Earnings Call Transcript - TOMZ Q4 2022

Operator, Operator

Good afternoon, and welcome to the TOMI Environmental Fourth Quarter and Year-End 2022 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, John Nesbett from IMS Investor Relations. John, the floor is yours.

John Nesbett, Investor Relations

Good afternoon. Thank you for joining us today for the TOMI Environmental Solutions investor update conference call. On today's call is TOMI's CEO 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 March 30, 2023, the details of which are included in the company's press release dated March 13, 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, March 16, 2023. And we're, 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 any 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 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 March 16, 2023. I will now turn the call over to TOMI's Chairman and Chief Executive Officer, Dr. Halden Shane. Please go ahead.

Dr. Halden Shane, CEO

Good afternoon, everyone. Thank you for joining the TOMI Environmental earnings call. Today, we will share our operating and financial results for the fourth quarter and the full year of 2022, along with a positive update on some key current areas of focus for the company. This has been a solid quarter for us, concluding a very significant year for TOMI Environmental. Our GAAP revenue increased by 40% for the quarter and 8% for the year. We achieved efficiencies in our business, and in the fourth quarter, we significantly reduced our losses, reporting a small adjusted EBITDA loss of only $268,000, as we continue to make substantial progress towards breakeven in our financial outcomes. Let me highlight a few key reasons why I believe this quarter is particularly promising. Firstly, our business has grown, with an increase in revenue from large custom systems, which we call CES. These larger, long-term orders provide us with better visibility into our growth, along with an expanding customer base in CES. Additionally, our new mobility customers are driving growth in our higher-margin BIT solution sales, and we are seeing positive trends in the marketplace, as fourth-quarter solution sales rose by 31% compared to the same quarter last year. Facilities that invest in custom permanent units typically do so with the intention of using the system as needed. Secondly, as we installed our initial CES some time ago, there is now considerable interest in our fully automated decontamination system, which is being requested frequently. We are just beginning to really take off. There is no substitute for hard work, and overnight success is a myth. We have reached a point where the larger life science companies know us and trust us, and some of our referral customers include top names in the life science industry. We worked very hard to gain acceptance from these companies. On this call, I have invited E.J., TOMI's COO, to dive deeper into the process our team goes through to secure these accounts, highlighting the excitement that surrounds our future growth. Third, in the fourth quarter, we showcased the strength of the economic engine we are building. You can start to see that we are on the verge of achieving sustainable profitability. The reasons for this are three-fold: we have better long-term visibility than ever, our gross margins are slightly improving due to our revenue mix, and we have significantly reduced our SG&A expenses, even as we continue to hire. We have concentrated on cutting costs and ensuring operational efficiencies. For instance, we have increased our in-house engineering capabilities instead of relying on external firms. We anticipate our SG&A growth will be much slower than revenue growth. Lastly, our adjusted EBITDA was close to breakeven, and it will not take much for us to reach sustained EBITDA and net income profitability, provided our active pipeline remains strong. The CES product line involves a lengthy sales cycle and fosters a partnership with the end-user company. Our growth now encompasses not just current mobile unit sales but also a backlog of orders, allowing us to recognize revenue in future quarters. Our customer contracts and orders for mobile equipment, CES systems, and iHP services are subject to the delivery timelines established by our customers, which impacts when we can recognize related revenue. For the year ending December 31, 2022, our recognized revenue combined with our sales orders backlog reached about $10.4 million, marking one of our best years to date. This total consists of recognized revenue of $8,338,000 and a customer sales backlog of $2,024,000 as of December 31, 2022. Over the course of 2022, we received more than $10 million in customer sales orders, including several from major global Fortune 500 companies, representing a 22% increase compared to 2021. The growth in sales orders is primarily due to the increased demand for our CES and mobile equipment orders, especially from the life sciences, commercial, and food safety sectors. Our fourth-quarter revenue for 2022 was $2,812,000, a 40% increase from the fourth-quarter sales in 2021. Sequentially, our revenue grew by 60% compared to the third quarter of 2022, making it the best stand-alone quarter we have achieved since 2020. This increase in sales is largely thanks to heightened demand for our CES systems and our tech team's efficiency in executing and delivering systems in the fourth quarter of 2022. We also experienced growth in mobile equipment orders due to our expanded product line. Last quarter, we installed two systems and the applicator portion of another CES order, successfully recognizing revenue and adhering to our timelines. The contractors building these systems are experiencing delays on their end for two out of the three systems mentioned. Consequently, the full expected revenue from BIT solutions has been postponed by a quarter due to factors outside of TOMI's control, and the commissioning of the systems will be slightly delayed. Securing additional CES bids remains a top priority, and we will announce these wins as they come in throughout the year. At the end of last year, we received approximately $400,000 in bookings for an ongoing