Good afternoon, and welcome to MedAvail's 2021 Fourth Quarter Earnings Conference Call. My name is Sam, and I will be your moderator for today's call. [Operator Instructions] At this time, I'd now like to turn the call over to our host, Caroline Paul, Investor Relations. Caroline, please proceed.

Thank you, and 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 fourth quarter and full year ended December 31, 2021. 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 this 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 are in response to your questions that relate to expectations or predictions of future events, results or performance or similar statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 and the military action launched by Russian forces in Ukraine on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion and guidance for revenue, gross margin and operating expenses in 2022 are based upon our 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 these forward-looking statements 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 our business, please refer to the Risk Factors section in our most…

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us. I'm very pleased to be participating in my first earnings call as CEO of MedAvail. It is a privilege to be leading this company, and I thank the Board for this opportunity. By way of background, I've spent my entire career in pharmacy, starting as a pharmacist and working across this industry in various other capacities, including leading national and regional retail pharmacy chains. Most recently, I was CEO of eRx Network until its acquisition by Change Healthcare in 2020. Under my 3-year tenure, the company's revenue and EBITDA increased in each year before the acquisition. I believe that pharmacy is a big business with a significant opportunity for novel models to improve efficiency and patient outcomes while achieving discipline with respect to cost and quality. And I strongly believe that our new team at MedAvail is uniquely poised to address this opportunity. I was attracted to MedAvail for 2 reasons. First, I was impressed by MedAvail's differentiated technology platform, our MedCenter and its supporting system that enables our on-site pharmacy at the point of care in a cost-effective way. Second, I believe in the opportunities that our solutions provide given how strongly positioned we are to solve a multifaceted problem that challenges pharmacy services today. There's a clear need for solutions to address the gaps faced by both retail pharmacies and at-risk value-based medical providers. Retail pharmacies struggle with labor shortages and higher costs, resulting in reduced operating hours and compromised service levels, which effectively limit patient access to their medications. These factors contribute to reduced patient satisfaction and lower medication adherence. Poor medication adherence tends to result in suboptimal patient outcomes and impacts the Star Ratings for at-risk providers, which, in turn, affects the reimbursement levels…

Thank you, Mark. Turning to our fourth quarter results. Net revenue for the 3 months ending December 31, 2021, was $7.3 million, a 135% increase from $3.1 million in the same period of the prior year. This was aided by 170% increase in Retail Pharmacy Services revenue. As we've indicated in the past, Pharmacy Technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise-level capital sales. As Mark mentioned, we deployed 46 new MedCenters in 2021. At the end of 2021, we had 81 net cumulative deployments to date and 68 dispensing units, representing 76% and 79% growth over the prior year, respectively. I want to take a moment now to define these metrics. We have excluded the previously discussed non-revenue-generating sites from our deployment metrics such as pilot, decommission equipment and demo site. We define dispensing unit as the sites that are live, that is have payer network acceptance, pharmacy board approvals and trained clinical staff or clinical account managers. Moreover, we work closely with state boards of pharmacy and our clinic partners to reduce the time to progress from deployment to becoming dispensing units, which generally takes 4 to 12 weeks. Gross margin for the fourth quarter of 2021 was negative 5% as compared to negative 7.9% in the fourth quarter of 2020. The negative margins were a result of inventory write-downs of $626,000 and $352,000 in the fourth quarters 2021 and 2020, respectively. The inventory write-down in the fourth quarter of 2021 was specific to the M5 model of our MedCenter within the Pharmacy Technology segment and is not related to the M4 models currently being sold to third parties and deployed within SpotRx. We now carry our M5 inventory at zero, given that we and our customers are…

Thank you, Ramona. Thank you for joining the call today. We look forward to updating you on our progress as we continue to execute across our strategic initiatives and drive profitable growth. With that, we will now open it up to questions. Operator?

[Operator Instructions] Our first question is from Charles Rhyee of Cowen.

It's actually James on for Charles. Previously, it's been noted that on average, each deployment generates about $1 million in revenue at full run rate. Can you give us an update on this revenue target? Are MedCenters a year or more -- deployed a year or more ago generating about $1 million in revenue on average? Maybe you can give us some color on what revenue looks like on like a median basis, 75 percentile basis for those that have been deployed over a year ago?

