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spk02: Good morning, ladies and gentlemen. I would like to welcome everybody to the Q1 2022 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. With me on the call today are John Andrews, Chief Executive Officer, and Mike Riccio, Chief Financial Officer. As a reminder, all materials for today's live presentation are available on the company's investor relations website at www.applieduv.com. Before we begin, please take a moment to read the forward-looking statements in the 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 risk and uncertainties. Our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. With that, I'll now turn the call over to John Andrews. John, you may begin.
spk05: Thank you, and good morning, everyone. It's a pleasure to be with you to review the highlights of our first quarter. The progress we discussed in our 2021 Q4 year-end call continues to gain traction. The integration of our three strategic acquisitions that diversified our business to create an air and surface pathogen elimination platform is now firmly established so that as a company, we are well positioned to capitalize on increasing market demand for safer environments born out of the devastating impacts of the pandemic, as well as the recently announced U.S. government's EPA, EANS2, CMS, and the White House's Clean Indoor Air Initiatives, all aiming to improve indoor air quality. We are well positioned to serve a global market that is expected to reach $24 billion by 2030 as a leading provider of pathogen elimination offerings that protect businesses, facilities, and the people who move through them. Simply put, we are in the business of providing solutions that address the growing demand for purer, cleaner, safer air in any environment where people live, work, and play. We have set the stage for increased organic growth driven by a sophisticated, and targeted marketing initiative that we stated last quarter was to begin in Q2. That initiative was launched in April and includes digital and social media campaigns aimed at the following key vertical markets, including cannabis, food preservation, logistics, long-term care, schools, dental, other health care facilities, and hospitality. As we announced recently, the first targeted marketing push was in the cannabis space which was directed by our recently appointed director, Monica Wu. The Cannabis Marketing Initiative marks the first of many planned marketing investments into our three acquired companies, and we are already seeing strong market interest and expect to announce a significant relationship with one of the world's largest cannabis growers very soon. The marketing campaign is targeting key prioritized high demand verticals that we expect will increase brand recognition drive both market share and top line revenue. Secondly, for the first time since many of the countries we serve begin to reopen, we have returned to a number of industry conferences that were shuttered due to the pandemic, and we are scheduled to exhibit our platform of mobile and fixed air purification technologies at nine conferences throughout the U.S. and Europe, targeting cannabis, janitorial sanitation, correctional facilities, medical, and food preservation. we will continue to expand these marketing initiatives to drive and expand market share in 2022 and beyond. As we stated last quarter, we still can see a positive and energizing shift in the air purification market, displacing some of the uncertainty that was an overhang for much of last quarter of 2021 and well into Q1 2022, as end users awaited key policy decisions and funding allocations. On the other hand, we have seen increasing inflationary pressures and the uncertainty and fear related to the Ukraine-Russia war temporarily slowing down our growth in Europe. As more of the initiatives and commitments to funding by government agencies, including the Centers for Medicare and Medicaid and the Environmental Protection Agency, among others, are announced, we continue to see the advancement of new business opportunities that we have been pursuing towards contract award. As we recently announced, demand from the non-public schools program is accelerating with our distribution partner in Washington State being awarded a multimillion dollar contract of which a large allocation of those funds are expected to be used for the purchase of our air purification solutions. As we also stated on our Q1 call, we expect to announce several product placement pilot programs across long-term care, urgent care, hospitality, and the logistics sectors. We have two of the best class tools available and what the U.S. government detail announced its potential tools in a toolbox to improve indoor air quality. Next, I'd like to cover our progress in sales, our product development roadmap and R&D. Clearly, our solutions are scalable and the list of opportunities for further awards is seemingly endless when you consider all the venues globally of varying sizes that are seeking ways to keep patrons safe from contagions and return to pre-pandemic levels of operations. We are in the process of increasing our headcount to support our growth and expect to add additional seasoned business development professionals before the end of Q2. We also recently added a senior vice president of marketing and market development, as well as engineering talent. Before diving deeper, our wholly owned subsidiary, Munworks, recently announced a model room contract for the Renaissance Cleveland Hotel, which upon product approval should lead to a $2 million follow-on order. This win is primarily the result of our asset acquisition of VisionMark, which will expand our product offerings to the hospitality industry. VisionMark reported revenues on a pro forma basis of approximately $7 million in their fiscal year ended December 31st, 2021. Our air purification sales pipeline continues to build as we continue to identify attractive opportunities for new business that we believe will provide a positive contribution to financials and build on our 2021 accomplishments. accomplishments. Importantly, our expansion of network, international distributors to increase sales channels and product throughput continues. Our distribution channel includes global leaders such as 360 Bio Farmer in Africa, Solaris, Lutu, Bata Water, among others. We continue to seek new distribution partners and growing our global distribution beyond our base of 52 distributor partners and increasing our presence beyond the current 52 countries. In fact, we