TOMI Environmental Solutions, Inc. (NASDAQ:TOMZ) Q3 2022 Earnings Conference Call November 10, 2022 4:30 PM ET
John Nesbett - IMS Investor Relations
Halden Shane - Chairman and CEO
Conference Call Participants
Sameer Joshi - H.C. Wainwright
Good day, everyone, and welcome to today's TOMI Environmental Solutions, Inc. Third Quarter 2022 Financial Results Conference Call. [Operator Instructions]
It is now my pleasure to turn the conference over to John Nesbett of IMS Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us today for the TOMI Environmental Solutions 3Q Earnings Call. On today's call are TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane; and Nick Jennings, TOMI's Chief Financial Officer.
I'll remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the Securities and Exchange Commission. We assume no obligation to update the information provided in today's call.
In addition, in this conference call, we will discuss certain non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release.
I will now give the call over to TOMI's Chief Executive Officer and Chairman of the Board, Dr. Halden Shane. Go ahead.
Thank you, John. Good afternoon, everyone, and thank you for joining the TOMI Environmental earnings call. Today, we'll provide operating and financial results for the third quarter of 2022, along with a favorable update on a few key current focuses for the company.
The last time we met, I reiterated how TOMI's patented iHP SteraMist technology is the only perfect 10 out of 10 in the disinfection, decontamination manufacturing world. Our process not only meets standards in the industry, but surpasses customer expectations by providing all the necessary competitive advantages.
With the current market trends to the application of our original, current and upcoming product lines, we believe our production and pipeline has revenue poised to end the fourth quarter profitable along with meeting our expectations for the year. This year, TOMI has seen an increase in our customer sales backlog or rather pending sales orders where revenue has not yet been recognized, but purchase orders or contract bids have been received or won.
We believe analyzing and reporting this metric is worthwhile when measuring our overall sales and business development performance as it gauges the overall volume of sales and business development activities. This is largely attributable to the increased demand for our Custom Engineered System, CES, as well as routine and new iHP Service engagements. Our iHP Service revenue for the current year has already surpassed all of 2021.
A key driver to our longer-term growth is strengthening demand for our CES by referrals to the product line, hosting churns of current installed systems, continuing brand awareness via our domestic independent manufacturing sales representatives and growing the network of international partners.
Avid Bioservices is a good new example of our current CES in the design phase and set for implementation in Avid's new purpose-built viral vector development and manufacturing facility in Costa Mesa, California next year. To properly promote state-of-the-art iHP permanent and fully automated integrated decontamination system, TOMI has begun entering into marketing agreements with customers such as Abbott to assist in the continued brand awareness.
This year, we have completed 1 complete installation for Fresenius Kabi internationally, 5 additional systems are being designed to manufacture for Merck and Orna with 3 of the 5 on schedule for delivery by the end of the year. We are waiting on the purchase orders for another 4 systems set to close. The revenue will be recognized throughout 2023 and 2024 upon delivery of those orders.
As we install CES units, we can expect to see increased solution sales as these units are contracted to be used at set regular schedule. For example, 2 of the installs currently being manufactured and expected to generate $250,000 in BIT Solution revenue annually by the end of the fourth quarter of 2023. The 9 months ended September 30, 2022, we have received $7.9 million in sales orders, of which revenue recognition will be upon delivery throughout this year and next. This represents 25% growth when compared to the first half of last year. And for the 3 months ended September 30, 2022, we received approximately $2.3 million in sales orders and/or winning contract bids, which represent a 5% growth when compared to the same prior year period.
Due to the increase in demand for our mobile SteraMist product, TOMI's revenue increased by 20% over what was reported for the second quarter of this year. Our financial operating results also showed sequential quarterly improvement compared to the second quarter of 2022, with a 24% reduction in our loss from operations due to the higher revenue, gross profit and lower operating expenses. As our customer base grows, we continue to address the need for timely responses to inquiries, questions, orders and support.
