Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the intelligent incorporated fourth quarter in full year 2019 results conference call.
At this time, all participants lines are no listen a limit.
After the speakers presentation.
Will be a question and answer session.
That's a question during the session you'll need a press star one on your cell phone.
Please be advised that today's conference is being recorded.
Except for historical facts statements in this presentation as well as oral statements or other written statements made or could be made by tells incorporated or forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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For example, without limitation statements about the company's anticipated growth and future operations.
Current or expect a market size first products the success of our current or future product offerings, and the research and development efforts and the company's ability to file for and obtain <unk> food and drug administration approvals for feature products are forward looking statements.
Forward looking statements are merely the company's current predictions a feature event.
The statements are inherently uncertain.
An actual results could different materially from the statements made here it.
There is no assurance, but the company will cheese sales levels that will make its operations profitable.
F.D.A. filings approvals will be completed and obtained as anticipated for description of additional risks and uncertainties. Please refer to the company's filings what the Securities and Exchange Commission, including its latest annual report on foreign 10, K. and its latest quarterly report on foreign 10 Q.
The company seems no obligation to update as forward looking statements.
Reflect new information and development.
If you require any further assistance please <unk>.
Oh now like to hand, the conference over your speaker today.
Mr. Damien Infinium Pelzer incorporates chief financial Officer. Thank you. Please go ahead Sir.
Thank you Daniel and good morning, everyone.
Damien <unk>, the Chief Financial Officer, Intelligent I'm joined on this morning's call by our new President and CEO Tim Sawyer.
Before introducing you to 10 on behalf of all employees intelligent I wanted to take a moment to thank our former president and C.O., Jason Grant itself Gardner for his vision and significant contributions made to this organization.
Now this morning, I'm excited to introduce you to our new President and C.E.O., Tim Sawyer. He brings over 26 years of experience in the pharmaceutical industry, having held a variety of senior executive positions in general management marketing and sales.
Prior to join intelligent Tim spent 16 years at bar laboratories, eventually serving as executive Vice President Global generic sales and marketing where he led a team of nearly 2000 employees in 25 countries.
Subsequently, Tim held positions such a senior Vice President corporate strategic development at Milan, and President retail Medicine at one 800 doctors think most recently Tim served as Chief Executive Officer, Jerry attracts a manufacturer and marketer of generic over the counter pharmaceuticals.
Since Tim joined on February 5th is leadership style has been consistent and it's no surprise. He's had success in this industry. He's a great listener adapted building relationships quickly crystal clear with his expectations and does not hesitate and holding individuals' accountable. We are confident in his ability to leave this organization.
The next phase about evolution.
And with that introduction I will hand, the Mike over to Tim Tim.
Thanks, Damian good morning, and thanks for that kind introduction I truly appreciate the time, you've spent helping me get up to speed quickly. Thank you I'm, Tim Sawyer, the new President and C.E.O. intelligent I'm delighted to be here with you. This morning to discuss the queue for in full year 2019 results for <unk>.
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Been five months since since televisions last call with investors, So needless to say Damien and I have a lot of topics to cover this morning.
I'd like to start by thanking the intelligent employees.
Board of directors, and the many stakeholders, including shareholders creditors customers and vendors for their warm welcome. Thank you I look forward to working with you as we drive telegrams business forward.
During my first eight weeks with Telligent I've been very clear with all of these stakeholders about my top three priorities.
First resolving the warning letter issued by the F.D.I. in November of 2019.
Seconds, passing the pre approval inspection.
New injectable manufacturing facility in Buner, New Jersey.
And third managing cash flow.
Before walking you through these priorities in more detail I'd also like to highlight that I believe in the company's Tico Topicals Injectibles complex.
Oh my strategy.
My plan is grounded on efficiently executing the strategy not fundamentally changing it.
I worked in the pharmaceutical industry for nearly 30 years.
Strategies companies people in products come and go.
But regardless of the ever shifting headwinds. This industry is based for decades, the companies that succeed know how to execute.
To execute you need to build an organization hyper focused on delivering uninterrupted supply of high quality low cost pharmaceutical products to its customers. My plan is to execute the tico strategy not change it.
Let's talk about our first priority resolving the F.D.A. warning letter there are two phases to the warning letter remediation.
He's one is a physical audit of our facility conducted by a third party auditor.
This phase is intended to show that the current prophecies procedures and policies of the company or compliance for pharmaceutical products. This space has been completed.
And the report was submitted to the F.D.A.