Sure. James, this is Ramona. And in the past, we have used net deployments as a leading indicator. And now we're focused on the number of dispensing sites as those are the ones generating revenue and were associated with that $1 million target. As we look historically at our mature sites, we're seeing that in year 1, we're typically finding $200,000 to $250,000 in annual revenue. In years 2, rate is $500,000 to $600,000. By year 3, we're in $700,000 to $800,000. As of the end of last year, we have 68 dispensing units that were generating revenue. We expect, as Mark said, an additional 25 to 30 dispensing units in fiscal year '22. So as we look to how we're qualifying sites now versus in the past, we're seeing and believing that the new sites are performing better than the median rate. So we're leaning towards the 75th percentile to be our target, which would start seeing that $1 million come in, in year 3. We feel comfortable with the goal of $1 million for the site set maturity, but I want people to understand that we have impacts to our revenue ramp such as like timing for a new or existing clinic. If it's a new clinic, it's going to take longer for it to ramp up. We call those de novo clinics. We also -- if we're entering into a new market, it could take us time to get accepted into insurance plan. So that could take a few weeks to get into all the plans. I think we said in the past 4 to 12 weeks to be fully ramped up. We can also have impacts to our volume through clinic staffing and patient penetration rate. And then finally, like the average sales price is impacted by our payer mixes and the types of prescriptions we're filling. So we expect to continually improve the ramping for our revenue with the new clinics we're bringing on and the selection process that we have in place. And we're seeing that our clinics are generating -- [ some of those ] clinics are generating over $1 million. Mark, maybe can you add to what we're doing that kind of moving the median rate up towards the 75th percentile?

Sure. Thanks. I think the key to what we're seeing with the most recent clinics are our qualification process. So we're really selecting the right clinics that we go into, but we're also doing a much better job as we go live and really around our training, both for our clinical account managers as well as for the provider themselves so they feel comfortable in recommending our services. And then the last thing is we're using data more effectively once we're in market to both monitor the performance of the clinic itself and also adapt to the clinic such as the prescribing patterns, making sure that we have the right inventory in the MedCenter to capture the first fill dispensing.

Does that answer your question?

Okay. Great. Yes, that's very helpful. In the prepared remarks, I think you had mentioned that you're looking to ramp up sites more efficiently. Can you maybe give us some color on what you're doing to maybe accelerate or enhance this ramping process?

Yes. I think I'd go back to just the comments I just made similarly. I think we're really doing a better job in selecting those sites, right? And then the other thing is it's really the end market performance. And again, it's now using that data. We're starting to get appointment data so we know when patients are coming in to make sure that we're focused on those high-value patients for our partners as well as, like I said, making sure we have the inventory and stock to dispense the prescription while they're in the clinic at the point of care.

Okay. I mean, we appreciate you providing first quarter 2022 revenue guidance, but is there any color you could give on, I guess, revenue growth for the entire year or at least the key puts and takes we should be considering? Maybe some details on like the progression of the 25 to 30 net dispensing sites would be helpful.

Yes. We're not providing sort of the full year revenue guidance at this time. I think that's why we went and want to provide the information on the 25 to 30 dispensing units for the year, given that's how they drive -- how we derive revenue. And that's very similar to last year's sort of overall deployment, right, would get us from 68 to roughly 95 to 100 total dispensing units. And I would say we're continuing to assess and I'm working with the Board, to provide guidance, revenue guidance, in a future update.

Okay. And similarly, I guess, sequential improvement expected in 1Q '22 on an adjusted gross margin basis. Should we think that margins sequentially improve throughout the course of the year? I know you're not giving full year guidance, but anything on that front would be helpful.

Yes. So we finished the full year about 1.4% unadjusted with 4.3% adjusted. We do expect that those will continue to improve quarter-over-quarter. We're targeting between 8% and 9% adjusted gross margin within the next 4 to 6 quarters with our long-term goal being right around 15%, aligned with the industry average. We have a lot of initiatives that we're putting in place in like 4 key buckets: utilization, mix, cost of goods sold and reimbursement. And Mark, do you want to add some things that the team is working on?