will be hosting our African partners this month as they are beginning to see increased demand for the AeroCide product offering related to cannabis in the continent of Africa. As we stated in Q4, our domestic and international distributor partners are key to the company's scaling our global market share and reach, a clear differentiation between us and our competition. We expect to see our first stocking order from our recently announced Finnish-based distribution partner, planned at division in late Q3. Operationally, we continue to analyze 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. From an R&D perspective, we're beginning to formulate our new product roadmap and making substantial improvements to our entire line of mobile and fixed-air purification products, further differentiating our patented PCO and UVC carbon-based solutions from that of our competitors, as well as the creation of our Sterilumin app, which we believe will both set a standard as well as set the stage for all our devices to join the IoT ecosystem. As we stated in our Q4 call, from a strategic transaction perspective, We continue to explore joint venture and other airside product placement pilot programs with established leaders to include big box retailers in the consumer market and hospitality verticals to further increase market penetration and adoption of our air purification products into new markets and expect to announce some strategic wins in the near term. Let me close by saying that the last 12 months has been about laying a foundation for the business we plan to build upon going forward. 2022 will be a year of execution. We plan to meet performance obligations for existing contracts, sign new business with existing contracts and new opportunities, continue to develop and enhance our product capabilities to meet the growing demands and needs of the market, continue to further our market expansion into adjacent market opportunities, and invest in internal operations to optimally capitalize on all these global opportunities. As of today, our business is performing at its highest level in the past year, the results of which will begin to show in the latter half of 2022 and into 2022. Next, I'll turn the call over to Mike Riccio, our Chief Financial Officer, who will walk us through the financial results of the quarter.
spk04: Mike? Thanks, John. Net sales of approximately $3.3 million represented an increase of $1.0 million or 45.1% for the three months ended March 31, 2022, as compared to net sales of approximately $2.3 million in March 31, 2021. This is attributable to the disinfection segment, which increased $1.2 million, largely as a result of the strategic acquisitions of Kess and Scientific in Q3 and Q4, of 2021 respectively decreased approximately $159,000, primarily due to supply chain disruptions with multiple order fulfillments delayed into Q2 of 2022. As a reminder, the disinfection segment includes the design, manufacture, assembly, and distribution of disinfecting segments for use in healthcare, hospitality, and commercial, municipal, and residential markets. The hospitality includes the design and manufacture of fine mirrors and furniture specifically for the hospitality industry. Gross profit increased approximately $225,000 or 24.3% for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, driven primarily by volume growth from the disinfection segment. However, Gross profit as a percentage of sales decreased approximately 5.0% in Q1 of 2021 to 2020. Sales, an increase in factory overhead absorption, and higher logistical costs in the hospitality segment. As the company continues to integrate their strategic acquisitions, the focus will be on realizing cost synergies from the consolidation and streamlining of the manufacturing and distribution operations. SG&A costs for the three months ended March 31, 2022 increased to approximately $3.1 million as compared to $1.6 million for the three months ended March 31, 2021. This increase of approximately $1.4 million was driven primarily by the increase of $0.3 million year-over-year as headcount increased from 31 at March 31, 2021 to 89 at March 31, 2022. Consulting, accounting, and legal costs increased $0.3 million, and amortization expense, mostly related to the example with our acquisitions. Additionally, advertising expenses increased $0.2 million. In the coming year, as we fully integrate our acquisitions and leverage synergies where possible. During the quarter ended March 31, 2022, the company determined that a triggering event had occurred as a result of a settlement agreement with Scientific Air. A quantitative impairment test on Goodwill determined that the fair value was below the carrying value, and as a result, the company recorded a full Goodwill impairment charge of approximately $1.1 million dollars. on the condensed consolidated statements of operations during the three months ended March 31, 2022. Also, as a result of this settlement agreement, the previous owners of Scientific Air agreed to link shares that were part of the original The company recorded a loss on change in fair market value of consideration of $240,000. As a result of the settlement agreement, the company recorded a gain on the settlement of consideration of $1.7 million. The company recorded a net loss of approximately $1.6 million for the three months ended March 31, 2022. compared to a net loss of approximately $1.0 million for the three months ended March 31, 2021. The increase of $0.6 million in the net loss was mainly due to the increase in SG&A costs incurred in support of the expansion of the disinfection site. On a non-gas basis, adjusted EBITDA was a loss of approximately $1.2 million for the three months ended March 31, 2022. which was an increase of approximately $0.8 million as compared to the three months ended March 31, 2021. We use adjusted EBITDA to assist in analyzing our operating performance by removing the impact of certain key items that we believe do not reflect our underlying operations. Adjusted EBITDA is defined as operating profit or loss excluding depreciation and amortization and excluding stock-based compensation and loss on impairment of goodwill. Lastly, we ended the quarter with approximately $7.1 million of unrestricted cash available on our balance sheet. Looking ahead, we expect further efficiency gains during our fiscal year ending December 31, 2022, as we increase momentum with the integration of our acquisitions and leverage targeted synergies. This concludes our prepared remarks. Operator, we can open the call for questions.
