MedAvail Holdings, Inc. (NASDAQ:MDVL) Q2 2022 Earnings Conference Call August 11, 2022 4:30 PM ET
Company Participants
Caroline Paul – Investor Relations
Mark Doerr – Chief Executive Officer
Ramona Seabaugh – Chief Financial Officer
Conference Call Participants
Charles Rhyee – Cowen
Brooks O’Neil – Lake Street Capital Markets
Operator
Good afternoon, and thank you for attending today’s MedAvail Second Quarter 2022 Earnings Call. My name is Austin, and I will be your operator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]
I would now like to pass the conference over to our host, Caroline Paul, Investor Relations with MedAvail. Caroline, you may begin.
Caroline Paul
Thank you, and thank you all for participating in today’s call. Joining me are Mark Doerr, Chief Executive Officer; and Ramona Seabaugh, Chief Financial Officer. Earlier today, MedAvail Holdings referred to as MedAvail or the company, released financial results for the second quarter ended June 30, 2022. A copy of the press release is available on the company’s website.
Before we begin, I’d like to remind you that management will make statements during this call, including statements or responses in addressing your questions that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Any statements contained in this call are in response to your questions that relate to expectations or predictions of future events, results or performance or similar statements are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19, the ongoing military action launched by Russian forces in Ukraine or the impacts of other global economic conditions, including any economic effects stemming from adverse geopolitical events and economic downturn and inflation or interest rates on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion and guidance for revenue, gross margin and operating expenses in 2022 are based upon our current estimates and various assumptions.
Any forward-looking statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements and do not guarantee future performance. Accordingly, you should not place undue reliance on these statements and should not rely on them in making an investment decision without considering the risks associated with such statements.
For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section in our most recent periodic reports, including our Annual Report on Form 10-K and our quarterly report on Form 10-Q filed with the Securities and Exchange Commission.
This conference call contains time sensitive information, and is accurate only as of the live broadcast today, August 11, 2022. MedAvail disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise.
And with that, I will turn the call over to Mark.
Mark Doerr
Thank you, Caroline, and good afternoon, everyone. In the second quarter, we continue to execute against our strategic priorities of increasing dispensing MedCenters and utilization, expanding Pharmacy Technology and reducing cost across the enterprise. Net revenue in the second quarter was $11.2 million, representing over double the revenue in the same period of the prior year.
Retail Pharmacy Services generated $10.6 million in revenue for the second quarter of 2022, representing 137% growth over the same period in 2021, while Pharmacy Technology revenues were essentially flat at approximately $500,000 year-over-year. Pharmacy Technology revenue can be variable from quarter-to-quarter due large part to customer purchasing patterns associated with enterprise level capital sales.
As a result of our progress, year-to-date and visibility into the second half of the year, we are introducing net revenue guidance of at least $42 million for the full year 2022. We are also raising our projection of 25 to 30 net new dispensing units for the full year 2022 to 30 to 35 net new dispensing units.
Now, I’d like to share a few highlights from the quarter that will illustrate the effectiveness of our strategic initiatives. And then Ramona will provide more detail on our financial results and outlook.
Turning to Retail Pharmacy Services and SpotRx. We ended the second quarter with 91 dispensing units, representing a 3% increase from 88 as of March 31, 2022 and a year-to-date increase of 34%. Net cumulative deployments at the end of Q2 2022 were 98 units. We continue to drive our corporate strategy to leverage our expansion with current clinic partners and seek to broaden our footprint as they continue to build their networks.
We work purposefully with each of our partners on selecting sites we view as being highly productive in order to drive profitable growth. As each site ramps and matures, we routinely review MedCenter data with the goal to optimize dispensing and increase productivity. We continue to balance expanding new clinic sites, which driving organic performance of existing MedCenters, which is a cornerstone of our strategy to leverage our hub and spoke pharmacy model.
In Central Florida, we recently opened our Tampa pharmacy hub. We look forward to leveraging our new hub pharmacy to address the continued demand we are seeing from our key clinic partners in the region, Cano Health and the IMA Medical Group.
Additionally, we are pleased to announce a new partnership with AdventHealth. AdventHealth has agreed to deploy SpotRx at two clinics in Tampa initially with opportunity for additional sites as we seek to prove our value proposition, driving patient and provider satisfaction, as well as positively impacting medication adherence. We are excited to be partnering with AdventHealth, a connected system with 50 hospital campuses and hundreds of care sites.
