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Thank you for standing by. This is the conference operator. Welcome to the Protech Home Medical Second Quarter Fiscal 2019 Earnings and Corporate Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Greg Crawford, Chairman and CEO. Please go ahead, sir.
Thank you, operator, and thank you all for joining us today on the call. My name is Greg Crawford, and I'm the Chairman and Chief Executive Officer of Protech Home Medical. Joining me today is Hardik Mehta, our Chief Financial Officer.On this call, I would like to outline our core business, review our progress over the past year with a focus on the last quarter and provide you with our updated outlook for the rest of calendar 2019.I hope we will leave you with a resounding impression that Protech is in a truly sound commercial position in respect of its financial performance, its operations, the balance sheet and organic and inorganic revenue opportunities. On May 21, 2019, we announced our Q2 fiscal 2019 financial results for the period ended March 31, 2019.But first, a brief background on our story. Protech Home Medical provides a diverse offering of home medical equipment and services for treating patients with chronic disease in the United States. The company provides a range of products, including respiratory, oxygen, various medical supplies, power mobility and Coumadin home monitoring. We operate in 12 states across the Midwest and East Coast region, completing hundreds of thousands of deliveries each year to our more than 80,000 active patient customers. Our growth strategy is focused on utilizing technology to make life easier for the patient, the physician and improve health care outcomes.Today, for example, if a patient needs respiratory equipment, he or she would typically have to drive to a location to pick up the equipment and receive some level of in-person training. If the patient has trouble with the device, either someone drives to them or they are forced to come back to the location where they acquired the device. In contrast to that, Protech uses our technology to reduce or eliminate these points of friction, resulting in more successful treatment and management of these chronic conditions and, not unimportantly, at a higher margin yield per patient.With that background, I'd like to hand the call over to Hardik to discuss our Q2 fiscal 2019 financial results.
Thanks, Greg. In reviewing the financial results for the second fiscal quarter ending March 31, 2019, please note that all financial values are in Canadian dollars and the full results are available on SEDAR.In the second fiscal quarter of 2019, Protech completed 11,641 setups or deliveries, compared to 9,798 in the corresponding period last year, an increase of 18.8%. The company generated revenue of $21.9 million, up 17% from Q2 fiscal year 2018.Our efforts to streamline operations and standardize regional processes continues to bear fruit. Recurring revenue in October stood at 37%, compared to 38% for the second fiscal quarter last year.We continue to maintain our gross margin. Gross margin for current quarter is 71% and year-to-date is 71.4%, compared to 70.3% for the same 6-month period in 2018. This reflects continued changes to product mix as well as streamlining pricing standardization across the company.Adjusted EBITDA for Q2 fiscal year 2019 was $4 million, up 78% from the corresponding period last year. Adjusted EBITDA margin for the current quarter was 18.2%, up significantly from 10.1% in Q2 fiscal year 2018. On March 7, 2019, we closed a $15 million unsecured convertible debenture bond deal offering, which allowed us to pay up all debentures that was coming due in December of this year.Notwithstanding the cyber attack on our company that Greg will address shortly, our balance sheet remains strong. At the end of second quarter, we had $19.1 million in cash. As of today, following the attack and the repayment of debentures, we have sufficient levels of cash and working capital requirement to operate the business and grow organically. Current assets including cash totaled more than $44.68 million at March 31, 2019, compared to $28.4 million in net short-term liabilities.From an equipment finance leasing, we continue to finance major equipment processes with leases from our major vendors. And we believe that we will be able to fund our future equipment growth using the same financial instruments. However, there has been an industry-wide change whereby 7 leading vendors have changed their leasing policies. As a result of which, over the next 2, 3 quarters, we will borrow slightly lesser than what we had in the past. From a capital perspective, we are actively engaged with debt sources to establish a line of credit to support our accelerating growth.To summarize: our balance sheet remains solid, our operational base continues to grow, and we continue to post industry-leading margin.Thank you. And with that update, I'll turn the call back to Greg.