spk02: Thank you, Mike. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one 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.
spk01: Please hold while we poll for questions. Thank you. Your first question is coming from Chip Moore of EF Hutton.
spk02: Chip, please can you ask your question?
spk03: Hi, good morning. Thanks. I'm wondering maybe first if you could just expand a bit on the marketing initiatives you talked about launching in cannabis in April to start. I think you referenced the potential for a nice win there. Maybe give us a sense of the potential size there and I guess just more broadly how to think about the rollout of some of these efforts, you know, over the next few quarters. and the initial sort of feedback?
spk05: Sure, Chip. Thanks for the question. We're very excited about the marketing initiative we launched in April. The initiative really is a sophisticated and expansive approach to driving leads and our cost per customer acquisition down. As I mentioned earlier, we launched our first initiative and targeted at cannabis. And the early results are very, very good. And we've seen good traction in terms of what we're doing with social media as well as other digital forms of marketing. And as I said earlier, we are going to convert several of the leads that we've gotten. And one of those leads, which I can't disclose at this time, is one of the largest cannabis producers on the globe. And we're very close to that deal, and we will announce it, we think, in the next month or two. We're going to, once we're done with cannabis, we'll probably move to food preservation and or processing post-harvest, and then we have three other verticals that we'll also migrate towards.
spk03: Got it. That's helpful. And if I think to the... the large cannabis producer would the right way to think about that assuming you convert that sort of an initial site and then potential to grow from there or how how should we think about that yes i would think about it that that way initial site with large expansion capabilities following yeah okay um and then specifically on on the the dealer dealer award in washington um i think it's about 700 buildings is sort of the addressable opportunity. What's sort of that initial contract? I know they've got some money to spend. And again, sort of similar, have to think about the timeframe, sort of initial site versus multi-site.
spk05: Correct, correct. How many facilities did you mention?
spk03: I thought it was something like 700 potential buildings.
spk05: That's correct, Chip. So The award is a multimillion dollar award. We can't disclose any further numbers, but it's multiple millions of dollars. And there is a large allocation of that award that will go towards our air purification solutions. And the implementation of those facilities is expected to begin next month.
spk03: Yeah, OK. And another for me, if I could sneak one in, just supply chain, I know you called out in the queue some unfulfilled orders. Were those, I guess, can you give us a sense of the magnitude and were those recognized in Q2? And then is that a trend we should expect to continue given some of the supply chain challenges that are ongoing?
spk05: Hard to answer that question just simply because the supply chain is an issue that no one can really predict right now at this stage, but we're most likely planning for some delays and building that into our financial model so that our financial model is rigorous in terms of being accurate. But we do plan for supply chain issues going forward in 2022. Got it. Okay.
spk03: Sorry, one last one before I I hop off. The goodwill write down and settlement with Scientific Air, just maybe a little more color there. I think it sounded like Mike was cutting out a little bit, just some of the mechanics as well.
spk04: Oh, sorry. Sorry. I didn't realize I was cutting out. But yeah, there was a settlement agreement with Scientific Air. And so, and then basically that is considered a, you know, a triggering event as well. So, um, so as part, part of the settlement was the give back of, um, the 400,000 shares that was part of the, uh, original, uh, uh, asset acquisition of scientific air. And, um, and, and, and when you do that, um, you know, there's a kind of a mark to market that we have to do. So, um, there, so there's an initial, you know, accounting for, for that, um, stock or basically contingent consideration that was done, um, through the first quarter. And then, um, as a result of the settlement agreement, uh, we were able to record a gain of a $1.7 million. And that, in a sense, offset, although that's non-operating, offset the operating expense of the goodwill write-down. So, because of that triggering event, we just had to reevaluate the purchase price allocation and the approximately $1.1 million of goodwill was then written down. So, you know, the net impact really is, you know, the write-down of the goodwill offset by the net gain on the contingent consideration for the quarter. Does that help?
spk03: Yeah, no, that's helpful. Appreciate it. Okay, I'll hop back in here. Thanks.
spk02: Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question or you have a comment, please press star 1 on your handset at this time. Your next question is coming from Simeon Goodman of Morgan Stanley.
spk01: Simeon, over to you. Simeon, you might be on mute. I don't think we have Simeon's line. Okay, there appear to be no further questions in the queue.
spk02: I will now hand back over to John.
spk05: Thank you. Again, I want to thank everyone for joining us on today's call. Should anyone have any additional questions, please do not hesitate to contact me directly. Thank you again.
spk02: Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect your lines and have a wonderful day. Thank you for your participation.
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