project that automates the entire cell therapy manufacturing process. This integration aims to fully automate decontamination throughout the entire cell therapy process, ensuring complete coverage for a 6-log kill. We are on track for delivery this summer with multiple prototype systems and hope to announce a partnership soon as the primary decontamination solution for this cell therapy system. Additionally, we are refining our superior product for the life science sector by offering an enhanced decontamination solution for chambers, cage washers, and modular clean rooms, with production expected to begin shortly. SteraMist disinfection decontamination is essential for laboratories to comply with stringent regulations and guidelines within the industry. Lessons learned from the COVID-19 pandemic demonstrate that our product can mitigate the spread of infectious diseases. Our TOMI service network providers continue to address outbreaks in their communities related to this recent pandemic, as well as bird flu, norovirus, monkeypox, E. coli, and Listeria. TOMI was informed that one of its TSN providers supported the Ohio train derailment by using SteraMist for disinfecting homes and nearby commercial structures. Another TSN provider maintained a service contract with a large hospital system, delivering routine disinfection services during the COVID pandemic in 2020, which continues to be effective against other pathogens on a daily basis. As we look ahead, we are enhancing our business development strategies, including the initiation of a new growth strategy in domestic distributions. Numerous agreements are in advanced stages and will soon be executed and announced, spanning multiple divisions. TOMI is establishing partnerships with recognized distributors in the animal science, life sciences, and further commercial sectors by entering into distribution agreements for aligned SteraMist equipment. This domestic distribution strategy aims to penetrate the U.S. market and boost SteraMist mobile equipment sales. The international market, while characterized by a long sales cycle, is advancing well. We achieved a notable success with the National Health Services in Wales last quarter, as they consistently promote our brand publicly. Furthermore, our innovative partners in Australia and Germany have made significant strides within their countries and neighboring regions. Ongoing studies are a focus as we continue to expand both domestically and internationally. In Germany, we are conducting studies to validate our efficacy on materials that must meet strict life science regulations. In the U.S., we are collaborating with government entities and contractors to demonstrate effectiveness against ricin and sentinel, which is critically important for national security. Additionally, other studies are taking place directly on cannabis flowers to combat common fungi without affecting the plant's oil or integrity. Currently, SteraMist is reporting successful results, and we aim to finalize these studies and publicly share the findings soon. Food safety usage has increased by over 653% when comparing 2022 to 2021. New food safety challenges continue to arise, primarily due to shifts in food production, supply chain complexities, and increased transportation delays, including the rise in imported goods. Environmental changes are leading to food contamination and the emergence of new bacteria, toxins, and antimicrobial resistance. Food safety represents a significant growth opportunity for TOMI as we continue our product research and compliance testing. The food safety industry in North America faces heightened scrutiny with the implementation and enforcement of both new and existing guidelines. SteraMist's cold plasma technology has shown to be an effective decontaminant in the food sector. It can help comply with the Food Safety Modernization Act and the Safe Food for Canadians Act and regulations. Today's geopolitical issues in farming and ranching add further concern regarding the protection of our limited global food supply, which includes food transportation challenges. TOMI is actively collaborating with leading companies to test and validate SteraMist technology in food safety and seed industries. In 2022, we made strides in enhancing brand awareness in food safety through targeted promotion and marketing efforts. We're experiencing an uptick in inquiries within the food safety division as a direct result of these strategies. Daily news sources report on food supply contamination, and with the global population surge along with significant avian flu pandemics causing extensive culling of bird populations, and numerous accidents leading to the destruction of many storage and processing facilities in the U.S., we expect growing demand for effective mechanical solutions to disinfect our food supply. TOMI, in partnership with the USDA, has showcased that our technology provides a stable, rapid, and effective alternative to traditional chemical disinfection techniques that have been in use for decades. SteraMist can deliver more timely and consistent results across the food supply chain, from farm to market, processing to packaging, and storage to delivery. We are vigorously pursuing these opportunities. Continued testing and market demand, combined with our new BIT 0.35% hydrogen peroxide label, will contribute to our success in seizing these prospects. Furthermore, our solutions and processes are environmentally friendly, resulting in by-products that are merely oxygen and water in humidity form. Our product is listed on OMRI and labeled as organic. Unlike most disinfectants, SteraMist leaves no residual chemicals on any surface. It has an extremely low carbon footprint, with only oxygen and humidity as its by-products. SteraMist is ideally positioned to address the pressing food safety challenges we currently face. We recognize that we consume too much food while producing too little, often harming the environment in the process. SteraMist is ready to support the food industry in tackling these challenges. I will now pass the call to TOMI's COO to provide further insights into the CES sales and installation process, as well as TOMI's pipeline. E.J.?

