Hamilton Thorne Ltd.

Thank you, and good morning, and welcome the Hamilton Thorne Limited fourth quarter and year-end 2019 earnings conference call. I'd like to introduce myself.

I'm David Wolf, President and CEO of Hamilton Thorne. On the call with me today is, Michael Bruns, our Chief Financial Officer.

As our calls have always had, we will have the following format. First, I'll provide a summary of operational and financial results for the quarter and for the year-end December 31, 2019 with a focus on our sales, markets, and operational performance.

Michael will follow with a more detailed discussion of our financial results for the periods, as well as a review of our financial position and liquidity at the end of December. 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 viruses impact on our business, and the steps we have taken to address this outbreak.

We will then open up line for questions. I'd like to remind all our participants that we do not provide financial guidance.

So I would like to ask you to limit your questions through 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 to the year continued in the fourth quarter resulting another successful year for Hamilton Thorne. Let me give you some highlights from our performance.

Sales increased 21% from $35.4 million for the year ended December 31, 2019, up 34% to $10.8 million for the fourth quarter. This includes only 4.5 months of sales from our latest acquisition for the Planer Limited, which puts our pro forma sales assuming we had on Planer for the entire year at about $39.5 million for the year.

Sales and constant currency increased 24% for the year, 36% for the quarter. Gross profit increased 15% to $19 million for the year, up 34% to $6.1 million for the quarter.

Adjusted EBITDA increased 15% year-over-year to $7.1 million up 28% to $2.2 million for the quarter. Organic growth was 12% for the year, 15% constant currency, and organic growth for the quarter was 17% and 18% in constant currency.

Cash flow from operations was strong at $6.4 million for the year, up 48%, and total cash at December 31 was $12.8 million. Digging a little deeper into the numbers.

Revenues for the full-year increased through a combination of organic growth of equipment and consumable sales and to a lesser extent service sales augmented by the contribution from 4.5 months of revenues from the Planer acquisition. Sales into the human clinical Assisted Reproductive Technologies or ART markets increased significantly for both periods as we added new products and direct sales and support resources.

Sales into the research and cell biology markets were significantly up as well, primarily from the contribution from our Planer acquisition. Sales into the animal market were relatively flat for the year and a little down in Q4.

As I mentioned, we also closed an important acquisition in mid-August as we completed the acquisition of Planer Limited. Planer is leading worldwide provider of incubators, control rate freezers, and lab monitoring equipment with manufacturing, sales and support operations in the U.K.

This acquisition enhances our product offerings in incubation, cryopreservation and lab monitoring solutions and provides us a quick hold order for future direct sales in United Kingdom. Gross profit margins were up sequentially each quarter of 2019, ending at 56.5% fourth quarter, and 53.8% for the full year.

Our gross margin variations were primarily due to product mix and we're happy to see margins up in Q4 despite the Planer business delivering somewhat lower margins than the overall blend. In part as a result of the introduction of our next-generation LYKOS DTS laser product, laser sales contributed to margin growth with laser sales in the fourth quarter substantially ahead of prior year's quarter.

We also made substantial progress in several of our other business gross this year including completing several large build outs many in the U.S., one in Germany, and substantially increasing cell culture media sales. I'll now turn the call over to Michael to provide a more detailed discussion on the numbers.

Good morning, everyone. Thank you David.

I am Michael Bruns, the CFO of Hamilton Thorne. I will review the full-year results, add some remarks for the fourth quarter and then discuss our liquidity and cash flow for the year.

In the results of operations, annual sales increased 21% to $35.3 million for the year, an increase of $6.1 million over the $29.2 million achieved in 2018. Sales were up due to organic growth and operations owned by the company for more than one year, and were augmented by the added 4.5 months of revenues from the Planer acquisition.

Total equipment sales increased 39% to $16.3 million for the year due in part to the Planer acquisition. Consumables and services increased 9% to $19 million and comprised 54% of HTLs total enterprise sales in 2019.

Gross profit for the year increased 15% or $2.5 million to $19 million for the year, compared to $16.5 in the previous year, primarily as a function in sales growth. Gross profit as a percentage of sales was down at 53.8% for the year versus 56.5% for 2018 primarily due to product mix.

We have aggressively pursued growth particularly direct sales of lower margin third party products in the U.S. We also added the somewhat lower margin sales of Planer products as planned through acquisition.

Profit margin was enhanced by increases in direct sales of higher margin proprietary equipment, branded consumables, and quality control testing service sales. Operating expenses increased 22% or $2.9 million to $15.8 million for the year due primarily to the addition of Planer expenses post-closing, increased acquisition expenses, and increased depreciation and amortization.

Excluding those acquisition related expenses for both periods, operating expenses would have been up 18.5% on sales growth of 21%. Operating expenses were also affected by continued strategic investments and research and development as well as sales and marketing resources.

Research and development expenses increased 35% to $2.3 million for the year primarily due to the acquisition of Planer’s R&D expenses and new product amortization expenses partially offset by those expenses relating to the development of products which the company capitalizes under IFRS. Sales and marketing expenses increased $985,000 up 15% to $7.6 million for the year primarily due to the addition of Planer expenses as well as amortization of intangibles increased investment and direct sales and support services and increased marketing and travel costs.

