Hydreight Technologies Inc. (NURS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Hydreight Technologies Second Quarter 2026 Earnings Conference Call. [Operator Instructions] this call is being recorded. [Operator Instructions] A replay will be made available on the company's Investor Relations website following the call. So no worries if you do have to drop for any reason. Before we begin, please note that today's remarks contain forward-looking statements within the meaning of applicable Canadian securities law. Actual results may differ materially from those expressed or implied today. For a discussion of the assumptions and risk factors involved, please refer to the company's MD&A and other continuous disclosure documents filed on SEDAR+. Today's discussion also references certain non-GAAP financial measures, including adjusted revenue, adjusted gross margin and adjusted EBITDA. The consolidations to the most comparable GAAP measures are provided in the company's MD&A. And we're just going to give a few moments here? Well, I see some more people just joining in before I do turn it over, just one moment and we will just pass it off to CEO, Shane Madden.

Thank you, Abbey. Good morning, and thank you for joining us for everybody, 3 months ago, we stood in front of you and told you that our record first quarter wasn't a one-off. That is the platform doing what it was built to do and that the momentum would carry forward. This morning, I get to show you that it did. The second quarter was another record quarter for Hydreight, our highest revenue and gross profit quarter-to-date. We generated $28 million of revenue, up more than 400% from the same quarter last year and up 12.5% sequentially over what was already a record first quarter. And we did it while remaining solidly profitable. Adjusted EBITDA of $3.2 million and 11.5% margin and net income of $2.5 million, consistent with the first quarter. Looking at the first half of the year as a whole and the picture is even clearer. $53 million of revenue in 6 months against $9.9 million in the same period last year and $5.1 million of net income. Half a year into 2026, we have already generated roughly 50% more revenue than we did in all of fiscal 2025. This morning, I want to walk through what drove the quarter and spend a moment on how we are deliberately putting our balance sheet to work and then take you through the results and our outlook. And then we will be taking some analyst questions at the end of the call. So last quarter, when we were asked what drove the record results, my answer was that there was no single driver. No single customer, no single product and that this was exactly what made the results durable. One quarter later, I can tell you the same thing, and I can tell you it with more evidence behind it. Growth in the second quarter again came from every part of the engine at once, existing partners continuing to ramp, new partners onboarding and the pharmacy network and product catalog deepening underneath it all. Our direct-to-consumer platform known as VSDHOne generated $22.8 million of revenue in the quarter, a business line that produced roughly $700,000 in the same quarter a year ago. At the same time, our mobile medical services vertical grew nearly 30% year-over-year. This is broad-based structural growth, and that breadth is precisely why we believe it is repeatable and scalable. Next, I want to talk about our balance sheet, cash flow and how we are leveraging it to drive growth. In the first half of the year, we deployed approximately $8.7 million of cash into operations. And I want to be very clear about what this is and what it is not. This is not cash being consumed by losses. We were profitable in the quarter and profitable in the half on both an adjusted EBITDA and net income basis. What you're seeing is a deliberate investment of working capital into the launch and securing of customized compound product line with our pharmacy partners. Funding, we extend to the pharmacy partners to bring new products onto the platform and support existing ones. These products carry a conversion cycle of roughly 30 to 180 days. And as the funding is repaid with associated profits, we intend to recycle that capital into the next product line. Think of it as the platform equivalent of stock in the shelves, so to speak, except we don't hold the inventory. We secure the supply to service our ecosystem. It is precisely this funding that helped drive the pharmacy sales growth you saw in first quarter and quarters results. And we expect the working capital to convert and recycle through the back half of the year with $20 million of cash and a working capital position of $35.1 million, up from $15.7 million at year-end. We have ample capacity to keep making these investments where the returns justify them. On regulations, our message is unchanged from last quarter and the evidence behind it keeps accumulating. The regulatory environment around digital health as whole, telemedicine and compounding medications continues to tighten. And that tightening remains a tailwind for Hydreight, not a threat. As we've always talked about Hydreight, we're a medical ecosystem very unique to the industry. And this quarter, we didn't just get more evidence. We got the clearest illustration yet of how this dynamic works, and it came directly from Washington. Over the past few months, the FDA has fundamentally shifted its posture on compounded peptides. In April, the agency moved a dozen peptides out of its most restrictive category. That was the designation that had effectively kept them off the market and creating a black market of sorts. And in July of this year, the FDA's pharmacy compounding advisory committee went a step further, boarding to recommend that 6 peptides, including such peptides as BPC 157, one of the most sought-after substances in the recovery and wellness space. They recommended that those be formally added to the National compounding list. A further group of peptides is scheduled for review early next year. Now these are recommendations, not final rules. The