Scienture Holdings Inc (SCNX) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Trxade Group's Second Quarter 2020 Earnings Conference Call.

(Operator Instructions) This conference is being recorded today, July 27, 2020. And the earnings press release accompanying this conference call was issued at the close of market today. The quarterly report which includes the company's results of operations for the quarter ended June 30, 2020, will be filed with the SEC tomorrow morning.

On our call today is Trxade Group's Founder, Chairman and Chief Executive Officer, Suren Ajjarapu; and Howard Doss, Chief Financial Officer.

Before we begin, I'd like to remind everyone that statements made on this call and webcast, including those regarding future financial results and industry prospects, are forward looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks, and we would also refer you to the company's website for more supporting industry information.

At this time, I would like to turn the call over to Suren Ajjarapu, the company's Chief Executive Officer. Sir, the floor is yours.

Thank you, operator. And thank you, everyone, for joining us today. I'd like to welcome you to our second quarter 2020 financial results conference call, the first earnings call we have had as a public company.

Before we walk through our financial and operational results for the quarter, for those of you new to the company, I'd like to walk you through who we are, how we are revolutionizing the way independent pharmacies procure drugs. Prior to the launch of our company, obtaining drug cohorts as an independent pharmacy was an extremely laborious and time-inefficient process with no insight or transparency into a fair market price or what others are paying for the same drug. Traditional wholesalers would provide unfavorable payment terms, slow delivery; and create a difficult conundrum for the approximately 22,000 independent pharmacies nationwide.

We identified this market inefficiency as well as the incredible potential in these independent pharmacies, which together maintain a $78 billion in annual purchasing power, and proceeded to launch Trxade. We design, own and operate a business-to-business web-based market platform bringing together the nation's independent pharmacies and accredited national pharmaceutical suppliers to provide a uniquely efficient, transparent buying and selling process. Our platform lets these independents know that they are receiving a fair price from competing suppliers on fair payment terms and often with next-day delivery.

We believe this radical price transparency, economy of scale and competition amongst suppliers lead up to 10% reduction in pharmacies' total annual drug purchase costs, with a drug-level savings of up to 90% on certain pharmaceutical products. Our platform saves pharmacists from having to manually compare prices across distributors, saving hundreds of hours of unnecessary labor annually; and eliminating negative reimbursement, in some cases, filling the prescription at a loss.

Our revenue model is simple: we charge a percentage of transaction fee based on the value of drug purchases transacted on our platform, similar to PayPal or Visa-like model. To date, we have seen incredible success in garnering attention from independent pharmacies nationwide, validating our business model. We currently have over 11,700 pharmacies on our platform, representing over 50% market penetration into the 22,000 independent pharmacies nationwide.

Our growth drivers for the Trxade platform are twofold: one, increasing the average purchases per pharmacy so that pharmacies transact an increasingly high percentage of total drug purchases through our trading platform; two, continuing to expand our market penetration, adding new independent pharmacies to our network.

Now proceeding to our second quarter 2020 financial and operational results. I was particularly pleased with our growth in the second quarter compared to 2019, achieving record quarterly revenues while continuing to grow average spend per pharmacy on our proprietary platform.

Our affiliated services offering continue to expand, with our telemedicine subsidiary Bonum Health in particular shaping up to be a critical health care service to thousands of customers across the United States. We recently appointed senior health care executive Ashton Maaraba as the President of Bonum Health to spearhead our telemedicine efforts, in which we see a significant opportunity as more and more consumers shelter in place due to the COVID-19 pandemic.

Ashton is an intuitive leader with acute business acumen and expertise in channel market development. I'm confident in his ability to drive adoption of Bonum Health amongst both employers seeking to provide unique health care perks to their workers; as well as to individuals seeking a low-cost, convenient way to speak with a doctor.

On the capital markets fronts, we have made exciting progress over the last several months, fortifying our balance sheet, uplisting to NASDAQ, being added to Russell Microcap Index and now today hosting our first earnings call. We continue to mature as a public company, and our progress this year is a testament to these efforts.

Now before we go further, I'd like Howard Doss, the CFO, to walk through some key financial highlights on the second quarter of 2020.