General and administrative expenses increased $1.3 million or 29% to $5.9 million for the year over half of that increase is attributable to acquisition expenses related to the Planer purchase. Excluding those acquisitions related expenses for both periods, G&A expenses were up 16%.

G&A expenses also increased due to the additional Planer’s general administrative expenses for 4.5 months, as well as increased compensation expense and increased amortization and depreciation. Net expense actually decreased $47,000 to $1.1 million for the year, due primarily to reductions in the company's revolving line of credit, convertible debentures due to the June 2019, partial conversion and other long-term borrowings plus interest earned on the company's cash balances.

All of which were partially offset by increased term debt in August partially financed the Planer acquisition. The fair value of the derivative decreased $846,000 for the year ended December 31, 2019 from a non-cash gain of $573,000 in 2018, to a non-cash loss of $274,200 in 2019.

This of course is all driven by the variables of the fluctuations in the currency value of the euro, as well as the increase of the company's share price between measurement dates. Income tax expense was $1 million for the year ended December 31, compared to a net expense of only $48,000 in the prior year.

Earned income tax expense decreased $195,000 in 2019 to $195,000 compared to $266,000 in 2018 due to the favorable mix of rates and activity between foreign and U.S. states in 2019 versus 2018.

Deferred income tax expense was $830,000 for the year 2019 compared to an actual deferred income tax recovery of 2018 for the year ended December 31 2018. Remind everyone that in 2018, the company recognized approximately $1.1 million of deferred tax assets primarily generated by the company's historical U.S.

NOL carry-forwards. For 2019 and 2018, U.S.

federal income tax cash payments were largely offset by the utilization of a portion of these deferred tax assets and that will continue to be utilized in 2020. Net income actually decreased to $793,000 for the year ended December 31, 2019 versus $2.6 million for the prior year.

2019 profitability is attributable to increased revenues and profitability for the relevant periods, offset by increased operating expenses, changes in fair value of derivative, increased income taxes, increased acquisition expense, and continued strategic investments in both research and development as well as sales and marketing. 2018 results included the gain in fair value of the derivative and the tax asset recovery mentioned earlier.

Other comprehensive income for the year ended December 31 was $684,000 compared to the comprehensive loss of $792,000 in 2018, all of which are attributable to foreign currency translation activity by the parent company from the foreign operations of the subsidiaries, primarily in Europe. Adjusted EBITDA which we consider an important measure of our financial performance increased 15% to $7.1 million for the year 2019 versus $6.2 million in 2018 due to revenue and gross profit growth, and partially offset by increased operating expenses in the periods.

Please refer to the reconciliation of adjusted EBITDA to net income in our MD&A report filed today on SEDAR and also on our website. And now I'd like yes to provide some brief comments on the results of operations for the fourth quarter of 2019.

For the three months of Q4 sales were up 34% or $2.8 million to $10.8 million. Gross profit was up 34% to $6.1 million.

Sales and gross profit were up due to organic growth and operations owned by the company and augmented by the added revenues and gross profit from the August 2019 Planer acquisition. Gross profit percentage was largely flat at 56.7% in 2019 versus 56.5% for the prior year quarter, primarily due to product mix.

Quarterly gross profit percentages continued to increase sequentially in 2019. Operating expenses were up 34% to $5.2 million versus $3.8 million for the prior year, primarily due to the addition of Planer operating expenses post closing for the full quarter of Q4 of 2019.

In the fourth quarter, the company's operating income increased 31% to $961,000. Net income decreased 66% to 931while adjusted EBITDA increased 28% to $2.2 million versus prior year net income of $2.8 million and adjusted EBITDA of $1.8 million respectively.

These changes were due primarily in the case of net income to the substantial prior year gain and the fair value of the derivative and the increased income taxes. Adjusted EBITDA are true measure of our operating performance after elimination of the anomalies of the Q4 non-cash derivative and income taxes was attributable to substantially increased sales and gross profits, partially offset by increased operating expenses.

I'd like to turn to the balance sheet and speak a bit about the liquidity of the company. Cash flow generated by operations was up 48% for the 12 months ending December 31, 2019 to $6.4 million, compared to $4.3 million in the prior year, including a very strong fourth quarter.

Company has invested over $1.7 million in inventory growth as of December 31, to continue to facilitate expanded product offerings across all companies, but primarily in the Americas to enhance production efficiency 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 $7.6 million in 2019, including $6.3 million in net cash for the Planer acquisition, as well as $1.2 million for ongoing investments in intangible development cost by our R&D teams for next generation and new product development, including the 2019 introduction of the LYKOS Dynamic Targeting System or DTS laser.

Cash generated by financing activities was $400,000 for the year for the new $3 million term loan utilized to partially finance the Planer acquisition, offset existing scheduled term debt and lease payments. Stock options and warrant exercises also added $700,000 in financing activities for the year.

Our final 2019 cash position of $12.8 million is actually $873,000 less than the prior year, with the $6.4 million generated from operations being utilized for the Planer acquisition, research development, reduction of our revolving line of credit and our scheduled debt service. In addition, we have $3 million of availability in our acquisition line of credit, which is an important resource for our ability to complete acquisitions in a relatively lower cost of capital.

Finally at December 31, we had an increased availability of $3.7 million in our $4.5 million overall revolving line of credit. We renewed our bank lending facility in September 2019, extending to July 2021.

