Scienture Holdings Inc (SCNX) 2020 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Trxade Group's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) This conference is being recorded today, March 29, 2021, and the earnings press release accompanying this conference call was issued at the close of market today. The annual report, which is -- included the company's results of operations for the fiscal year ended December 31, 2020, was filed with the SEC today.

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

The replay of this call and webcast will be available for the next 30 days on the company's website under the NASDAQ: MEDS link. The company website also includes more supporting industry information.

At this time, I would like to turn the call over to Mr. Howard Doss, the company's Chief Financial Officer. Howard, the floor is yours. Thank you. You may begin.

Thank you, operator, and thank you for joining us today. I would like to welcome you to our fourth quarter and full year 2020 financial results conference call.

Our press release announcing our fourth quarter and full year financial results was issued after the close of market today and is posted on our website. We have also published a copy of the presentation that accompanies this call and webcast on our website and furnished such press release and presentation to the SEC on Form 8-K.

Statements made on this call and webcast include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of the operations or the performance of the company, including the potential continued impact of COVID-19 on the company's business and results of operations. These statements speak only as of the date hereof, and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call or webcast, except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures, which we believe are useful as supplemental measures of Trxade's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release.

Unless otherwise stated, all financial comparisons in this call will be our results for the comparable period of fiscal 2019.

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

Thank you, Howard. 2020 was a milestone year for our health services IT company as we continued to innovate, grow and expand. Despite the challenges of global pandemic, we increased revenues by 130% for the year, a testament to our team's continued innovation and the development of our breakthrough digital health care services IT platform.

Before we do a more detailed walk-through of our financial and operational results for the fourth quarter and 2020 year, for those of you new to the company, I would like to walk you through who we are, how we are digitalizing the retail pharmacy experience through the optimization of drug procurement, prescription journey and patient engagement.

Prior to the launch of Trxade, obtaining drug quotes 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 21,000 independent pharmacies nationwide. We identified this market inefficiency as well as the incredible potential in these independent pharmacies, which together maintain approximately $73.7 billion in annual purchasing power and proceeded to launch Trxade.

We designed and own and operate a business-to-business, web-based marketplace platform, bringing together the nation's independent pharmacies with the accredited national pharmaceutical suppliers to provide a uniquely efficient and transparent buying and selling process. Our platform lets independent pharmacies know that they are receiving a fair price for competing suppliers on a fair payment terms often with next-day delivery.

We believe this radical price transparency, economy of scale and competition among its suppliers leads up to a 10% reduction in a pharmacy's 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 or fulfilling a prescription at a loss.

Our revenue model is simple. We are paid an administrative fee of up to 6% of the buying price on generic pharmaceuticals and up to 1% on brand pharmaceuticals that pass through our pharmaceutical platform, similar to like a PayPal or Visa-like mode.

To date, we have seen incredible success in garnering attention from independent pharmacies nationwide, validating our business model. We currently have approximately 11,800-plus registered members on our platform, representing over 50% market penetration into the 21,000 independent pharmacies nationwide.

We have leveraged our significant success since the launch of the aforementioned marketplace platform to move into adjacent, complementary business where we can leverage our strong retail pharmacy network and core competencies in technology. These include our Bonum Health, our telehealth subsidiary, as well as mail-order pharmacy and Rx distribution, which act as an enabling infrastructure for our Bonum Health's business-to-business, business-to-consumer platforms as well as the future business lines we currently have in development.

I'm particularly pleased to announce the recent launch of our new subsidiary, MedCheks, which is developing a digital health passport to help facilitate the safe reopening of the global economy. To lead this new initiative, we brought in James Ram, an accomplished strategist with leadership experience in travel, tourism and location-based entertainment industries. Under his lead, the digital health app or passport we plan to launch will leverage both state-of-the-art encryption and blockchain technology to conceal all the private health data of users, allowing for the secure exchange of data between a passport holder and a verifier. We're evaluating initial rollout locations internationally and given the pay-per-use model, believe this could be a significant revenue potential into 2021.

