Applied UV, Inc.

Good day. I would like to welcome everyone to the Q4 and full year 2021 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, Brett Moss, Investor Relations from Hayden IR. Thank you. You may begin.

Thank you. Once again, welcome to AppliedUV's fourth quarter full year 2021 earnings call. With me on the call are Mike Riccio, Chief Financial Officer, and Mark LeBeau, who has recently joined the company helping formulate business strategy. As a reminder, all materials for today's live presentation are available on the company's website at AppliedUV.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we'll make certain predictive statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recent form 10-K and 10-Q lists 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 Mark LeBeau. Mark, the floor is yours.

Thank you, Brett, and good morning, everyone. Pleasure to be with you this morning to review the highlights of our most recent quarter and full year. 2021 was a year of significant accomplishments centered around the closing and integration of three strategic acquisitions that diversified our business to create an air and surface pathogen elimination platform that is well positioned to capitalize on increasing market demand, safer environments born out of the devastating impact of the pandemic, as well as the most recently announced U.S. government EPA and CMS policy initiatives all aim to improve indoor air quality. We are well positioned to serve a global market that's expected to reach $24 billion by 2030 as a leading provider of oxygen elimination offerings to protect businesses, facilities, and the people who move through them. Simply put, we're in the business of providing solutions that address the growing demand cleaner, safer air in any environment where people live, work, and play. Throughout the course of 2021, we invested nearly $15 million in three acquisitions to build out our portfolio of disinfection assets. Specifically, early in 2021, we acquired substantially all the assets of Akita Holdings, which folded its airside systems of air purification technologies into our mixed equity transactions. Akita's 2020 revenue was $4.7 million. Later in that same year in 2021, actually in September, we acquired substantially all the assets of Kes Science for approximately $6.3 million in cash and equity transactions. Kes's revenue for the 12 months ended October 31st, 2020 was approximately $4.5 million. These two acquisitions provide us with all the rights, title, and interest to the airside system of the air purification technologies. And finally, on the acquisition front in 2021, we acquired substantially all the assets of Scientific Air Management Partners, which own the line of air purification technologies labeled and sold as Scientific Air, and a cash and equity transaction. At the time of that closing, the transaction was valued at approximately $11.5 million. With these acquisitions completed and integrated, we have set the stage for organic growth driven by a large and targeted marketing program kicking off in the mid-Q2, and we expect to drive and expand market share in 2022 and beyond. We begin to see positive and emerging shifts, excuse me, an energizing shift in the electrification market as we exit 2021, displacing uncertainty that was an overhang for much of the last quarter of 2021 and into Q1 2022, as end users awaited key policy decisions and funding allocation. Globally, scientists and health care experts have been advocating for improving air quality to control the transmission of airborne pathogens for quite a while. And the pandemic that struck in 2020 further heightened the importance of clean air for our personal health and for the health of the global economy. And back after 2021 and early 2022, there was much uncertainty as to how and when governments would respond to scientists' call for action for policy changes and if funding would be made available to comply with those changes. Since then, government initiatives and commitments to funding by governmental agencies, including the Centers for Medicaid and Medicare and the Environmental Protection Agency, among others, have reignited market activity and were increasingly encouraged by these developments and the advancement in new business opportunities toward contract awarding. Over one straw market headwinds have shifted to market tailwinds that are propelling opportunities forward. More specifically, the Centers for Medicaid and Medicare announced a meeting with stakeholders in February of this year that mobile air cleaners installed in long-term care facilities held to ease visitation restrictions are now reimbursable for up to $3,000. So we're already getting to see interest and demand from our exclusive U.S. distribution partner, Medline. Likewise, as part of the President's Clean Air Agenda recently announced, the EPA has recently launched a Clean Air in Buildings Challenge, which is a call to action and a concise set of guiding principles and actions to assist building owners and operators in reducing risk from airborne viruses and other contaminants indoors. We have two best-of-class tools available in what the government detailed and announced as potential tools in a consumer and business toolbox. Together as part of the American Rescue Plan, the Emergency Assistance for Nonpublic Schools Program, better known as the ANF, the government has made available over $3.5 million in funding to address the educational and business disruptions caused by the COVID-19 pandemic, which includes improving ventilation systems, including mobile and air, fixed air purification systems to ensure healthy air in non-public schools and workplaces. Across the competitive landscape, the air purification market remains highly fragmented, and we are well positioned to attack it head on. As a note, iRobot's Q4 2021 acquisition of Swiss Air Base Paris $72 million in a cash transaction that effectively adds air purification capabilities to its suite of Oakland products. This market transaction, in our opinion, affirms the opportunity in the space and further validates our business plan and model. Over the course of the last year, we had a number of high-profile installations in large venues and facilities that serve as prime examples of our capabilities that we hold up as referenceable accounts. These wins included the pallets that were sized, which held 20,000 visitors in over 700 rooms, the Tennessee Department of Corrections, which houses tens of thousands of inmates, the Armed Forces Research Institute, the U.S. Army Army Improving Grounds, and the list goes on. Clearly, our solutions are scalable, and the list of opportunities for further awards is continually endless. We consider all the venues globally of varying sizes, seeking ways to keep patriots safe from contagion and return to pre-pandemic levels of operation. Our sales pipeline is building as we continue to identify attractive opportunities for new businesses, and we believe we'll provide a positive contribution to our financials and build on our 2021 accomplishments. Importantly, we've expanded our network of international distributors to increase sales channels and product throughput. Our distribution channels include global leaders such as 360 Viral Pharma in Africa, Planted Division covering Scandinavia, and Lutabata and Water for the Middle East, among others. We close out 2021 with a global distribution base of 52 distributors and dealers and now have presence in more than 52 countries. Our domestic and international distributors and dealers are key to the company expanding our global market share and reach a clear differentiation between our company and our competition. From a marketing perspective in 2022, we're preparing to launch a number of targeted initiatives that include digital, radio, social media campaigns, all aimed at the following verticals, including cannabis, long-term care, schools, dental, and other healthcare facilities, and the hospitality sector. Operationally, we are also analyzing each of the points in our supply chain to tighten integration, to optimize inventory, improve quality control, and mitigate against supply chain disruptions that are so prevalent in our world today. including exploring the use of large globally recognized contract OEMs and leasing companies for our product and users. From a strategic transaction perspective, we're also currently exploring joint venture and other airside product placement pilot programs with established leaders in the long-term care, floral, veterans administration, and hospitality verticals to further increase market penetration and adoption of our air purification products. We will also continue to seek out low-cost opportunities to bolster our legacy hospitality business, such as the recent VisionMark acquisition that we completed in late March of this year. This acquisition expands our reach into the luxury hospitality space of new construction and remodeling of hotels beyond our core MunnWorks mirror business, while also potentially contributing to our top-line business. I'd like to provide you all with a brief update on our senior executive search. We're pleased to state that an announcement regarding our permanent CEO is forthcoming, and we're also interviewing other senior executives who we expect to join the team, further strengthening the bench. Next, I'd like to turn the call over to Mike Riccio, our Chief Financial Officer, for a review of our financials. Mike.

