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Welcome to the Hamilton Thorne Ltd. 2020 First Quarter Earnings Conference Call. Before turning the call over to your host today, please be reminded of our standard public company policy on forward-looking information. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve, but are not limited to, comments relating to strategies, expectations, planned operations, product announcements, scientific advances or future actions. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict.Should one or more risks or uncertainties materialize or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements may vary materially from those expressed or implied by these forward-looking statements. These factors should be considered carefully and prospective investors or other parties should not place undue reliance on these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless or until required to by securities law applicable to the company.Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian securities regulators including, without limitation, the company's management discussions analysis for the quarter ended March 31, 2020, which filings are available under the company's profile at www.sedar.com. Now let me turn the call over to Hamilton Thorne's CEO, David Wolf.
Thank you, and good morning to all. Welcome to the Hamilton Thorne Ltd.'s First Quarter 2020 Earnings Conference Call. I'd like to reintroduce myself. To most of you, I imagine, know me, I'm David Wolf, President and CEO of Hamilton Thorne. On the call with me today is Michael Bruns, our Chief Financial Officer. As is typical, our call will have the following format. First, I'll provide a summary of operational and financial results for the quarter ended March 31, with a focus on our sales, markets and operational performance.Michael will follow with a more detailed discussion of our financial results for the period -- for the quarter as well as a review of our financial position and liquidity. I will then return for a few minutes to provide some information on our outlook for the remainder of 2020, during which I will address the COVID-19 virus' impact on our business, some special matters we're considering at this year's annual meeting, and discuss the financing that we closed this morning. We will then open up the line for questions.I'd like to remind all participants that we do not provide financial guidance. And so I would like to ask you to limit your questions to either historical periods or general trends in the business. I'll begin with our sales results. I am pleased to report that our strong start for the year was -- that was very strong. Let me give you some highlights from our performance.Sales in U.S. dollars increased 36% year-over-year to $10.4 million. Sales in constant currency were up 38%. Gross profit increased 31% year-over-year to $5.2 million. Net income increased $710,000 to $145,000 from a loss last year, primarily attributable to a derivative revaluation. Adjusted EBITDA increased 21% year-over-year to $1.8 million. Organic growth in U.S. dollars was 11% for the quarter, 12% in constant currency.Cash flow from operations was $709,000 for the quarter, and total cash at the end of March increased to $15.9 million. As I said, the first quarter of 2020 started off very strong. We achieved significant increases in sales with solid organic growth above industry averages. Sales into the human clinical market were up substantially, primarily driven from the Planer acquisition, augmented by significant increases in consumable sales worldwide, somewhat offset by a reduction of equipment sales in the U.S. Sales into the cell biology and research markets also grew substantially, primarily due to contribution from the Planer acquisition, augmented by strong toxicology testing, equipment sales, while sales into the animal breeding market were slightly down. Gross profit margins were down at 1.9% to 50.2%, primarily due to product mix, particularly the increase in sales of third-party capital equipment associated with the labs, large laboratory setup in Europe, increased sales of third-party consumables, and the addition of the somewhat lower-margin sales of Planer products, partially offset by increases in the sales spend, particularly direct sales of our higher-margin branded consumables and services.Our operating expenses were generally in line with our expectations with increased spending attributable to the addition of the Planer expenses, continued investments in sales and support resources and increased R&D spending. I'll now turn the call over to Michael to provide a more detailed discussion on the numbers.