E.J. Shane, COO

Thank you, Dr. Shane, and good afternoon, everyone. I appreciate the opportunity to report some of TOMI's growth and future trends on today's call. I personally join weekly calls for SteraMist projects for partially or fully automated installs that we have won or plan on closing in the near future, attend trade shows and answer general inquiries for our mobile units across all divisions, both domestically and internationally. And there has been a strong transformation in these conversations. I used to have to introduce the science of our technology and the many competitive advantages ionized hydrogen peroxide, or iHP, has in comparison to new and old products alike. Today, many come to us already knowing our brand SteraMist. Therefore, conversations now begin: I know your technology is superior and understand the science behind it, so what applications can you offer for a facility that fits our budget? Basically, it becomes a pitch on the equipment and the product line of SteraMist. This makes maintaining interest for SteraMist easier, as we know the versatility of the technology and what our legacy units offer. And now with our experienced team, regarding our custom engineered systems or CES, TOMI is set to offer solutions to these potential opportunities with ease and knowledge of the process. Earlier this year, we received news of becoming the global disinfection standard and acceptance for another premier company, which we had already established a strong partnership with in prior years. There have been proposals and purchase orders from significant companies looking to expand their usage of SteraMist throughout multiple facilities globally. To fully win a project for our CES, we must undergo a series of steps. This can be as simple as entering an NDA to share blueprints, and a minimal amount of engineering documents are exchanged, to as complicated as a series of meetings with contractors, engineers, electricians, building and safety management executives, and so forth. Once won, these mini meetings continue weekly and the timing of our delivery or install or even commissioning varies. The TOMI team was accelerated on a one-applicator SteraMist system to maintain project goals made by the customer, and I'm happy to report that TOMI has met these goals. And by the 27th of this month, the full SteraMist process will be completed, and that's fully recognized into revenue in the first quarter. To date, TOMI has successfully stayed on schedule and budget for implementation of this product line, whether it be the custom design, manufacturing, installation, commissioning, or qualification part of the process. That said, there are forces beyond our control that, at times, make it difficult to specifically predict when we will recognize revenue. As a point of information, the Avid installation has now been delayed until June because the electrical utilities have not been completed by their contractors because they are waiting for building permits to be approved. We are currently working with Avid's marketing team on the case study of their iHP system, which will be released this year, providing the TOMI sales team yet another referral report to use with their open opportunities. With our custom engineered systems, we deliver the physical system, but we also complete the last steps of commissioning and qualification to the system, which includes supplying the BIT solution. These last steps are critical to our razor-razorblade business model. For example, as reported during the last two of our CES systems, we're installed at the end of last year, they will produce $250,000 in revenue of BIT solution a year. This holds true that these two systems are delayed for the iHP qualification part of the process until early next year. So full BIT solution recurring revenue attributed to these systems will begin to take place early 2024 rather than late this year. Our pipeline is very healthy. We are in ongoing conversations for approximately 25 custom builds, ranging anywhere from $100,000 to $2.5 million in revenue. A simple custom install can equate to $5,000 a year in BIT solution to a multi-applicator system with continuous use of $250,000 or more a year in BIT solution. But it all depends on the end user's production facility and, unfortunately, with the many stages to the process and parties involved, timing is out of our control. In the life sciences, we are a global standard decontamination solution to many. This is not a statement to take lightly. The interest does not just lie with our custom builds. Becoming accepted by the global leadership of such companies, TOMI's SteraMist becomes easier to be approved by quality and safety alike, meeting new guidelines and keeping to old guidelines. At this time, I believe our fourth-generation environment system just released to our SteraPak model will move faster in this market than we have seen prior years, both domestically and internationally. This will be reflected in year-end revenue and open bookings for 2023, specifically with the parties we are pursuing to become distributors for our SteraMist brand. I would like to take the time to thank all the TOMI employees. We really have grown into an incredible team. And I look forward to the success we will be part of this year and beyond, with the foundation we have set together. Now I'll turn the call over to our CFO, Nick Jennings.