In Arizona, we are pleased to be growing with our partners as they continue to build their networks. One of our key partners has been expanding primarily through a de novo strategy in Arizona, which has recently started to drive utilization through both our Phoenix and Tucson hubs. We would reiterate that ramping of revenue is anticipated to be longer in de novo site, as partners clinic are building their patient panels.
Additionally, we’ve been working with HonorHealth since summer 2021 in the Phoenix market and we have been seeing momentum more recently as a result of our efforts to strengthen our value proposition to our existing partners.
We are encouraged by this continued momentum with each of our partners that leverages our current hub pharmacy infrastructure. We anticipate most of these sites will be dispensing by late this year and would note that over 10 additional sites are currently contracted for SpotRx, but are not yet deployed.
Turning to pharmacy technology, we’re encouraged by our recent progress on expanding the breadth of our pharmacy technology. As a reminder, we sell our hardware and importantly license our software and systems and provide maintenance to our platform, which is intended to create highly predictable and profitable recurring revenue.
We are happy to announce that during the second quarter, University of Florida Health implemented three MedAvail MedCenters in Gainesville, Florida. The three MedCenters are serving patients admitted to the emergency departments of, the University of Florida Health Shands Cancer Hospital, University of Florida Health Shands Emergency Center, Springhill, and the University of Florida Health Emergency Center of Kanapaha.
While timelines can vary from partner to partner, we were pleased to have move from contract signing to the implementation of the three MedCenters in approximately four months. Finally, as part of our aiming to expand gross margins and reduce costs across the enterprise, we are using data more effectively to identify potential cost savings opportunities.
During the second quarter, we were able to achieve 8.2% gross margins, which significantly improved on a sequential basis from 5.5% during the first quarter. Our team’s focus on streamlining prescription delivery was a core contributor to margin expansion, and we anticipate the improvements to continue into the back half of 2022.
Additionally, during the first half of this year, we increased efficiency in our patient contact center by reducing our reliance on contractors and in data management and research and development areas by leveraging existing technology and internal resources. We expect these changes, which began in the second quarter and will continue through the remainder of the year to result in projected savings of 20% over the fourth quarter 2021 cash burn rate.
In summary, we believe we are delivering growth and executing on each of the strategic priorities we have previously outlined. I am optimistic about our opportunities to drive utilization and expansion while continuing to reduce expenses. We remain strongly committed to delivering long-term profitable growth and maximizing value for our shareholders.
With that, I’ll now turn the call over to Ramona to provide a review of our second quarter financial results.
Ramona Seabaugh
Thank you, Mark. Turning to our second quarter results. Net revenue for the three months ended June 30, 2022 was $11.2 million, a 122% increase from $5 million in the same period of the prior year. This was aided by a 136% increase in retail pharmacy services revenue over the same period in 2021.
As we have indicated in past, pharmacy technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise level capital sales. As Mark mentioned, we ended Q2 2022 with 91 net dispensing units, a 3% increase from 88 at the end of Q1 2022. Net cumulative deployments at the end of Q2 2022 was 98.
As a reminder, we define net dispensing units as sites that are live, meaning that such sites have payer network acceptance, pharmacy board approvals and train clinical staff or clinical account managers. Gross margin for the second quarter 2022 was 8.2% as compared to 3.4% in the second quarter of 2021.
Consolidated margins in the second quarter 2021 benefited from the higher contribution from the pharmacy technology segment. Our pharmacy segment gross margin improved from 1.3% in the second quarter of 2021 to 6.7% in the second quarter of 2022. Total operating expenses for the second quarter of 2022 were $12.3 million, a 16% increase from $10.6 million in the second quarter of 2021.
Our pharmacy operations and selling and marketing costs increased as a direct result of our growing pharmacy and MedCenter portfolio. General and administrative costs increased due to higher equity compensation and executive severance costs in the second quarter of 2022. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation and exclude non-recurring expenses and other income to net loss is a loss of $10.3 million in the second quarter of 2022 compared to a loss of $9.7 million in the second quarter of 2021 reflecting growth in new deployments.
We ended the second quarter of 2022 with $29.2 million of cash and cash equivalent as a result of our private placement completed in April. The second closing of our placement occurred on July 1, 2022 and yielded $10 million in additional gross proceeds. We continue to believe that we have sufficient capital to fund our current operational needs.
