Applied UV Inc (AUVI) 2021 Q4 法說會逐字稿

I would like to welcome everyone to the Q4 and full-year 2021 Applied UV earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brett Mass, Investor Relations from Hayden IR. Thank you. You may begin.

Thank you. Once again, welcome to Applied UV's fourth-quarter and 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 investors website at Applied Digital -- 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 of future events that are subject to risks and uncertainties. Our most recent Form 10-K and 10-Q with 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. It's a 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 the increasing market demand, safer environments born out of the devastating impact of a pandemic as well as the most recently announced US government EPA, EMS policy initiatives, all aimed 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 pathogen elimination offering, tech businesses, facility and the people who moved through that. Simply put, we're 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.

Throughout the course of 2021, we invested nearly $15 million in three acquisitions, build out our portfolio of disinfection asset. Specifically, early in 2021, we acquired substantially all the assets of Akida Holdings, which folded its Airocide systems of air purification technologies into our mix of offerings for approximately $7.9 million in cash and equity transaction.

Akida's 2020 revenue was $4.7 million. Later 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 transaction. KES' revenue for the 12 months ended October 31, 2020, was approximately $4.5 million. These two acquisitions provide us with all the rights, title and interest to the Airocide 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 owned the line of air purification technologies, enabling [us all] that Scientific Air and cash and equity transactions. At the time of that closing, the transaction was valued at approximately $11.5 million.

The acquisition is complete and integrated. We have set the stage for organic growth driven by a large and targeted marketing program kicking off in mid Q2, and we expect to drive and expand market share in 2022 and beyond.

We began to see positive and energizing shifts in the air purification market as we exited 2021, displacing uncertainty that was an overhang in much of the last quarter 2021 and into Q1 2022, as end users awaited key policy decisions and funding allocations. Globally, scientists and healthcare experts have been advocating for improving air quality to control the transmission of airborne pathogens for quite a while. And the pandemic has struck in 2020 further heightened the importance of clean air for our personal health and for the health of the global economy.

In the back half of 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 to those changes. Since then, government initiatives and commitments to funding by governmental agencies, including the Centers for Medicaid and Medicare, and Environmental Protection Agency among others, have reignited market activity. We're increasingly encouraged by these developments and the advancement of new business opportunities toward contract award, over one strong market headwinds that shifted market tailwinds [that were] propelling opportunities for.

More specifically, the Centers for Medicaid and Medicare announced their meetings with stakeholders in February this year that mobile air cleaners installed in long-term care facilities helped to ease visitation restrictions, now [an inversible bucket without the policy of the facility. So we are] beginning to see interest in demand from our exclusive US distribution partner MedLine.

Likewise, as part of the President's clean air agenda recently announced, the EPA has recently launched the 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, reducing risks from airborne viruses and other contaminants indoors.

We have two best-of-class tools available with the government detail and announced the potential tools in a consumer and business toolbox. Together as part of the American Rescue Plan, the Emergency Assistance for Non-Public Schools program, better known as EANS, the government has made available over $3.5 billion in funding to address the educational and business disruptions caused by 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 Q4 2021 acquisition of Swiss-based Aeris for the $72 million and the cash transaction effectively as air purification capabilities because [of suite of] open 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 at service prime examples of our capability that we hold up as referenceable account. These wins included the Palace of Versailles, which holds up to 20,000 visitors from more than 700 rooms; the Tennessee Department of Corrections, which houses 10,000 inmates; the Armed Forces Research Institute, the US Army Aberdeen Proving Ground; and the list goes on. Clearly, our solutions are scalable and listed opportunities for further awards in the analysts when you consider all the venues globally of varying sizes that are seeking ways to keep nature safe from contagions and return to pre-pandemic levels of operations.

Our sales pipeline is building as we continue to identify attractive opportunities for new businesses, and we believe will 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 3Sixty Biopharma in Africa, Plandent Division covering Scandinavia and [loop the bottle of water] for the Middle East, among others.