She's too is the documentation audit and review this ensures that all products on the market that are within X. free are verified as safe effective m. sits reduce this phase is nearly complete and we expect a file our final response to the agency in the cutting days.
Although ultimately only the F.D.A. can decide to lift a warning letter I feel confident in the companies were mediation efforts led pirate enhanced quality teams.
Regarding the second priority passing the pre approval inspection.
We engaged the third party auditor previously mentioned to conduct a mock audit of our prior approval supplement application and the beautiful facility, which included the new sterile facility.
At the conclusion of the audit.
Reviewed the findings and our quality an operational teams have worked diligently to address the observations. We believe we are prepared for the F.D.A. inspection.
[noise] our original intent was to use our redeeming product to trigger this D.I. However.
Light of the F.D. action on redeem last week, including requesting the market withdrawal of all related even products distance I'm, the lightly and we will shift to our next injectable product to trigger the P.A.
This product is expected to be filed shortly.
After the warning letter submitted.
Coming days.
Again, although it's ultimately up to the agency to decide our preference and intent is to work with the F.D.A. to perform a combined inspection in view of that covers both what's necessary to lift the warning letter and approve our sterile facility for commercial production.
Managing cash flows has been and will continue to be helpful. Priority under my leadership. The organization was successful in reducing discretionary spending and read a porting the savings to find more invested in our quality Department previously.
Savings however are integral part of entering our company and we will continue to focus on savings like impact our cost of goods to enable intelligent to remain cost competitive in the marketplace.
Another area of focus has been on the company's capital structure.
You'll hear from Damian He has led the team in retiring issuing and swapping convertible bonds.
Additionally to executing amendments on a revolving credit facility and term loan with Aries capital.
Hurts to reduce costs will continue.
Capital structure will continue to with ball.
We also continue to work with our development partner and the F.D.A. to address the second to complete response letter received on our complex drug application.
And finally, we continue to work with Leerink on the non core asset divestiture process initiated in October of 2090, we are progressing and will provide updates as appropriate.
At this point, let me turn the call over to dating and so he can provide more insight.
Actual and projected financial performance and a few other important topics at the conclusion of danger marks I'll share some final thoughts before opening it up to your questions.
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Thanked him.
Last earnings calls in November of 2019, so I would like to spend a few more minutes than usual in order to provide you with a full update on for important topics.
The one <unk> and projected financial performance number two.
Highlights to the areas loan amendments announced earlier today.
<unk> liquidity and finally for our lifting status with NASDAQ So let's start with the first topic actual projected financial performance.
Consolidated net revenues for the fourth quarter of 2019 were $16.7 million, bringing full year 2019 revenues to $65.9 million for 4% short of our last clear guidance.
Quarter revenues were dampened by failure to supply fees that point $8 million point 4 million of which were incurred in Canada, and although it's difficult to quantify it's reasonable to assume that path supply disruptions coupled with the nonprofit divesture process initiated on October 1st and the warning letter issued by the F.D.A. in late.
Number 2000 in 19 combined to dampen demand for our products.
As we worked through these challenges efforts to smooth the ongoing process of balancing supply and demand will be further emphasized and with tens experience and leadership in this area I remain confident that we will get their ass than any covert 19 related business interruptions.
Gross margin for the fourth quarter was 12% 3100 basis point decline from the 43% realized as a year to date September 30th 2019.
Favorable customer and product mix accounted for 1700 of those 3100 basis points decline in the fourth quarter.
<unk>, the rose and accounted for another 1000 basis points, well incremental inventory of reserves accounted for the remaining portion of the quarter on quarter decline.
Fourth quarter total operating expenses were consistent with previously reported September 30th year to date results.
Specific the product development in research expenses, the incremental expense realized in the fourth quarter was driven by a point 9 million dollar noncash right off of a prepaid asked that relating to a delayed tap transfer between two of our injectable contract manufacturers.
Pacific the selling general administrative expenses, we continue to incur legal fees as we vigorously defend our position in ongoing litigation. However for a company about our size legal fees of $1 million on the fourth quarter and $3.7 million for full year 2019 or material.
As you put in today's press release adjusted to you, but for the fourth quarter was a lost the $4.3 million. That's sad consistent with what I described earlier. This loss includes the point $8 million a failure supply penalties recorded as an offset to revenue.
Point 9 million dollar right off recorded in product development in research expenses and the continuing legal defense costs.
Terms of full your performance the company posted 65.9 million of revenue, which is consistent with 2018.
