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Greetings. Welcome to the TOMI Environmental Solutions, Inc. Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. You may begin.
Good afternoon, and thank you for joining us today for the TOMI Environmental Solutions Investor update conference call. On today's call is TOMI's Chief Executive Officer and Chairman of the Board, Dr. hld, TOMI's Chief Operating Officer, E.J. Shane; and TOMI's Chief Financial Officer, Nick Jennings. Dr. Shane will provide an overview of recent business highlights. E.J. will report the company's growth and latest trends, and Nick will review the financial performance for the most recent quarter before addressing any questions you may have.
The telephone replay of today's call will be available through November 28, 2023, the details of which are included in the company's press release dated November 14. A webcast replay will also be available at TOMI's website, www.tomimist.com. Please note that information contained within this presentation is relevant only to the date of which it was recorded, November 14, 2023, you are therefore revised that time-sensitive information may no longer be accurate at the time of any replay. Certain written and oral statements made by management of TOMI may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements should be evaluated in light of important risk factors that may results to differ materially from our anticipated results. The information provided in this conference call is based upon the facts and circumstances known at this time. Company undertakes no obligation to update these forward-looking statements after the call -- after the date of this call. In addition, TOMI will discuss certain non-GAAP financial measures during this call. The company's use of non-GAAP measures -- this is non-GAAP measures because it believes they provide useful information about the operating performance that should be considered by investors in conjunction with the GAAP measures.
A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release dated November 14, 2023. I will now turn the call over to TOMI's Chairman and Chief Executive Officer, Dr. Halden Shane. Please go ahead.
Thank you, John, and good afternoon from the West Coast of the United States. Thank you all for joining to discuss some key achievements of our third quarter 2023 performance.
During the third quarter of 2023, our strategic focus on expanding our sales channels and business development persisted worldwide, along with collaborative efforts from key current and new customers. Simultaneously, we diversified our product line to accommodate to the evolving needs of our market segments leveraging the advanced capabilities of our SteraMist technology.
Finally, our launch of our SteraMist transport system and the SteraMist integration system, known as the SIS seems to be the answer to the automation requests that many industries are looking for to replace their old VHP decontamination technology. We are now sure SteraMist is in the right place at the right time, and E.J. will discuss this in some detail shortly.
Revenue declined during the quarter due to the timing of customer orders and the related revenue recognition. That said, our revenue was up 5% for the 9-month period, and we are optimistic about our high-margin business model and its ability to drive future sustained profitability as we scale the business. Subsequent to the close of the third quarter of 2023, we agreed to sell and issue convertible notes in a private placement in one or more closings up to an aggregate principal amount of $5 million.
As of November 7, 2023, we sold and issued an aggregate of $2.6 million to a group of institutional and accredited investors most of whom are new investors in the company's securities. The note contains no restrictive covenants or restrictions that may impose burdens or limitations on our operations. We intend to use the net proceeds from this offering for working capital, expansion of our existing Frederick facility and other general corporate purposes, including expanding our sales channel through the addition of distributors outside sales representatives, internal sales staff and external consultants.
Throughout this year, our strategic emphasis has been significantly geared towards the expansion of additional sales channels, distinguishing itself from previous years, our approach has evolved to encompass not only domestic but also international partnerships with larger groups. This strategic shift in focus involves collaboration with prominent entities to enhance our distribution network and simplify our market presence. As we continue recruitment of additional independent sales representatives, we have also added consultants possessing key expertise in our targeted market segments.
Thus far, in 2023, we have brought on 8 distributors expanding our presence worldwide. Our team has grown to include 11 independent manufacturing representatives, and we were recently onboarded by a GPO, group purchasing organization Vizient last week. This collaboration marks a significant milestone in our efforts to broaden our reach and strengthen our position in the health care market. Some of the notable additions in Q3 are as follows: we partnered with Colcom Inc. to offer SteraMist iHP part of Colcom's life science and health care portfolio of products.