formal rule-making process still has to run its course through the FDA, and it will take some time. But the direction of travel is unmistakable. The regulatory framework is moving towards structured compliant access of these new peptides and wellness medications, and structured compliant access is exactly what we have built over these last 8, 9 years. Think about what this means in practice. Every one of these peptides represent enormous pent-up consumer demand. Demand can see building in real time. But accessing that demand at scale requires precisely the infrastructure that is hard to build, licensed prescribers in every state, compliant telehealth workflows pharmacy relationships and the regulatory discipline to keep pace with a framework that is still being written. An operator trying to do this alone has to solve all of that before they can sell their first order and operator on our platform does not. Hence, the traction and number of licenses, I think that we've all seen here over this last 12 months. And this is where the leverage of our model does it work. As these categories formally open, we onboard them once to the platform and then they become available for our entire partner base in a single motion. Our one regulatory green light because thousands of new revenue opportunities across our network on infrastructure that already exists. We're preparing exactly that. We believe the operators who move first compliantly will take the market. With that, let me turn to the financial results in more detail. Revenue for the second quarter was $28 million compared with $5.4 million in the second quarter of 2025. Growth of approximately 420% year-over-year. Sequentially, revenue grew 12.5% over the $24.9 million, we reported in the first quarter. On adjusted revenue basis, which reflects gross cash receipts before the deferral of certain business partner contract revenue, we generated $30.2 million versus $7.3 million a year ago. For the 6 months, revenue was $53 million against $9.9 million in the comparative period, more than fivefold increase. Last quarter, we showed you our trailing 12-month revenue chart to illustrate the step change underway in the business. And I want to update our trailing 12-month revenue now stands at approximately $78.4 million, up from $55.8 million just 1 quarter ago and $18.5 million 4 quarters ago. Before VSDHOne launched, that is more than a fourfold increase in 12 months. The consistency underneath that inflection also continues. This now marks 16 consecutive quarters of year-over-year growth, a 4-year climb with the slopes deepening. Moving below the revenue. Gross profit was $5.4 million, a gross margin of approximately 19.4% compared with $1.9 million or roughly 36% a year ago. As we discussed last quarter, the change in gross margin percentage is a function of the revenue mix and pharmacy sales, which carry a lower margin, have grown much faster than our other revenue streams. The pharmacy margin itself was approximately 14% in the quarter compared with roughly 17% in the first quarter, reflecting pricing concessions and initial transactions under several new supporting pharmacy partnerships. Our target economics on that business remain approximately 20% before discounts and incentives. One thing to consider on that side of it is the lowering of the cost of medications over the previous 6 months and over the last year, specifically in the GLB1 sector. Operating expenses for the quarter were $2.7 million, under 10% of revenue compared with 36% a year ago. As we added pharmacy consulting capacity and sales and marketing to support new partnerships that leverage flows through to the profitability. Adjusted EBITDA was $3.2 million compared with $3.3 million in the first quarter and roughly $200,000 a year ago. Our adjusted EBITDA margin was approximately 11.5% compared with 13.1% in Q1, reflecting the pharmacy pricing concessions, lowering of some medication category costs such as GLP-1 and the growth spend I just described. Net income was $2.5 million, consistent with the first quarter and compared with essentially breakeven a year ago. For the first half, net income was $5.1 million. On cash flow, as I discussed earlier, we used approximately $8.7 million of cash in operating activities in the first half driven by working capital deployed into receivables and pharmacy prepayments, tied to the launch and securing of customized compound product lines. We closed the quarter with $20 million in cash and working capital of $35.1 million. Turning to our outlook. And for the full year, we are reaffirming our guidance of $150 million in revenue with adjusted EBITDA margin of approximately 15% to 17%, with $53 million delivered in the first half, we recognized this implies material acceleration in the second half, and we want to be direct about why we remain confident. Our guidance was always constructed as a baseline built from existing partner relationships and revenue attributable to the ecosystem as a whole. Currently active customer programs, observable transaction volumes and contracted demand. And the shape of the year reflects the timing of product line launches now funded and coming online. Partner cohorts that ramp with a lag after onboarding. The working capital we deployed in the first half is, in a very real sense, the second half being built. The drivers behind the full year number are visible to us today. And the ecosystem as a whole is far larger from a revenue perspective than the guidance. To close, the second quarter extended every trend we showed you 3 months ago, record revenue to stay in profitability and a balance sheet being put to work deliberately to fund the next leg of growth. The regulatory landscape continues to move in our favor, consumer demand across our categories continues to build, and the majority of the value in our existing partner base is still in front of us. Thank you for your time this morning and for your continued support of Hydreight, very exciting times. With that, I will hand the call back to the operator to open the line for some questions.