<unk> unexpected performance in the fourth quarter of 2019 year on your gross profit improved by point $7 million were 3%, while gross margin improved 200 basis points from 34% for 36%.
Fourth quarter financial performance led to a shortfall in our goal of forging the path to profitability in 2019, as we posted adjusted EBITDA equivalent to a point 2 million dollar loss for the full year.
We filed for a 10 K. extension on Monday March 30th the extension provide us with an incremental 15 days additional time was needed to execute the loan amendments with areas and add the resulting and required subsequent events disclosures to form 10, K., we intend to file by the end of this week, but certainly before the extended deadline.
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Lastly in terms of projected financial performance, we will not be providing 2020 financial guidance on today's call. There are several major variables weighing on our ability to accurately project and deliver our 2020 financial targets aside from the impact cope with 19 might have on our manufacturing capability.
<unk> indoor patient demand for our product.
<unk> also operating under a warning letter as a consequence of that warning letter our files topical and da's will not be approved and the injectable preapproval inspection will happen either in parallel we're after warning letter resolution.
Variables such as covert 19, a warning letter pre approval inspection complex drug application and the non core assets divestiture process or material and not entirely within our control for all of these reasons, we will not be providing 2020 guidance today.
However, we do anticipate recording and approximately 50% decline in first quarter 2020 revenues.
Looking beyond the first quarter of 2020, assuming successful resolution of the material events mentioned, we would expect to see financial performance improvement over the remainder of the calendar year.
This leads me to the second of the four topics I'd like to cover and that is providing t. highlights to the loan amendments announced earlier today.
Both are actual 2900 financial performance and medium term projections were reviewed and discussed in detail with our security creditor areas capital.
As an outcome of those collaborative discussions we executed amendments to both our first lean revolver and second lien term loan agreements on April sex 2020.
These amendments served to eliminate the original fourth quarter 2900 financial covenants, while significantly reducing the financial performance required to meet financial covenants going forward.
For the four quarters of 2020, the company must record trailing 12 month net revenues of 59 million 55 million 54 million and $57 million respectively.
Beginning with the quarter ended March 31st 2021, the company must report trailing 12 month, adjusted even a performance in excess of arranged beginning with $10 million.
Greasing, the $14.5 million for the last quarter, just prior to low maturity.
Also the calculation of adjusted EBITDA per the amendment now include certain add backs, including but not limited to legal expenses within certain limitations.
In addition to the amendments provide the company with the option to continue picking or differing pass interest paid on the term loan for an additional year.
The company a successful in resolving the warning letter and passing me injectable preapproval inspection by December 2020.
Only one of those items occurs by this time than the company may still elect to pay interesting kind during 2021, but only from the time the second condition has been satisfied.
Beyond December 2021, a portion of interest on the loans accruing at a rate of 4.25% per annum may continue to be paid unkind.
Although I preferences to generate the operating cash flow needed to service our debt to avoid the compound infected picking interest this provision improves the company's ability to maintain the liquidity needed to execute our strategy.
In consideration of the relaxed covenants and potential to extend the pick option cost of capital increased.
Interest rate on the first lean revolving credit facility is lie border plus 5.5% with a 1.5% my bore floor.
The new rates, it's about 100 basis points more than that loan inception in December 2018 for 225 basis points more than the rate just prior to executing the amendment.
The difference between increments at loan inception versus today relates to the 15 month decline in the library.
You men an interest rate on the second lien term loan his life more plus 13% also with the 1.5% library or floor.
The new rate is about 350 basis points more that loan inception, or 475 basis points more than the rate just prior to executing the amendment again the difference between the incremental loan inception versus today relates to the 15 month decline in line more.
Lastly areas was granted approximately 5.4 million warrants at the cost of one cent per warrant equivalent to just under 10% of the outset standing shares of the company at December 31st 2019.
More detail on these loan amendments will be made available to the public when we file form eight k. aftermarket closed today.
Going forward by resolving the warning letter passing the pre approval inspection and consistently achieving positive financial results cope with 19 aside.
Credit profile should improve and we will be in a better positioned to work with areas capital.
Listing bondholders and potentially new creditors to address our capital structure and must reduce our cost of capital.
Having a review the key highlights the loan amendments, let's move to topic three of four hour liquidity as you heard Tim mention is opening remarks, one of our top priorities is to manage cashflows and I will add particularly in the second quarter of 2020.
