MedAvail - Q1 2023

Executive Summary

• Q1 2023 marked MedAvail’s first full quarter pivoting to a pure pharmacy technology model: revenue rose to $0.62M (vs. $0.27M a year ago) on early traction with MedCenter hardware, subscriptions, and services; adjusted EBITDA improved to $(3.66)M from $(4.42)M YoY as SpotRx is exited and costs are removed.
• Management reaffirmed FY2023 guidance: approximately $3M pharmacy-tech revenue (>100% YoY), full-year gross margin >60%, and 25 net new dispensing MedCenters in 2023 (57 cumulative by year-end).
• Strategic catalysts executed in Q1: (i) sale of pharmacy assets to CVS (up to $4.4M consideration; reduced debt to ~ $2.5M), (ii) 75% workforce reduction targeting $35–$37M annualized OpEx savings, and (iii) $16M private placement to bolster runway.
• Stock-relevant narrative: management expressed confidence in achieving operating cash flow breakeven without additional dilutive equity, citing a growing deployment pipeline and favorable regulation (e.g., Colorado authorization for remote kiosk dispensing).

What Went Well and What Went Wrong

• What Went Well

  • “Our pipeline continues to grow… we remain on track to [add] 25 net new dispensing MedCenters… [and] identify cost savings opportunities… to reduce our expense run rate and extend our cash runway.” – CEO Mark Doerr.
  • Regulatory tailwinds: “Colorado [is] the latest state to enact legislation… favorable to remote kiosk pharmacy dispensing,” expanding long-term addressable market.
  • Balance sheet and runway: “We are well financed… we believe we can achieve operating cash flow breakeven without the need for additional dilutive equity financings,” supported by a $16M private placement closed March 13.

• What Went Wrong

  • GAAP noise from financing: a $10.42M non-cash loss on issuance of warrants and $(3.05)M gain from change in fair value of warrant liabilities drove a larger GAAP loss in the quarter.
  • Continued investment ahead of scale: adjusted EBITDA remained negative at $(3.66)M despite YoY improvement, reflecting early-stage revenue scale in the tech model.
  • Transition execution costs: restructuring (75% workforce reduction) and the SpotRx exit required one-time actions; management guided to ~$6.5M one-time costs in 1H23 tied to the restructuring (ex-loan paydown).

Transcript

Operator (participant)

Hello, everyone, and thank you for joining MedAvail's 2023 Q1 conference call. My name is Alicia, and I'll be your operator for today. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance before the conference, press star zero on your telephone keypad. As a reminder, this conference is being recorded. I now have the pleasure of handing over the call to your host, Steve Halper, Managing Director at LifeSci Advisors. Please go ahead.

Steve Halper (Managing Director)

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, Inc., referred to as MedAvail or the company, released financial results for the Q1 of 2023. 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 the 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 or 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 the company's operating trends and future financial performance, general market and macroeconomic conditions, including the effect of inflationary pressure, including any impact of adverse developments affecting the financial services industry, such as those based on liquidity constraints or concerns and events, including the outbreak of war in Ukraine or the impact of COVID-19. Expense management, expectations for hiring, growth in the company's organization and reimbursement, market opportunity and expansion and guidance for revenue, gross margin and operating expenses in 2023, are based upon 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 those 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 MedAvail's business, please refer to the Risk Factors section in the company's most recent periodic reports, including its annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 15 2023. 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. With that, I will now turn the call over to Mark.

Mark Doerr (CEO)

Thank you, Steve. Thanks to all of you for joining us this afternoon for our Q1 2023 financial and operational update. During the Q1, we continued to make excellent progress executing on our mission to become a leading pharmacy technology company following our announcement in January that we were divesting the SpotRx pharmacy services business, which we subsequently sold to CVS during the quarter. Recall that concurrent with the sale of SpotRx, we pivoted towards our pharmacy technology business that we believe can address key unmet needs in the pharmacy market, including workforce shortages and medication access challenges, especially in rural, less populated areas. With the MedCenter, we bring prescription medication dispensing to the point of care through our innovative hardware and software platforms.