With a combined 50 years of technical sales expertise, Colcom Inc. joined forces with us under the leadership of [ Bridge at Collins ]. Colcom Inc. as a trusted supplier of high-quality clinical and laboratory equipment. Given its established customer base and extensive expertise in the decontamination industry, this partnership will be mutually advantageous. In August, we entered into a business development consulting agreement with DAR Inc., a company specializing in food safety and food processing spaces.
We anticipate the agreement will better position us in providing education to the food safety markets through the education of the advantages of the SteraMist platform of products and expand our sales channels as well as our customer bases on the food safety markets. In September, we entered into a sales representative agreement with Universal Disinfection to better facilitate growth in the European region in the commercial, aviation and life science markets. The 2 partners of Universal Disinfection are the most knowledgeable about our technology in all of Central Western Europe and the Baltic states.
Most recently in November, we entered into an agreement with Patty Olinger, the Founder of BEAMS, LLC who specializes in Public Health Preparedness. Patty is also a Director of Frontline Foundation dedicated to protecting American citizens from bioterror threats. In the past, she was Assistant Vice President of the Office of Research Administration and Executive Director of Environmental Health and Safety Office of Emory University Hospital System and most recently, the Executive Director Global Biorisk Advisory Council, a division of ISSA. Patty will assist, strengthen and expand the TOMI SteraMist network and increased business development in the commercial markets.
She brings over 20 years' experience, establishing executive strategic vision and direction of large institutions and companies, spanning multiple industries, including higher education, non-for-profit health care, consultancy, hospitality and pharmaceutical sectors. We continue to remain active in our marketing initiatives and attended and presented our SteraMist brand of products at 6 different trade shows during the second quarter alone.
The expansion of our sales infrastructure in 2023 has been substantial and we will maintain a strong sense of optimism as we approach the conclusion of 2023. Looking ahead to 2024, we anticipate a significant acceleration in the momentum of our sales network. We continue to see positive signs with our SteraMist iHP service team as we saw quarter-over-quarter revenue growth of 59% and year-over-year growth of 16% through September.
As we announced in August, Pfizer Rocky Mount engaged our iHP service to conduct emergency decontamination within their facility, which suffered substantial damage to the tornado. Pfizer Rocky Mount has been a long-term loyal client TOMI, having commenced their utilization of SteraMist iHP corporate service in 2014. Since then, TOMI has been performing decontamination services twice a year during their facilities, routine scheduled shutdowns and called on as necessary throughout the years.
During the third quarter, we expanded our portfolio of CES systems with the delivery of a 3 applicator CES system to Ragon Institute of MGH, MIT and Harvard for implementation in their research and clinical lab located in Cambridge, Massachusetts. I would now like to turn the call over to TOMI's Chief Operating Officer, E.J. Shane, who will provide a comprehensive overview of the company's forthcoming initiatives with both new and exciting partners' insights into our product development endeavors and the strategies in place to drive revenue growth. E.J.?
Thank you, Dr. Shane, and good afternoon, everyone. Our current pipeline and backlog remains healthy. We are encouraged by long-term disinfection and decontamination trends in aseptic manufacturing in the biopharmaceutical sector and general worldwide pandemic preparedness.
Within the biopharmaceutical industry, aseptic manufacturing is undergoing several noteworthy developments. The emphasis on maintaining sterile environments in the production process is more critical than ever. There is a continuous integration of advanced technologies such as automation to enhance the aseptic manufacturing process, ensuring precision and minimizing human interventions. Stringent regulatory standards persist, demanding adherence to strict guidelines to ensure product safety and efficacy.
Biopharmaceutical companies are increasingly adopting a global approach, establishing facilities in strategic locations to meet growing global demand. There is a notable shift towards the adoption of single-use systems, offering increased flexibility, reduce contamination risk and quicker changeovers between production runs. Companies are engaging in collaborations and partnerships to leverage shared expertise and resources to allow for continuous manufacturing processes, providing for more efficient and streamlined production, reducing the time and resources required for manufacturing cycles.