Nick Jennings, CFO

Thank you, E.J., and good afternoon, everyone. I'll provide a brief overview of our financial results for the full year 2022 and the fourth quarter of 2022 compared to the prior-year periods. For the year ended December 31, 2022, compared to December 31, 2021, our consolidated net revenue was $8,338,000 compared to $7,754,000, representing an increase of $584,000 or 8%. Consolidated gross profit was 60.7% compared to 59.2%, representing an increase of 1.5%. The increase in our gross profit was due to our product mix and sales. The consolidated operating loss was $2,882,000 compared to $4,924,000, representing a 41% year-over-year decline. The improved operating loss was attributable to higher sales, increased gross profit, and lower operating expenses. Our consolidated net loss was $2,880,000 or $0.15 per basic and diluted share, compared to $4,435,000 or $0.25 per basic share. Adjusted EBITDA was a loss of $1,899,000 compared to $4,123,000, representing a year-over-year improvement of 54%. A table reconciling the adjusted EBITDA to the appropriate GAAP financial measure is included with today's press release. For the year ended December 31, 2022, and 2021, cash used in operations was $1,234,000 and $3,824,000, respectively, representing an improvement of $2,590,000. The improved cash flow from operations was primarily due to our low reportable loss for the year, which declined 35% when compared to the same prior-year period, as well as an increase in our deferred revenue, which is up $700,000. For the three months ended December 31, 2022, compared to December 31, 2021, our consolidated net revenue was $2,812,000 compared to $2,010,000, representing an increase of $802,000 or 40%. Consolidated gross profit was 58.6% compared to 54.5%, representing an increase of 4.1%. The increase in our gross profit was due to our product mix and sales. The consolidated operating loss was $706,000 compared to $1,734,000, representing a 59% year-over-year decline. The improved operating loss was due to higher sales, increased gross profit, and lower operating expenses. Our consolidated net loss was $705,000 or $0.04 per basic and diluted share compared to $1,660,000 or $0.10 per basic share. Adjusted EBITDA was a loss of $268,000 compared to $1,573,000, representing a year-over-year improvement of 83%. A table reconciling the adjusted EBITDA to the appropriate GAAP financial measure is included with today's press release. Now to move on to the balance sheet. As of December 31, 2022, our cash and cash equivalents were approximately $3.9 million. Deferred revenue was $700,000. Working capital was $8.8 million, and shareholders' equity was $11.4 million.

Dr. Halden Shane, CEO

Thank you, Nick. 2022 was a year of establishing and preparing for considerable future growth of the company. We continued growing internal departments with new positions and hires, applied and received additional intellectual property, streamlined internal controls, and entered into new agreements for more studies. We continued to undergo a website redesign to provide enhanced user experience and finalize new products to meet the needs of our divisions. As mentioned before, we continue to grow and need more space for new hires and product development. TOMI is currently under negotiations for an office expansion. We look forward to 2023 with new products and partnerships as we advance our company forward. Operator, let's open the call to questions.