While it is still early, our leading indicators suggest that our strategy is working, as evidenced in part by our robust and growing pipeline, which is comprised of both existing and new partners that I will discuss in more detail shortly. Our successful integration with the Epic Willow pharmacy management system is providing a significant tailwind for us and is resonating with many primary care and urgent care clinics across the U.S. who utilize that system. In parallel with these activities, we are closely monitoring state regulations and playing an active role, where possible, to create regulatory environments that are favorable to remote kiosk pharmacy dispensing. We played a critical role in Colorado, where legislation was just signed into law that supports our MedCenter technology and remote dispensing.

We believe there will be others as additional states embrace the many advantages kiosk dispensing to both the clinic and patient. We are executing against our plan and remain on track to nearly double our footprint this year with 25 net new dispensing MedCenters in the field during 2023. Our early progress is very encouraging and gives me confidence that we have placed MedAvail on a path to success. Looking at the quarter, we generated revenue of $620,000 and installed four net new dispensing MedCenters. Ramona will cover the financials and guidance shortly. We remain on track to generate total revenue of $3 million for 2023, representing more than 100% growth over pharmacy technology revenue of $1.4 million for full year 2022.

Assuming we are successful in placing 25 net new MedCenters in the field this year, we would exit the year with 57 dispensing MedCenters by the end of this year. Again, we are in the very early stages of tapping into the numerous significant and long-term growth opportunities that we have identified for the pharmacy technology business, and we are excited about what we can achieve this year in terms of laying a foundation for future growth and profitability. On the topic of SpotRx, the planned divestiture and wind down of that business is progressing as planned. As we indicated previously, this transaction reduced our head count by approximately 75%. Our annual OpEx run rate by $35 million-$37 million and our cash usage by about 65%.

As part of the wind down, we have retrieved all the MedCenters that were previously serviced by SpotRx hub pharmacies. A substantial number of the hub pharmacies have been dismantled to date. We anticipate being substantially done by the end of the Q2. The majority of expenses associated with the closure, which have been lower than projected, are expected to be captured in the Q2 as well. Taking a step back, or for those who may be new to the story, on January 19th, MedAvail announced a shift in focus from our SpotRx pharmacy services business to our emerging pharmacy technology business. The underlying technology of MedAvail, which includes our MedCenter dispensing kiosk and the associated proprietary MedDispense software, is the core of our value proposition.

The ability to remotely dispense 600 to 1,000 medications in roughly 13 sq ft is a cost-effective way to bring pharmacy to the point of care and is like having a pharmacy in a box. Through the MedAvail technology business, we offer partners the ability to purchase or lease the MedCenter and to license our software in order to provide point of prescribing dispensing solutions under their own brand. In the MedAvail pharmacy technology model, partners employ their own pharmacy staff and procure their own inventory. MedAvail pharmacy technology enables providers to dispense medications at the point of care. With the MedCenter, the patient can easily initiate medication therapy while avoiding an inconvenient separate trip to a retail pharmacy. By doing so, prescription abandonment rates can be reduced, and this can inherently lead to improved patient outcomes.

Additionally, pharmacies are currently suffering a shortage of both pharmacists and pharmacy technicians, which is resulting in restricted or delayed patient access to medication. This pharmacy labor shortage has been persistent and has not been improving. The MedCenter is designed to provide patients with enhanced quality and safety through its integrated barcode technology and convenience with expeditious dispensing times that average five to seven minutes while offering access to a live pharmacist when needed. There are additional benefits to the clinic that offer the convenience of point of prescription medication dispensing, such as improved quality ratings associated with medication compliance and increased patient satisfaction that can drive potential incremental reimbursement revenue. With the wind down SpotRx well underway, we have continued to look for opportunities within the core pharmacy technology business to manage our expenses carefully and become more nimble and efficient.

To that end, we conducted an additional reduction in force at the end of April, mostly impacting our development quality assurance teams. This was another difficult but required action that further reduced our overall head count by approximately 27%. Prior to this action, we commenced the partnership with the software engineering company Ancora for future development activities. Ancora has significant experience in software development and specifically integrations with the various pharmacy management systems that are used by our partners. We previously announced integrations with Epic Willow and McKesson EnterpriseRx systems. There are several other pharmacy management systems used in the market, and the Ancora partnership should facilitate faster completion of full integrations with these systems. MedAvail is able to complete a proof of concept integration in six to eight weeks for partners that want to accelerate deployment of the MedCenter.