Thanks, Mark. Looking at the fourth quarter first, our fourth quarter net sales increased by 2.9 million to 3.9 million, up from 1 million in the fourth quarter of 2020. The majority of this growth was driven by the three strategic acquisitions that essentially established our disinfection segment during 2021. Our fourth quarter net sales increased by 10.3% sequentially when compared to 3.6 million in the third quarter of 2021. This increase was the result of our efforts to continually integrate the operations of these three strategic acquisitions. Gross profit for the fourth quarter of 2021 was $1.6 million, or 40.3% of revenue when compared to $106K in the year-ago quarter, primarily as a result of the addition of the disinfection segment. Sequentially, gross profit was up over $529K as compared to the third quarter gross profit of $1.1 million, primarily due to improved product mix. Net loss for the fourth quarter of 2021 was 3.1 million compared to a net loss of 2.4 million last year in the fourth quarter. This loss was primarily due to the build out of our infrastructure to support the disinfection segment and the integration of the acquisitions. For the full year 2021, net sales increased by 103.5% to approximately 11.7 million up from 5.7 million in 2020. Again, the majority of this growth was driven through the addition of the disinfection segment through the acquisitions mentioned previously. 2021 net sales for the disinfection segment were 5.7 million compared to zero in 2020. The hospitality segment began to rebound from the slowdown caused by the pandemic, reporting 5.9 million in net sales for 2021. an increase of nearly 4% when compared to $5.7 million in 2020. Net loss for 2021 was approximately $7.4 million compared to a net loss of $3.4 million in 2020. The increase in net loss in 2021 was primarily due to the costs associated with the build-out of the disinfection segment, specifically related to personnel costs due to the increased headcount, consulting costs and legal expenses related to the three strategic acquisitions, additional amortization expenses, increased advertising, product certification and testing, and corporate governance and public listing expenses. Almost half of the expense increase is related to what I'll call one-time expenses. Looking ahead, we expect efficiency gains in 2022 as we increase momentum with the three fully integrated acquisitions and leverage target synergies. On a non-GAAP basis, adjusted EBITDA was a loss of $4.8 million in 2021 compared to a loss of $2.6 million in 2020. We use adjusted EBITDA to assist in analyzing our operating performance by segment by removing the impact of certain key items that we believe do not directly reflect our underlying operations. Adjusted EBITDA is defined as operating profit or loss excluding depreciation and amortization and excluding stock-based compensation. In closing, we ended the year with $7.9 million of unrestricted cash available on our balance sheet. Our balance sheet is strong with ample cash on hand to support our growth initiatives, and we just recently announced that our Board of Directors has approved a $1 million share repurchase program of our common stock, in open market transactions that will remain in effect until September of this year. This concludes our prepared remarks. Operator, we can open the floor for questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality.

Please hold while we poll for questions. Your first question for today is coming from Jeffrey Cohen.

Please announce your affiliation, then pose your question.

Hey, good morning. How are you?

Good morning, Jeff.