Operator, Operator

Sameer Joshi, H.C. Wainwright.

Sameer Joshi, Analyst

Thanks. Good afternoon, everyone. Doc, E.J., Nick, congratulations on the progress that you have made over the last several quarters and certainly this quarter. On the OpEx front, good to see year-over-year reductions. But I do understand that, given your expected growth, you're making investments in office space, certain personnel hires. How should we look at OpEx going for the next 12 months?

Dr. Halden Shane, CEO

I think you will see an increase in operating expenses, as we are looking to continue to grow revenue. And the two go hand in hand to some extent. So as we ramp up more, there could be an increase in the operating expenses.

Sameer Joshi, Analyst

Okay. And the expected growth will indeed lead to a conversation about operating expenses. Please proceed.

Dr. Halden Shane, CEO

Our revenue from it is going to greatly outpace the expenses.

Sameer Joshi, Analyst

Yeah, yeah. I mean, I had presumed there would be leverage there. Just a little bit specific on that. I think during the last quarter, you had mentioned you've had hired a new salesperson for the life sciences industry, and you outlined a lot of outreach for food and various verticals within that industry on this call. Are there any hires expected for sales in the food industry?

Dr. Halden Shane, CEO

We have hired people that are considered specialists in the area and that have allowed us to move our percentages up significantly in food safety. And we're all very excited about food safety, as you can tell from the report. I can only see that this product becomes a natural in food safety. And we'll be fighting with life sciences over which division is the best in the company.

Sameer Joshi, Analyst

Understood. E.J., could you clarify when you consider a project or order to be in the pipeline versus in backlog? Specifically, what timeline leads you to classify something as being in the pipeline?

E.J. Shane, COO

Certainly. So it comes into the pipeline once we start towards the end of our conversations with these companies, and then we sign into contracts with them to win the bid. The recognized revenue of each of these builds are scattered throughout the project from the beginning of design to the equipment to the end of installation and commissioning.

Sameer Joshi, Analyst

Okay. Okay. Thanks for that color. And then I had a specific question I think in discussing life sciences applications. In the commentary, I think, Doc, you mentioned modular clean room development. Is this something that we should consider a product maybe with a strategic partner going forward? Or is this something that you are supplying to modular clean room manufacturers as a solution for them?

Dr. Halden Shane, CEO

So it's a specific customer, but it's a design that can apply to many customers that produce and design modular clean rooms around the world. E.J., do you want to comment a little further on the advancements in that?

E.J. Shane, COO

Of course. Yeah. So we're actually working with manufacturing companies of cage washers, decon chambers, and these modular build-ins. There are about four companies that are really well known globally in which we're creating a turnkey solution of our iHP system to integrate nicely with them, in which they would manufacture and assist in the sales process of those deliverables.

Sameer Joshi, Analyst

Got it. And last one from me. In the food vertical, are you seeing more interest in one vertical rather than other than for example, the controlled environment agriculture industry? It's growing, and it's open to new technology. Is that the field that you're seeing more a spill from?

Dr. Halden Shane, CEO

Yes, we're examining all aspects of it. I think everyone feels a bit frustrated, especially regarding the current food costs. Much of this stems from issues related to food safety, delivery, and storage. In the past, the industry was reluctant to invest extra money in protecting these areas, but now that food has become such a valuable commodity, we're seeing significant interest from food manufacturers. This includes working with the world's largest seed producer to disinfect seed packages before they are packed, as well as engaging with storage facilities and sectors like organic and vertical farming. I believe this trend is expanding globally in relation to food safety, and our products are well-suited to address these needs.

Sameer Joshi, Analyst

Great. Thanks for that color, and thanks for taking my questions. Good luck.

Dr. Halden Shane, CEO

Thank you. Thanks so much.

Operator, Operator

John Nelson.