The increase in the revolver - also increased the revolver from $2.5 million to $4.5 million. In Q1, we drew down $3.5 million of this credit facility to enhance our cash position in light of the developing uncertainty due to the COVID-19 pandemic.

We are well positioned to support our operations in the coming months, including continuing our acquisition program and financing further growth as the business climate improves. Now, thank you for your attention.

And let me turn the call back over to David to comment on the HTL outlook.

Thank you, Michael. So the recent outbreak of the coronavirus or COVID-19 certainly has added substantial uncertainty to the short and mid-term outlook for our company and many companies.

Many of the - if not all the countries where we have significant operations have required entities to limit or suspend business operations. They'll also implemented travel restrictions and quarantine measures, which affect our business and those of our customers.

I will say that the company's operations are deemed to be part of the essential medical infrastructure in most places where we have personnel. And we have implemented robust business continuity plans including safety measures those reporting to our facilities, and work from home programs for those who do not in order to maintain operations.

I'd like to call your attention to the risk factor in our most recent management discussion and analysis regarding COVID-19. Summarizing, while it's not possible to estimate at this time the impact that COVID-19 could have in the company, the continued spread of COVID-19 and measures taken by governments of countries affected has and is expected to continue to affect the demand for certain of our products and services, and could disrupt the supply chain and manufacturer shipment of products.

Product inventories and adversely affect our business financial condition and results of operations. In addition, the COVID-19 outbreak and mitigation measures may also have an adverse effect on the global economic conditions, which could have an adverse effect on our business and financial condition.

The extent to which the COVID-19 outbreak impacts the company's results will depend on future developments that are highly uncertain and cannot be predicted, including new information that they emerge concerning the severity of virus and the actions taken to contain its impact. To add some context, let's talk a little bit about the first quarter results and some of what we've seen following that.

So in the first quarter of 2020, we started out very strong. Our preliminary estimated results for Q1 were approximately $10.2 million in sales, which is over 30% year-over-year growth and approximately 10% organic growth, that's 12% in constant currency.

We did however, see reduced demand for some of our products and services in certain territories as the quarter developed, and as many IVF clinics reduced their activities in response to scientific guidance from ESRI and ASRM, as well as government requirements. The reduction in demand has continued into the second quarter, but we've also seen demand for some of our products returned in some territories, notably China, which had been severely impacted in Q1.

These fluctuations in demand for many of our products and services will last for a period of time that is difficult to determine. We are also impacted unevenly as parts of our business are largely unaffected.

For example, our toxicology testing service business continues more or less on track the prior quarters, while others have had more significant impacts. Balancing the uncertainties and in order to improve our financial results, we've taken several actions to reduce our expenses including eliminating non-essential expenses such as travel, trade shows and marketing and defer capital expenditures and do hire.

Earlier, we do however continue to invest in business. Earlier in the first quarter, we brought on two new sales personnel in Europe and launched a direct sales and support presence in France where we had historically had a strong installed base of equipment.

Given the intervening events, the timing was not perfect. However, while may take longer than we had anticipated to get to breakeven and of course begin to show profitability, we are committed to the French market and believe we will have long-term success there.

We've also added additional sales resources or direct sales resources in the U.S. early in the quarter, and again, are committed to that path.

On the other hand, to save on expenses, we have deferred additional hiring of some direct sales personnel in U.K. until the picture in the U.K.

is clear. Overall, given the changes we've made, we're looking at cost savings of approximately $400,000 in Q2.

Thus far we've avoided large scale furloughs or layoffs as we believe it is important to maintain the specialized skills and knowledge of our workforce. We have taken certain measures to conserve cash and reduce personnel expenses by for example, reducing working hours, compensation in certain locations for all employees, including senior management.

We've also applied for payroll protection program loans for our U.S. entities of approximately $1 million.

We were shot out of the first round before the program ran out of money, but assuming there is additional funding, and we are granted loan, this will help us avoid further personnel cuts. Regarding cash flow, Hamilton Thorne has generated cash from operations since 2013 and in normal circumstances, we expect it to generate cash from operations in 2020.

Given the uncertainty surrounding the COVID-19 outbreak, it's impossible to predict whether we will generate cash from operations this year. Regardless, the company maintains a strong balance sheet with cash on hand of approximately $15.1 million, net bank debt of approximately $10.1 million, so, net cash was about $5 million following the company's recent draw down under its line of credit.

I'd like to add a few comments on our media business. In 2020, we achieved significant growth in Gynemed branded media, mostly through increased sales in newer markets through distribution channels.

Given the uncertainty in the markets today, and to reduce regulatory and marketing expenditures, we've decided to defer a large scale rollout of our media products in the U.S. to the second half of the year, with possible further push down.

On the other hand, as I mentioned in our last call, as our media products as well as other Gynemed branded consumables are CE marked, we are able to sell them immediately in the U.K., and we actually saw small but steady sales in Q1. Despite the uncertainty around the 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, the effects of the COVID-19 outbreak could certainly affect the scope. In closing, I'd like to add that COVID-19 buyers will eventually run its course.

And we remain optimistic that once this happens the strong macroeconomic and demographic tailwinds that have driven the growth of our business over the past few years will continue for the foreseeable future. We will now open line up for questions.

A couple of questions. The first one, you mentioned that your operations are deemed to be part of the central medical infrastructure in most places.