I wanted to get a little more information as far as revenue composition by segment. If you could provide a little clarity from 21 as far as MindWorks error side and anything from Luma side, and then maybe give us some thoughts as far as 22 and revenues and segmentation of those revenues.

As far as the revenues for 21, as I mentioned, Hospitality, or OneWorks, approximately 5.9 million in 2021. And our disinfection segment was 5.7 million for 2021, again, as opposed to zero in the prior year. And our disinfection segment, as you may know, is made up of our aerosite products, and our scientific air products. Scientific air was only, well, both the KESS acquisition, two of the two or three acquisitions, KESS and scientific air, occurred basically in Q4, one late in Q3, one in Q4. So there was some contribution from them, but primarily the disinfection segment is due to the what we'll call the from the acquisition of our airside product.

Okay, got it. Could you talk a little bit about margins from current levels and how you're thinking about what they may look like going forward from the current call it mid thirties?

Yeah, well, as I mentioned, you saw the Q4 margins, a tremendous increase from the previous quarter, just as we start to sell the higher margin KESS and Scientific Air products. So from top to bottom, our SCI Air products are the higher margin contribution products, followed by KESS and then Akita. So as we blend in the newer or the later acquisitions, based on some of the initiatives that Mark had discussed earlier, you're going to see improved margins going forward. The mix is much stronger now with those two most recent acquisitions on the disinfection side.

Okay. That's perfect. And then as far as 22 on a sequential basis, any guidance or thoughts there as far as how the year may look sequentially through the quarters?

Not prepared to give guidance today, however, I will tell you that as we fully integrate, as we continue to fully integrate the acquisitions, you will see improved sales, obviously, but also you will see improved margins from the improved mix that I just discussed. So, and, you know, we're just finishing up Q1 now. Still, Q1 was, I would say, still in the process of integrating these acquisitions. And coupled with the initiatives that Mark described earlier, you're going to see some improvement in Q2 and beyond. That's the anticipation. But again, not prepared to give guidance at this stage. But the framework or the foundation has been laid from which we're going to continue to grow.

Got it. And one more, if I may. The SG&A expense from Q4, should we think of that as the new baseline, or were there some one-time charges in that?

There were one-time charges in there. Roughly half of that increase is related to one-time charges, so you can use that as a guide. So there is a baseline, but the baseline would be slightly below that because these one-time charges, you know, I'm not counting them going forward.

Okay, perfect. That does it for us. Thanks for taking the questions.

Sure. Thanks, Jim. Thanks, Chip.

Once again, if there are any questions or comments, please press star 1 on your phone at this time. Your next question is coming from Chip Moore. Please announce your affiliation, then pose your question.

Morning. Hey, thanks for taking the question, guys. One of the Circle back to margins that look like, I think, disinfection segment margins were, you know, about 50% and a quarter. Just wondering, you know, you talked about Scientific Air and KES coming on and being accretive to margins. So is that, should we think about that 50% margin as a reasonable run rate on the disinfection segment, or how should we think about that?

Yeah, the disinfection segment, I'd say, you know, again, it depends on the mix. It's definitely a larger margin, you know, higher margin structure than hospitality, no question. And as I said, Scientific Air being the larger contributor in terms of margin, and Kess not far behind, if we continue with the same mix in sales, you'll see approximately the same margin in that segment. But, again, it's all going to depend on the mix of sales. But it is a healthier margin question.

And any – we didn't talk about supply chain at all, but any impacts there or anything we should take into account on either side of the portfolio?

Well, the one initiative, we have the China tariff reduction coming, so that will help for products that are, you know, imported from China. And we do qualify, so there will be – I haven't done the calculations completely yet, but there are retroactive adjustments as well as on a go-forward basis. So from a supply chain logistics perspective, you'll see some improvement there. Also, there are some synergies that are occurring with the integration of these acquisitions as we look at the landscape of manufacturing and distribution. So we're going to start to enjoy those somewhat in 2022 as well.

Got it. That's helpful. And then, you know, in terms of the CEO search, it sounds like you've got something coming very soon. Just how should we think about timing on that? I know you had a search firm. Maybe you should update us on the process there.

There'll be an announcement in the very, very, very short term. Okay.

We'll stay tuned for that. And I know you're not giving guidance, obviously, for the year, but I think, you know, in the past, we talked about Scientific Air and KESS being, you know, a sort of 10 to 14 million contribution this year. Is that still reasonable, or how should we think about that?

I'm sorry, could you repeat that again, Chip?

So, I think in the past, we talked about SAM and KESS I think it was 5 to 7 million in 22. Is that still a reasonable expectation?

Again, you know, we're not – I'm not in a position to give guidance. The overall contribution from those, you'll see, you will start, obviously you're going to see that now in the coming quarters because you saw a bit of it in Q4, but it's going to become more clear in Q1 and Q2 and onward. So, yeah, I mean, I'd say that's the floor, and then, you know, the number that you see there, and then we want to build from that, so. I'm bullish, but not numerically bullish today.

Fair enough, understood. Okay, I will hop back in queue and let someone else talk.

Thank you. Thank you.

There appear to be no further questions in queue.

I would like to turn the floor back over to management for any closing remarks. Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.