Applied UV, Inc. (NASDAQ:AUVI) Q2 2023 Earnings Call Transcript

Applied UV, Inc. (NASDAQ:AUVI) Q2 2023 Earnings Call Transcript August 21, 2023

Operator: Good day. I would like to welcome everyone to the Q2 2023 Applied UV Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John McNamara, Investor Relations for TraDigital IR. Thank you. You may begin.

John McNamara: Thank you. Good morning, everyone, and once again, welcome to Applied UV’s Q2 2023 earnings call. With me on the call this morning today are Max Munn, Founder, CEO, President and Director; and Mike Riccio, Chief Financial Officer. As a reminder, raw materials for today’s presentation are available on the company’s Investor Relations website at applieduvinc.com. Before we begin, as usual, please take a moment to read the forward-looking statements in our earnings press release. During today’s call, we will make certain predictive statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations on future events that are subject to risks and uncertainties. In our most recent Form 10-K, you’ll find some of the most important risk factors that could cause actual results to differ from our predictions. With that, I’ll turn the call over to Max Munn. Go ahead, Max.

Max Munn: Thanks, John. Good morning, everyone, and thanks for joining us today. In addition to reviewing the highlights from the second quarter of 2023, we’ll spend some time discussing our strategic roadmap, the progress we are achieving across multiple business lines and the outlook for the second half. I’m pleased to report another strong execution quarter for our business, posting second quarter revenue of $10.8 million, up 83.6% from the comparable period of 2022. Our Hospitality segment grew 23.5% and our Disinfection and Healthy Buildings Technology segment grew 227.6%. We continue to benefit from strong underlying trends in our Healthy Buildings Technologies segment and from our Hospitality segment. Moving on to our backlog.

We’re pleased to report a record backlog of approximately $20 million as of today, an increase of 279% year-over-year. The increase in our Hospitality segment is particularly noteworthy, representing over 59% of our total current backlog. This is a testament to the remarkable work of our employees and an indication of the momentum in our business as we look to the remainder of 2023 and into 2024. Beneath the top-line results, we’re very focused on our path to profitability and positive cash flow from operations by improving our gross margins, optimizing our operations and carefully managing our expenses, while making the necessary investments to ensure we deliver on our commitments to our customers and shareholders. We are focused today on three key factors to get us where we need to be next year: scale, gross margin expansion, and the management of operating expenses.

We believe growth in both of the operating segments that we’re in will play a leading role in transitioning to a positive and profitable cash flow company. As such, scaling any businesses is challenging, but growth is critical and we’ve begun to establish our brands and build a business that we believe is well positioned in the enormous markets we operate in today. Let’s start by reviewing our Hospitality segment, specifically MunnWorks, a manufacturer of mirrors and furnishings specifically for the hospitality and multi-family industries. Our Hospitality division is experiencing unprecedented growth with leading hotel brand and property developers, underscoring the success of our strategic expansion in manufacturing capacity and our ability to meet the evolving needs of the hospitality and leisure industry.

The combination of hospitality case goods with electrified and lighted mirrors has proven to be a winning formula, leading to increased revenue per customer. This integration of product lines has allowed Applied UV to offer comprehensive solutions to its hospitality clients, enhancing customer satisfaction and driving revenue growth. This segment has continued its pre-pandemic growth, fueled by the post-pandemic travel surge, combined with increasing demand from the industry to source products manufactured in the U.S. There are a number of factors driving this trend, which we believe is largely driven by hospitality buyers seeking to avoid the stiff tariffs and duties on products now manufactured in China, and to reduce the significant risk in supply chain disruption, allowing our furnishings to drive — to arrive faster with less quality risk.

Although furnishings constitute on average only 15% of the cost of building a hotel, you can’t open the hotel without the furniture. A good example of the success we experience in this segment was our announcement recently of having received over a $2 million in cash deposits on a significant $4 million order from hotel and multi-family developers for interior furnishings. These new orders are contributed to our growth in backlog, which, as I’ve said, currently is approximately $20 million. Before I turn the call over to Brian Stern, President of PURO Lighting, to discuss our Intelligent Buildings Technologies segment, I will close by reiterating our expectation of total revenues for this calendar year of approximately $45 million. We’ve had a solid start to the first half of the year, acquiring two new businesses, and we anticipate further positive developments as we fully integrate PURO’s technology into our Airocide platform.

Our broad range of FDA-cleared premium air purification products, SaaS solutions and IoT capabilities puts us in the enviable position of being able to deliver best-in-class solutions that meet the evolving needs of our customers. We’ve recently realized cost and operational and sales synergies from the acquisitions of PURO and LED Supply and have identified additional synergies to be implemented. And we will continue to evaluate costs as we drive toward being cash flow positive. Let me add that in line with our commitment to efficiency and profitability, we’ve been aggressive with cost reduction activities, including the reduction of the number of employees by over 10%, and the payroll expense reduction of even a greater amount, allowing us to significantly improve operating margins and position Applied UV for a trajectory to a cash flow positive results.