During the fourth quarter of 2020, we made progress with our Trxade drug procurement marketplace, adding 328 new registered members for a year-end total of approximately 11,800-plus registered members. As we continue to scale exciting new affiliated services, such as our telehealth platform and our digital health passport initiatives, we anticipate continued top line growth in the coming years.

Bonum Health, our telehealth subsidiary, made significant strides in the fourth quarter to propel adoption nationwide more rapidly. We signed an exciting partnership with KPH Healthcare Services, bringing affordable health care to the patients of approximately 100 Kinney Drug retail pharmacies on the East Coast as well as more than 2 million Rx discount card members of Kinney's sister company, ProAct, Inc., a fully integrated pharmacy benefits manager.

Trxade has multiple subsidiaries and are well positioned within the business-to-business, business-to-consumer space to synergistically help realize our vision and work to bridge the gaps in the health care.

Trxade will focus on 3 main deliverables. The first is drug procurement optimization, so that we can help reduce the cost of medication further. This expands our current offering to include primary vendor contracts and better use of cost minimizing algorithms with the goals of prompting pharmacies to significantly increase their spend on our marketplace.

Secondly, digitalization of patient health services as it relates to prescription journey optimization. Customers via our app are expected to be more involved, better informed on their medication, resulting in enhanced medication adherence. We intend to create a smart prescription, much like we created a smarter drug supply chain. This would allow customers to get the right medication at the right time at a reduced cost, something the industry has been struggling to solve effectively.

Thirdly, key to consumer care is engagement and the ability to also offer customers convenient access to providers at all times. Our e-health passport app will house vaccination certificates, and we believe our telehealth and pharmacy services programs will make us as one-stop solution for consumers looking to simplify their health care needs.

On the capital markets front, we were proactive throughout the fourth quarter attending 2 investor conferences, the Virtual Investor Summit and the Diamond Equity Research Emerging Growth Invitational, all with the goal of enhancing broader investor awareness of our company.

To simplify, we intend to bring the doctor and pharmacy into a customer's home for their nonurgent care inexpensively and instantaneously, an almost end-to-end solution the industry desperately lacks. Also, while COVID-19 has made 2020 a challenging year for many, both on a personal and business level, we were lucky in 2020 that the pandemic had only a limited effect on our operations, causing minimal delays in our supply chain but otherwise not materially negatively affecting any of our operating results, a pattern we currently see continuing into 2021.

I'd like to now turn the call over to our Chief Financial Officer, Howard Doss, to walk through some key financial highlights from the fourth quarter of 2020.

Thank you, Suren. Let us discuss fourth quarter 2020 results. Revenues for the fourth quarter of 2020 increased 17.1% to $2 million compared to revenue of $1.7 million in the same quarter last year. The increase in revenue was primarily due to revenue generated by the Trxade platform and Trxade Prime. Gross profit in the fourth quarter of 2020 decreased by 90% to $0.1 million or 6.5% of revenues compared to gross profit of $1.3 million or 76.5% of revenues in the same quarter last year. The decrease in gross profit was primarily attributable to higher costs associated with Trxade Prime transactions and inventory write-down.

Operating expenses in the fourth quarter of 2020 were $2.4 million compared to $1.6 million in the same quarter last year. This increase is primarily due to the loss on impairment of goodwill and an increase in employees with our expansion into business-to-consumer sales. Net loss in the fourth quarter of 2020 was $2.3 million or $0.29 per basic and diluted share outstanding as a result of the $726,000 loss on impairment of goodwill and a $1,081,000 inventory write-down compared to a net loss of $0.5 million or $0.04 per basic and diluted share outstanding in the same quarter last year. Adjusted EBITDA, a non-GAAP financial measure, decreased to a negative $1.4 million compared to a positive $0.2 million in the same quarter last year.