Thank you, Suren. Revenues for the second quarter of 2020 increased 244% to a record $6.6 million compared to revenue of $1.9 million in the same quarter last year. Sequentially, this represents an increase of 199% when compared to revenues of $2.2 million in the first quarter of 2020. The increase in revenue was primarily due to personal protective equipment sales, such as N95 masks and sanitizer products. These products were sold by our Integra Pharma unit as a response to the COVID-19 pandemic.

Gross profit in the second quarter of 2020 increased 72% to $2 million or 30.4% of revenues compared to a gross profit of $1.2 million or 60.7% of revenues in the same quarter last year. The increase in gross profit was at lower margins, which was primarily due to lower-margin sales of the personal protective equipment in our Integra Pharma unit. Operating expenses in the second quarter of 2020 were $2.5 million compared to $1 million in the same quarter last year. This increase is primarily due to noncash stock-based compensation expenses, which included executive bonuses for 2019; IT expenditures; and marketing expenses.

Net loss in the second quarter of 2020 was $542,000 or a loss of $0.07 per basic and diluted share compared to net income of $60,000 or $0.01 per basic and diluted share in the same quarter last year. Adjusted EBITDA, which is a non-GAAP financial measure, increased 525% to $500,000 compared to $80,000 in the same quarter last year.

Looking at the balance sheet. Cash and cash equivalents were $4.2 million as of June 30, 2020, compared with $7.7 million as of March 31, 2020. A sizable portion of this cash usage was due to inventory purchases surrounding personal protective equipment sales to address the COVID-19 pandemic, a notable driver of our sales in the quarter.

I should also note that accounts receivable and inventory increased to $3.5 million and $1.8 million, respectively, as of the end of the quarter compared to only $0.9 million and $0.4 million, respectively, as of March 31, 2020, which helped our total current assets only decline $0.3 million compared to March 31, 2020, even with a decrease in cash.

As the pandemic subsides, we don't expect to carry the same level of inventory going forward. And we do not foresee a need for further capital to support the business.

Thank you, Howard. Overall, I'm pleased with our growth in the second quarter laying the foundation for what we hope will be an incredible year. But what's driving this growth? Of course, the platform growth, along with personal protective equipment sales. We'll continue to meet or exceed internal projections while regularly attaining key milestone achievements. As the founder of Trxade, I firmly believe that we are better positioned to create a sustainable value for our shareholders than any prior time in our history.

I look forward to continued operational execution into the second half of 2020 and beyond. With that, I'll turn it over to operator to begin the question-and-answer sessions. Operator, take it over.

(Operator Instructions) Our first questions come from the line of Gene Mannheimer of Colliers Securities.

Congrats on a spectacular quarter and your first earnings call.

Thank you. Appreciate that.

Certainly. Suren, I wanted to -- before we get to the Integra piece, which is really impressive, I wanted to just ask you a couple of questions about the platform. The revenue was down a little bit sequentially. I was looking for a little bit of growth there considering you added more pharmacies. What were the drivers there in the quarter? How much did COVID impact pharma spend? And how was the same-store sales growth or as you refer to as revenue per store compared to the first quarter?

Sure. I'll take a first stab at it, and then I'll pass it on to Howard, if he wants to add anything. And definitely we see the -- we saw the impact of the COVID because most of the stores have been shut down in the month of April and later part of the May, but eventually they had to open slowly and steadily. Everything is all getting opened up. So I don't have the exact percentage of the decrease, how much they bought less, but definitely we saw the impact. And to present his calculations -- Howard, if you want to take that, please go ahead.

Actually I don't have those calculations right in front of me, but I do know, for the 6 months ending June, our revenue in Trxade, Inc. was about $2.9 million, where the revenue over the 6-month period in 2019 was about $2.1 million. So over the 6 months period of time, I think we still have some pretty nice revenue.

No doubt, no doubt. And what about the same-store sales growth? Are you able to quantify that for us?

Howard, do you want to take that?

Actually we don't publish that same-store sales growth, so I can't really answer that question for you.

Okay, but as Suren mentioned in his prepared remarks you did grow revenue per store over the prior year, right?

Correct.

Yes, okay, all right. What do you think -- or what are the some of the strategies or opportunities you see to increase higher revenue per pharmacy?

