Trxade Group Inc. (MEDS) Q2 2020 Earnings Call Transcript

Trxade Group Inc.  (NASDAQ: MEDS) Q2 2020 earnings call dated July 27, 2020

Corporate Participants:

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Howard Doss — Chief Financial Officer

Analysts:

Eugene Mannheimer — Colliers Securities — Analyst

Howard Halpern — Taglich Brothers — Analyst

Carlo Corzine — Dawson James Securities — Analyst

Andy Gold — Gold Capital — Analyst

[irp posts=”67236″]

Presentation:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Trxade Group’s Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 would 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 — 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.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

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 created 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 maintained a $78 billion in annual purchasing power and proceeded to large Trxade.

We designed, owned and operated a business-to-business web-based market platform, bringing together the nation’s independent pharmacies that they could adhere national pharmaceutical suppliers to provide a uniquely efficient, transparent buying and selling process. Our platform lets these independents know that they’re 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 leave 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 percent of transaction fees 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 Trxade platform are two-fold; 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 healthcare service to thousands of customers across the United States. We recently appointed senior healthcare executive, Ashton Maaraba as a 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 healthcare products to their workers, as well as to individuals seeking a low-cost convenient way to speak with a doctor.

On the capital markets front, we have made exciting progress over the last several months, fortifying our balance sheet, uplisting to NASDAQ, being added to the 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 going further, I would like Howard Doss, the CFO, to walk through some key financial highlights from the second quarter of 2020.

Howard Doss — Chief Financial Officer

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 non-cash 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 the 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.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

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 continue to meet or exceed internal projections, while regularly attaining key milestone achievements. As a 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 session. Operator, take it over.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Gene Mannheimer of Colliers Securities. Please proceed with your question.

Eugene Mannheimer — Colliers Securities — Analyst

Thanks very much. Hey, good afternoon, guys. And congrats on a spectacular quarter on your first earnings call.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Thank you. He said that.

Eugene Mannheimer — Colliers Securities — Analyst

So — 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 a revenue per store, compared to the first quarter?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Sure. I’ll take the 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, how to open slowly and steadily, they would think it’s 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 the percentage calculation, Howard, if you want to take that, please go ahead.

Howard Doss — Chief Financial Officer

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

Eugene Mannheimer — Colliers Securities — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Howard, do you want to take that?

Howard Doss — Chief Financial Officer

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

Eugene Mannheimer — Colliers Securities — Analyst

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

Howard Doss — Chief Financial Officer

Correct.

Eugene Mannheimer — Colliers Securities — Analyst

Yeah. Okay. All right. What do you think — what are some of the strategies or opportunities you see to increase higher revenue per pharmacy?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

As far as whether they’re buying from us, because if you look at the brand drugs, Eugene, the percentage is always less, like you have a wholesale acquisition cost plus or minus pricing there. And most of the margins, the pharmacies kept 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 drug side. So we continue to grow on the branded side — sorry, on the generic 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.

Eugene Mannheimer — Colliers Securities — Analyst

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 an 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?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

You’re absolutely correct, but nobody understands where this PPE opportunity is there. We definitely took the opportunity in the second quarter. How sustainable it is? And nobody knows, but we continue to grow the platform and see any other opportunities on the PPE side to help our pharmacies, because if you look at April, all the pharmacies were stacked up to sanitizers and there’s 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 jump on to the PPE equipment, like masks and so on, 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 see — really, I don’t know what is the percent of the growth will be on PPE side.

Eugene Mannheimer — Colliers Securities — Analyst

Sure. That’s going to be difficult to forecast. And tell me, you mentioned — well, I noticed that you signed some law firm during the quarter, so who is the customer here? Is it the pharmacy, is it the employer or are you targeting both?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Both, but CLIAs is not allowed to the pharmacies to execute this. You’re talking about the PPE side or you’re talking about the testing side?

Eugene Mannheimer — Colliers Securities — Analyst

Both of those.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

The PPEs are, everybody — anybody is a customer, right? Whether it’s the law firm or a pharmacy, but especially the testing side, we’ve executed through a — the nursing — the point-of-care people that have executed — administered the test on site, we’ve become as a supplier of those test kits and — but the CLIA waiver — or 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 of our point-of-care facilities to move these testing kits.

Eugene Mannheimer — Colliers Securities — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

We’re not — we don’t have any segmented that way. We have segmented Trxade, Integra Pharma and CSP side.