Given the impact coven 19 might have on our business and less anticipated cash collections from customers as a consequence of the decline is first quarter 2020 revenues available cash balances will decline over the course of this quarter.
We issued series be bank 2023 convertible bonds and the fourth quarter of 2019, we used to 29.3 million of gross proceeds from those bonds plus the final 10 million dollar draw from our term loan with areas to cover fees associated with the capital raise pay down current liabilities retired third.
Team between $1 million of December 2019, convertible bonds and provide the company with further liquidity.
The increasing current assets and declining current liability is associated with this bond issuance in term loan drawl working capital at December 31st 2019 increased to $45 million. This represents a 28.4 million dollar improvement I'm working capital from what we reported that September 30th 2009.
Team.
More specifically we ended the year with 15.5 million of cash from the balance sheet.
In order to preserve cast we will continue to pick her differ cash interest payments on our series be may 2023 convertible bonds and the term loan with Aries keeping in mind. The company now has the potential to extend this option for another year, yes, we are able to resolve the warning letter and pass pre approval inspection by December 2020.
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We continue to pay regular insist on our areas revolving credit facility as well as our series they may 2023 convertible bonds.
With the loan amendments announced today Telegenic quarterly 2000 men 20 cash interest payable to areas will increase by about $150000.
Crease relates solely to the estimated 225 basis point increase on them revolving credit facility.
Our next semiannual interest payments are bondholders is $1.6 million and is payable in may 2020.
Lastly, we like many other companies with less than 500 employees are exploring and have applied for Kobe 19 relief made available by recently passed state and federal legislation in the form of payroll related reimbursement and low cost small business Association loans.
I'm in switch gears to the last topic are NASDAQ lifting status and potential for reverse split of our common stop.
June 2019, we received the lifting notice from NASDAQ due to our share price trading below one dollar for 30 consecutive trading days.
The notice specified that our share price most trade above one dollar per share for 10 consecutive trading days prior to December 2nd 2019 in order to prevent are common stock from being do you listed.
On December 2nd 2019, we had yet to regain compliance.
He requested the second 100 and day 180 day extension NASDAQ denied I request and the company chose the file for an appeal.
The company was granted hearing date for the end of January 2020.
Subsequent to the appeal hearing shareholders approved to reverse stocks split in the range of any home number ranging from five and 10 to one.
Soon after we were informed by NASDAQ that are appeal was denied.
In light of the coded 19 impact on the markets Navteq set a deadline to regained compliance of June 1st 2020.
Although possible is not probable that business performance alone, particularly as we navigate through covert 19 related challenges will be the catalyst to increase the share price above one dollar.
Are shares argue lifted from the NASDAQ we would be in default for the nonfinancial covenant required by our senior credit facilities and convertible bonds, and we would need to seek a waiver where seek new capital.
Leaving reverse stock split as the only remaining option to prevent this occurrence.
While we believe that the reverse stock split will ultimately increase our share price above one dollar for their required 10 consecutive trading days, we can provide no assurances this would be the case.
What's that let me now turn the call back over to Tim for his final remarks before we moved to the question to answer portion of today's call Tim.
Thanks Damian.
I can come from my first two months, you're intelligent have been exciting as Damien and I've highlighted the company has some headwinds however, the untapped potential of this company is evident and I'm thrilled to be here and confident that I have the management team an employee base needed to execute efficiently to achieve our objectives.
We hope that you when your families are safe and in good health our teams you're intelligent, particularly those on site working it'd be able to inspire me every day their dedication commitment and loyalty to both this company and our customers and patience is admirable.
During this pandemic, we've taken many extra steps to protect our employees and I'm glad to report that no teletext employee has tested positive for cope with 19.
Manufacturing in viewing it and distribution from our third party logistics provider has been thankfully uninterrupted <unk>.
We are recognized as an essential business in each me because Italian country, where we are located and that's such we're operating normal we continue to closely monitor our supply chain to ensure we have the materials necessary to produce our products.
To date, we have not experienced any significant delays in production. Thanks to the commitment of our operators. We're proud to have a U.S. manufacturing facility for our products. We look forward to utilizing it's expanded capacity upon approval from the F.D.I.
With that I will now ask Daniel to open up the call two questions like.
As a reminder to ask the question you'll need to press star one on your telephone to withdraw your question press the pound key.
Please stand buying while we compiled the q. and a roster.
Our first question comes from Matt here with Craig Helen <unk> Capital Group your lines no.