I would like to note that our financials for Q4 2022, six months ago, and Q1 of 2023 incorporated one-time costs that are essential for all of us to understand. These were primarily related to the rapid drop-off of COVID-related sales as the pandemic quickly receded. This resulted in significant and required write downs of certain non-cash acquisition costs as well as one-time costs to pivot from our COVID-related business concentration, all of which is now behind us. Despite these transient expenses, we remain confident in our strategic direction, and we firmly believe that these proactive measures will enhance our market standing and will drive sustainable growth in the near term. So now I’ll ask Brian Stern, President of PURO, to jump on.

Brian Stern: Thank you, Max, and good morning, everyone. I’m going to spend some time discussing the Intelligent Building Technologies segment of our business, which designs, manufacturers, and distributes, disinfection, food preservation, and lighting systems for use in food storage, healthcare, hospitality, education, multi-family, and public spaces, as well as cannabis correctional facilities, commercial, municipal, and residential markets. Our Intelligent Building Technologies segment reported revenue of $5.7 million for the quarter, largely attributed to the acquisition of PURO and LED Supply. The global air purification market is expected to double to $30 billion by 2030. Several factors are driving this growth and include increasing media attention on the importance of air quality, growing consumer awareness of health implications from poor air quality, and the rising level of pollution, airborne diseases, and natural catastrophes.

We firmly believe we are on the precipice of an indoor air quality revolution as poor air quality more frequently impacts the lives of the overall population, whether as a result of industrial air pollution, the burning of coal or wildfires — or the burning of coal and wildfire. Additionally, our air sterilization technologies address the monumental problem of food preservation through the oxidation of ethylene, while also destroying viruses and pathogens. We’ve seen efforts from organizations such as the CDC and ARA to further improve public health by establishing formal recommendations and standards for indoor air quality, or IAQ. We agree with these organizations as our understanding of the detrimental health effects associated with poor IAQ grows, and we believe this is a significant step towards safeguarding the well-being of the public.

And at the same time, we, at AUVI, will continue to address those needs with our proprietary technology. We have accelerated our product offering and we are now in a position to showcase our full range of products and services that enhance safety across various sectors, including food preservation, hospitality, consumer education and healthcare. Through our commitment to research and innovation, we’ve developed innovative technologies in rigorous quality standards to ensure that customers can rely on our products for exceptional protection. We have an FDA-cleared suite of medical-grade air sanitization technologies that utilize patented and proprietary technology to continuously sanitize the air and destroying 99.9% of airborne viruses, bacteria, allergens and fungi.

We’re also advancing our IAQ — IoT center and IAQ monitoring and device control technologies to accelerate our opportunities to generate recurring revenue. We believe our broad range of trusted and FDA-cleared products will further solidify our position as a leading force in the industry. Let’s focus on one particular market segment where we are aiming to expand our market share over the next several years. Both industry and academic reports have recently addressed the impact of food spoilage on the world economy, totaling over $400 billion a year in spoiled fruits and vegetables. This equates to roughly 31% of product in the supply chain. Because we are leaders in photocatalytic oxidation, we will continue to leverage our position in post-harvest food security.

Our Airocide line has already proven effective with global companies such as Del Monte, Dole, and Whole Foods, in significantly reducing spoilage, improving yield and protecting high value food. The recently established ethylene oxide abatement requirements by the EPA have created an opportunity for significant growth utilizing our Airocide technology, which has the capability to effectively remove ethylene oxide. This opens up an entirely new industry application for our proprietary Airocide technology. Industries that use or produce ethylene oxide, such as sterilization processes in healthcare, pharmaceuticals and agriculture, can now benefit from our innovative ethylene oxide restructuring technology. This not only broadens our reach, but also positions us as the solutions provider for industries facing new stringent environmental regulations.

With the help and partnership of Canon Virginia, a unit of Canon Japan, we will be introducing a photocatalytic oxidation based air purification system that removes ethylene gas. We expect that these systems will be incorporated into shipping containers, long haul refrigerated trucks, and distribution centers, thereby significantly increasing the shelf life of produce. We will be launching this new generation of our Airocide line in October of this year. Our primary focus will be centered on food security and storage applications in post-harvest facilities. These technologies can be used along the entire supply chain from horticultural applications to processing to distribution and logistics, improving the yield on high value foods, cannabis and wine.

With our global distribution, which now includes 90 dealers and distributors in 52 countries, including Southeast Asia, with manufacturers reps and U.S.-based sales reps, along with numerous strategic partnerships firmly in place, we’ve created a competitive advantage with relationships with Canon, Acuity Brands, Johnson Controls, Ushio, Siemens, and Grainger to name just a few. Our transfer of manufacturing to Canon Virginia, a wholly-owned subsidiary of Canon U.S.A., is progressing on schedule. We believe this will yield a significant reduction in our fixed G&A expense into a variable G&A expense, and believe this partnership will transition to production and logistics cost savings by removing manufacturing execution risk and allowing the company more effectively to scale and focus solely on marketing and sales.