As of the second quarter, we now have approximately 70.6 million shares of common stock outstanding and we expect to have a weighted average share count for the third quarter of approximately 80 million shares. Regarding our outlook, as Mark indicated, we are introducing full year 2022 net revenue guidance of at least $42 million.
Additionally, as we are already ahead of our initial expectation of 25 to 30 net dispensing units in 2022, we are increasing this range to 30 to 35 net dispensing units. Regarding our growth margin outlook, we remain focused on improving our adjusted gross margins and operating costs throughout the balance of 2022. Our target of 8% to 9% gross margins within the next four quarters remains on track as we have made significant progress already. Long-term, we continue to target gross margins in the mid-teens.
And with that, I’ll turn the call back over to Mark for closing comments.
Mark Doerr
Thank you, Ramona. Thank you for joining the call today. We look forward to updating you on our progress in the coming months.
With that, we will now open it up to questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is with Charles Rhyee from Cowen. Charles, your line is open.
Charles Rhyee
Thanks for taking the questions and then congrats on the quarter, Mark and Ramona. Mark, I kind of missed a little bit at the beginning, you mentioned AdventHealth, can you just go over what you said again the phone was cutting in and out a little bit.
Mark Doerr
Yes, Charles. I think in that part, I was talking about we opened up our Tampa hub pharmacy, right? We had one pharmacy in Orlando. We opened up the Tampa pharmacy driven by current clients like Cano Health and IMA Group and sites being over there.
And then we also signed a new agreement with AdventHealth. We put a master service agreement in place. We also signed to implement two clinics with them, one of which is live already. And they’re a very large health system there. They’ve got about 50 care pavilions and 100 of sites care. So represents another scalable partner for us in the Tampa, Orlando area.
Charles Rhyee
Got it. And with Advent, is there an opportunity also to put the MedCenter into their hospitals as well? Or is this really just to be used in the clinics right now?
Mark Doerr
Right now, we’re starting with the clinics. I think we’ve really got a nice partnership going there and it could lead to other opportunities within the organization, but we’re going to focus on the SpotRx clinic implementations at this point.
Charles Rhyee
Okay. That makes sense. Hey, so obviously, you introduced guidance here greater at least $42 million in revenue. If we just take the run rate and also you increase the dispensing unit guide, if we take the run rate just here on the second quarter, that would be about $42 million. Anything to think about that, because you certainly outperformed, I think here on the second quarter you’re increasing the number of sites that you have. I would imagine the productivity of the sites are improving as the early ones are ramping up. Anything that you can kind of provide why that the guide might be set here at $42 million.
Mark Doerr
Yes. I think, we feel confident in the $42 million, right on the run rate, we continue to focus on the organic productivity and the network with a balance on the new site. And I believe we’re going to continue to get that productivity up, but continuing to learn about how we do that.
Charles Rhyee
Okay. And then on the margins, obviously I think in previous quarters you guys had talked about kind of getting to the high single digits by the year end. It looks like we’ve obviously gotten there a little bit faster. Where should – where would you want to see gross margins probably by year end? Can we be breaking double digits here by year end? Or is that something that you’d see further out.
Mark Doerr
Charles, I think what we’ve done in large part is work inside of the current agreements that we have to maximize the gross margin, always looking for more opportunity to grow faster. We do sort of limited a little bit by being able to renegotiate some contracts and expand those margins. So we’re going to stick with that guide to hit the 8% to the 9% by the end of the year and certainly would like to accelerate it if possible, but I think we’re going to stick with the guidance right now. And Ramona, I don’t know if you anything you’d like to point.
Ramona Seabaugh
No, I concur with everything you just said.
Charles Rhyee
All right. Great. And my last question is on the – sort of the efforts to reduce cash burn. Can you remind us what the cash burn in the fourth quarter of last year was?
Mark Doerr
Ramona, do you want to that?
Ramona Seabaugh
Yes. The cash burn cash burn in Q4 was about $15 million, I believe. And we expect, as we said to at least reduce that by 20% by Q4 this year and that remains on track.
Charles Rhyee
And then is it fair to think that we would expect, that cash burn to continue to decline next year, largely as revenues improve or would you expect more cost saving initiatives of flow into next year as well?
Ramona Seabaugh
I think both. I think we will continue to focus on improving gross margin, improving our operating costs, expanding our revenue and the margin that brings. So both of those contribute then to the reduction of the cash burn.
