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Healthcare - Medical - Pharmaceuticals - NASDAQ - US
$ 23.8
-0.725 %
$ 1.08 B
Market Cap
-10.37
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2020 - Q3
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Operator

Good afternoon. Thank you for joining us today to discuss Conversion Labs Third Quarter Results Ended September 30, 2020. Joining us today is the Chief Executive Officer of Conversion Labs, Justin Schreiber; and company’s Chief Financial Officer, Juan Piñeiro. Following their remarks, we will open the call to your question.

Before we conclude today’s call, I will provide some important cautions regarding the forward-looking statements made by management during the call.

I would like to remind everyone that today’s call is being recorded and will be made available for telecom replay via instructions in today’s press release, which is available in the Investor Relations section of the company’s website. Now I would like to turn the call over to Conversion Labs’ CEO, Justin Schreiber. Please go ahead, sir..

Justin Schreiber Chairman & Chief Executive Officer

Thank you, Judy, and good afternoon, everyone. Thanks for joining us today. After the market closed, we reported another quarter of continued outperformance across our key financial and operational metrics. 2020 continues to be a transformational year for Conversion Labs.

Most of the growth is due to the launch of our direct-to-consumer telemedicine platform and the overall performance of our entire brand portfolio generating strong organic growth and an increase in our subscription revenue.

As we all know, the ongoing COVID-19 pandemic has accelerated everything e-commerce, for especially the adoption of telemedicine. This has greatly supported our aggressive growth strategy, focused on new patient acquisition and the continued optimization and build out of our technology platform. It’s important to emphasize the word platform.

What you own as a shareholder in Conversion Labs is part of a direct-to-consumer telemedicine platform that is invalidated by our success this year in men’s health and hair loss. It has tremendous potential across the entire healthcare product world.

The tailwinds created by this paradigm shift towards telehealth has clearly helped strengthen the demand for our brands, especially in the third quarter, resulting in record revenue of $11 million. This was up 21% from just the previous quarter, and up 252% compared to the same year ago quarter. This momentum has carried into the fourth quarter.

As you may have seen, October was an outstanding month for us with net revenues of $4.1 million, which is greater than the revenue we generated in Q4 of last year. Looking at October and the first couple of weeks of November, we’ve achieved an overall annualized revenue run rate of nearly $50 million.

This compares to $12.5 million for all of last year, a solid four-fold increase. This run rate is also up by more than $2.1 million from September, showing a continued rapid acceleration in the overall growth of the business.

We’re particularly excited about our annual recurring revenue, ARR, from subscriptions to our products and services, which we started to report in July. In the last month of the third quarter, that is September, it increased by 458% to $19.3 million compared to September of last year.

In October, this jumped by $2.8 million or 14% to $22.1 million and was up 514% versus October of 2019. As a result of our third quarter performance and the momentum we’re seeing across our brands, we believe we’re still on track to meet our full year revenue guidance.

Despite the strong growth we’ve seen over the past few quarters, I believe it’s only the first inning for Conversion Labs in telehealth. This is why as an early mover in telehealth, the following quarters will be pivotal in establishing our reputation and status as a leading provider in virtual healthcare.

Although we were seeing significant revenue growth across the business, it’s important to understand that we are continuing to make significant investments in our infrastructure in order to support the exponential growth we believe lies ahead for the business.

We’ve made big investments in our telehealth technology platform, our provider network, and on medical and compliance personnel as we continue to scale the business. One of our biggest areas of focus and investment has been our internal customer service and sales team.

Recently released space for a 400 seat call center in South Carolina and have already hired the first 40 representatives that have been doing great work, assisting our patients and customers for the past 60 days.

We also completed a $15 million financing led by institutional investors that will enable us to continue to build out of our telehealth platform and uplift to the NASDAQ capital market. I’ll discuss these in more in further detail later in the call.

I believe the milestones and the actions we accomplished in the third quarter will be invaluable, having set the foundation for more robust, even faster growth than we’ve seen before. With that, I’d like to turn the call over to Juan, our CFO, who would take us through the financial details for the third quarter.

Juan?.

Juan Piñeiro

Thank you, Justin, and good afternoon, everybody. As Justin mentioned, Q3 was another quarter of strong organic top line growth. Revenue in the third quarter of 2020 increased 252% for record $11 million, up from $3.1 million in the same year ago quarter.