As far as they are buying from us because, if you look at the brand drugs, Gene, the percentage is always less. Like you have a wholesale acquisition cost, plus or minus pricing, there. And most of the margins -- the pharmacies get negative reimbursement on the generic products. And that's -- what is our main focus even though 75% of our product that moves through our platform is a generic, and remaining 25% is on the branded drugs side. So we continues to grow on the branded side -- sorry, on the generics side, how can we add more and more product list, than worrying about high-dollar-value product because the pharmacy has a set margin, plus or minus percentage, versus on the generic side.

Okay, makes sense. So switching gears then to Integra. I mean you really knocked it out of the park there with the PPE revenue. I'm just wondering if, Q2, we should view that as a extraordinarily high quarter due to the onset of the COVID pandemic just sort of peaking there. I guess, how sustainable are these PPE sales in the back half of the year?

You're absolutely correct, but nobody understands where this PPE opportunity is there. We definitely took that opportunity in the second quarter. How sustainable it is, nobody knows, but we continues to grow the platform and see any other opportunities on the PPE side to help our pharmacies. Because if we look at April, all the pharmacies were -- stocked up sanitizers. And no -- big wholesalers don't have the sanitizers. By month of May, everything changed the dynamics, so you don't need it. And then they jumped on to the PPE equipment like masks and so on and gloves and isolation gowns. Now as the states are mandating more and more masks, we may see that spike in requirement that gets through these independent pharmacies or other schools and stuff that come to us to buy us when the schools start opening up, but nobody really knows what the PPE opportunity is there, so we cannot quantify that whether it's going to be the same as second quarter. But we see some improvement or -- and see that -- really I don't know what is the percent of the growth will be on PPE side.

Sure. No, that's going to be difficult to forecast. And tell me, you mentioned -- well, I noticed that you signed some -- a law firm during the quarter. So who is the customer here? Is it the pharmacy? Is it the employer? Or are you targeting both?

Both, but as the CLIA waived is not allowed to the pharmacies to execute this -- you are talking about the PPE side, or are you talking about the testing side?

Both. Both of those.

The PPEs are -- anybody is a customer, all right, whether it is a law firm or a pharmacy, but -- especially the testing side, we've executed to move a -- to nursing the point-of-care people that have executed or administered the tests on site. We've become as a supplier of those test kits and -- but a CLIA waiver -- or a CLIA-certified, FDA-approved antibody testing is not allowed at these pharmacies still. So we could not move any of our products to these pharmacies, but we went after the employers or point-of-care facilities to move these testing kits.

Makes sense, okay. And did you or could you disclose your revenue from COVID test kits?

We're not -- we don't have any segmented that way. We have segmented Trxade, Integra Pharma and CSP side of...

Fair enough. Fair enough. Okay, one more then for me would be on your Community Specialty Pharmacy business. You beat us by a little bit there as well. What metrics can you offer around Bonum Health either in terms of how many kiosks are set up today, how long the app has been available and if you know how many users there are at this point?

No problem, Gene, but there still is a maturing level. The app is getting stabilized, so we don't have that data readily available. So when it's available in the next quarter, we'll -- hopefully, we'll try to get those metrics, but right now it's not available.

All right. No, very fine. In terms of one final, final question then. How are we shaping up for 2020? Are you in a position to give any full year guidance at this point?

No, not at this time.

(Operator Instructions) Our next questions come from the line of Howard Halpern of Taglich Brothers.

Congratulations on the quarter, guys.

Thanks, Howard.

I'm going to go back to, I guess, accounts receivable and inventory. Do you expect those 2 numbers to go back to more normalized levels by the end of this fiscal year?

Howard, can you take that question?

Yes. I do. One of -- the accounts receivable at the end of June was very high. We had about a $2.5 million accounts receivable to one customer, and that was paid in July. So that came down significantly. And then the inventory, which is now at about $1.7 million, most of that is PPP (sic) [PPE] product. And we expect to work through most of that through the end of the year. We anticipate that, anyway.

Okay. And in terms of the PPEs and the FDA test kits and stuff, do you have multiple sources for that -- those products that you're shipping to customers?

Yes. Our primary business in the -- for the last 10 years on the platform, if you look at, is the supply chain. And those relationship will transitioning into Integra, especially on the PPE side and as well as the testing set, yes. We have multiple sources to buy these products, correct.

Okay. And if the PPE sales come down some, we would expect gross margin to improve as time goes on from this level in the second quarter.

Yes, that's probable, yes, because the tech platform is the one -- or then because of the product side, the gross margins are varies. Correct.