Good morning, everyone. I am Michael Bruns, the CFO of Hamilton Thorne. I'd like to express our apologies for the slight conference call ID confusion to access the call this morning. I will review the first quarter financial results, along with our balance sheet and liquidity before turning it back over to David. Sales increased, as you know, 36% to $10.4 million for the quarter ended March 31, an increase of $2.8 million over the $7.7 million of the prior year's first quarter. Primary contributor to the increase was, of course, the full quarter contribution of Planer after the August 2019 acquisition. Total equipment sales increased 66% to $4.9 million in the first quarter of 2020. Planer acquisition contributes primarily equipment sales to the HTL product mix. Other successes included increased cross-selling of HTI lasers by the Gynemed sales team in the EMEA region, increased sales of toxicology testing equipment and a large laboratory setup in Europe.All were partially offset as several capital equipment orders were deferred by customers due to the COVID-19 shutdowns. Consumables and services increased 17% to $5.5 million and comprised 53% of HTL's total enterprise sales in Q1. Gross profit increased 31% to $5.2 million, an increase of $1.2 million versus the prior year's first quarter, primarily as a function of sales growth. Gross profit as a percentage of sales was 50.2% for the quarter ended March 31 versus 52.1% in the previous year.This margin decrease is primarily attributable to product mix, particularly the increase in sales of somewhat lower-margin third-party capital equipment associated with the large laboratory setup in Europe, increased sales of third-party consumables and the addition of somewhat lower-margin sales of Planer products as we expected. These margin impacts were partially offset by increases in direct sales of higher-margin, branded consumables and services.Operating expenses increased 43% quarter-over-quarter or $1.3 million to $4.2 million, primarily due to the addition of Planer expenses post-closing. Excluding Planer, operating expenses increased 18.2%, driven primarily by year-over-year planned investments in direct sales personnel and sales support resources as well as increased new product amortization costs and R&D.Research and development expenses increased $220,000 or 50% to $661,000 for the quarter, due primarily to new product amortization expenses for the DTS laser as well as other product development costs, the addition of Planer's R&D group and reduction in capitalized expenses relating to the ongoing development of products. Sales and marketing expenses increased $503,000 or 32% to $2.1 million for the quarter, primarily due to the addition of Planer's expenses, including the amortization of acquisition-related intangibles, and the continued investment in direct sales and support resources in both Europe and the U.S. General and administrative expenses increased $559,000 or 61% for the quarter, primarily due to the addition of Planer's general and administrative expenses as well as amortization of acquisition-related intangibles and increased personnel cost.Net interest expense actually decreased $78,000 to $253,000 for the quarter, primarily due to principal reductions in the outstanding convertible debentures as a result of last year's June 2019 conversion as well as reduction in other term debt due to principal reductions and partially offset by increased term debt incurred last August as a component of the Planer acquisition financing.The loss on the fair value derivatives was $367,000 versus a loss of $997,000 in the prior year's first quarter. Principal value of the underlying convertible debentures issued in connection with the Gynemed acquisition, was reduced by 45% in June 2019 due to the partial conversion permitted by the original 2007 agreement. Fair value of the derivative is driven by the variables of the fluctuations in the currency values of both the euro and the Canadian dollar as well as the change in the company's share price between measurement dates. We remind you that the final tranche of this debenture was converted in April, and so after the next quarter, the significant noncash adjustment to income will go away. Income tax expense decreased $207,000 for the quarter ended March 31 compared to $252,000 in the prior year. Current income tax expense increased $132,000 for the quarter, due to changes in the mix between foreign and U.S. state taxes. Deferred income tax actually decreased $73,000 for the quarter compared to $190,000 in the prior year.Deferred income tax expense, as a reminder, is a noncash offset against the company's deferred tax assets. Net income increased $710,000 to $145,000 achieved for the quarter versus the net loss of $564,000 in the prior year, again, primarily attributable to increased sales and gross profits, and the reduction of the loss on the fair value of the derivative. And partially offset by increased acquisition-related expenses of Planer post-closing.Other comprehensive loss for the quarter ended March 31 was $1.1 million compared to other comprehensive loss of $165,000 in the prior year due to noncash foreign currency translation losses by the parent company from the foreign