Overall, the landscape of aseptic manufacturing with the biopharmaceutical sector is dynamic, driven by technological advancements, regulatory considerations and the evolving needs of the global health care markets. We believe the competitive advantages to TOMI's iHP SteraMist technology is well aligned with these prevailing trends within the biopharmaceutical sector. Furthermore, our expanded range of SteraMist products and applications, combined with recent partnerships is poised to reinforce this alignment.
These developments aim to enhance awareness among facilities ensuring iHP technology caters effectively to evolving industry needs. Our partner in Germany, universal disinfection has significantly expanded their list of opportunities in recent months across a variety of market segments, but mainly biopharm. They maintain a positive outlook on the collaboration with the German biotechnology company referenced during our last call, anticipating the conversion of this partnership into several orders for our CES or custom environment system.
On a side note, Universal Disinfection and the German Red Cross, the largest humanitarian organization in the world, recently released its successful implementation of SteraMist iHP, with its project manager stating and I quote, "SteraMist disinfection system could revolutionize hygiene measures in the ambulance service and would make it possible for ambulances to completely disinfect during the return journey from an infection transport. This would be a real milestone". The Universal disinfection purchased 2 SteraMist transports in quarter 3.
We are actively engaged with Fresenius Kabi in Brazil, and we anticipate the qualification process to be completed later this month. The next phase involves the assessment of SteraMist iHP in the second location in Brazil, 2 in South Africa and 1 in Argentina. Notably, the technology has already been introduced to key personnel at these facilities. It's worth reiterating the Fresenius Kabi extends to 47 countries around the globe. Adhering to the industry trends previously discussed, our innovative product, the SteraMist Integration System, or SIS, is gaining notable traction. This system introduces automation and ensures compliance with necessary guidelines, making it an ideal solution for large manufacturers of enclosures requiring decontamination.
This product line meets every noteworthy developments referenced earlier. Moreover, it extends the small lab spaces, research universities and the animal research industry. CSIS is offered in 3 distinct packaging and assembly options, establishing a standardized product line adaptable for almost any enclosure utilizing life sciences. Our strategic collaboration with recent partners and representatives specializing in the industry, positions SteraMist iHP to market and sell this product line effectively.
The past 2 months have been marked by significant activity, and I am optimistic that the efforts invested will yield positive awareness, by the end of this year with an even greater impact anticipated in the coming years. Our ongoing partnership with [ Solaris ], as highlighted in the press release from the previous quarter continues to be of significant importance. I'm pleased to share that we are gearing up to advance the Phase 4 of our collaboration. We anticipate unveiling further details, so I encourage everyone to stay tuned for this upcoming announcement.
In the current quarter, we initiated discussions with engineers and scientists of another stem cell company based in New England. This company currently in the design phases of a cell therapy device is exploring the integration of iHP as its decontamination method. This presents another promising prospect for a collaboration in the realm of long-term integration. While quarter 3 presented timing challenges on the revenue front, we made significant achievements in acquiring new customers, particularly within the industry closely monitored by our shareholders that is food safety.
Notably, we successfully sold our SteraPak to [ Simplot ], a leading international food and agricultural company headquartered in Boise, Idaho. [ Simplot ] known for innovations in plant nutrition and food processing is currently incorporating the SteraPak into potato-related processes in Idaho, with plans for expansion to other facilities. We have collaborated on drafting their initial [ plantation ] standard operating procedure. Additionally, our SteraPak found significance with other notable clients, including [ Karina Nestle ] for pet food manufacturing and Mayorga Coffee, who allow TOMI to heavily promote their use of the SteraPak in their facility.
In Michigan, our deformed wing virus study has generated interest in a group of professional keepers. We will soon be traveling to the group to assist in its effort to save the bees through the application of our SteraPak, marking a meaningful contribution to environmental sustainability. These accomplishments underscore the diverse applications and positive outcomes associated with our innovative solutions. The recent collaboration with Vizient GPO holds promise for expansion in the health care sector.