During the third quarter, we increased our employee headcount in our customer experience, sales and technology departments in response to our growing customer base and backlog. With the addition of 2 direct hire engineers, our enhanced technology department will accelerate R&D initiative and streamline internal production as we take on larger CES products. Thus, our manufacturing capacity not only improved in the first half of 2022 with the addition of ARM EnerTech Associates who can manufacture our CES in their Pennsylvania facility. But now the added staff to our technology department can assist in research and development, prototype testing and assembly of our products. We anticipate all these developments will reduce our overall cost and manufacturing leads.
TOMI hired a sales director with significant sales experience in the clinical health care industry. Part of this background includes using TOMI SteraMist systems during his emergency medical EMS service for the past 7 years. As a professional sales leader with an extensive record of success developing, supporting and implementing strategic plans to increase market share and penetration, TOMI expects to increase use of SteraMist in many of its commercial industries, schools, emergency services, transports, for example.
Additional sales director at TOMI has years as an independent manufacturing representative for SteraMist with a focus on the life sciences and vivarian market. Since his tenure with TOMI, he has expanded into the food safety industry and is working some great opportunities with the addition of 2 new independent TOMI manufacturing representatives.
TOMI launched SteraMist support portal, which is now available on desktop as well as via a mobile app providing ease of use for sales support, branding and assistance to our TOMI Service Network or TSN providers, sales representatives and international distributors and end users. We anticipate further growth in sales and the continued build of our pipeline for the remainder of 2022.
We see sizable sequential increase in profitability in the fourth quarter. We are also encouraged that we will see continued momentum into 2023 and 2024. Our last statement is based on a very strong interest in SteraMist and pending negotiations and opportunities, a growing strong referral base from our existing customers. With the increase in TOMI personnel leads me to believe we will exceed analyst expectations in 2023 and 2024.
Third quarter confirmed our belief that SteraMist will play a very prominent role in the food safety industry, a multibillion-dollar market. It has been established, we are not only solving contamination problems in a more efficient way, but we are solving ongoing issues in the industry that have never been solved before.
With the global population explosion and continued concern over food safety, we anticipate an increase in demand for a mechanical way to disinfect our food supply. Every day, there are news articles around the world pertaining to the contamination of the food. The many published food safety articles from the USDA demonstrates that our technology offers a consistent alternative to the decades-old chemical disinfection process.
Earlier in the year, Indoor Environmental Solutions and Consultants, or IESC, completed their forensic, architectural and engineering investigation and decontamination report with Kalera indoor farms. IESC acts as an independent sales representative to TOMI. The report demonstrated the efficiency of SteraMist in a large-scale the EA vertical farm dramatically reducing fungal growth, mold spores and yield loss from environmental bioloads, with notable efficacy against the species causing 20% yield loss in all annual vegetable production. And it outlined decontamination protocols while calculating long-term savings in using SteraMist as their decontamination solution.
Italia reports structured the pathway to Soli Organic Incorporated, one of the nation's largest commercial indoor organic growing companies. Soli is now a proud owner of multiple SteraMist systems across 2 locations. Soli's expected to implement SteraMist in additional 8 locations.
The TOMI team continues to work with a few partners in the cannabis industry. Biomist, a legacy TSN member, has been testing cannabis flower incubated with multiple species of aspergillus, E.coli, Salmonella, yeast and other molds followed by a treatment with SteraMist to the dried material. Potency results of the cannabis plant were not affected, and no additional residual solvents were found. The process was successful in completion remediation of all microbial contaminants, while another partner in the cannabis industry has proven SteraMist reduces microbial count on cannabis flower from 400 cubic foot to non-detectable without affecting the levels of THC.
For new long-term investors, you may recall the number of studies and partners TOMI collaborated within the life science industry. And now we have a premier set of global Fortune 500 companies, such as Pfizer, Merck, Catalent, AbbVie, Sanofi continuously using SteraMist as their decontamination standard.
There is demand for every SteraMist product line in the life sciences. The utilization of TOMI's Mobile SteraPak to the intelligent permanently mounted CES to having our own iHP corporate service deployed customer facilities. We expect the food safety industry to follow the same path, and the win at Soli Organic in the third quarter of this year has started that path forward, especially in vertical farming.