Charles Rhyee
Got it. And sorry, one last one for me. The increase in the dispensing unit guide, what’s driving that? Is that just existing clients accelerating their deployment plans. Or is it conversion of your pipeline signing new clients like an Advent here?
Mark Doerr
Yes, Charles. I similarly to what Ramona said, I would say it’s both from a standpoint of, we’ve got really strong demand from our qualified partners that it’s scalable. And we talked about sort of the growth in Arizona being a driver there. And then we’re also really happy with the pipeline that we’re seeing and being able to announce the AdventHealth. We believe there’s other new partners that we can bring on. That’s helping drive our guidance up on the net new dispensing units to 30 to 35.
Charles Rhyee
Great. I appreciate all the comments. Congrats, again.
Mark Doerr
Thanks for the questions.
Operator
Our next question is with Brooks O’Neil from Lake Street Capital Markets. Brooks, your line is open.
Brooks O’Neil
Thank you very much. Good afternoon. I have a few questions too. I guess I’d like to start off, maybe you could just give us a little bit of color of what your large clients are seeing in terms of, are they seeing strong, I don’t know, you might call it same unit growth. Just whatever you could say about the experience your existing large clients are having would be great.
Mark Doerr
Yes. Brooks, good question. I would say, we’re – we’ve seen the demand, I think what I would call the patient visits return mostly to the pre-COVID sort of demand and that’s happened over the first half of this year. So I think it’s relatively back to what I call pre-COVID. I think it remains strong and from what we’re seeing in our patient conversion, in our prescription rates, it’s certainly playing out in the metrics and what you’re seeing in our revenue growth.
Brooks O’Neil
Yes. Great. And would you say the trend of home delivery with the return to normal in the clinics? Is that fallen off or is there still pretty good demand for home delivery as well?
Mark Doerr
Yes. I mean, I think the demand for convenience is still there. We are seeing, and it’s one of our focuses is to optimize MedCenter dispensing and we are seeing an improvement there. And we talk about productivity at the MedCenters. We haven’t released any stats on it, but we continue to focus on that as a clear opportunity and that’s part of the way that we’re expanding the gross margin. So that’s a contributor as we use the MedCenter more than home delivery to see that margin expansion.
Brooks O’Neil
Yes. Okay, good. And then you talked quite a bit about Florida and Arizona. Are – would you say you’re having success in Texas and California and Michigan as well?
Mark Doerr
Yes. So we’re not operating in Texas. It is a target state for us. As we stated before Illinois and Texas have favorable regulations. And we do have demand from current customers potentially open there. When I think about the other two markets that we didn’t mention, Michigan and California, we’re seeing a demand in both of those markets. Michigan, we are working under a board of pharmacy waiver. So there are some limitations on that waiver right now. We are actively working with the board to promulgate rules around it, but we are seeing increase in utilization in Michigan, in the sites. And then California, we continue to focus on that area. We’ve got three hub pharmacies and we continue to build the business there organically with partners that are expanding.
Brooks O’Neil
Great. And I understand that pharmacy tech business is lumpy, but could you comment at all about the pipeline you’re seeing in that side of things? Is there still interest in that opportunity?
Mark Doerr
Yes. We’ve talked a – in previous calls around really the Epic integration and we’re…
Brooks O’Neil
Yes.
Mark Doerr
In their App Orchard, that integration now we’re finishing off what we call the complete integration with our first partner still intend to have that done by the end of the year. That type of integration as well as the integration with McKesson is helping us build a pipeline. Like we said, we intend that technology sales will be flat this year for really building a pipeline for 2023 new sales team in place.
And we are seeing increased inbound interest in our technology. And again, somewhat because it addresses some of the challenges that are out there today with the labor shortage of Pharmacy Tech, as well as the increased wages. The MedCenter represents an economical way of increasing sort of patient access and satisfaction without needing to put additional labor.
Brooks O’Neil
That’s great. Well, thanks for all the color and congratulations on the progress you’re making.
Mark Doerr
Thanks, Brooks. Really appreciate it.
Ramona Seabaugh
Thanks, Brooks.
Operator
At this time, there are no further questions. [Operator Instructions] There are no further questions. So I’d like to pass the conference back to the management team for any closing remarks.
Mark Doerr
Just want to thank everyone for joining us this evening, and I want you to take care. Thank you.
Operator
That concludes today’s call. Thank you for your participation. You may now disconnect your lines.
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