Our PDFSimpli subsidiary contributed net sales of $1.6 million, up 136% from the same year ago quarter. Gross profit in the third quarter increased 238% to $8.3 million compared to $2.4 million in the same year ago quarter.

Gross profit as a percentage of revenue in the third quarter of 2020 decreased to 75.1% from 78.2% in the same year ago quarter due primarily to product mix, but still at the high level we’ve been expecting. Operating expense in the third quarter of 2020 was $28.8 million, up from $3.4 million in the same year ago quarter.

The increase was primarily due to increases of $8.5 million in selling and marketing expenses, as well as $16.7 million in general and administrative expenses. $120,000 in other operating expenses, $90,000 in customer service and $57,000 in development costs.

It’s important to note that the increase in general and administrative expenses was largely due to $16.3 million in stock-based compensation with the majority relating to restricted share insurance liability resulting from the attainment of performance threshold exceeded in the period.

This also contributed to the GAAP net loss attributable to common stockholders for the third quarter of $24.1 million or negative $1.64 per share. This compared to a net loss attributable to common stockholders of $944,000 or negative $0.09 per share in the third quarter of 2019.

The net loss for the third quarter of 2020 included other non-cash or financing-related charges, such as interest expense of $291,000 and combined amortization expenses of $630,000.

Adjusted EBITDA, a non-GAAP term, which factors out these items, totaled negative $3.4 million in the third quarter of 2020 compared to negative $248,000 in the same year ago quarter. Now turning to our first nine months 2020 financial summary.

Revenue in the first nine months of 2020 increased 186% to a record $24.4 million, up from $8.5 million in the same year ago period. PDFSimpli contributed net sales of $4.1 million, increasing 241% from the same year ago period. Gross profit in the first nine months increased 172% to $17.7 million compared to $6.5 million in the same year ago period.

Gross profit as a percentage of revenue in the first nine months of 2020 decreased to 72.6% from 76.4% in the same year ago period; again, due primarily to our changed product mix, but still at the high level we’ve been expecting.

The more costly product mix reflects higher product-based costs that we believe are due to the impact of COVID-19 related distributions to our product supply chain, which involved increased costs for procuring product input. We expect this to be resolved over time with an expected return or our historically higher margins.

Operating expense in the first nine months of 2020 totaled $43.2 million, up from $8.9 million in the same year ago quarter.

The increase was primarily due to an increase of $16.1 million of selling and marketing expenses, as well as $18.1 million in general and administrative expenses, $80,000 in customer service expenses and $131,000 in development costs. The increase was primarily offset by a decrease of $36,000 in other operating expenses.

General and administrative expenses for the nine months also included the aforementioned stock-based compensation.

Our GAAP net loss attributable to common stockholders for the first nine months of 2020 was $29.9 million or negative $2.38 per share as compared to net loss attributable to common stockholders of $2.4 million or negative $0.25 per share in the first nine months of 2019.

The net loss for the first nine months of 2020 also included certain non-cash or financing-related charges such as interest expense of $1.3 million, amortization expenses of $93,000, financing transactions expense of $62,000, acceleration of debt discount of $500,000, inventory valuation adjustment of $769,000, and stock-based compensation expense amounting to $16.9 million.

Adjusted EBITDA, a non-GAAP term, totaled a loss of $5.3 million in the first nine months of 2020 compared to a loss of $787,000 in the same year ago nine months period. Turning to our balance sheet, cash totaled $917,000 at September 30, 2020, as compared to $336,000 at June 30, 2020.

Subsequent from the end of the quarter, we completed a private placement equity offering with institutional investors, which generated net proceeds of $13.2 million. So as of today, our cash balance totals approximately $11.7 million.

We believe our current cash position and available funds provide the company with ample liquidity committing our current needs and plans for growth. This wraps up our financial results. And I’d like to turn now the call back over to Justin. Thank you..

Justin Schreiber Chairman & Chief Executive Officer

Thanks Juan. The momentum that we’ve seen throughout the year continued into the third quarter and continued into the final quarter with November on track to be our strongest month yet. Looking ahead, the telehealth opportunity for Conversion Labs is truly incredible.

More importantly because of the increased access to healthcare enabled by telehealth companies like Conversion Labs, millions of Americans will gain access to important medical treatment that they otherwise might not have had access to.

It’s very fulfilling for our whole team to be creating and delivering products and services that can make such a big difference in the lives of our customers and all the while creating tremendous value for our investors who have helped make this all happen.