We closed out 2021 with a global distribution base of 52 distributors and dealers that 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 and social media campaign, all aimed at the following verticals, including Canada's long-term care, schools, dental, and other health care facilities and hospitality budget.

Operationally, we are also analyzing each of the points in our supply chain with heightened integration to optimize inventory and 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 that we're in, [in addition to companies through our product and the institution].

From a strategic transaction perspective, we're also currently exploring joint venture and other Airocide product placement pilot programs from established leaders within the long-term care, [floral], the veteran's administration and hospitality verticals to further increase market penetration and adoption of our air purification model.

We 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 remodeling of hotels beyond our core MunnWorks' mirror business while also potentially contributing to our topline business.

And lastly, I'd like to provide you all with a group update on our senior executive search. We're pleased to state that an announcement regarding our permanent CEO is for funding. And we're also interviewing other senior executives who we expect to join the team, further strengthening that.

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 $106,000 in the year ago quarter, primarily as a result of the addition of the disinfection segment. Sequentially, gross profit was up over $529,000 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 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 call for questions.

(Operator Instructions) Jeffrey Cohen. Please announce your affiliation, then pose your question.

Hey, good morning. How are you?

Good morning, Jeff.

So I wanted to get a little more information as far as revenue composition by segment. If you could provide a little clarity from 2021 as far as MunnWorks, Airocide and anything from LumiCide and then maybe give us some thoughts as far as 2022 and revenues and segmentation of those revenues.

As far as the revenues for 2021, the -- as I mentioned, hospitality or MunnWorks, 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 Airocide products and our Scientific Air products.

Scientific Air was only -- both the KES acquisition -- two or three acquisitions. KES and Scientific Air occurred basically in Q4, very, very -- one late in Q3, one in Q4. So there was some contribution from them. But primarily the disinfection segment is due to the -- from the key acquisition of our Airocide 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 their current, call it, mid 30s?

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 KES and Scientific Air product. So from top to bottom, our Sci Air products are the higher margin contribution products, followed by KES and then Akida.

So as we blend in these -- 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 -- the two most recent acquisitions on the disinfection side.

Okay. That's perfect. And then as far as 2022 on a sequential basis, any guidance or thoughts there as far as how the year may look sequentially through the quarters?

I'm not prepared to give guidance today. However, I will tell you that 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 we're just finishing up Q1 now. Still Q1 was, I would say, still in the process of integrating these acquisitions. And coupled within 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 are one-time charges in there. I think 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 it's one-time charges. I'm not counting them going forward.

Okay. Perfect. That does it for us. Thanks for taking the questions.

Sure. Thanks, Jeff.

Chip Moore. Please announce your affiliation, then pose your question.

Good morning. Hey, thanks for taking the question, guys. Wanted to circle back to margins that look like, I think, disinfection segment margins were [about] 50% in the quarter. Just wondering you talked about Scientific Air and KES coming on and being accretive to margins. So does 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 again, it depends on the mix. It's definitely a larger margin -- a higher margin structure than hospitality, no question. And as I said, Scientific Air being the larger contributor in terms of margin and KES 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 without 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 when -- for products that are imported from China, and we do qualify. So there will be -- there's -- I haven't done the calculations completely yet, but there are retroactive adjustments as well on a go-forward basis.

So from supply chain logistics perspective, you will 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 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 just update us on the process there.

There will 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 in the past we talked about Scientific Air and KES being at $10 million 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've talked about SAM and KES both contributing. I think it was $5 million to 7 million in 2022. Is that still a reasonable expectation?

Again, we're not -- I am not in a position to give guidance. However, the overall contribution from those, you'll see -- 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 onwards.

So yeah, I mean, I'd say that's the floor. And then the number that you see there and then we want to build from that. I'm bullish, but not numerically bullish today.

Fair enough. Understood. Okay. I will hop back in queue and let someone else on. Thanks.

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.

Thanks again, everyone, for joining our call today. And should anyone have any additional questions, everyone has our contact information. Please do not hesitate to contact either of us directly. Thanks again for your time.

Thank you.

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.