I'm wondering what about your customers, the IVF clinics and labs themselves? Are they essential - deem to be essential and are they staying open even in regions that are enforcing shelter in place?

So thank you for the question. I think the answer varies a certain extent by location or geography I'll certainly be able to answer more clearly for U.S.

and part of Europe. So I mentioned briefly in my prepared remarks, ASRM, which is the American Society for Reproductive Medicine and ESRI, which is the European Society of Immunology of Reproduction, Human Reproduction and Embryology have both issued guidelines recommending that clinics reduce in order to maintain health of their patients and reduce risk, curtail operations significantly, including suspending initiation of new treatments, considering cancelling embryo transfers.

They do however, recommend continuing to care for patient who are in cycle and suspending what would be considered maybe elective and non-urgent procedures. The ASRM is a little stronger in this but both of these organizations clearly believe that assisted reproduction is not an elective procedure.

And therefore, is a disease as determined by the WHO, and that especially with the time clock ticking, not all procedures should be cancelled particularly those relating to let's say, oncology or other very clear fertility preservation procedures. These guidelines for most jurisdictions do not have the force of law.

So, clinics have been generally free to determine what they think is right. Certainly large, many clinics, and I would say probably most clinics were in hospital settings have certainly reduced about eliminated new procedures, while we see other clinics or private clinics than the public clinics staying open some maybe because of financial motivations and certainly some because clearly we're in a field where there's a level of mission driven medicine.

And people who feel that as I mentioned earlier, that assisted reproduction is not an elective procedure and that they have an obligation to their patients, as long as they can take mitigating safety measures to stay open. So it's a - I guess in summary, it's a mixed bag.

But we clearly are seeing continued business from clinics in Europe into where we have consumables, where again people need their consumables on a daily basis, and at a lower level, of course, then had been in Q1, and we are seeing the beginnings of clinics and contacting us inside the U.S. and other areas out there planning to reopen and reinvigorate operations and they need help from us to set up their equipment and calibrate it, inspect it, et cetera, et cetera.

Okay, great. You mentioned that you're going to defer the formal launch of the Gynemed media in the U.S.

until the second half possibly longer. But I'm wondering the strength in media sales that you saw in Q4.

I know you haven't formally launched in the U.S., but was any of that strength, some prelaunch sales of media in the U.S.?

Yes, so nothing in any way significant. So it was primarily a continued strong growth in Europe where we always had a good franchise and growth in export markets and primarily in Southeast Asia.

And are those new markets for the Gynemed media or were you selling there before and you're just picking up sales there?

So I guess the question is wide as before so - we've been continuing to put more effort into expanding sales into Asia. Since we acquired a company now which is almost three years ago, company had always had some sales in those markets, but less of a focus on it.

And you know, agreed with - to put more focus on more resources on it, including hiring personnel to address those markets.

Okay, one more question if I could, and then I'll get back in the queue. So with Planer, that business when you bought it has typically lower margins than the rest of your business, but you have mentioned opportunities to increase the margins.

Can you remind us what are those opportunities and had you implemented any by the end of Q4 or have you implemented any in Q1?

So those opportunities are largely similar to the kinds of opportunities we have across our entire business by increasing more direct sales of the products, which had been previously under the Planer business sold almost exclusively through distribution. So we do have direct sales of Planer products actually fairly meaningful amount of direct sales of Planer products in Q4 were sold in Germany and in the U.S and also to increase sales in the U.K.

As I mentioned, though, we've deferred that as a cost reduction method, we've deferred hiring those significant personnel to do that. There is also opportunity for margin enhancement due to scale Planer’s relatively small manufacturing business.

So combining both some of the resources that we have in our other manufacturing operations, there's opportunities to increase margins. Again, we're talking in some cases basis points, in other cases percentages, but if you do it over time and you're intentional about it, it does add up to.

Just getting back on the forecast or I guess the preliminary results for Q1 of $10.2 million. You indicated I think as part of that that China sales were down in Q1.

What was the quantum that they were down in Q1, for example, and what typically is China representing of your total sales just remind us on that?

Yes, so we don't work breakout those numbers, but certainly for some of our equipment sales, China was down significantly. We've looked at it more while we have the granulate numbers, but we looked at it overall.

And I can kind of give you just some sense that the combined business generally met our expectations maybe a little bit short as you can imagine, as we saw increase - decrease in certain sales. Certain of our units and our operations and maybe if you - I think but this way overachieved, but on the other hand we clearly quantified I would call the COVID headwinds, which you could look at where we were most effective, which is in China.

And in U.S. our equipment business, particularly in - as Q1 got on is in the mid to high single digits.

So kind of $0.5 million or more range.

And as we progress through April here with three weeks through April, can you give us an idea of what the quantum is decline in sales, three weeks in April versus three weeks in April last year?

Yes, so I think that's a little harder for me to do both for actually quantifying it and in terms of trying not to get down the slippery slope of providing too much forward looking financial guidance. Let me talk instead about what we see is the trends and then we can discuss them.

As mentioned, we have different operations under the Hamilton Thorne umbrella, the toxicology testing business, which is in fact our largest business but as you know, good sized business is continuing more or less unaffected by this. We primarily serve people who produce products, as well as clinics who want to test their materials and as production continues we're seeing, we're not seeing any real reduction in that business.