The variety of well-established partners ranging from the collaboration with design and engineering groups of pharmaceutical facilities to the decades of expertise and enclosure decontamination representation, combined with our new product lineup, positions SteraMist iHP for significant growth, especially in the life sciences. Our association with Patty Olinger, a renowned figure and Biorisk security and industry leader for commercial service providers, is anticipated to refresh the TOMI Service Network or TSN members and enhance our commercial division. Additionally, the recent additions to our customer base in the food safety sector, acting as referrals for our technology, marked first-time progress for us.
I appreciate your patience, and I'm encouraged that our strategic initiatives position the company to drive sustained revenue growth in the near term. I thank you all for your continued support, and now I turn the call over to our CFO, Nick Jennings.
Thank you, E.J., and good afternoon, everyone. I'll provide a brief overview of our financial results for the third quarter of 2023 compared to the same prior year period.
For the 3 months ended September 30, 2023 compared to September 30, 2022, our consolidated net revenue was $1.47 million, compared to $1.76 million. Consolidated gross profit was 55% compared to 61%. The decline in our gross profit was due to our product mix and sales. The consolidated operating loss was $901,000 compared to $654,000. Our consolidated net loss was $901,000 or $0.05 per basic and diluted share compared to $653,000 or $0.03 per basic share.
Adjusted EBITDA was a loss of $807,000 compared to a loss of $571,000. A table reconciling adjusted EBITDA to the appropriate GAAP financial measure is included in today's press release. Moving on to the balance sheet. As of September 30, 2023, our cash and cash equivalents were approximately $1.4 million, working capital was $6.9 million and shareholders' equity was $9.5 million. Now I'd like to turn the call back over to Dr. Halden Shane.
Thank you, Nick. As I hope you have garnered from our remarks, a key strategic shift in our business this year has been the establishment of a robust partner and reseller network to more efficiently expose our product to the right customers. A few years ago, I tried to establish Vice Presidents of Sales to head up each vertical, and this was just a mistake and cost us valuable time. That being said, we learned from it, and E.J. and the team have done an amazing great job building a sales and distribution network that can help us scale TOMI to be a much larger company.
It is my belief that we are poised to move through to profitability in the fourth quarter. And if we execute, we should be able to drive sustained profitability going forward. Thank you all for joining us today and for the unwavering support as investors and followers of our company. A big thank you to our team around the world who has laid the foundation for our company to become the world's leader in the disinfection decontamination space. It is the right time in place to unseat the competition, vaporized hydrogen peroxide whose technology is at least 33 to 53 years old.
We now open the Q&A part of the call. Operator, let's open the call to questions, please.
At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first questioner is [ Frank Lewis ] with Adam Street Capital.
How should we think about revenue mix this year by end market? And have we seen a particular shift over the last few years?
Sure. In terms of a breakdown of that, really, we continue to see growth in life science in that vertical as it's the most mature. And food safety is developing quickly. So in terms of markets, and really, if you were to break it further down into how we generate revenue through equipment, solution and service. If you've been falling along, you can see the custom engineered systems or the collaboration projects we have with certain companies provide a lot of optimism for us because these are great things we're getting into.
Yes. I think also the CES and the SIS systems will be what drives the company going forward in that specific vertical.
[Operator Instructions] We now hear from John Nelson, private investor. .
Dr. Shane. And I have several questions. The first one is, you mentioned at the end of your statements that you expect to be profitable in the fourth quarter. And if that were the case, it must -- or it should mean that you're expecting a significant increase in revenue from this last quarter. Is that correct?
We are hoping that. That is correct.
Okay. And what areas might -- would you think would be driving that increased revenue?
Well, I think it's the interest in the CES and the SIS systems that we have out there and our new transportation system, mostly from the life sciences along with the addition of the onboarding, the education of these new partners that we've taken on who have significant pipelines in the sales end of all verticals.
Good. The next question is related to the convertible debt deal that you did. Is there anything in the documents that prevents the participants from shortening your stock?
Yes, there is. There are a couple of documents that restrict sales and also restrict shorting of the stock. So we are covered from that standpoint.
Excellent. Great. And next question, is there any -- can you give us any update on the ethylene oxide replacement market?