Eugene Mannheimer — Colliers Securities — Analyst

Fair enough. Okay. One more then from 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? Thanks.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

No problem, Eugene. But still it’s at a mature level. The app is getting stabilized. So, we don’t have that data readily available. So when it’s available in the next quarter, hopefully we’ll try to get those metrics. But right now, it’s not available.

Eugene Mannheimer — Colliers Securities — Analyst

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?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

No, not at this time.

Eugene Mannheimer — Colliers Securities — Analyst

Okay. Very good. Thank you and congrats.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question is from the line of Howard Halpern of Taglich Brothers. Please proceed with your question.

Howard Halpern — Taglich Brothers — Analyst

Congratulations on the quarter, guys.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Thanks Howard.

Howard Halpern — Taglich Brothers — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Howard, can you take that question?

Howard Doss — Chief Financial Officer

Yes, I do. One of the — 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 product. And we expect to work through most of that through the end of the year. We anticipate that anyway.

Howard Halpern — Taglich Brothers — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Yeah. Our primary business in the — for the last 10 years on the platform, if you look at it, is the supply chain. Those relations will be transitioning into the Integra, especially in the PPE side and as well as the testing side. Yes, we have multiple sources to buy these products. Correct.

Howard Halpern — Taglich Brothers — Analyst

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?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Yes, that’s probably — because the tech platform is the one — then because of the product side, the gross margins are varied, correct.

Howard Halpern — Taglich Brothers — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

We don’t anticipate anything at this time.

Howard Halpern — Taglich Brothers — Analyst

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 of around $5 million. Is that going to be slightly higher this year, even excluding the stock-based comp?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Howard, do you want to take that?

Howard Doss — Chief Financial Officer

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.

Howard Halpern — Taglich Brothers — Analyst

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?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

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 payment — 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.

Carlo Corzine — Dawson James Securities — Analyst

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

We can’t give you guys that guidance at this time. As I mentioned, the app is getting matured as we speak. And that is — the COVID has impacted people who are paying and now it’s picking up the steam.

Howard Halpern — Taglich Brothers — Analyst

Okay. And one last one. Because you had mentioned too that schools, I guess primarily K through 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 your base, but is that something that you’re looking to do actively?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Yes.

Howard Halpern — Taglich Brothers — Analyst

Okay. Well, keep up the great work, guys.

Operator

Thank you. Our next question is coming from the line of Andy Gold of Gold Capital. Please proceed with your question.

Andy Gold — Gold Capital — Analyst

Hey, guys. How are you doing? Nice quarter, Suren.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Very good, Andy. Thank you.

Andy Gold — Gold Capital — Analyst

A question on your PPE side. Do you have like a gross margin for that particular side of the business? I know that’s all depending on what particular deal you’re doing. Or is that — obviously, that’s a little — much lower gross margin business. Is that running at a — sanitizer run at a lower rate or masks than, let’s say, gowns or gloves or any of the particular products?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Sure. I would — the average it out to 25% to 30% because the supply and demand, right, when the big time, movement was in April, was a bigger margin because at the same time the cost of goods were higher. And it’s all depending on the supply and demand at that time. But we would try to maintain around 25% to 30% gross margin.

Andy Gold — Gold Capital — Analyst

That’s good. Your supply chain, is it coming from overseas? Is it is…

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

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

Andy Gold — Gold Capital — Analyst

And you — can you get adequate supplies going forward? Or is it…

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Yeah, we have solidified from Far East. If you 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 are always able to find the product 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.

Andy Gold — Gold Capital — Analyst

Do you have a natural — you have a natural customer base in your pharmacy clients?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Yes. A little bit [Speech Overlap] some hospitals, a couple of hospitals at the time because those came through our pharmacy network asking, hey, here is the hospital looking for these kind of things, so on and so forth. But our primary customer is our pharmacies.

Andy Gold — Gold Capital — Analyst

Have you gotten in to any of the states — the state type contracts? Or they are harder to get into?

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

We tried 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.

Andy Gold — Gold Capital — Analyst

Okay, thank you. Great quarter again. Thanks.

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

Thanks, Andy.

Operator

Thank you. Our next question is coming from the line of Carlo Corzine of Dawson James Securities. Please proceed with your question.

Carlo Corzine — Dawson James Securities — Analyst

Hi, Suren. I think all the previous persons asked all my questions, and I actually exhausted to them. So I don’t have anymore. I was really looking at the inventories and 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 continue through rest of my time. Thank you.

Operator

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

Suren Ajjarapu — Founder, Chairman and Chief Executive Officer

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 update you on our progress and growth.

Operator

[Operator Closing Remarks]