The capital equipment business as I mentioned in Q - talking about Q1 we saw some reductions to that and that's sort of our best guess and this is our best estimate. And this is just an estimate - as that is likely to have sort of a U shaped curve in terms of both how it winds down, how it comes back in the sense of more parabolic curve.

In the sense that as people get more concerned about economics and worried about the future, one of the first things that's easiest to decrease is capital expenditures. And one of the things that is easier even as things start to emerge to perhaps defer our capital equipment expenditures.

But in the long run, if the equipment is actually needed to maintain operations, improve efficiency, meet demand, we believe that most of the capital equipment business that you might have think was lost is really more just deferred. How long is deferred from what period of time that is a little harder to determine.

Consumables business I would say has more of a V shaped curve as while clinics are running great guns regardless of whether they are worried about the future, if you need consumables, you need consumables to do that next cycle that next day and off you go. But on the other hand, if you decide to reduce or eliminate operations, for whatever reason, your demand for consumables drops linearly in turn of that.

And conversely, when you reopen or when you start increasing activity, demand for consumables comes back up on a linear basis with activity. The big question of course is will activity return to pre COVID-19 levels and if so, how long will that take that requires a level of crystal ball gazing that I'm not equipped to do.

So I hope that gives you a little more color on how we think about things without necessarily giving you a direct answer to the - numerical answer to your question.

Okay just on the acquisition front, are you seeing, assuming you guys are in a pretty good balance sheet position. Now that you've drawn down that facility, I think you said you have $15 million in cash.

Are you potentially seeing acquisitions that you had in your sites become cheaper like some of the maybe private companies are more desperate to monetize their positions? Maybe just an update to what you're seeing or thinking there?

Yes, so I would say we're just a little bit of cognitive dissonance in this in the sense that on the one hand, we are very clear that our strong cash position and availability of potentially more credit should we need it - is what allows us to feel very confident about continuing to make investments not having to thus far at least do significant personnel reductions or other reduce other we've done some around the edges, but reduce other core investments for the future. On the other hand, as you say there well can be opportunities on the M&A side, either because other companies just aren't as well prepared or for whatever reason the point in their lives where they don't want to - just put up with the difficulties that this is going to entail for some period of time.

So we've actually increased our outreach efforts a little bit. And again, we're always careful about talking about exactly what the results are about outreaches.

But we're mindful that there's an opportunity to do that - as you can imagine are focusing in that case on somewhat smaller acquisition opportunities, not some million dollar acquisition opportunities, but not some of the very larger ones we're looking at. So I think again, being a little cautious.

Now is not the time for us to look at doing some kind of transformational acquisition that could not only or could be very positive as things develop, but possibly not as things develop in the wrong way, and certainly would stress our balance sheet.

So firstly wondering, can you give us a more exact date of when you saw sales begin to slow in Q1. Was it simultaneous with the economy closing in, let's say mid-March or did you see things start slowing before that in February?

Yes, so I'll talk about this and then maybe I'll ask Michael to amplify if he would like so. We actually very interesting, we looked at in hindsight, it was a lot more clearer than in foresight.

Because some of our businesses as I mentioned, and talked about the difference between the consumables business and the equipment business also layered on the equipment side is at least certainly in certain areas where - you end up with end to budgets, where people have to spend. And you end up with situations where there were large capital equipment commitments made perhaps six months, year, two years before, and people just fulfill those.

So, we had a couple of large capital equipment sales and a couple of units that's sort of masked exactly what might have been going on under the surface in some ways. I will tell you that March was our strongest month of the quarter, which is again a little unusual.

And February was our weakest month of the quarter. It was a short month, but with leap year this year, so maybe not quite as short.

So, if you kind of look back, and if we start digging in, it was clear that in February, we were starting to see some softness particularly in China. And China had closed, which we understood and anticipated and maybe some softness and other areas.

So it's - again and we also similar to what I described earlier. We have - at least one of our businesses that was almost completely unaffected by this.

So it's a - we clearly don't have that I can say is a sharp date. So on this date, this event occurred and we saw a meaningful decline.

Certainly, I would say the last week of March was not our strongest week by any sense.

Okay, excellent, thank you. And were there speaking to that strength in March, were there any full lab installed done during the quarter?

Yes, there was one lab installed in Europe, one good sized lab kind of 250,000 euro-ish.

And following along the lines of the last question about China sales I am wondering since the economy reopened. Would you agree that like based on your statements for the U curve in equipment sales and V curve in consumable sales?

Has the China - like uptick since they've opened the economy and matched those statements?

So we sell very little consumables - in China. So unfortunately, I can't give you a comparative, but certainly, that's I guess I would say it's sort of the two-fold.

It matches our statements, but on the equipment side, but it's also sort of the source of belief in that statement, because we're watching what happens as you come up the other side.

Perfect, okay. And I'm not sure if you can answer this for me, but do you know what percent of clinics in your big markets so let's say in the U.S.

and EU that maybe you're more familiar with what percent of IVF clinics are in hospitals versus private?

So we actually looked at that in the U.S. and our understanding is about 75% in U.S.

are private versus in hospitals. Europe is as you know is not really one Europe it's…

Yes.