We also terminated our agreement with our kiosk manufacturer, Kitron, given the more than 100 pre-built MedCenters that we currently have in inventory. We are also bringing MedCenter service in-house, whereas we had previously been using an external vendor to service the kiosk. This not only positively impacts our current expense run rate, but should also create a better experience for our partners. We are continually exploring options for service and manufacturing aligned to our expansion and sales pipeline. In the second quarter, we anticipate bringing our first partner live on our cloud-based software platform, which will be hosted on the Google Cloud. This is a net new partner to MedAvail, and we intend to migrate all partners to the cloud before the end of the year. This will further reduce costs and accelerate MedCenter deployments.

Importantly, this migration will be primarily done by in-house resources, will be minimally disruptive to partners, and will be completed by the end of the year. In summary, we have identified and continue to work to identify areas of our core pharmacy technology business that we believe can be executed more efficiently. We make every one of these decisions after careful consideration of alternatives and with partner and patient experience in mind. We are committed to operating a lean organization capable of responding quickly to new growth opportunities as they emerge. Turning now to our pipeline. We continue to see growing demand for the MedCenter among both existing and new partners across our current primary care and urgent care channels. Franciscan Missionaries of Our Lady Health System in Baton Rouge, Louisiana, recently executed a contract for four MedCenters.

This health system uses Epic, so our successful integration with Epic Willow was critical to securing this partnership. We expect to bring the first MedCenter online with them during the Q3. In addition, we have six more contracted MedCenters with partners who are new to our company, including Curant Health, who we expect to bring live next month. In addition to the 10 contracted MedCenters previously mentioned, there are an additional five MedCenters that have been committed to in 2023 by an existing partner. In all, based on the current contracting momentum that we are seeing, as I stated previously, we are confident with our guidance of 25 net new dispensing MedCenters in place during 2023, bringing our total network to 57 cumulative dispensing MedCenters by December 31st.

In terms of a regulatory update, the current states that are open to remote dispensing or have favorable waiver rules in place cover greater than 72% of the U.S. population. As previously mentioned, Colorado recently passed new regulations, essentially opening up the state to remote dispensing as well. We were involved in this effort. Given the many benefits of remote dispensing to both patient and the clinic that I previously touched on, and the worsening shortage of pharmacists and pharmacy techs, we anticipate that the regulatory environment will continue to evolve in our favor. Oregon is also currently evaluating legislation that would essentially allow remote dispensing as well. Despite these positive developments, half of the states continue to be restricted or have rules in place that we consider to be unfavorable.

Over the long term, we view this as a significant opportunity to work with state lawmakers to continue to expand our serviceable market, which currently stands at more than $1.3 billion, with an additional $500 million in recurring software license and maintenance revenue. It is worth recapping that if we just look at the primary care and urgent care channels, if all states were open to pharmacy kiosk dispensing, we believe our total addressable market encompasses more than 20,000 sites across the U.S. and represents more than $3.4 billion in MedCenter sales or leases, with an additional more than $1.3 billion in annual recurring software license and maintenance contracts. This analysis excludes additional channels such as federally qualified health clinics and retail pharmacies that will likely be long-term growth drivers for our company and add billions more to our addressable market. I would now like to turn the call over to Ramona to review our financials. Ramona?

Ramona Seabaugh (CFO)

Thanks, Mark. I will begin with a review of the Q1 results before touching on our 2023 outlook. The following comparisons exclude discontinued operations. For the Q1 2023, we generated total revenue of approximately $620,000, representing growth of 134% over pharmacy technology revenue in the comparable period in 2022 of $265,000 and growth of 143% over Q4 2022 pharmacy technology revenue of $255,000. Looking at gross profit. Total gross profit for the Q1 of 2023 was 41.5%. This was in line with our expectations.