Let us now discuss fiscal 2020 results. Revenues for the 2020 year increased 130.3% to $17.1 million compared to revenue of $7.4 million in 2019. The increase in revenue was due to revenue generated by Trxade platform, Trxade Prime and Integra Pharma Solutions, our wholly owned subsidiary, which revenue increased from personal protective equipment sales related to the COVID-19 pandemic. Gross profit in fiscal 2020 increased 17.2% to $5.7 million or 33% of revenues compared to gross profit of $4.9 million or 65.5% of revenues for last year. The decrease in gross profit percentage was primarily attributable to higher costs associated with Trxade Prime and Integra Pharma transactions.

Operating expenses in 2020 were $8.2 million compared to $4.7 million last year. This increase is primarily due to the loss on impairment of goodwill, an increase in employees with our expansion into business-to-consumer sales, IT initiatives and noncash compensation. Net loss in 2020 was $2.5 million or $0.33 per basic and diluted share outstanding compared to a net loss of $0.3 million or $0.05 per basic and diluted shares outstanding last year. Adjusted EBITDA for the year ended 2020 was $0.1 million compared to $0.85 million for the year ended 2019.

Looking at our balance sheet. Cash and cash equivalents were $5.9 million as of December 31, 2020, compared with $2.9 million as of December 31, 2019. The increase in cash was due to our fully underwritten offering of equity, which closed in February 2020. We do not currently foresee a need for further capital to support our business.

With that, I will turn the call back to Suren for closing remarks.

Thank you, Howard. Throughout the year, we continued to drive our business forward, achieving several key milestones in our internal road map with a focus on innovation and development through our various complementary growth opportunities. This is an exciting time for Trxade, and I believe we are better positioned to create sustainable value for all our stockholders than at any prior time in the company's history.

With that, I will turn it over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) Our first question comes from the line of Allen Klee with Maxim Group.

Can you hear me?

Now we can hear you.

Okay. I'm sorry. In the Trxade platform segment, what are you hearing from your customers in terms of how they were impacted in the quarter from the combination of the pandemic and just people being less sick from staying at home? And is there any sense of how they're feeling going into '21 on those 2 metrics?

That's a great question, Allen. Yes, there's definitely a lot of impact. People are not traveling. People don't want to go to these stores and picking up their medication. I'm talking about the maintenance medication and so on and so forth. They are visiting less doctors. But we see that based on the vaccination going forward, I hope people will come to normalcy and then start increasing going to these independent stores and picking up the medications and so on and so forth. But still, people are shaky. Some other states have not opened yet. As the states are -- keep opening up, we see more and more patients will visit these independents and then they start buying more on our platform.

Okay. On Bonum Health, I believe there were 3 chains, pharmaceutical chains where you've signed deals with. Can you tell -- in addition to Kinney, there are 2 other ones. Can you give us a sense of those 3? How many of independent pharmacies they represent and potential patients?

Yes. As of -- yes, those happened in this particular fourth quarter of this year. After the Kinney Drugs, we signed up with the SpartanNash and that's -- they have almost like around 160 to 190 retail stores. And Brookshire in Texas, they have around 150 to 175 stores. But the implementation will take a little longer, even though they've signed up the agreement. The creation of the brand packs and the information flow, getting into the retail store will take a quarter to 2 quarters before we see any results.

I'll ask one other question, then I'll get back in the queue and ask some more later. With -- for Trxade Prime, can you explain a little of what you were spending on in the quarter and how you're thinking about that going forward?

The primary reason we started Trxade Prime is some of these suppliers don't have minimums. And these pharmacies miss on those minimums, even though there is a greater deal. For example, a product is only $50, they have interest in that, but they did not meet the minimums of that particular supplier. So we are offering the suppliers to achieve that goal through our Trxade Prime model. So there are lower than the required minimums so that we can combine 2, 3 people's -- 2 to 3 suppliers' packages into 1 big package and send it to the pharmacy so that they can save on the transportation costs. At the same time, they will meet the minimums that are required by these suppliers. So it's an advantage to both suppliers as well as the actual pharmacies.

Our next question comes from the line of Gene Mannheimer with Colliers.