Twenty plus different countries and it varies where let's say in Belgium they're almost all in hospitals and in France it's half and half and in Germany it’s a little bit different. So, I don't really have a number there beyond my gut sense, which I'm happy to share, but - I wouldn't say it's anyway authoritative.

Okay perfect. And I'll ask one more here before I get back in the queue, but could you - maybe provide us with some quantitative detail on how much of your operating expenses are flexible in nature and can be cut.

I know you mentioned that 400,000 number in your prepared remarks, what is this include?

Yes, so if you look at our and maybe I’ll ask Michael to amplify, and maybe I'll - filibuster for a minute while he pulls the numbers together. If you look at our financials, our biggest expenses are cost of goods, and obviously cost of goods is variable pretty quickly.

Second biggest expense by far is personnel, which is variable in the long run and not that much in the short run. And then marketing and sales costs and then becomes a lot of other things that are not very variable like rent insurance and the like.

So where we have focused is on the variable side is our marketing and sales costs. Some of these costs were I would say forced upon us in the sense that we spent a lot of money historically on going to a couple of large trade shows in the March and primarily April through July and August - July timeframe, and all those have been either cancelled or postponed.

So there is a significant level of savings that comes from those - again some of that’s in Q2, some of that’s in July one obviously would end up in Q3. We also similarly with travel, when you're unable to travel through either stay at home orders or just customers aren't interested in having our salesperson have to visit them face-to-face.

You save money on travel. So those are - and that's a fair piece of that savings.

And then we also did some significant look on the cost side on the personnel side. As I mentioned without getting into too much specifics, we did across the board compensation reductions, which includes senior management including all the HTL senior management to save some money or at least through the end of June I believe we've committed to.

And I think that's - those are the major components. I don't know if you have anything you'd like to add Michael or if I have covered it all.

That's an excellent total coverage I would reiterate that our cash balance doubly serves as well, because total operating expenses in 2019 were just about 45% of revenue. And as we started to plan and do our planning for issues around COVID, as we knew from our planning and our construction that there is not as much variable expenses in our current structure.

As perhaps other companies, other companies that I've been associated with. So it's a - we have large investments in people and personnel and intelligent personnel in terms of R&D sales.

Our sales people are quality people, quality scientists, and embryologist and those are not easily variable expenses to just look at and cut our production facilities include highly trained individuals. So there is much less variable expenses than one would think and looking at an enterprise such as ourselves.

So we're managing that very carefully, looking at that very carefully, and also trying to weigh - the future timing of coming back out on the other side of this. Because we certainly want to remain poised and ready to capitalize as we talked about earlier not only on acquisition opportunities, but also - to the degree the V shaped curve helps us out and to the degree the U shaped curve begins to respond.

We certainly don't want to cut out of variable and into fixed expenses and reduce our ability to respond. So a long way of saying not a lot of variable expenses, but we're managing those to the degree we can and taking some steps as required as this very unknown [indiscernible].

I was just wondering first about the that payroll protection plan in the U.S. David, I think you said you were shutdown in the first round and you're applying for $1 million this round, is that correct $1 million?

Yes, the way it works is we applied for the first round. As I'm sure you read probably less in the - it’s very choppy discussion with U.S.

papers maybe less in data. The whole program was fought with various, frankly administrative problems in terms of the banks not exactly knowing what the rules were.

The actual methods of application, the ability to these are all SBA, ultimately back loans, so the ability to enter loans and then get them granted through the SBA. So when I say we were shut out, it wasn't a qualitative decision.

It was more that just as we pulled our - even though we applied the first day it was available to us based on the demand that we were too far down the queue at least at our bank. But to have kind of made the cut before the funds were exhausted.

I heard today that the US Senate has approved another roughly similar sized amount of money and again it has to go through the House which will have whatever political wrangling that involves and ultimately if it's inactive. We will have another chance we preserve our space in the queue, which we should be fairly well positioned, again that we applied the first day that - it was open for application.

But it would be wild speculation to say whether we will or won't. Rightly, we clearly qualify for the loan.

And my understanding is we ought to - it shouldn't be any level of qualitative judgment about whether we do or don't get it based on it's really a timing question.

Okay. So just as a follow-up to that is there any other sort of grants or programs or interest free loans or stimulus globally that you could take advantage of, aside from this?

So there are other programs in the U.S. that are smaller, but they still are meaningful, that allow us to get reimbursement for people, if somebody got sick or somebody asked for extended childcare we have a couple of people in our company who have children because schools are closed.

They have to stay home with their kids and - we pay them and the government effectively reimburses us for that. So there are those kinds of programs, but the major U.S.

program is the PPP program there's a few others around the edges, but just the major ones. In the UK which is the other area and Germany the other areas we've looked at, there are similar programs to the program I mentioned about covering costs for people who are sick frankly, not quite as generous, but every little bit helps.

And there is a loan program in the UK, that thus far we looked at it, it doesn't appear we qualify for, but there are - and then the grant programs are very minor. Most of the both UK and frankly Germany have been looking you know their programs are more how do you pay the people.

In Germany, the program that would be most interesting to us, if we decided to do this again, we're trying to avoid this would be a work share program that would allow us to reduce the work for most of our people and have again, the government pay a portion of their compensation. So these are less programs that provide the company with loans or grants more, how do you which is similar to the PPP loan in some ways?

How do you continue to pay the people.