As an early mover in telehealth it’s paramount that we continue to make intelligent investments in our infrastructure to support our accelerating growth in this rapidly growing marketplace.

This includes big investments in our telehealth technology platform, our provider networks and our medical, financial operations and compliance personnel that are critical as we scale the business. One of our biggest areas of focus in investment has been our internal customer service and sales team.

In October, we leased space for a 400 seat call center in South Carolina and hired our first 40 customer representative. They’ve been doing phenomenal work, assisting our patients and customers over the last 60 days. And the positive feedback we’ve been receiving has been tremendous.

I believe the goals and milestones we accomplished in the third quarter will prove to be invaluable going forward, setting a stronger foundation for more robust, even faster growth we’ve seen before.

To support these investments in our growth, we recently completed a $15 million financing, led by a select group of institutional investors who believe in our long-term outlook. BTIG, a highly regarded investment bank serves as our exclusive placement agent.

The funding enables us to continue the build out of our telehealth platform and our plan to uplift to the NASDAQ capital market. Last week, we also engaged B. Riley, another prominent investment bank as a financial advisor to the company.

We believe that support of both banks and hopefully coverage from their research analysts will be very valuable as we continue to increase the awareness of our story among the institutional investors and build a world-class telemedicine business.

Prior to the recent $13.2 million raise, we attracted a strategic $3.5 million from a select group of private investors and family offices, which included business and finance thought leaders, David Blitzer from Blackstone and Wes Edens from Fortress. As important as this funding is the quality team members we have and continue to attract.

We recently appointed two extremely impressive members to our Board of Directors, Roberto Simon, and Dr. Connie Mariano. Roberto currently serves as the CFO of WEX, a nearly $8 billion FinTech services provider traded on the New York stock exchange.

He previously served as the CFO of Revlon, overseeing its Global Finance and IP Operations has incurred nearly 2 billion in annual sales. Given his extra ordinary financial credentials, Roberto has been appointed Chair of our Audit Committee, which is also another step in our preparation for our NASDAQ listing. Dr.

Connie Mariano, as some of you may know, has served our country as a U.S. Navy Rear Admiral and as the White House physician for three sitting presidents. Needless to say, she’s a huge pioneer in breaking barriers and an incredible presence and leader in healthcare.

We’re thrilled to benefit from her knowledge and guidance as we continue to develop our presence in telehealth. With these appointments, our board now has eight members with five serving as Independent Directors. Following our recent 5-to-1reverse split and meets the final qualifications.

We’ve submitted our application to uplift to the NASDAQ capital market. We now meet all the listing requirements for NASDAQ and based on our conversations from a few days ago, we believe that we are within one to two weeks of a listing. We believe that NASDAQ listing can be transformational for all shareholders.

So we’ll open the doors wider to institutional investors and especially for retail, where we have a very relatable and compelling investment story for the individual investor. Altogether, we expect NASDAQ to dramatically improve liquidity and trade execution for our investors.

I’d like to make a final point on our financing strategy as it relates to future growth. We do not believe that we will need to raise equity to support our growth following this financing. I can’t say that we will never sell equity again, as this might make sense for our shareholders if our share price were to appreciate significantly.

Our plan, which we’ve already begun to execute on, is to use non-dilutive sources of capital to finance our patient and customer acquisition efforts. And we believe that given our proven unit economics and relatively quick cash-on-cash return, this is very doable. Everyone at Conversion Labs is exciting about this upcoming phase for our company.

If you’ve been following us closely, you’ll know that we grew our e-commerce and now telemedicine business from basically zero to now $50 million annual revenue run rate with less than $15 million in total invested capital. This is because we treat every dollar invested in Conversion Labs like it was our own.

Although we’re not perfect and therefore can occasionally make mistakes. We have been pretty good at investing our capital wisely in areas that we believe will deliver great returns to our shareholders. Our balance sheet is now stronger than it’s ever been before.

And this will enable us to scale many of our planned campaigns, where we have proven and very attractive unit economics. It also gives us the ability to test and scale new traffic sources, both online and offline. In the past quarter, we launched Rex MD our streaming TV and saw a very promising results.

This week, we are launching additional creative for Rex MD on 16 national networks and we are extremely optimistic about this traffic for us. We think that there is a big offline opportunity for our telemedicine brands, and we plan to exploit this over the coming quarters.

We expect our call center operation in South Carolina to be a major growth driver for Conversion Labs going forward, within just the first 60 days of operations is dramatically reducing our customer acquisition costs.