Okay. Also in terms -- do you foresee any larger -- any additional large amount of stock-based comp in the second half of the year?

We don't anticipate anything at this time.

Okay. So excluding that from the first half -- I know sometimes -- I know, in the first quarter, you put in the Q you expect operating expenses around $5 million. Is that going to be slightly higher this year even excluding the stock-based comp?

Howard, do you want to take that?

Yes. I think that, because of some of the things that we're doing in Integra and potentially the ramp-up with Bonum Health, that $5 million may go up during 2020. We'll be doing a reevaluation of that and disclose that in the next Q.

Okay. And in terms of Bonum, you talked about thousands are using it. If you could just give a little bit of context on how you're seeing people sign up for it. Has it increased a little bit every week that you've seen? And how are they finding out about it? Is it through your independent pharmacies that are letting customers know that it exists?

That's one channel but, of course, the social media. But that's the primary channel that we would like to move it on but especially on the business to business, when they are trying to open up new stores and they cannot afford these insurances, and those are the ones that are attracted to Bonum Health because it's our payments, our fee structure is less than the insurance co-pay. Those are the attractive items. So the main channels are through our independent pharmacies, of course. The second and tertiary are, of course, making the calls and social media.

Okay. And do you expect the sign-ups to be in the 100s per month? Or do you think you could drive it in the next -- in the second half of the year, could it be, well, 500 a month?

Yes, well, we can't give you guys that guidance at this time. As I mentioned, the app is getting matured as we speak. And as we said, the COVID has an impact with people who are paying and now it's picking up steam. So...

Okay. And one last one. As -- because you had mentioned too that schools, I guess primarily K-12 schools, are going to be -- it looks like they're going to be opening up around the country. Are you making plans to market yourself to districts around, especially in the State of Florida since that's where you're based? But is that something that you're looking to do actively?

Yes. Yes.

Our next questions come from the line of [Andy Gould of Gould Capital].

Nice quarter, Suren.

Yes. Very good, [Andy]. Thank you.

Question on your PPE side. Do you have like a gross margin for that particular side of the business? I know that it's all depending on what particular deal you're doing. Or is that -- obviously that's a much lower-gross-margin business, but is that [one that the] sanitizer run at a lower rate, or masks, than, let's say, gowns or gloves or any of the particular products?

Sure. I would have averaged it out to 25% to 30% because the supply and demand, right? When big-time movement was in April, it was a bigger margin because, at the same time, our costs of goods were higher. It's all depending on the supply and demand at that time, but we'll try to maintain around 25% to 30% gross margin.

That's good. I mean, where -- your supply chain, is it coming from overseas? Is it...

It varied in April to a vendor, but I don't want to pinpoint. When we have Far East locked up, we had to bring in from Canada. And so it's various sources that we continue to bring in, so...

And you -- can you get adequate supplies going forward? Or is it...

Yes, we have solidified from Far East, if we have an issue with -- of course, our country itself has an issue with China. Then we moved on to Vietnam, Malaysia or something like that. So we're always able to find the products, to bring it in and so that we can store it in our stores because the stores also need these sanitizers and masks and so on and so forth.

So you have a natural customer base in your pharmacy clients.

Yes. And a little bit of that is to some hospitals, a couple of hospitals, at the time because that's came through our pharmacy network, asking, "Hey, here is the hospital looking for these kind of things," so on and so forth. So -- but it's our primary customer is those pharmacies, yes.

Have you gone into any of the states through state-type contracts? Or they're a lot harder to get into or...

We try to do a subcontracting of that but not as a primary contractor. We could not get to it because you need to have an established service oriented, disabled, veteran or some certifications and so on and so forth. So we're trying to fulfill those too as a subcontractor.

Our next questions come from the line of Carlo Corzine of Dawson James Securities.

Suren, I think all the previous persons asked all my questions and exhausted them, so I don't have any more. I was really looking at the inventories and the receivables, but great quarter.

And I thank you and Howard for having the call and so everybody can hear more about the company. And I'll extinguish the rest of my time.

Thank you.

There are no further questions in the queue. I will now hand the call back over to management for any closing remarks.

Thank you, operator. I would like to thank all of you joining for our call. If we are unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist.

Once again, thank you for joining us today. And we look forward to continuing to update you on our progress and growth.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.