Not really. It's still these regulatory agencies or still creating a foundation for who's going to be able to use ethylene oxide and who isn't. At the moment, it seems it's just large facilities that they're restricting because of OSHA and some employees regular standards. But it's going to be a while, John, and I think that this will go out to all users of ethylene oxide once regulatory agencies start condensing and specifically hitting uses of it.
We think our product is the -- we know it's the replacement and we think that it won't be too long until it's used in the food safety industry for the ripening and for prevention of foodborne diseases and fruits and vegetables.
Okay. [ Fenne ] has been in the news a lot concerning a number of people. Is there anything new on the neutralization regarding use of SteraMist?
So we're hoping -- you've read that, I'm sure the press release that the [ Amy ] did in relationship to other toxoid. And we're hoping that they will do a similar study on Sentinel. As we all know, or we all should know, it's a significant problem throughout the United States and it's affecting educational systems, effecting police. And I personally believe because it's an organic compound, we'll be able to alter the structure of that compound use of SteraMist in closed areas, which is the most concern for people.
And we're pursuing it. We're pursuing also some studies with individuals that know how to do the right studies and collect the right data. So we're on track to hopefully have something in 2024. I'm not sure what part of it but within -- by 2024.
Okay. And let's see, any -- also any new developments on -- with the FDA as far as SteraMist on food treatment?
We're still working towards that label in this 1%. We're able to treat it with our 0.35%. We just want to get a little more pathogen kill, and we're still involved in that process. But many food companies are using our regular 7.8% in nonfood areas to decontaminate space and equipment.
Okay. And I always ask this, but the UCLA study? Anything to report there?
Nothing published yet, as you and I know. We know the data is good.
Yes. The -- my next question is related to -- from the installs with the transport system. Have you been able to -- can you give us any metrics as far as comparison -- cost-effective comparison between the use of SteraMist versus the [ tool ] manual cleaning on that ambulances generally require after usage?
I'm going to let E.J. answer that question, primarily involved with the transport system.
Of course. So currently, we are still at a soft promotion on the transport. We have a few sold with our partner in Germany, who is working on the next stages with the Red Cross there to install the transports there. We do still are in communication as well with the hospital who is a customer of ours that started the whole transport development, and we're hoping to meet with them before the end of the year.
We're also working with the Canadian distributor group, [ Tecnimont ] that we released earlier in the year, and they're gaining a lot of traction on the transport with designers of ambulances in which we're going to work with them on certain mounting devices because that is their specialty. We still have to endure some crash testing that's required in the region. But once that's completed, we'll be able to establish more of a metric.
Okay. But any preliminary indications as far as a significant cost benefit using the new transport system?
Of course, it goes in line with our technology on the course of -- lack of [ grosveness ] of use of iHP with comparison of the main competitor in the industry. So there's certainly interest and the speed in which we can turn over in ambulance. And that was generated in a case study we've released with the German Red Cross on [indiscernible].
All right. And my last question is related to, again, back to the convertible debt offering. You had a number of I think, was 28 investors, and that's a rather large amount for a deal of size. Can you explain why so many investors in the deal?
Well, I think I've always felt that the more eyeballs we have in our company that understand our technology and that are long-term investors, the better off will be. Certainly, we raised a small amount of capital, and we could have raised a lot more with 22 investors, but I felt that the company started way back when with a group of investors. And I think now this group fits the criteria being what we like to have and what we currently have going forward. So that's why we did it. It's obviously a lot more difficult to bring in many of 1 or 2 just from standpoint, education and paper. But we did it. And with the help of [ Agos ] Capital, they did a terrific job and to making sure that all investors, including these new ones are successful in years ahead going forward.
Okay. Makes sense. That is all the questions I have. I look forward to a profitable fourth quarter. Thank you.
Thank you. Thank you all.
We have reached the end of the question-and-answer session, and I will now turn the call over to management for any closing remarks.
I just want to thank everybody for joining, and I hope everybody has a happy and healthy Christmas.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.