operations of our subsidiaries in Europe. The value of both euro and the British pound gained significantly against the U.S. dollar in Q1. Total comprehensive loss for the quarter, again, noncash, was $999,000 versus $729,000 for the prior year's quarter.Adjusted EBITDA, which we consider an important measure of the performance of the company, increased 21% or $322,000 to $1.8 million in the first quarter, up from $1.5 million in the prior year, attributable to revenue and gross profit growth and partially offset by the Q1 product mix of somewhat lower margins, as well as planned investments in sales and R&D operating expenses to facilitate continued growth in the business.As you know, we provide a complete reconciliation of adjusted EBITDA to net income in our Management Discussion and Analysis report, which is available on our website and on SEDAR. Now turning to the company's balance sheet and cash flow for the first quarter of 2020. Cash generated by operations was $709,000. Cash from Q1 operating activities, a component of that, actually increased $535,000 in the first quarter versus the prior year. The robust prior year increases in total cash from operations of $1.4 million was generated by the changes in current assets and liabilities driven by the prior year timing of quarterly sales and related late in the quarter material purchases.The company continues to invest in inventory growth to facilitate expanded product offerings primarily in the Americas, to enhance product efficiency, production efficiency, rather, in the U.S. and the U.K. and to provide the industry's best fulfillment turnaround in Germany and the EU. We continue to review and manage our inventory to optimize our new and existing opportunities.Cash used in investing activities was $426,000 for the quarter for ongoing investments in intangible development cost by our R&D teams for next-generation and new product development as well as equipment and software for sales and production. Cash generated by financing activities was $2.9 million for the quarter due to the $3.5 million drawdown of the company's line of credit, then as we've disclosed as a precautionary step, to maximize cash in response to the uncertainties of the COVID-19 pandemic.These funds were partially offset by scheduled term loan debt and lease payments, versus the $382,000 of cash used last year in Q1, attributable also to scheduled term loan and debt payments. Our quarterly ending cash position of $15.9 million is up $3.2 million from December 31 due to our cautionary dry down of that revolving line of credit availability. In addition, we have $3 million of availability in our separate acquisition line of credit, which is an important resource for our ability to complete acquisitions with a relatively low-cost of capital.In April, after the close of the quarter, we further improved our balance sheet with the conversion of the remaining convertible debentures, exchanging approximately $2.2 million of the outstanding accreted convertible debenture, plus the fair value of the derivative liability as of the date of the conversion for the 4.1 million common shares in accordance with the terms of the debentures. Company also paid the 3-year accrued coupon interest of approximately $388,000 to the 3 debenture holders.In May, the company's U.S. subsidiary, HT, Inc. closed on an unsecured bank loan guaranteed under the Paycheck Protection Program in the amount of $775,000. This loan specifically supports the ongoing U.S. staffing and operations of HT, Inc. And the loan may or may not be forgiven in whole or in part to the extent permitted under the program. In summary, we are well positioned to support our operations in the coming months. And with today's added financing, we're very well positioned to continue our acquisition program and financing further growth as the business climate improves. Now let me turn the call back over to David to comment on the HTL outlook.
Thank you, Michael. As many of you would imagine, the coronavirus or COVID-19 outbreak continues to add substantial uncertainty to the short and mid-term outlook for the business. Despite our strong start to the year, we -- as discussed in our last call, we experienced reduced demand for some of our products and services in certain territories as the quarter developed, as many IVF clinics reduced their activities.As a reminder, in March of 2020, the main scientific bodies that provide guidance to IVF clinics in Europe, which is ESHRE and the Americas, ASRM, as well as regulators in certain countries recommended or in case regulators mandated in some cases, that clinics suspend new procedures. This led to a reduction in demand, which has continued in the second quarter. But we have also seen demand for some of our products return in certain territories, notably China, which had been severely impacted in Q1. In addition, commencing in late April, guidance and regulations in most of Europe and the Americas have turned to encouraging IVF clinics to resume operations with enhanced safety measures. In fact, just today, ESHRE, ASRM and the IFS put out a joint statement reiterating that infertility is a serious time-sensitive disease and its treatment must be considered an essential service.The