Earnings Call Transcript - HROW Q3 2020

Operator, Operator

Good afternoon, and welcome to the conference call covering Harrow Health's Financial Results and Business Update for the Third Quarter 2020. On the call joining me today, I have Harrow's Chief Executive Officer, Mark L. Baum; and Harrow's Chief Financial Officer, Andrew Boll. My name is Karen and I will be your operator for today's call. Currently all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. By now you should have received a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations page of the company's website at www.harrowinc.com. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow Health's control including risks and uncertainties described from time to time in its SEC filings such as the risks and uncertainties related to the company's ability to make commercially available its compounded formulations and technologies and FDA approval of certain drug candidates in a timely manner or at all. For a list and description of those risks and uncertainties, please see the Risk Factors section of the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Harrow Health's results may differ materially from those projected. Harrow disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today. Additionally, Harrow will refer to non-GAAP financial metrics, specifically adjusted EBITDA and/or adjusted earnings. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's letter to stockholders available on the website. With that, I'd like to turn the call over to Mark Baum to go over some prepared remarks prior to the question-and-answer session. Mark?

Mark Baum, CEO

Thanks for joining our call today. I would encourage everyone listening to review our third quarter 2020 letter to stockholders, which was posted on the Investor Relations section of our website just after the close of trading today. A link to the stockholder letter is also available on the Q3 earnings press release we issued today. Before we begin the Q&A portion of today's call, I'd like to quickly touch on a few items to provide some additional color on our business since we last spoke in August. The third quarter of 2020 was the best financial quarter in the history of the company. Our team delivered on revenues, gross margins and nearly every other internal metric that we chart. Revenues in July were better than June, and each subsequent month continued to improve, resulting in total revenues in Q3 of $14.4 million, a new record. We were also pleased that while we achieved record revenues, we also achieved 74% gross margins, a new record. We also had adjusted EBITDA of $3 million, another record. When compared to Q3 2019, I am proud of the $1.6 million of revenue growth and even more proud that during Q3 2020 versus Q3 2019, we also delivered a $2 million increase in gross profit. Continuing on with the efficiency theme, going forward we expect that each incremental dollar of revenue growth will yield an increasing percentage of operational earnings, thus improving our adjusted EBITDA and margins, a demonstration of what we like to call our financial escape velocity point. As we move into the fourth quarter and set our sights on 2021, we are hopeful our revenue trends, which currently look V-shaped, will quickly transition into a checkmark-shaped trend line into 2021. We believe this trend of growth will be driven by expanding our core business through new customer growth, continuing to expand with the many thousands of accounts we currently serve, exciting new product development in our pipeline, and adding new revenue sources such as DEXYCU commissions and other potentially transformative initiatives we've been working on and hope to conclude in the coming quarters. In addition to the outstanding performance of ImprimisRx, other Harrow businesses also continued to hit new and major milestones and we expect to see more value inflection events in the coming quarterly periods. Importantly, once we complete the deconsolidation of Mayfield Pharmaceuticals, we intend to leverage our position in eyecare and from a strategic perspective, exclusively focus on investing in and developing eyecare-related healthcare assets. We believe this focus will better serve our stockholders. Now let's jump into the Q&A. I will pause to have our operator pull for questions.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. We'll take our first question from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Brooks O'Neil, Analyst

Good afternoon, Mark, and congratulations on the excellent results. I have a couple of questions. I noticed a comment in the letter about October and how you expect the trajectory to continue, and I want to make sure I understand what you mean by that. Are you indicating that we should anticipate a stronger fourth quarter compared to the third quarter, or is there something else you are suggesting?

Mark Baum, CEO

Well, thanks for the question, Brooks. No, I think what we're saying is that the months have since progressively gotten better in sequence in terms of revenue and that has continued into the fourth quarter and the month of October was a great month and November, which is a very new month, has also been strong. So, I don't want to make any projections specifically about the fourth quarter other than to say that business still remains strong.

Brooks O'Neil, Analyst

That's great. That's very helpful. And then I love the focus on eyecare, but I'm just curious if you can elaborate a little bit about how you came to the decision to do that?

Mark Baum, CEO

To be clear, if you look at where we've been very successful operationally, our strength lies in eyecare. It has been eyecare for many years and I think that's where we think we can drive the most value. A lot of the work that we've been doing over the last year and a half or so strategically to grow the ImprimisRx business and transition that business from exclusively being a compounding pharmaceutical business to really being an ophthalmic pharmaceutical business has caused us to believe that we can create a tremendous amount of value if we just focus on eyecare and we have great relationships in that space and some exciting things that we hope to conclude here in the coming quarters, as I said, some of which could be transformative.