As the food industry is coming on strong, our life science is growing even stronger. The biggest problem with integrating traditional vaporized hydrogen peroxide, or VHP, our #1 competitor in the industry into rack washers and other enclosures is the long cycle times. It is so long that they are rarely ever used. No one can afford to shut down their operations to 7 hours. No one knows this better than the manufacturers of the washers and enclosures, thus TOMI's new team reconnected with the main players this year while exhibiting at AALAS.
Last month, Allentown, Better Bilt, Tecniplast and Brit + Co are some of these players interested in partnering with TOMI. We can sell the idea to end users prior to buying a cage washer enclosure, but it's an entirely different scenario if the manufacturing of the enclosure recommends SteraMist iHP.
The deal we are working on with Brit + Co is a bit of a game changer because we achieved 6 log kills nearly on contact, and the superior material compatibility allow us to convert a biocontainment cubicle into a decontamination chamber. Traditional chambers are extremely expensive heavy-duty pieces of equipment, usually made of 100% stainless steel. VHP requires this type of enclosure. The unique properties of iHP fast kill, superior material compatibility and it does not require these big heavy-duty enclosures. We will be able to design a cubicle that's faster, safer and less expensive than traditional decontamination changes. Brit + Co is a highly respected name in the industry and no better partner introduce the solution to the market than with them.
Simultaneously, TOMI designed its fourth generation SteraMist environment system. The system will now be 24 voltages, allowing for universal outlet usage and convert even more of the hydrogen peroxide solution, allowing for faster turnaround time. In addition, the unit will have 8 outputs where 4 are dedicated to our regular process of injection, dwell and aeration, along with a light beacon status bar and 4 that are programmable to meet the customers' needs for any external equipment they may desire to work with the system.
This fourth generation has been released, and 3 are set for delivery this month to our Australian partners. Critical science solutions to be used by a world-renowned influenza vaccine company. SteraMist customers, representative and partners continue to grow throughout the world, currently now in over 40 countries. Currently, TOMI is in the registration process for India and renewal to meet new requirements in the Philippines. Both markets offer excellent potential due to increased interest in the TOMI suite of decontamination solution.
The National Institute of Health, or NIH, began using SteraMist just 1 year after receipt of our EPA registration to support the research of cutting-edge medical knowledge and development of revolutionary health care innovation. And now they have 30 SteraMist machines across 11 divisions. Third quarter reported their latest purchase of 2 SteraPak systems, and 2 select surface units support the disinfection requirement for an Africa-based biosafety laboratory, expanding use of SteraMist to the international biosafety marketplace.
We continued to confer with Group Purchasing Organizations, or GPOs, with Vizient, who serves more than 50% of the nation's acute care providers, including 97% of the nation's academic medical centers and more than 20% ambulatory care providers. We anticipate final contracts to be signed early next year.
After release of the SteraPak, the TOMI technology team quickly began designing new SteraMist products, which include the Select Plus. The one applicator fogging unit will allow for enhanced flexibility being in an enclosed stainless steel pushcart to decontaminate full room to small space volume. Select Plus prototype is currently in real setting testing with one of our key local customers who owns many of all our current SteraMist products has received an enormous amount of praise.
iHP SteraMist transport system has been designed for the transportation market, specifically emergency response, easy-to-use turnkey integration system with the option to fully integrate with the vehicle or act as a stand-alone device. TOMI maintained strategic partnerships with associations, including ISSA, a leading and worldwide association for the cleaning industry. Many TSN members are also participants of this association. And we continue to onboard new TSN members to the network, most notably in the third quarter was Jenkins restoration who holds 23 locations in 15 states and growing. TOMI will be launching a new website early next year. As we introduce new products and continue to penetrate in new markets, it is time to update the design to showcase our new innovations. One of the main features on the site will be logos and case studies of our prestigious clients worldwide.
Our financial results for the 3 months ended September 30 compared to the same prior year period for 3 months ended September 30 compared to September 30, 2021, our consolidated net revenue was $1,760,000 compared to $2,205,000. The decline in revenue is due to customer-imposed delivery restrictions for equipment and CES orders and related impact on our revenue recognition and deferred revenue. We are continuing to see positive signs in the marketplace and increased demand for our technology.
Our customer sales order received in the current year is up 25% compared to last year, and our customer sales backlog continues to grow as a result of our customers' time lines, which have an impact on our delivery times and corresponding revenue recognition as well as our deferred revenue, which increased $600,000 during the third quarter.