We continue to anticipate a gross margin in excess of 60% for the full year, which would represent a significant improvement from our full year 2022 gross margin of 47%. Total pharmacy technology operating expenses for the Q1 of 2023 were $5.3 million, down from $5.5 million in the Q1 of 2022. As Mark indicated, we continue to evaluate the operations of the core pharmacy technology business in search of additional efficiencies. Total company adjusted EBITDA for the Q1 was a loss of $3.7 million, representing a 15.9% improvement from $4.4 million lost in the Q1 of 2022. At the end of Q1 of 2023, we had 80.300,000 weighted average shares outstanding.

In terms of our guidance for 2023, it remains unchanged from our Q4 update call. We anticipate adding 25 net new dispensing MedCenters throughout the course of this year, which in addition to the 32 dispensing MedCenters we ended Q1 with, would enable us to exit 2023 with a network of 57 revenue generating MedCenters. We anticipate that full year revenue will be approximately $3 million, which represents growth of well over 100% as compared to pharmacy technology revenue of $1.4 million for the full year of 2022. We further assume a full year growth margin in excess of 60%, well above 45%, which represents a fully costed margin at current volumes and representing nice expansion relative to our pharmacy technology growth margin of 47% that we reported for full year 2022.

Recapping the assumptions we provided on our last call to assist with modeling purposes, we assume a blended average selling price of $65,000 per MedCenter kiosk. The actual price to purchase a kiosk is higher, but $65,000 reflects our current mix of business between sales and leases of approximately 50/50. We further assume $25,000 per year per machine for the software license and maintenance. In terms of cash, we ended the Q1 with cash and cash equivalents of $19.5 million, including $676,000 of restricted cash. During the Q1, we used $2.8 million in cash to fund our operations, excluding $6 million attributable to discontinued operations of SpotRx pharmacy services business and pay down of our Silicon Valley Bank debt and final payment requirements.

Recall that we anticipate full year cash usage attributable to the divestiture and wind down of SpotRx to be approximately $6.5 million. Further, we anticipate that a combination of higher revenue and margin together with lower expenses will reduce our quarterly cash burn, excluding SpotRx, throughout the balance of this year. We anticipate our current cash is sufficient to fund our operations at least through 2025, at which time we believe we can achieve profitability and therefore potentially eliminating the need for additional dilutive equity financings. That concludes the financial overview, and I will now turn the call back over to Mark.

Mark Doerr (CEO)

Thank you, Ramona. To sum up, I am very pleased with the significant progress we have made in the relatively short time since we announced the sale of SpotRx to CVS in January. By focusing exclusively on the pharmacy technology side of the business going forward, I believe we can strike a balance between long-term top-line growth and profitability. I also believe we are on the right track to be a leader in the field of pharmacy kiosk dispensing to the benefit of both clinics and patients, while creating enduring value for our shareholders. At this point, we'd like to open the call for your questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you. Our first question is from Charles Rhyee with TD Cowen. Please proceed with your question.

Lucas Romanski (Research Analyst)

Hi, this is Lucas in for Charles. Wanted to ask about the 25 MedCenter deployments guided for 2023. Can you give us a sense of the mix of customer type between urgent care clinics and primary care clinics, and where you're seeing more traction? On the number of expected MedCenter deployments coming from new customers compared to existing customers. yep.

Mark Doerr (CEO)

Lucas, thank you for the question. On the mix between urgent care and primary care, we're continuing to see a pretty even mix across the two, with probably a little bit more coming from the urgent care market, which seems to have a little more momentum in it at this point. When we look at existing customers versus new customers, new customers represent probably about 2/3 of the pipeline right now, versus existing customers are about 1/3 of the pipeline, based on commitments and contracted units.

Lucas Romanski (Research Analyst)

Okay, great. You guys noted that you were part of opening up legislation in Colorado. Curious, I'm sorry. When it comes to your go-to-market strategy, are you guys focusing on states that you've already been in? I know you guys have presences in Florida and Arizona. Are you more taking a broad-based approach? If you can give us some details on your go-to-market strategy in terms of region, that'd be helpful.

