduces microbial count on cannabis flower from 400 cubic foot to non-detectable levels without affecting the levels of THC. For new long-term investors, you may recall the number of studies and partners TOMI collaborated within the life science industry. And now we have a premier set of global Fortune 500 companies, such as Pfizer, Merck, Catalent, AbbVie, and Sanofi continuously using SteraMist as their decontamination standard. There is demand for every SteraMist product line in the life sciences. The utilization of TOMI's Mobile SteraPak to the intelligent permanently mounted CES to having our own iHP corporate service deployed at customer facilities. We expect the food safety industry to follow the same path, and the win at Soli Organic in the third quarter of this year has started that path forward, especially in vertical farming. As the food industry is coming on strong, our life science sector is growing even stronger. The biggest problem with integrating traditional vaporized hydrogen peroxide, or VHP, our number one competitor in the industry, into rack washers and other enclosures is the long cycle times. It is so long that they are rarely ever used. No one can afford to shut down their operations for seven hours. No one knows this better than the manufacturers of the washers and enclosures. Thus, TOMI's new team reconnected with the main players this year while exhibiting at AALAS. Last month, Allentown, Better Bilt, Tecniplast, and Brit + Co are some of these players interested in partnering with TOMI. We can sell the idea to end users prior to buying a cage washer enclosure, but it's an entirely different scenario if the manufacturer of the enclosure recommends SteraMist iHP. The deal we are working on with Brit + Co is a bit of a game changer because we achieved six log kills nearly on contact, and the superior material compatibility allows us to convert a biocontainment cubicle into a decontamination chamber. Traditional chambers are extremely expensive heavy-duty pieces of equipment, usually made of 100% stainless steel. VHP requires this type of enclosure. The unique properties of iHP fast kill, superior material compatibility, and no requirement for these big heavy-duty enclosures will allow us to design a cubicle that's faster, safer, and less expensive than traditional decontamination chambers. Brit + Co is a highly respected name in the industry, and there is no better partner to introduce the solution to the market than with them. Simultaneously, TOMI designed its fourth-generation SteraMist environment system. The system will now be 24 voltages, allowing for universal outlet usage and converting even more of the hydrogen peroxide solution, allowing for faster turnaround time. In addition, the unit will have eight outputs, where four are dedicated to our regular process of injection, dwell, and aeration, along with a light beacon status bar and four that are programmable to meet the customers' needs for any external equipment they may desire to work with the system. This fourth generation has been released, and three are set for delivery this month to our Australian partners. Critical science solutions to be used by a world-renowned influenza vaccine company. SteraMist customers, representatives, and partners continue to grow throughout the world, currently now in over 40 countries. Currently, TOMI is in the registration process for India and renewal to meet new requirements in the Philippines. Both markets offer excellent potential due to increased interest in the TOMI suite of decontamination solutions. The National Institute of Health, or NIH, began using SteraMist just one year after receipt of our EPA registration to support the research of cutting-edge medical knowledge and the development of revolutionary healthcare innovation. Now they have 30 SteraMist machines across 11 divisions. The third quarter reported their latest purchase of two SteraPak systems and two select surface units to support the disinfection requirement for an Africa-based biosafety laboratory, expanding the use of SteraMist to the international biosafety marketplace. We continued to confer with Group Purchasing Organizations, or GPOs, with Vizient, who serves more than 50% of the nation's acute care providers, including 97% of the nation's academic medical centers and more than 20% of ambulatory care providers. We anticipate final contracts to be signed early next year. After the release of the SteraPak, the TOMI technology team quickly began designing new SteraMist products, which include the Select Plus. The one applicator fogging unit will allow for enhanced flexibility being in an enclosed stainless steel pushcart to decontaminate from full room to small space volume. The Select Plus prototype is currently in real setting testing with one of our key local customers who owns many of all our current SteraMist products and has received an enormous amount of praise. The iHP SteraMist transport system has been designed for the transportation market, specifically emergency response, and is an easy-to-use turnkey integration system with the option to fully integrate with the vehicle or act as a stand-alone device. TOMI maintained strategic partnerships with associations, including ISSA, a leading worldwide association for the cleaning industry. Many TSN members are also participants of this association. We continue to onboard new TSN members to the network, most notably in the third quarter with Jenkins Restoration, who holds 23 locations in 15 states and is growing. TOMI will be launching a new website early next year. As we introduce new products and continue to penetrate into new markets, it is time to update the design to showcase our new innovations. One of the main features on the site will be logos and case studies of our prestigious clients worldwide. Our financial results for the three months ended September 30 compared to the same prior year period indicate that our consolidated net revenue was $1,760,000 compared to $2,205,000. The decline in revenue is due to customer-imposed delivery restrictions for equipment and CES orders and related impact on our revenue recognition and deferred revenue. We are continuing to see positive signs in the marketplace and increased demand for our technology. Our customer sales orders received in the current year is up 25% compared to last year, and our customer sales backlog continues to grow as a result of our customers' timelines, which have an impact on our delivery times and corresponding revenue recognition, as well as our deferred revenue, which increased $600,000 during the third quarter. Consolidated gross profit was 60.8% compared to 59.6%, representing an increase of 1.3%. The increase in our gross profit was due to our product mix and sales. The consolidated operating loss was $654,000 compared to $487,000, representing a 56% decline. The higher loss is due to lower sales and gross profits, offset by lower operating expenses. Our consolidated net loss was $653,000, or $0.03 per share on a diluted share basis, compared to $488,000, or $0.03 per basic share. EBITDA was a loss of $571,000 compared to $417,000. For the nine months ended September 30, 2022, and 2021, cash used in operations was $929,000 and $3,823,000, respectively, representing an improvement of $2,894,000. The improved cash flow from operations is primarily due to our lower reportable loss for the nine months ended September 30, 2022, which has declined 22% when compared to the same prior year period, as well as the increase in deferred revenue, which is up $1.1 million in our current calendar year. Moving to the balance sheet. As of September 30, 2022, our cash and cash equivalents were approximately $4.3 million. Deferred revenue was $1.2 million. Working capital was $9.3 million. And our shareholder equity was $11.8 million. Operator, let's open the call to questions.