Consolidated gross profit was 60.8% compared to 59.6%, representing an increase of 1.3%. The increase in our gross profit was due to our product mix and sales. The consolidated operating loss was $654,000 compared to $487,000, representing a 56% decline. The higher loss is due to lower sales and gross profits, offset by lower operating expenses. Our consolidated net loss was $653,000 or $0.03 per share on a diluted share basis compared to $488,000 or $0.03 per basic share.
EBITDA was a loss of $571,000 compared to $417,000. For the 9 months ended September 30, 2022, and 2021, cash used in operations was $929,000 and $3,823,000, respectively, representing an improvement of $2,894,000. The improved cash flow from operations is primarily due to our lower reportable loss for the 9 months ended September 30, 2022, which has declined 22% when compared to the same prior year period as well as the increase in deferred revenue, which is up $1.1 million in our current calendar year.
Moving to the balance sheet. As of September 30, 2022, our cash and cash equivalents were approximately $4.3 million. Deferred revenue was $1.2 million. Working capital was $9.3 million. And our shareholder equity was $11.8 million.
Operator, let's open the call to questions.
[Operator Instructions] We'll move first to Sameer Joshi with H.C. Wainwright.
Congratulations on the progress and the building order book and also all the other progress that you outlined. On the revenues front, can you elaborate a little bit on the customer imposes extended delivery time lines? Is it because they are delaying their projects? Or are there other budgetary constraints on their end? And what is the reason for this?
No. I mean these customers don't have budgetary restraints, really. The problem is a lot of the orders we're getting, we're able to build systems, but their facilities are not completed or they're having engineering delays due to materials of their own.
Okay. Understood. Understood. So these orders will be -- are you expecting deliveries in the fourth quarter? Or are they pushed into 2023?
It's a fine balance. We're expecting a number of them in the fourth quarter and more of them into 2023. And as we complete them, we're now even taking orders into 2024.
Okay. Okay. I think in September, we saw some residential executive order allocating roughly $200 million for DoD for biosecurity. Have you seen that? And is there any benefit that you may get from that?
We're not sure yet. It's a long process. Again, we're increasing our sales department, and we're signing those types of projects to them to go out and look into. We have not seen anything as of this date that I could tell you about.
Okay. And then on the cannabis and CEA front, what is the potential that you are looking at, not in terms of the market sizes, but your addressable market, which you can get in, say, 2023 and 2024 from these kind of customers?
Again, I think the market, as we know, is huge. The fact that it's working, we're getting calls all the time. This study was really good, and I just have to go back and ask the guy how he knows it didn't affect the level of it. But it will. In the U.S., I don't know about internationally.
Yes. It's a big market, even within a few states in the United States, that is true.
Yes, yes, that's true.
Just a question on expenses. You said you're increasing the headcount, you're hiring directors, sales directors. How should we see your operating expenses grow over the next few quarters? You've been pretty steady last 2 quarters. So just wanted to see how it goes from here.
I think you'll see an increase in proportion to our sales revenue. I don't think we're overly increasing. Some of them were replacements. Some of them are new engineers, as I said on the call. And some of them are increasing our sales. But as we increase our sales, we're increasing our revenue. And the operation expenses should increase. But on a percentage basis, pretty much stay the same or increase a little.
Understood. And just one last one clarification on the core generation equipment. Is it priced similar to your existing equipment? Or do you -- is it at a premium price range?
Well, like everyone else in the world, we've raised our prices on all our equipment. And the fourth generation will be a moderate increase over what our previous environmental systems and third generations were.
And we'll move next to [John Nelson], who's a private investor.
Halden, congrats on the quarter, and the future sounds bright. A few questions for you. The -- you mentioned earlier in the call about having the ability or increasing your ability to take on larger CES projects. And I was wondering what kind of larger projects are -- do you envision going after.
Anything from complete floors to complete buildings.
That will be something.
John, when the initial DARPA study came out, going back when the technology was developed, it was an immune building that it was developed for. So we just have escalated the ability to have consistent kill throughout a room, throughout a floor, throughout multiple rooms and even a building. So we'll be going back to that immune building concept for those people that are in the defense industry and obviously the high security profile clients that may be interested in that.