A couple of things. Just, Suren, if we could just kind of start with your number of pharmacy members. You indicated you added over 300 in the quarter to get you to 11,800. Yes, that number -- that total number seems to be the same as it was last quarter. And going back, I think, a year ago, there were closer to 12,000. So on the one hand, you're growing pharmacies, but it sure seems like there's some natural attrition in the business as well. Could you elaborate on that?

Sure, Gene. It's -- the pharmacy, and we call it 11,800 member -- registered members, I wouldn't segregate that as a pharmacies, the reason is we're trying to get into the new segment of the medical clinics, urgent cares and those other things. So the number, to answer your question, 11,800-plus, Howard, help me if I remember the exact number that I don't remember the last quarter, but there is -- because of the pandemic, some pharmacies may not have been still sustaining the business or they might have closed it down. The attrition we see on our platform is we're not losing that many pharmacy sales. We are adding.

Got you. Got you. Okay. That's good to hear. And in terms of just staying on the platform here, your revenue was down slightly sequentially, and I understand that may be due to the holidays and fewer business days. But what is your feeling about same-store growth? Are you -- is the amount of product being purchased per pharmacy delivering at the level that you've expected it to?

Definitely, we had an impact of pandemic because the less number of patients are visiting these stores and they're buying less. If you look at it in 2019 to 2020, we might have seen some spike. But the real figures will come into the '21 as the new stores will be opening up -- not new stores, the same stores are opening up from the pandemic, coming out of the pandemic. So it's clearly an oddball 2020, how the platform is growing and to tell you the actual growth. But we see when compared to the 2019 December, 1.7 million to 2020's 2 million, that's pure platform and Trxade Prime, and there is no PPE that much sales in there.

So we see some growth in there. But despite the holidays, despite less number of pharmacies opened up, we see the impact. But it's all about the per store purchase growth per month is the focus that we have, adding the new categories on our platform or helping them to get other health care services. Like for example, the Bonum Health, we'll be able to promote them with a patient. Next time you have a need, you don't need to come to our store. At least you can speak to the doctor. And at least we can -- our independent pharmacists can deliver the drugs to them. Those are the things that we try to have -- let these pharmacies buy more and more on our platform as we keep on adding more and more health services to that independent store.

Makes sense. So if we think about platform growth this year, it sounds like it's going to continue to grow. Is it fair to say that it will accelerate because we're reopening the economy, we're coming out of a pandemic, so we should probably see Trxade growth accelerate from where it was in 2020? And more broadly speaking, are you providing guidance for 2021?

We usually don't provide the guidance. That's because we are still at a growth phase because of the revenue drivers between the platform and Bonum Health and our MedCheks. We're at a growth point. So we're still not [including] point of taking that growth. So that's the reason we are unable to provide any guidance on that, but we still see the growth both on the platform side. We're seeing the retail store adoption of our Bonum Health and, of course, the MedCheks launch as the vaccinations that are going to open up. I know you've guys must have seen the article in Wall Street also today. The Biden administration is looking into getting the vaccination passports and stuff. So to answer your question, we're in a growth phase. We're still not able to provide any guidance on the revenue at this time.

Yes. No, that makes sense. And last question then from my end is on the PPE sales. It -- they fell considerably during the quarter, and I'm just wondering if that was the main reason for the inventory write-down. And is this $300,000 or so the right level to think about going forward?

Yes. Because we want to focus on the platform where we have the tech margins. We're aware of the onetime opportunity sale. I would say if the opportunity presents this year, we will pick it up, whether it's a vaccination sales or whatnot. But yes, our primary focus is on the technology platform, Bonum Health and MedCheks.

(Operator Instructions) Our next question comes from the line of Howard Halpern with Taglich Brothers.

In terms of the Trxade Prime, what were the costs that were incurred that lowered gross margin in the fourth quarter?

It's the product cost, right? It's a technology. We just booked our margin, the tech margin versus in the Trxade Prime, there is a cost of goods increase. Like there is a cost of goods because actually of the inventory that we'll be carrying on it. So that's the reason you see the cost of goods high there.