Mark Doerr (CEO)

Yeah. We're focused primarily on the states where we've operated in, where we can be a little bit more effective, more efficient, and quicker on a go-to-market basis. Texas, Florida, Louisiana are three key states for us as we build out those markets and again, can go a little bit faster. We take a broad approach to all the states that allow for the dispensing technology. Again, you know, there's a predominant number of states that have favorable regulations or waiver processes in them such that we believe we can cover about 72% of the population. We're gonna stay focused where we're at, but we'll also look at opportunities to expand to the new states when partners come to us. You know, when you bring up Colorado, again, we were active with a partner there, to help push that legislation through, and we continue to speak to potential partners in new states like Colorado as an example.

Lucas Romanski (Research Analyst)

Okay. Then wanted to ask about Oak Street. I understand that you've retrieved 100% of the MedCenters that were a part of the SpotRx pharmacy network. Has there been any conversation about potentially reigniting that relationship given they were recently acquired? I understand there's probably a lot of moving pieces on their side, but have you gotten a sense of whether or not that relationship could return?

Mark Doerr (CEO)

Yeah, I can't speak specifically about any dialogue that's going on. I will say that, you know, with Oak Street we had a very strong partnership. We did remove all the MedCenters based on the timing. I know the Oak Street acquisition was just, you know, fully completed in the last couple of weeks. A lot of those sites were built, right, constructed from the ground up with placement for the MedCenters. you know, we anticipate that there could be an opportunity there based on the relationship we had, based on the way that the performance was going and really the way that the design was done with the clinics. Can't elaborate any further on that particular relationship at this time.

Lucas Romanski (Research Analyst)

All right. Understand. In terms of you guys having cash runway to 2025, at which point you could see being profitable, is there any way you could kind of break down the moving pieces in terms of what we need to see to reach profitability in 2025?

Ramona Seabaugh (CFO)

I don't think at this point, we wanna go through the annual expectations. As you know, this quarter we did spend about $2.8 million on the technology side of the house and about $6 million on the discontinued operations. We do expect largely that the expenses for the discontinued will cease after this year. With that, perhaps you can calculate what you would expect the remaining costs to be in the further years.

Lucas Romanski (Research Analyst)

Okay, great. Regarding the potential to see more pharmacy management system integrations in 2023, can you give us an indication on when you expect this may take place? Should we expect it in the back half of the year? I guess in terms of integrations translating into MedCenter deployments, can you give us a sense of whether an integration for other pharmacy management systems is opening up the opportunity to sell and sell to new clients? Are you having conversations with potential clients who are on pharmacy management systems that are not yet integrated onto your platform, that kind of warrant having to integrate with new platform or new systems?

Mark Doerr (CEO)

Yeah. We routinely track in our pipeline, by partner, potential partner, their pharmacy management system, and we use that to guide us on where we wanna focus on what I'd call full integrations. We mentioned in the prepared remarks that we were pretty close to deploying Curant. That would be a new integration that we did. You know, that will help us open up to other locations with them. I would say that we're mainly focused on where we have integrations already, like Epic, which is powering a pretty significant portion of our pipeline, as well as McKesson EnterpriseRx Solutions, just because it's more efficient and more effective. We do anticipate that we'll build out at least one or two more integrations before the end of the year.

Do anticipate that will be the back half of the year, given where we're at today and how we're setting up our pipeline and seeing the MedCenters come into the year and into the sales cycle. I would say that we mentioned that we did the relationship and engaged on core software development company to help us along with our development and our quality assurance. They have experience working with several of the large pharmacy management systems in the industry today. We think that's gonna help us build out those integrations in an efficient manner.

Lucas Romanski (Research Analyst)

All right. Thanks for the questions.

Mark Doerr (CEO)

Thank you, Lucas.

Operator (participant)

Thank you. We do not have any further questions at this time. I'm going to hand it back to Mark Doerr for final remarks.

Mark Doerr (CEO)

I just wanna say thank you again to everyone that joined the call or webcast. We look forward to our next quarterly update in August. Have a good evening and stay safe.

Operator (participant)

This concludes today's call. Thank you for joining. You may disconnect your lines.