Excellent. I was wondering when you were talking about immune building concept, complete floors buildings, have you -- are your salespeople going after or consider going after the semiconductor industry because of its need for clean rooms and very serious levels of sterilization?
Absolutely. In fact, we've done some of that work in the service end, and that's an ideal facility to use our technology.
Okay. Very good. And I think your listeners will probably be interested in a -- just a brief update on the progression of the SHIELD study.
Yes. Okay. Again, it's completed. The results are phenomenal. The paper is somewhere being edited. And I'm just not pushing it with the authors as they're in the public health sector, and it seems like they always have a potential pandemic or a viral outbreak to deal with. And I don't want to step on their toes, but we're going to start coming out with some marketing material about the effectiveness of it. And I think the public will be interested.
Definitely. And let's see, the EMS progress? Anything -- a new report on that?
We have that transportation unit that next year, we have a customer that has a multiple need for it in their ambulances and it's still on budget. And time-wise, we're able -- we will be able to deliver.
Okay. Very good. And anything else to report on the -- I think it was -- if I recall correctly, it was a percentage of the solution for the food industry that you are waiting for the FDA for approval on like the 1%.
Correct. So we have the 0.35% that was approved by the EPA, and we're still progressing with the 1%. At the moment, we're using the lower percentage and getting good results, and the 1% will be ideal. Probably next year, we'll have more information on that along with some other additions to our EPA label that we're actively pursuing.
Okay. And I think that is it. The -- I guess one more. When you look on Amazon for -- I mean this is just for regards to the backpacks. You see the -- your competitors have much cheaper units versus yours. And the -- using the razor blade concept, is it worth considering a price cut on the backpacks? Or is it -- is the demand such that -- and the functions of your backpacks being so much superior that it's not worth considering.
Yes. I mean I can understand that. If there's 2 levels of disinfection and we have this high level, which is consistent sick flog and we're not caustic, we don't damage materials, the lower-end people that are -- I haven't looked at the Amazon site for a while. But the lower-end people that are out there all have less expensive solutions, but they're damaging.
So you continue to use them, and we have some great case studies of major well-known facilities that use some of that product and came to us, and we're willing to pay what we charge because they were destroying materials for their clients. So it's a matter of just getting this around the world and going ahead and making these marketing claims and people reading them.
A lot of people do call up and they say it's very expensive compared to X, and we go over the reasons why. If you want to get that 10 out of 10, a perfect disinfectant, decontamination solution, you got to use our product. And we would rather have the client that understands that versus the client that thinks they can maybe throw any solution in there and destroy our piece of equipment. So it's going to be working out fine for us, I think, John.
Okay. And then just lastly, I think in the past, you've done some work with one of the ServPro or ServPro distributors. Is -- are you able to make any comments about any further penetration of ServPro for your units, the backpacks?
Not at the moment in relation to that company, but I did mention on the call other large -- another large one and other ones that we're working with. So I'll have to check in and get back to everybody about that specifics.
Okay. Well, it sounds -- the future sounds exciting. Thank you for your efforts. Thank your team for your efforts, and I look forward to the progress.
Thank you, John. Thank you for your support.
And we'll take our next question from Adam Brent with [indiscernible] Partners.
Just wanted a bit more color as to what percentage of your sales are the higher-margin solutions sales. And how should we think about that going forward?
So I think our solutions sales overall has been around 15% of our total revenue. And the more equipment we get out there, the more we'll see an increase in solution sales. So with these new generation pieces of equipment and the current need of this type of disinfection, decontamination solution, along with our backlog and pipeline, I think that you're going to see that number percentage going up and you can use the 15%. I mean we have that as a historic number we've been following. And as time goes on, I mentioned on the call, we'll expect $0.25 million from these built-ins, and that's just a couple of them. So I think that, that will continue to increase as equipment usage.
And this does conclude the Q&A portion of today's call. I would now like to hand it back to management for any closing remarks.
Well, thank you all for listening. I hope everybody has a great Thanksgiving and a merry Christmas. Thank you. End of call.
This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.