Okay, sounds good. And then I just have one more question.

Even going beyond COVID and if we see the global economy or certain economies go into recession. I know that the ART or IVF industries change quite a bit since 2008.

But in a recessionary scenario, I wondered if you had some commentary on how that impacts demand for IVF cycles?

Yes, such data that we have is from that we look at carefully is from the 2007/2010 timeframe in the U.S. where the thinking is, since it's primarily a private pay.

Still, even now there's more public pay available, that's still primarily a private pay procedure that it is more subject to economic downturns. And we saw a slight decline, you know single-digit, small single-digit percentages in one of those years, but generally flat during the downturn, and then actually real spike up in 2010.

In Europe, we’re actually looking at the data we probably should, but the data of the recession wasn't quite as severe in some cases, but also since there's mostly public pay and a lot of places in Europe, thinking yes less governmental and kind of bankrupting themselves through this whole COVID thing. That we'll see less of a recessionary less impact from any kind of recessionary forces because it's backstopped by again government grants, government payment or insurance.

Okay, because I was just wondering in general, if people let's say would put off even having kids at all, let alone an IVF procedure. If they're economically not doing as well as a family, but I mean it's hard to say obviously?

Yes, I think - that was demographic questions that I think will after - we'll know better in two years, I guess.

Yes, okay thanks that's it from me guys.

So I just have one question basically, I'm just trying to get to like I know you're in the process of getting the Gynemed cell culture media FDA approved in the U.S. and then you're moving into Asia.

So I'm just trying to get a sense of what the current cell culture media market looks like in Asia like would we be playing up against some larger players or is Asia sort of lacking presence in this field?

Sure, so the cell culture media business is a large it's the largest single sector of the overall of all the products used in the IVF lab it's hundreds of millions of dollars. It's not the majority of what is sold in the IVF lab, but it's the largest surround I guess of the products.

It's also kind of an umbrella term for lots of different products. So cell culture media includes embryo culture media, which are used to treat embryos, while they're an incubator.

Media that is used for treating and washing sperm, media that use treating washing oval sides treating and choosing for cryopreservation. So it's a very business so it's - I guess it's not a monolithic business.

It does not really sort of the simplistic answer about cell culture media in general behaves in this fashion. It varies a little bit on the application and certainly varies country by country.

That being said, in nearly every country where we that I take on I guess every country I can think of are fairly two very well served by existing vendors of cell culture media. So when we expand our business in let's say, Asia where we've expanded.

It's typically that we are offering a product through distribution channels that have maybe a trusted relationship with a clinic and people are willing to give our media a shot. Our media is excellent media.

So part of it is just giving it a shot and then trying it out. We also are running some clinical trials in Asia of our new cell culture media.

And that's allowed us to penetrate some of those and these are typically larger clinics, some of these larger better clinics with our products. So I guess the kind of stepping back - is the cell culture media is a big and important part of overall sales is the IVF lab.

It's why we talk about it and we're willing to invest even though we've put off little investment in the U.S. We're willing to invest the time and effort and money to penetrate against, which is often large entrenched competition because the prize is worth it.

But on the other hand, I just want to make clear that and I've said this in other calls, this is not a kind of a hockey stick function. Once you offer it, you see dramatic increases in sales, you'd say you got to win product-by-product, application-by-application, clinic-by-clinic, but the same reason it's hard to win the business it's also is very sticky once you have it.

So once you have that business it's got a long tail of continued recurring revenue. So again, that's seasonal, the reason why we think it's working.

So I hope that was responsive.

Yes, thank you. Yes that was just sort of kind of understand, you'd be aiming or having to be at market leader in Asia and sort of like the timeline of the rollout and to be fully integrated in Asia and then the rollout for the U.S.

pending FDA approval I think the timeline yes?

Yes, so it again, it varies country-by-country. So clearly and we love to be a market leader and every country that we're in again we have to be realistic that it's hard work to do that.

But we would hope that through, you know over a period of time through accommodation, quality products, quality, service and support excellent sales. Our distribution, depending on where we go, that we can win our fair share of the business against again other frankly, high quality competitors.

A couple of follow-ups. You mentioned possible supply chain issues.

I'm wondering have you experienced any yet that have impacted your ability to deliver any of your major product lines or is it just something that could happen in the future?

Yes so - when the first arose the whole COVID-19 issue right around early February, when we became where this and thinking about this our biggest concern at that point was, so I think a lot of people were when we thought it was going to be unfortunately - have unfortunately, relatively confined to China and East Asia, that we're worried mostly about our China supply chain. We don't generally get a lot of finished goods and other products from China, but we do have in our manufactured products typically electronic components and others that are sourced from China.

As Michael mentioned in his remarks, our inventories grew pretty substantially last year, and that was, I'd like to say we were cushioned and [sausaged] with COVID-19 crisis coming, but it was really we just thought important to make sure that we had lots of both finished goods for resale as well as the components raw materials in stock. So as long story as we did not see any meaningful supply chain disruptions from China or frankly elsewhere in the first quarter.

And China has largely come back on track, so we're comfortable about that. We do - and now I guess over the month of March and into a little bit of April, we were frank little more worried about products that might be coming from Europe and the U.S.

and thus far again, we haven't had any real problems most of our manufacturers that we source products from out of the pure electronics manufacturers, our medical device products companies, and similar to us, they've been able to maintain operations during this whole procedure for the most part and some exceptions obviously. So we haven't yet seen dramatic supply chain problems, there’s certainly some around the edges that have caused a little bit of typically how do we backfill this product because more so than they requires engineering validation and other work versus necessarily lost sales.