Good morning, Tim Welcome you know nice to hear from you. This morning, I I've got a few questions. Maybe the first that you could start with just what attracted you to this opportunity you know where do you see the the the near term low hanging fruit and how quickly do you think you.
Capitalize on that.
Thanks, So I I think a couple of things first what attracted me to the opportunity. Obviously, you heard of a bunch about headwinds and things today, but what attracted me to the opportunity specifically is the product portfolio and the Injectibles transition.
The company had was under under that was undergoing at the time that I joined.
I think injectibles are critical component to the medical.
[noise] treatment protocol I think that they are an area, where there is lots of opportunity, particularly as you've seen in the marketplace with drug shortages. If you <unk> that area. So I think that was very very interesting to me and I think that the ability of this company to launch into that market is is really exciting.
So that's the first part the second part what do I see as low hanging fruit I think the first thing that we did an art doing is.
Improving our product supply. So what are the things that this company was burdened with previously was they they were unable to be a reliable supplier for customers and customers demanded that admits marketplace not not being an instrument.
Permitting supplier and that causes you know lumps in your sales lumps in your earnings and so we undertaken eight.
Comprehensive plan to overhaul our supply chain in our prophecies for on how we work and forecasting predict our business going forward. So that's the first thing is to become a reliable supplier for our customers.
That will pay off your dividends when our customers C.S. at such and are able to rely on US day any day out when we become they you know their first year, you know call when they're looking for new products. So I think that's a very low hanging fruit.
For us.
I think I might have forgot what your third part of your question plus.
No that that's that's perfect. Thank you you touched on one of the thing. So as you look at getting the Injectibles facility up an approved by the F.D.A.
<unk> one of the the opportunities with the first drug that was submitted was that you know it was a drug that had a history of shortages whatever <unk> as you look at shifting to a second submission to garner the the or to trigger the inspection is that your plan with that.
Second submission is to find a an opportunity where it's a drug that either either is currently on shortage or has a history of being on shortage or maybe even there's an opportunity within something within the current a virus treatments where.
There's there's a need in a demand that would trigger the F.D. to maybe come in sooner rather than later.
Yeah. So so good question. So so what we're what we're looking at the second product obvious will be file to your shortly it doesn't have a shortage. Currently however, as a as a part of an N.B.A. and it's a pre approval supplement.
<unk> <unk> what will happen then there's the statutory timeline that yucky has to come in and inspect for so because they have to respond to the agent to the.
Supplement within certain number of months. So number one this this product allows us to push a bastard track on that.
Number two we are always and what you mentioned is important we are always looking for opportunities to accelerate the timeline and if there are coded 19 related ways to do that we will we will pursue them vigorously to work with the agency to get to accelerate that approval.
<unk>.
Okay and then.
And I don't know if you know the answer to this but I thought I'd ask it anyway.
Given the situation with the.
The the the country right now.
There are you hearing anecdotally any issues with <unk> conducting inspections I know that they're considered obviously, a an essential business and they're still going to work, but is that slowing down the inspection process anyway any way that you heard.
They they have made a couple of announcements at the agency about delaying inspections absurd particular types.
We we we believe that you know quite frankly, we believe that with what's going on with this pandemic. The fact that we're a U.S. manufacturing facility.
Located in New Jersey, as we talked about on the call that we would want to the that that there was an incentive for them to approved domestic manufacturing capacity and so we believe that they they they will want to do that with us and we'll give them every reason to approval. So.
We're going to move.
Forward quickly, but we think that there's an incentive for them to do.
Understood and then you actually just touched on another question I had maybe just elaborate a little bit further.
Given what's happened.
Guarding the Coke Corona virus cope with 19, and what appears to be at least the initial stages of desire to bring more manufacturing back into the country versus China, India whatnot.
How does that sets you up let's assume we get through the headwinds over the next year.
Get through these inspections and whatnot, but how does that sets you up going forward given your domestic capacity.
I think it sets up well obviously, we we we are right in the wheel house there being the did on being a domestic manufacturer I think it's that's that's up for the potential for success and you know, while we don't know exactly what <unk> awful hard to predict exactly what the F.D.A.
Were what quite frankly, the government will do but but we feel good about being a domestic manufacture we feel good about you opportunities that that's going to present for us in the future.
Okay. That's great. Thank you very much.
Thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session.
Now like trying to call back over and Tim somewhere President and see how frightening closing remarks.
Alright. Thank you all for your time and attention this morning.
Lose our call have a great day.
Ladies and gentlemen, this conclusive days conference call. Thank you for participating you may now disconnect.
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