We believe that also will dramatically improve the experience of our patients, which will have a positive impact on customer lifetime value.

We know that in order to build a leading telehealth company which we aspire to do, we have to deliver not only the highest quality of care, but also the best patient experience with our company, healthcare providers and customer service professionals.

Our new call center will be an important part of this effort, tapping the power of social media will also be key. We are in late stage discussions with certain key female influencers that we believe will be a major catalyst for growth in our Shapiro MD telemedicine offering.

This will dovetail nicely with the licensing agreement we attained for Restorsea’s leading medical grade skincare technology platform. We’re extremely excited to leverage their platform for the upcoming launch of our new teledermatology brand Nava MD that we announced last month.

Restorsea’s IP and clinical results with a combination of over $50 million in R&D investment has produced 35 patents and broad industry and medical claims. The clinical results have been published in peer-reviewed journals, such as Journal of Drugs in Dermatology and The Journal of Clinical and Aesthetic Dermatology.

Nava MD will be positioned as an online skincare telehealth brand that offers prescription-grade chart teledermatology products to patients in all 50 states. Teledermatology is one of the fastest growing segments of this already quickly growing telehealth market.

Fortune Business Insights thinks this market segment alone will be growing at a 24% compounded annual growth rate and hit 45 billion by 2027. We will also soon formally launch new indications under our Rex MD brand. We expect this to cement our presence as a leader in men’s telehealth.

Rex MD’s expanding capabilities will be enabled by our proprietary telehealth technology platform, Veritas MD, which is also nearing its official launch. Looking ahead, we see our Conversion Labs, telemedicine platform continuing to drive growth and opportunities and especially greater shareholder value over the months and years to come.

We remain committed to the opportunities that lie ahead and we continue to develop and improve upon the customer healthcare experience. Once again, thank you for your continued interest in Conversion Labs.

And with that, I’d like to open the call to your questions, Julie?.

Operator

Thank you. [Operator Instructions] With your first from Andrew DeSilva with B. Riley Securities..

Andrew DeSilva

Good afternoon. Thank you very much for taking my questions. Congrats on all the progress you’d make. I’m just hoping you could discuss stickiness of subscriptions and what kind of visibility that’s giving you right now? Also as it relates to the subscription, you noted all brands increased 30% quarter-over-quarter.

Could you give a insight into how much of that growth is tied to cross-pollinization versus new Conversion Labs subscribers?.

Justin Schreiber Chairman & Chief Executive Officer

Sure. Thanks, Andy. Look, we haven’t formally put out retention numbers for our telemedicine business. So it’s tough to really say in a quantifiable way what the sickness is.

But that’s a number that we plan to really start talking about, I think, in the first quarter, but we’ve seen – as we’ve communicated over and over to all of our shareholders, we’ve seen extremely strong unit economics with a relatively quick cash on cash return.

Obviously, it’s a new business, so it’s a little bit – we have limited data on the kind of long-term lifetime value of these customers, but we’ll be talking more about that in 2021.

I think that regarding to your second question, we don’t see at the moment a lot of cross-pollination between, for instance, Shapiro and Rex, and that’s more of an infrastructure thing.

And one thing, Andy that we’re really going to start to see how – we think we’ll start to see how the call center and we already have a little bit is more of that happening. We’re investing a lot in training these reps to really help our patients.

And also as we launched Veritas, that’s another interesting thing, right? As we bring on our – as we bring on – as we bring physicians onto our platform with the launch of Veritas, we’ll have more ability to – the physicians will have more of an ability to talk about the different products across our portfolio..

Andrew DeSilva

Useful color. Thank you.

And the last question for me is just as far as demographics go; can you give a little sense of what the age of that total pool is right now? And where you’re finding the most success? Also just curious, how that others with some of the new offerings you’re expecting to add on in the coming quarters?.

Justin Schreiber Chairman & Chief Executive Officer

Sure. Yes, I’m going to let Stefan Galluppi answer that, who’s our Chief Marketing Officer.

Stefan, do you want to talk a little bit about the demographics we’re seeing?.

Stefan Galluppi Chief Innovation Officer

Yes, absolutely. For RexMD, the average age of our customers for the ED offer is 65 years old. So we’re a bit on the high side.

And then what was the second question?.

Andrew DeSilva

Yes.

As far as the age demographic goes, how do you feel that bodes for you going forward as you begin to add on more offerings? Is that 65-year-old demographic ideal at this point? Or do you need to move down to younger age groups?.