Thanks, Hardik. We have been very happy with our operating performance over the last year and are pleased to report that the growth we saw through 2018 has continued into 2019.I want to take a moment to explain a little more in depth what we are doing differently and why we have been able to achieve the results we have since our management came on board and why we continue to be so excited about the future.Protech uses unique efficient delivery cost models and technology to change the way in which home medical equipment is delivered to a growing aging U.S. population. This segment of the market, known as the durable medical equipment, or DME providers, is estimated at around $60 billion in 2020. That is underlined by the fact that over 10,000 people in the U.S. will turn 65 every day for the next 15 years. That is our core market.In the last 12 months, we had set up or delivered over 0.25 million pieces of equipment to over 80,000 patients. We operate out of 33 locations in 12 states and now have over 13,000 referring physicians. Our core product offering is for chronic illnesses treatable at home. Using proprietary streamlined logistics and distribution, Protech can offer home delivery and maintenance on this equipment, which is a first for many of these patients.The respiratory market, one of our key target markets, is interesting in that the demand for services continued to rise, but the supply side is fragmented and shrinking as significant reimbursement cuts have reduced the number of providers in this segment. There are very few companies like Protech that have the scale and competitive advantages, including those from technology and logistics, to benefit from such structural changes, and now, the balance sheet to feed upon these opportunities. I would now like to review with you the 3 components of our growth strategy that we implemented upon taking the reins of the company in late 2017.First, we are laser-focused on capturing market share economically and profitably. Our industry growth rate is about 3% to 5% annually. However, we believe we can achieve more than double the growth rate of industry. We are currently focusing on significantly increasing our market share in key target regions within the markets we serve. To execute on this, we have doubled our sales force. We will continue to expand our product base. It is important to remember that this is an industry at scale and Protech is still at the early stages of reaping the full benefits of scale. The benefits of scale will further magnify as we continue to grow both organically and through acquisitions.Secondly, we continue to lead the industry in technology deployment and the use of data mining tools to drive efficiencies and profitability. A patient's ability to order a piece of equipment, a service call or other ancillary option via the touch of a button is where this industry is headed. We have made significant investments in developing these tools, and we'll continue to invest, and so, we continue to maintain our cutting-edge advantage.The third component of our growth strategy is acquisitions. Our key focus for acquisitions is to consolidate the distribution channels and drive efficiencies and profitability of the acquired companies by integrating them onto the platform Protech has established. To recall, we made 3 acquisitions in the last calendar year, which had been successfully integrated. Our goal is to be at a run rate of $100 million in revenue by the end of this calendar year.Our combined three-pronged growth strategy should continue to reflect higher margins as our volume grows, allowing us to benefit from material purchasing volume benefits.Finally, I want to address the cyber attack that most of you are aware of, which we press released on May 6, 2019. Protech was the subject of a sophisticated breach of our e-mail system that ultimately led to the theft of approximately $9 million. We believe that we were able to jump on the situation quickly. Our advisers and especially our legal counsel engaged key regulatory and enforcement authorities in Canada, the United States and Hong Kong. We are fortunate to have legal advisers that have strong practices in North America and Asia.As you know, in order to stand by our commitment to our debenture holders, I stepped in with a personal loan to the company for $3.6 million that closed last week and allowed us to make the debenture redemption and lead the company with sufficient working capital to meet our ambitious internal growth targets. We are in a position today to say that there are some reasons for cautious optimism regarding recovery of the stolen funds. Recovery, if at all, will not be easy or a short process, and we caution all on this call that there can be no assurance that these funds will ever be recovered. We commit to keep the market informed as our legal counsel actively and aggressively work towards recovery. I have been advised by our counsel not to take any questions on this matter at this stage due to the nature of the ongoing investigation.If there is one takeaway I want you to have from these comments on the theft, it is this: our balance sheet is sound, we have sufficient funds to continue to provide our customers with excellent service they have come to expect from us and to provide the markets with the growth that they have come to expect from us.In conclusion, I want to leave you with these 3 clear messages. First, our core target market is growing and we continue to expand our market share therein. Secondly, our exceptionally strong balance sheet, expanding margins and cash flows allows us to speedily respond to strategic opportunities, creating a dynamic, and we believe, highly attractive investment opportunity. Finally, engaging with capital markets is a top priority for us. We truly believe that at current share price, Protech is highly undervalued compared to its peers. We will continue to tirelessly share and promote our story to the markets.We look forward to continuing to demonstrate strong financial results, and we'll continue to communicate to our retail and institutional shareholders the progress we're making towards our goals.This concludes our prepared remarks, and we will now open for questions.