I think you covered it really well. When you start to think about it and I said we're putting in sort of a full procurement strategy around how we buy at the lowest cost, but that we actually followed through making sure that our pharmacists are purchasing those items, dispensing those items and looking at how that rolls into the reimbursement that's coming in. I think the other thing we're very focused on is generic substitution. And -- because generics typically will carry a higher gross margin, and that will help us achieve that 8% to 9% that Ramona spoke about. The last thing I would say on the mix is we do want to continue to drive technology sales, which has a much higher gross margin associated with it. And we'd like to get that to be a larger portion of our total revenue.

Okay. That's a good segue into my last question. On Pharmacy Technology, which seems to be a greater focus, I guess, what percent of total revenue do you think Pharmacy Technology ultimately could represent in the future? And maybe you could talk about what the sales pipeline in Pharmacy Technology looks like now, given the new sales leadership that you just hired?

Yes. I think previously, the company has talked about targeting 20% for the technology revenue segment. I'm continuing to do an assessment on that. But I think that, that's probably a realistic target for us as we go forward. When I think about the sales pipeline, I mean, for 2021 this year, we're going to expect the revenues to be flat. Our -- for 2022, we expect the revenues to be flat to 2021. But the pipeline is really going to be strengthened as we complete our Epic integration. And Epic integration is sort of twofold. One, we need to get our MedCenter app in the Epic App Orchard, and we did just get approval in the month of March for our app to be in the Epic App Orchard. So that was the first step. The second step is we're working with our first Epic partner to complete an integration. And that should be done by the beginning of Q3, which will expand the number of outlets that we can go after. Specifically, it opens up about 350 health systems to us, which could represent thousands of placements. And I also would say, we have an integration with the McKesson enterprise system, which represents thousands of potential placements within retail. So we see both retail and health systems being viable channels for expansion as we move forward.

Our next question is from Brooks O'Neil of Lake Street Capital Markets.

I have a few questions, I guess. So just following on with the last question on pharmacy tech, do those -- do you expect those deployments to include a MedCenter unit ultimately? Or is it 100% of software sale?

Brooks, it's a good question. Always we'll have the hardware associated with it because the MedCenter is the platform for the dispensing. And then the software, as you recognize, we license the software with the MedCenter, and then we bill monthly for software and maintenance. So there'll always be a hardware component.

Okay. Cool. And then I'm just curious, were there any incremental terminations or reductions in deployment here either towards the end of the year or early in 2022?

No, there were not.

Okay. So would you say those units that are out in the field, you're either optimistic or you're pleased with the performance?

Yes. We're continuing to assess the performance of all the MedCenters inside of the SpotRx hub pharmacies that we run. And I would say that we are pleased with the MedCenters that are out in the field today, but we'll continue to monitor performance to ensure that we're maximizing the return from each MedCenter and each clinic.

Sure. That's great. So let me ask just one more. I'm curious what I hear in general, obviously, there are regional variations, but I hear that the impact of COVID has continued to decline, that there was quite a bit of impact in January but less in February and even less in March in most areas. And I'm curious if you can comment at all about how that's affected the utilization of the MedCenter pharmacy, and I'm thinking about it in terms of patients. Was there more in-clinic utilization? Was there more delivery, home delivery? Thinking about it in terms of the response you saw from the physicians that had access to MedCenters units. Was there any big change that you saw through the quarter? And do you expect any change as we move into the middle part of 2022?

Brooks, it's a good question. I would say we didn't see a substantial change in sort of the existing MedCenters from a utilization called the first fill dispensing versus delivery to home. I will say as we brought Florida online right in the last 6 months and they've become a significant portion of our dispensing MedCenters, we've actually seen an increase in the utilization of the MedCenter itself comparably to [ the rest ]. So that's been a really -- a key focus for us. And we want to continue to optimize the MedCenter. And that's utilizing the data from the prescribers and from our clinic partners to make sure we have the right inventory in the MedCenters.

There are no further questions waiting at this time. So I'll hand the call back over to Mark for any closing remarks.

I just want to say thank you, everyone. Stay safe, and have a great night.

That concludes the MedAvail's 2021 Fourth Quarter Earnings Conference Call. Thank you all for your participation. You may now disconnect your lines.