Brooks O'Neil, Analyst

That's great. And then I'm just curious on this topic, I think you had good success in some non-ophthalmic areas. Do you intend just kind of limit your focus or is there some way you can envision taking advantage of the development prowess you have outside of eyecare?

Mark Baum, CEO

Well certainly we see opportunities that are outside of eyecare. I think our board and shareholders that we've spoken to are really interested in our ability to build an eyecare business to take advantage of the relationships that we have. So that's where we're going to focus. We have had success outside of eyecare, I would say that building Eton was a great success so far, but I think our board and many of the shareholders we've spoken to are excited about the focus in eyecare and as I said based on what we have in the hopper, we're very excited about the eyecare business and the ability to grow the business and I think drive a lot of shareholder value in the near term.

Brooks O'Neil, Analyst

Sure, one last one and then I'll hop. I guess you don’t want to say a lot about transformative potential developments down the road, but can you say whether all the things you're working on right now relate to eyecare pharmaceutical products or are you thinking there might be good opportunities for the company if they go broader than pharmaceutical products?

Mark Baum, CEO

I don't want to comment on the specific products. I did say in the letter that we're focusing on eyecare goods and services. So it certainly may fall outside of making a bottle of eyedrops. We're really excited about our Visionology business for example and the potential for that business to grow. So we're going to stick with eyecare and that's an exciting area for us and we've got some really interesting things I hope to conclude and we're going to do a lot less talking, not that we do that much talking, and a lot more doing. So we're going to convert this activity to economic accomplishment and we're going to focus on economic accomplishment in eyecare.

Brooks O'Neil, Analyst

That's great. Congratulations. I love it, thank you very much.

Operator, Operator

We'll take our next question from Andrew D'Silva with B. Riley. Please go ahead.

Andrew D'Silva, Analyst

Thank you very much for taking my questions. Congrats on the snapback, really surprised by getting to record levels. Sorry if you already answered this. I was on a different conference, but just to start, can you give us a little bit of color just on how the segment breakout looks or the quarter ophthalmology 503B versus A and other revenue things like that or do you have information related to compounded products versus FDA-approved product revenue that you recommend?

Mark Baum, CEO

Andrew, do you want to touch on that? Go ahead.

Andrew Boll, CFO

Hey Andy thanks for the question, I'll try to get all of them. In regards to the segment of revenue, we stopped breaking out ophthalmology and ophthalmology revenue, but we did report $10.2 million in revenue out of our 503B facility during Q3, which is a company high. And then in regards to non-compounded sales, we had other revenues of $14,000, but $7,000 of that was related to the DEXYCU commissions and licensing revenues.

Andrew D'Silva, Analyst

Okay. Great. That's good to hear and as far as DEXYCU goes, I am assuming it was very back and waited as far as starting to actually roll out officially during the third quarter. Is it fair to assume that you’ve started to progress that even more as we're into the fourth quarter now and then I remember we had a discussion related to the DEXYCU and just the pass-through status. Has there been any update on that potentially being able to be extended due to the pandemic?

Mark Baum, CEO

There was an election recently, and we expect there will be some kind of stimulus being discussed. It appears to be bipartisan and bicameral, aiming to extend pass-through in some form, although there's no certainty. We still believe it will happen if there’s additional stimulus. I don't want to speculate on the final outcome, but we think that any stimulus will likely lead to an extension of pass-through in some way. Regarding DEXYCU sales, our sales team went through a learning curve and there was a ramp-up period. We initially targeted a small number of accounts, specifically the top 57, and we’ve made significant progress. I’m particularly excited that many of the largest Tri-Moxi customers are now using DEXYCU, which is a great advancement. Our success has encouraged the Eyepoint team to allow us to expand our offering to a larger segment of Tri-Moxi customers about 60 days earlier than we originally planned. We're optimistic that as we move further into the fourth quarter and into next year, we will start to see an increase in revenues from DEXYCU sales commissions. This is an exciting part of our business, and we also hope to pursue additional deals and continue to expand our portfolio of FDA-approved products over time.

Andrew D'Silva, Analyst

Okay. Great. I'll take everything else offline. Thank you very much and best of luck closing out the year.

Operator, Operator

That seems to be all the questions we have for today. I would like to hand the call back to Mark L. Baum, CEO of Harrow Health, for any final comments.

Mark Baum, CEO

Thanks again for attending our call today and let's hope that our nation's recovery continues to flourish over the coming months and until then please stay healthy, happy and prosperous. If you have any investor-related questions, please email [email protected]. This will conclude our call. Thank you.