Operator, Operator

We'll move first to Sameer Joshi with H.C. Wainwright.

Sameer Joshi, Analyst

Congratulations on the progress and the building order book and also all the other progress that you outlined. On the revenues front, can you elaborate a little bit on the customer imposed extended delivery timelines? Is it because they are delaying their projects? Or are there other budgetary constraints on their end? And what is the reason for this?

Halden Shane, CEO

No. I mean these customers don't have budgetary restraints, really. The problem is a lot of the orders we're getting, we're able to build systems, but their facilities are not completed or they're having engineering delays due to materials of their own.

Sameer Joshi, Analyst

Okay. Understood. So are you expecting deliveries in the fourth quarter, or will they be pushed into 2023?

Halden Shane, CEO

It's a fine balance. We're expecting a number of them in the fourth quarter and more of them into 2023. And as we complete them, we're now even taking orders into 2024.

Sameer Joshi, Analyst

Okay. Okay. I think in September, we saw some residential executive order allocating roughly $200 million for DoD for biosecurity. Have you seen that? And is there any benefit that you may get from that?

Halden Shane, CEO

We're not sure yet. It's a long process. Again, we're increasing our sales department, and we're assigning those types of projects to them to go out and look into. We have not seen anything as of this date that I could tell you about.

Sameer Joshi, Analyst

Okay. And then on the cannabis and CEA front, what is the potential that you are looking at, not in terms of the market sizes, but your addressable market, which you can get in, say, 2023 and 2024 from these kind of customers?

Halden Shane, CEO

Again, I think the market, as we know, is huge. The fact that it's working, we're getting calls all the time. This study was really good, and I just have to go back and ask the guy how he knows it didn't affect the level of it. But it will. In the U.S., I don't know about internationally.

Sameer Joshi, Analyst

Yes. It's a big market, even within a few states in the United States, that is true.

Halden Shane, CEO

Yes, yes, that's true.

Sameer Joshi, Analyst

Just a question on expenses. You said you're increasing the headcount, you're hiring directors, sales directors. How should we see your operating expenses grow over the next few quarters? You've been pretty steady last two quarters. So just wanted to see how it goes from here.

Halden Shane, CEO

I think you'll see an increase in proportion to our sales revenue. I don't think we're overly increasing. Some of them were replacements. Some of them are new engineers, as I said on the call. And some of them are increasing our sales. But as we increase our sales, we're increasing our revenue. And the operation expenses should increase. But on a percentage basis, pretty much stay the same or increase a little.

Sameer Joshi, Analyst

Understood. And just one last clarification on the core generation equipment. Is it priced similarly to your existing equipment, or is it at a premium price range?

Halden Shane, CEO

Well, like everyone else in the world, we've raised our prices on all our equipment. And the fourth generation will be a moderate increase over what our previous environmental systems and third generations were.

Operator, Operator

And we'll move next to John Nelson, who's a private investor.