Justin Schreiber Chairman & Chief Executive Officer

No. We think it fits perfectly in line with the rollout of all the additional categories that we’re entering into..

Andrew DeSilva

Okay. Perfect. Thank you very much. Best of luck closing out 2020..

Justin Schreiber Chairman & Chief Executive Officer

Thanks, Andrew..

Operator

We’ll hear next from Corey Deutsch with Paradigm Opportunities, LLC..

Corey Deutsch

Hey, Justin, Juan, and someone in the broader Conversion Labs team, first and foremost, I wanted to congratulate you guys on a truly phenomenal quarter..

Justin Schreiber Chairman & Chief Executive Officer

Thanks, Corey..

Corey Deutsch

Yes.

And then second, obviously, this is not something that you guys are forecasting in our modeling, but with the recent upticks in COVID, and with the ongoing conversation about a potential second shutdown in the U.S.; how do you see the opportunity there in the sense of the expedited growth that may cause for the company?.

Justin Schreiber Chairman & Chief Executive Officer

Yes, that’s a great question. I think a lot of people – we’ve gotten some phone calls, right, with the Pfizer and Moderna vaccine announcements. And people tend to think that telemedicine is kind of a COVID play and that these vaccines are negative for the business.

But, first of all, I disagree with that entirely, right, telemedicine is here to stay and COVID has accelerated this team and people are comfortable with that, it’s not going anywhere, it’s only going to grow. But, yes, as far as like – as far as the next couple of months ago, there’s without a doubt lockdowns drive e-commerce.

So certainly like we saw early in the year with both our telemedicine portfolio and our over-the-counter and our SaaS portfolio like we – no question about it, Corey, that is if we see a lockdown – it will happen like we’re expecting over the winter months here, it’s a big growth driver for us. So how big, I’m not sure.

And obviously, lockdown plus stimulus it’s an even bigger growth driver. So, but those two things although sad overall for the economy and for the population are our big growth drivers for Conversion Labs..

Corey Deutsch

Yes. Thanks Justin. Again, congratulations on the quarter and regardless of what happens in the broader, how you guys are positioning the company for growth and winning going forward is very impressive. So great job guys..

Justin Schreiber Chairman & Chief Executive Officer

Thank you..

Juan Piñeiro

Thank you..

Operator

[Operator Instructions] Next from John DeMaio with Newbridge Securities..

John DeMaio

Hey, you mentioned about the uplifting to the NASDAQ.

You said one or two weeks, can you be a little bit more specific or you just don’t know?.

Justin Schreiber Chairman & Chief Executive Officer

We just don’t know, but we had a great – our council had a terrific call with the NASDAQ last week. We believe we’ve satisfied all of their requests. So we’re hopeful to get the green light any day, but they haven’t given us – they just haven’t given us the green light yet formally, there’s still just a couple of process that’s relatively quick.

So we think it’s imminent..

John DeMaio

Okay. Thank you..

Operator

At this time, I’d like to turn things back to Justin Schreiber for any closing remarks..

Justin Schreiber Chairman & Chief Executive Officer

Thanks everyone for attending our call today. Thanks especially to our shareholders who have joined us during the most exciting time in our company’s history and everybody be well and stay happy. Julie, go ahead and wrap up the call..

Operator

Thank you ladies and gentlemen. Now before we conclude today’s call, I would like to provide the company’s safe harbor statements that include important cautions regarding forward-looking statements made during today’s call.

The information that the company has provided in this conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. And section 21E of the Securities Exchange Act of 1934 as amended regarding among other things, the company’s plans, strategies and prospects both business and financial.

Although the company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions.

Many of the forward-looking statements made during this conference call maybe identified by the use of forward-looking words such as believe, expect, anticipate, should, plan, will, may, intend, estimated and potential, among others.

Important factors that could cause actual results to differ materially from the forward-looking statements made during this conference call includes market conditions and those set forth in reports or documents that the company files from time-to-time with the United States Securities and Exchange Commission.

All forward-looking statements attributable to Conversion Labs or a person acting on its behalf are expressly qualified entirely by this cautionary language. Before we end today’s conference call, I would like to remind everyone that this call will be available for replay starting later this evening and running through November 30.

Please refer to today’s earnings release for dial-in replay instructions available via the company’s website at www.conversionlabs.com. Thank you for joining us today. This concludes today’s conference call. You may now disconnect..

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