But we have to be cognizant that could happen in the future, or it could be brewing right now, and we're just not aware of it. So, I would say that was not quite just a kind of a classic risk factor that we'd like to repeat.

But I'm happy to say at least as far it hasn't had a material impact on our business.

Okay, our next question. So the large lab build out business.

You mentioned you had one in Q1. Is that basically - will that not occur going forward until everything comes back or are there markets where you see lab build outs going ahead anyways, if you had any that were planned or contracted already that have been cancelled or delayed?

Yes, and by the way, I think I might have misspoke, I mentioned that was not in Germany was actually in Austria, but that's neither here nor there. So we, again, we don't do a huge number of lab build outs on an annual basis, it is single digits in the markets that we serve, which are primarily the German speaking markets in Europe, Germany and Austria.

We are launching in France. So hopefully we'll have the opportunity there over some period of time, and the U.K.

as that develops, and then in the U.S. We saw a lot of activity last year and so I think we did one or two last year in the German speaking markets.

We'll probably do a similar number this year. So I don't think we're going to see anything dramatically different.

Last year, we had a lot of activity in the first half of the year, not so much in the second half. We are seeing as far as I know, we have a pipeline of opportunities, but we do not have any committed labs in the U.S.

for the balance of the year. So that have either been there - so without having support anything committed, it's hard to say that we've seen anything that's been delayed.

We do also that tends to confuse the picture a little bit, do a lot of work with some of these clinics to do what would be on the bubble of whether it's truly a full lab where we might provide, a major workstation, which is a microscope laser, micro manipulators and incubator, and a couple of other things and it becomes $150,000 sales post maybe a three or four or $500,000 sale. But in fact, it's a lot of the major components that are used in the lab.

So somehow sometimes it becomes a little bit of a semantic thing. But in terms of the long-term macro-economic question is, are people going to continue to invest in expanding and opening new clinics.

I think that's long-term absolutely. Again, how long people remain cautious about those sort of capital expenditures is why I think they've talked about it being more of a U shaped versus a V shaped curve, like people will be cautious.

Okay, great, and one last quick question. You mentioned your distributors in Asia, are selling the cell culture media?

Do they sell other brands of cell culture media too or would you be the only one that are carrying?

So again, I think it depends - back to the question of that our cell culture media line includes lots of different products. So to be clear, I can't answer specifically for every different one.

But I would imagine that in most of those markets, they might sell another cell culture media potentially, put application where there's a market, they've either had a long-term relationship or there's a market leader that they sell their product and sell our products for other applications. And I'm sure there are some of those that are completely standardized at our media and some that are just purely opportunistic they'll sell whatever the customer wants.

My question actually follows on from some of the discussion on the cell culture media. At the clinic level, is there any signs of spoilage actually becoming an issue with cell culture media that was on hand heading into some of the shutdowns?

And if so is that a potential opportunity for you and some of your media?

So that's - a great question. So again, it's a little early to know the specific answer to that.

But certainly on a general level, cell culture media often has a very short shelf life, sometime measured, sometimes measured in weeks, usually in months, one or two months. Our cell culture media has been formulated of new shelf life, our shelf lives typically are six months from date of manufacturer, so far longer.

So, I guess maybe it's a negative opportunity in the sense that our customers will be less likely to have spoiled media that they need to immediately order to replace. But it's also an opportunity for us to market and we've looked at that market either offered to replace spoiled media from other manufacturers as a way to basically displace the incumbents.

So just a very tactical marketing program. And then on a more strategic basis to be able to convince people that, they haven't really thought as much about shelf life and that shelf life should be - and maybe potentially much more important part of their purchasing decision.

So that's pretty much kind of a day-to-day sales level that we're on top of.

Okay. And my second question is, I believe there was a little bit of a sequential decline in the constant currency organic growth rate from Q4 to Q1, and I suppose that is somewhat as expected.

Is it safe to say that that decline is pretty well largely - that sequential decline was pretty well largely due to some of the slowdown in Q1?

So I would say two things one is more cautious, which is when we talked about Q3 and Q4, which were very strong organic growth periods in constant currency, organic periods. They were far - significantly higher than it had been, say in the first half of the year.

And I do believe generally in reversion sort of mean. So I was not ready to say that that was the new normal.

And that - it was obviously we're good sales and we'll love this, we’ll continue to grow in those mid to high teens as opposed to the kind of the lowest teens where we've been the first half of the year. So the fact that we're in the low teens again in around 12% in some way it doesn't, isn't that surprising - wouldn't have been that surprising even had COVID not happened that being said.

Absolutely, there's again, back to the - what was the COVID headwind. It's some level of - it's mid single-digits headwind of sales from - from China and other specific areas that we could identify that would have had our organic growth be more in line with Q that second half of the year whether it would have been exactly the same a lot of speculation.

All right, thank you very much. Again, I'd like to thank everybody for participating this call and asking some helpful questions.

And I hope to see everybody right around this time next month, when we put out our full first quarter results. And look forward to having another lively discussion.

Thank you again.