group's also reiterated and codified their joint guidance on safety and tracking measures to support the safe reopening of clinics and announced a number of research projects underway to measure the effects of COVID-19 on the health of mother and child. So generally, our business has behaved as we expected. Our consumables business declined significantly for a period of time as clinics reduced activity and have clearly bounced back in much more of a V-shaped recovery as clinics reopen.Our equipment business will likely take -- have a longer U-shaped recovery as our -- as many customers hold off on pulling the trigger on capital expenditures versus the must-haves of consumables. And our services business have generally hung in with some but minimal impact on our lab testing services. While our equipment maintenance service business have been impacted by travel restrictions. But as regions open, we expect to be able to serve that backlog.That being said, I'd like to emphasize that it is not certain how quickly IVF clinics will return to pre pandemic levels. And of course, while we all hope it doesn't happen, what the effects will be if another significant wave of COVID-19 occurs. I'd also like to add a few comments on the financing that we announced this morning before the call. We raised approximately USD 5 million in a private placement with a small number of institutional investors. As you can see from our balance sheet, we do not strictly need to raise money. However, we think it's prudent today to strengthen our balance sheet to better equip us for whatever the future holds, and more importantly, provide us with additional financial strength to pursue our acquisition strategy. Augmented by this placement, we currently maintain a very strong balance sheet with cash on hand of approximately $20 million and net debt of approximately $10 million, following, as Michael mentioned, the recent dry down under our line of credit.Finally, I'd like to address 2 special matters we have on the agenda for this year's annual meeting. As we have discussed at various point of times, at some point, we believe that an uplisting to U.S. exchange such as NASDAQ or some other well-established exchange could make sense for us. Accordingly, we have 2 special matters on our agenda. First, we are asking approval for a share consolidation, or reverse stock split, as the Americans would say.The approval of a consolidation may be required in order to allow us to meet the listing requirements on another exchange, which would have minimum dollar value per share. We are looking for the flexibility to accomplish this as and when it makes sense. Second, we are asking for approval to move our province incorporation from Ontario to British Columbia out of continuation in legal parlance. Under Ontario law, we are required to have 25% of our directors be residents of Canada. Again, if and when we move to another listing structure, this will be perceived as limiting. And BC has no similar requirement. I'd like to repeat that despite the uncertainties around COVID-19 outbreak, we continue to work on our acquisition program with a goal of completing one or more meaningful acquisitions every 12 to 18 months.However, we have to be realistic that the effects of the COVID-19 virus could affect this goal. In closing, I'd like to thank all of our shareholders for the support you have shown in our company, and I would like to now open up the line for questions.
[Operator Instructions] Your first question is from Andrew Hood of M Partners.
Good quarter. I was just -- my first question was on that PPP loan. I think last quarter on the call, you guys said you were looking for about $1 million. So I'm assuming this was -- is there any other sort of PPP loan or anything else that you guys are still trying to get?
Yes. So I'll give you a quick answer, and Michael may want to indulge. So we, in fact, we're looking at PPP loans for 2 of our U.S. operations, the Hamilton Thorne, Inc. business, which is our capital equipment business, and the Embryotech business, which is our lab services business. As I mentioned in my remarks, the Hamilton Thorne, Inc. business, the capital equipment business, has shown a meaningful decline in sales and activity. And for that business, we made a decision of a PPP loan, which is designed to allow us, which is we did, to keep nearly all of our employees on staff. That was -- that made sense and it was in both the letter and the spirit of the program.For the Embryotech business, as mentioned, we've seen some small decline and almost more compared to last year's quarter, which was a very, very strong quarter. So we have -- but nevertheless, the business is really going along pretty well, and we didn't think it was appropriate to take a PPP loan for that unit.
Okay. And just on the forgiveness aspect of it. I've seen for other businesses that have gotten this, basically, they get forgiveness as long as they don't expand their sales force or anything like that. Is that kind of how this one works, too?
Michael, would you want to take that? And then obviously, with the caution that we don't know how it's all going to turn out because they're changing the rules on it, not like a daily basis, but clearly frequently.