So if you exclude that and the inventory write-down, what were your gross margins approximately in the fourth quarter?

Howard, would you like to take that?

Yes. I will. Bear with me one second. So in the fourth quarter, without the inventory write-down, our gross margin was just a little over 61% versus 2019, which was 76.5%. And that's primarily because in 2019, we had no Trxade Prime sales. So we really had no cost of goods sold really hardly at all in 2019.

Okay. So going forward, that 60-plus area without any PPE sales, that should be a base that we should be looking at going forward for modeling purposes?

That's our goal, to maintain an average between 60% to 70% gross margin. But because, as I mentioned, we want to stick to our technology business, where we have a fair gross margins, and so we want to continue to monitor that and maintain that pattern.

Okay. And just so -- and I don't know if you have the exact number. But do you know what PPE sales were approximately in 2020, just so for comparison purposes since you're going to have really platform and technology growth going forward, so we can compare apples-to-apples going forward?

We don't give that detailed, Howard, level of financials. But we have a segmented-wise platform sales as well as Integra. Primarily, Integra is where you have both Trxade Prime and PPE in there. So we try to give as much as segmented, but we don't have detailed product-level breakup. It will take us a lot of time to delve into it.

Okay. So -- but when you were talking about in the very beginning, we should see sales growth, you're really talking about platform sales growth, not necessarily Integra sales growth, in 2021?

Yes. So our focus is Trxade platform, Trxade Prime and Bonum Health and MedCheks this year, yes.

Okay. And also, are you planning to launch the MedCheks product before the end of the year? And will it be more a domestic launch or a global launch?

We're looking at it in all angles. As we're talking to various potential customers like stadiums, like Madison Square Garden or we got other NCAA stadiums and travel, cruise lines and stuff, as we are speaking. And then we're trying to get a beta client sometime in the second quarter an official launch towards the summer as the travel more picks up due to the travel season this year.

Our next question go to the line of Allen Klee with Maxim Group.

Yes. For the passport product that you're developing, how -- if you were to sell that to -- just to an event that someone's going to the event, how do you envision that it would work that the app is given to someone who's showing up there? Is it -- or could you explain that?

Sure. That's great, Allen. For our consumers, it's free to use them. And we partner with the businesses to actually pay for our per scan basis. Our model is like, for example, your cost or a consumer will pay for the ticket price, that scanning costs will be included in it. But our -- we are thinking of anywhere between $0.01 to $0.10 depending on where -- whether it's an international or domestic, but it's per scan basis. Every scan -- time that they scan in and out so that the way you may ask why, when they're coming outside, we want to maintain the integrity that he did not pass that passport to somebody else to get in. So we want to make sure that per scan basis in and out that we manage, and we charge them on a per scan basis. And sometimes it may include it in the ticket prices, or sometimes it's up to the businesses, how they want to maintain, open up safe economy. But we will be charging the businesses, free to use by the consumers.

Okay. Great. And my last question, I don't think it's your -- one of the things you mentioned as a priority, but I still wanted to just know what your thoughts are. The Community Specialty Pharmacy segment, how do you -- what are your priorities or your goals for the segment for '21?

It's going to keep on growing a normal trend. And because as I mentioned in our previous calls, our CSP and Integra are as a research arm for our products to be beta tested or alpha tested before they go into the markets. I would love to use these if they're generating the revenues. But at the same time, they are not our main drivers. We use them as a research on -- for our product launches.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Suren Ajjarapu for closing remarks.

Thank you, operator. I'd also like to thank all of you for joining our earnings conference call. We look forward to continuing to update you on our ongoing progress and growth and speaking with you again on our first quarter 2021 call.

If we are unable to answer any of your questions, please reach out to our IR from MZ Group, who would be more than happy to assist. For any of you who may have joined the call in progress, remember, the replay of this call and webcast will be available for the next 30 days on the company's website under the NASDAQ: MEDS link, and that more information regarding the financial information disclosed on this call or webcast, including a reconciliation of non-GAAP financial statements, can be found in our press release, which we filed after close of the market today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your evening.