There are a few notable achievements subsequent to the end of Q2 that I believe illustrate our success and support our strategy for continued growth across all our business lines. PURO and its partner Academy Energy Group were selected as finalist for the GSA’s Green Proving Ground Program. Together, we plan to demonstrate the benefits of using next-generation LEDs and Far-UVC lights to disinfect air without the need to increase ventilation. The GPG program will evaluate technologies that support healthier building while reducing energy use and improving IAQ. In early August, we announced that our SteriLumen subsidiary received its first purchase order for its disinfecting mirrors. This order is for the renowned Mt. Sinai Hospital in New York and represents the successful culmination of three years of research, investments and intellectual property developments by Applied UV.

These groundbreaking disinfecting mirrors have been rigorously tested and shown to be effective against Candida auris, a rapidly spreading fungal pathogen, a crucial achievement in light of increasing global concerns over resistant pathogens. Sinks and drains are one of the most dangerous areas where infection, bacteria, mold, and pathogens accumulate. Manual standard cleaning methods are ineffective as a disinfectant. Additionally, our laboratory validated Lumicide patented UVC technology is the only solution that continuously and thoroughly eliminates bacteria in and around hygiene sinks in hospitals, healthcare and heavily traffic public areas. This is a significant milestone for a Healthy Buildings Technologies division, and we hope to be able to share more in the coming quarters.

I will turn the call over to Mike Riccio for a further review of our financial result. Mike?

Mike Riccio: Thanks, Brian. Net sales of $10.8 million represented an increase of $4.9 million or 83.6% for Q2 2023 as compared to net sales of $5.9 million for Q2 2022. This increase was primarily attributable to the Disinfection/Healthy Building Technologies segment, primarily due to the acquisition of Puro Lighting and LED Supply Co. on January 26, 2023, which added approximately $4.0 million in revenue to AUVI. Additionally, the Hospitality segment increased $0.9 million as that market continues to steadily improve. Gross profit increased $1.1 million from $1.3 million or 22.1% versus sales for Q2 2022 to $2.4 million or 22.2% versus sales for Q2 2023. The increase in percent from 22.1% to 22.2% was driven primarily by the improved margins in the Hospitality segment as compared to the same period last year, and by the increase in sales mix of the higher margin Disinfection/Healthy Building Technologies segment.

For Q2 2023, the Disinfection/Healthy Building Technologies segment accounted for 52.5% of total sales, as compared to 29.4% in the prior quarter — prior-year quarter. Our SG&A expenses for Q2 2023 were $4.9 million as compared to $4.0 million for Q2 2022. This increase of $0.9 million was driven primarily by the expansion of the Disinfection/Healthy Building Technologies segment with the acquisitions of PURO Lighting and LED Supply Co. These acquisitions accounted for approximately $1.7 million of the increase, but were offset by a reduction of other SG&A expenses of approximately $0.7 million and also by a reduction in our corporate expenses. The company recorded an operating loss of $2.7 million for Q2 2023 compared to an operating loss of $2.8 million for Q2 2022.

The decrease of $0.1 million in the operating loss was primarily due to the improved profitability of the Hospitality segment and a reduction in corporate expenses, offset by an increase in the loss of the Disinfection/Healthy Building Technologies segment, as the company incurred higher SG&A costs, as I explained previously. The company is accelerating its efforts to realize cost synergies from these acquisitions, especially PURO Lighting and LED Supply Co., which will improve our overall — the overall cost structure of AUVI. On a percentage basis, the operating loss improved to 24.8% in Q2 2023 as compared to 47.6% for Q2 2022. The company incurred interest expense of $0.5 million due to the borrowings of Streeterville Capital and Pinnacle Bank, primarily to help fund the acquisitions of PURO Lighting and LED Supply Co., and also to fund additional working capital requirements.

The company recorded a net loss of $3.0 million for Q2 2023 compared to a net loss of $2.9 million for the prior-year quarter. The increase of $0.1 million in the net loss was mainly due to the $0.6 million increase in SG&A costs incurred as a result of the acquisitions of PURO Lighting and LED Supply Co. But these were offset by the improved profitability of $0.5 million in the Hospitality segment. Total cash and cash equivalents as of June 30, 2023 were $3.3 million compared to $2.7 million as of June 30, 2022. Thank you for your attention. Jenny, you can open up the call to questions now.

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Q&A Session

Operator:

Max Munn: Well, we’re anxious to deliver on our promises. As all of you know, we’re driving hard to get to operating cash flow positive results. I think we’re on track to deliver the top-line that we spoke about six months ago. And, I’m confident that in the next two quarters, we will approach cash flow positive; that’s what we’re driving for. I guess if there are no other questions, I guess we can terminate the call.

Operator: Thank you very much, Max. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.