Yes, exactly. Some continuing changes of the rules, but it's our assessment right now that we are complying with the essential forgiveness provisions. And first and foremost, this was to absolutely support the U.S. Hamilton Thorne Inc. entire workforce. So this was sorely needed to avoid any sort of layoffs and things we would have had to do otherwise. Regarding forgiveness, we believe that we're essentially complying right now and looks like if rules don't change, we should be in line to achieve a large portion of that forgiveness. But again, this is still projecting looking forward. And we certainly want to be very cautious on that. But at present times, with known rules, it seems as though we would be successful with a significant portion of that forgiveness.
Okay. And then on the expense front. Obviously, you guys have had Planer for a little while now, I guess since August. And I think you mentioned in your MD&A that you're still looking at expanding the sales team in both Europe and the U.S. So I'm just wondering for expenses, let's say, on the wage front, $2.3 million this quarter. Where do you see that going in the short to medium term?
So on the -- in terms of hiring, we did put a hiring increase in place at the end -- kind of middle of March. And that included the addition of sales reps for the U.K. In fact, the U.K. has been one of the slower regions to reopen there. In the U.K., the regulatory authorities actually mandated closures of clinics. Not every single clinic and every single activity, but with the force of regulation as opposed to with the force of recommendation as in it was in majority of other locations. And our clinics are slowly reopening by having to essentially get the regulators to review and approve their reopening plan and their mitigation measures and contingencies. So we are continuing to put off that hiring. I would -- again, on the one hand, we want to put it off because we don't want to hire somebody ahead of -- well ahead of the curve, particularly if their clinics aren't open, and they're not going to be allowed to visit the clinics. But on the other hand, we see that as a important element of our midterm and certain longer-term plans to have robust direct sales team in the U.K. selling both the Planer products and the other HTL family products.So if I had to guess, you wouldn't see that hiring -- well, it certainly won't have any meaningful impact in Q2. Maybe if we're lucky, we'll bring -- we'll get more confident, bring somebody on. But certainly, in Q3 and Q4, you would see an additional expenditure related to sales -- well, a salesperson and really more of an application specialist.
Okay. And then the last question, I guess, 2 questions for me here. You mentioned that China was particularly weak in Q1, but I didn't see any numbers attached to that. So I don't know if you guys know off the top of your head here. What were sales in China versus the previous quarter or maybe in Q1 2019?
So as you know, we don't give specific numbers for specific territories, but I can tell you that in our IVF-oriented business, the ART business, it was -- I wouldn't say it was quite 0 in Q1, but it was very close. Just to remind you the typical cycle -- and again, Chinese New Year was a little early this year. The typical cycle is -- a business, cycle is that clinics and sort of everybody closes a couple of weeks early for Chinese New Year. And then reopen some of it after. In this case, there was no reopening. So we saw a very little business in China in Q1.It turns out another part of our business that was, I would say, reasonably robust. So China is -- completely didn't go to 0, but it was -- that was probably the most meaningful impact. And in Q2, again, without giving numbers, we saw our business return to typical quarterly levels. We haven't yet made the, I guess, made up the backlog. That was kind of missed for Q1, if you want to think of it that way. But we would hope that, again, capital equipment in the short-term is not a must-have like consumables, but in the long term, it is. And we would believe that those deferrals will ultimately come through.
Your next question is from [ Kelsey Stalnic of II Securities ].
Just one quick question for me. I'm just curious to get an update like in terms of what you're seeing in terms of acquisition targets, like some of these smaller players who might have some difficulties being afloat during COVID? What kind of metrics are you looking at, et cetera?