[Operator Instructions] The first question comes from Doug Cooper with Beacon Securities.
Congratulations on a nice Q2. Greg, you indicated the industry growth rate around 3% to 5% and you guys are plus 17 and change in the quarter, obviously aided by some acquisitions. What do you think your organic growth was in the quarter?
Yes. About -- probably at roughly 6% to 7%.
Sure. You said you're in 12 states right now. Can you expand organically into further states or it has to be done through acquisitions? And what states might be most attractive to you?
Our primary focus has been the Midwest and the Southeast, and we can typically expand into neighboring states, but we've really been looking to fill the distribution channels in the current states that we operate in.
Okay. You've mentioned the product expansion. Can you expand on that maybe a little bit what might be interesting to you in terms of product lines?
Product lines is getting all of our locations in that to carry the same products and introducing those to our referral sources. Some of our locations in that don't necessarily carry everything and they're not known -- they're maybe just known for a certain product, maybe they're just known for oxygen and we want to introduce sleep in that same market. So we've been trying to expand across all of our product lines in all of the current locations.
Okay. Recently, Medicare announced a competitive bidding in 2021 for non-invasive events. Can you just maybe talk a little bit about how you think that will impact your business?
We believe that, likely, there's going to be some type of a reimbursement cut on the noninvasive ventilator product in that as in the past there have on the other product lines. But we think the number of referrals and things like that potentially could help us. If we were awarded contracts in certain metropolitan areas in that where we currently operate and maybe there were other companies that did not. So we're kind of up to the challenge to accept that product. We've experienced competitive bids since 2010. So submitting contracts and operating under lower margins and things is -- are all things that this company has experienced over the past 8 to 9 years.
Okay. You mentioned in your presentation you have 13,000 referring doctors. Can you give us an idea about, a, I guess how that's grown over the past year or quarters? And what kind of market share would that represent in your target areas? And can you drive more rev per doctor? If I can put it that way. Clearly, revenue per patient continued to grow on a year-over-year basis.
Yes. I mean a lot of those physicians in that are -- like I kind of mentioned before, you have a physician that loves you for oxygen, but maybe he also prescribes food products, too. But he don't necessarily prescribes those particular other products or something in that, so we try to work to let him know that we're able to provide sleep products for your patients, not just the oxygen that you came to know us for.
So that salesperson, for example, who talks to that doctor, it's making him aware that you have a more diversified product offering? Is that...
Absolutely, yes.
Okay. So that's like a training from corporate perspective, to get all the salespeople up to speed in the entire portfolio or what is the actual process?
Yes. I mean it's making sure we work with our sales reps on a daily basis. And we have reps that are very strong in one product category, but not necessarily in another. And we try to train them and figure out why are they not comfortable with, say, selling oxygen in a particular market because they're not very strong, but we have data that tells us that those same physicians that are prescribing another product in that are also prescribing oxygen. So when we're able to use the data mining tools in that, that we have and then provide that, that's where we're starting to see the fruit of the results of some of that data and -- that we give to the reps and then they're able to kind of go and cross-sell some of the products.
All right. And my final question for Hardik. Just on the balance sheet, as of March 31, working capital is $16.3 million. Obviously, subsequent to the quarter, you had the cyber theft. You paid the debentures and then Greg's loan. What -- and I'm guessing you're generating some free cash flow as we progress through Q2. What is the working capital situation now? Can you talk about that?
Sure. So I mean, you're right. I mean, post that, we are currently sitting with $3-plus million of cash and our AR and inventory are pretty strong. Our trade payables are kind of flat. So if you take the working capital and minus what was paid in debentures, which was part of the short-term working capital at the end of second quarter and take out what was subject to the cyber attack, I think we are pretty strong, even better, compared to where we were at this time last year.
Right. So -- and working capital last year at this time was in and around $4 million, $5 million. Would it be -- you'll be in a better position than that right now on a pro forma basis or actual basis?
Yes. Absolutely, yes.
The next question -- this concludes the question-and-answer session. I would like to turn the conference back over to Greg Crawford for any closing remarks.
Thank you, operator, and thank you all for your participation today. As always, you can find us on the web at protechhomemedical.com, where we will be posting the transcript of this call and all our updated investor deck. On the site, you can also view some of the exciting products and developments discussed on this call. Thank you and goodbye.
This concludes the question -- today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.