Yes. So thank you for the question. We clearly have, in some ways, increased our focus on acquisition activities in the first -- we're nearly end of it, first half of this year. Some of it related to COVID, some of it indifferent to COVID. As some of you may recall, in the last half of last year, we hired a Director of Corporate Development, came on full-time early this year. So he's very much devoted his job as to identify, nurture and ideally put over the -- push of the finish line acquisitions. So we've increased our activity with a focus on all sorts of businesses. In general, we tried to buy good, solid, well-run profitable businesses, and avoided kind of science projects and fixer-uppers, even if they might be inexpensive because they can be very expensive in the long run.So there are some -- these smaller companies that you mentioned that we are talking to that we -- or think may be good targets for us, either because they're having financial difficulty or realize that being part of a larger organization would give them financial strength and staying power, if the pandemic returns with a vengeance in the fall as some people are thinking or just future unknowns happen. Thus far, and maybe this is kind of the flip side of the good news, bad news, is that most of the good, well-run smaller companies that we're talking to believe that they have -- that business will come back. And they have financial resources to survive. And they want to -- so their kind of valuation and motivations haven't changed materially from prior discussions. That being said, there are some of them that, again, do think more about that it would be valuable, which has always been our kind of our approach to these companies, to be part of something larger, benefit from our economies of scale, benefit from our access to capital, benefit from our growing worldwide direct sales team and our established distribution channels. So again, I can't give you a specific update on either or companies or timing, but I will tell you, the activity is increasing in scale.
And I guess just a follow-up in terms of the financing, a portion of that is probably or most likely for your acquisition program, but also to weather the COVID storm yourself. What is sort of the breakout there?
Yes. So again, as I mentioned in our -- I think it was my remarks, maybe Michael said, we don't really need financing today for survival purposes. We were cash flow positive in Q1. We did in our last conference call, and I think in our last press release, note that we can't guarantee or maybe really can't forecast whether we will be as we have been every year for the last 5 or 6, 7 years, cash flow positive for the entire year. So the idea of bringing on a little extra cushion, if you want to think of it that way, made some sense to us. And again, in worst case, it could be a really significant resurgence of COVID, in which case having financial cushion would be very valuable. That being said, we're optimist at heart. So we certainly hope that the primary use of proceeds will be for our M&A program.
[Operator Instructions] The next question is from Devin Schilling of PI Financial.
Guys, good quarter here. Just wondering, I know you guys have mentioned in the past here that your cell culture media product line has a bit of a longer shelf life than some of the competition out there. So have you guys seen any uptick from this segment as clients begin to reopen here and to potentially having some spill of inventory? And I guess should we expect more of a sales focus and area moving forward?
Yes. Thank you. So just as a reminder, our most established territories for our cell culture media are primarily in Central Europe, in the German speaking countries. And some of the eastern -- some fair amount in Eastern Europe and then some selected parts of Asia. In a funny way, our longer cell culture -- our life -- I don't know if it will lead to lower sales, but we're not going to get the uplift automatically that some of our competitors whose -- essentially their product spoiled while the clinics were closed and the clinics need to reorder.That being said, we are looking at and have offered programs. And formally, I wouldn't say we put on a real formal program on this, to help those companies through and ideally incent them to switch to our media, which does have longer shelf lives. And I think will result in less -- obviously, less spoils at the clinic level. Importantly, that has also led -- though I can't say it's led to 0, but certainly less spoilage at our inventory position level. So some of our competitors, I don't think anybody's announced this, but I would certainly imagine they would have inventory write-offs as the inventory begins to go bad. I hope that was responsive to your question.
Yes, yes. No, of course, that makes sense. I guess just as a bit of a housekeeping item here. What was the revenue contribution from Planer this quarter?
Michael, I don't know what your response might -- that might be.
So as you know, Devin, as we've talked about, as you begin listing, we don't release individual results for our operating units, and we have a lot of cross-sell and a lot of interaction between them. I think I would assess that in general saying they were in line with expectations and in line with our projections and where we are looking for the direction of the Planer business to move to. So I would say we were happy with their contributions overall.
There are no further questions at this time. I will turn the call over to David Wolf for closing remarks.
All right. Well, thank you very much. I appreciate the attendance on the call. As most of you know, we had a call just about a month ago, so there probably isn't a lot new to talk about, and so we had a quick and efficient call. As always, I appreciate the support of our shareholders and the analysts who cover us. And I look forward to speaking to you all again in about 3 months. Thank you very much.
This concludes today's conference call. Thank you for your participation. You may now disconnect.