[Operator Instructions] I'll begin with Gabe Leung.

Congrats on the progress. Shane, 2 questions I want to ask. First, I'm just curious if you can provide more granularity around what's been driving the growth around VSDHOne for the first half, specifically around a number of live licensees, and sort of the product lines, which have been the most popular? And how does that evolve as you get into the second half where we do -- where you are expecting that big ramp-up in revenues?

Yes. Thanks, Gabe. I think the -- it's been more of an evolution of the model, as I said earlier in my comments, and it was more the structural rollout and execution from a company perspective of the partners within the ecosystem, getting more live, of course. The opportunity arose last year where, from a compliance perspective, the pharmacies themselves one of the partner with the structural setup like ourselves, a 50-state medical ecosystem where there was one set of rules, everything is compliant and all partners working through that protects both entities, the pharmacy themselves. All of the partners working on our ecosystem. So from a client acquisition perspective, from an interest perspective, that's where a lot of the ramp-up has been, as you saw from Q4 to Q1 with the number of licenses, for example. And from that point forward, it's more of an execution from a company perspective. In terms of the product lines, there's been a lot of diversity cleanup. So there was a black market of sorts from the B to the A to the compliance perspective. And that has been kind of normalizing as the FDA have brought out legislation. So again, it's more of a compliant structural drive towards a platform like ours. Obviously, the category 1 peptides that are already approved, like your GLP-1s, GLP-2s in the correct manner, obviously produced with a prescription via 503A, not a 503B and the other products, amorlin, NAD plus, [indiscernible] the category that are approved. And these are all compounded medications. So again, driving a compliant platform in a partnership with a pharmacy who also wants to only work through one set of rules has been basically all part of the acceleration. And obviously, working with the already approved peptides in preparation for the ones that we see towards Q4 potentially coming out. So that's kind of been just more execution Gabe than anything dramatic, more of an evolution of the model.

Got you. And just as my follow-up, it would be helpful if you were able to walk through maybe some of the working capital accounts and sort of the cash conversion you're going to expect to materialize over the next several quarters as the growth of VSDHOne continues. If you can provide some expectations around days payables or DSOs, that would be really helpful.

Yes, absolutely. I think it's important to understand what's sitting behind that increase. A significant portion of the working capital build related to the scaling of our pharmacy programs, like I just identified that partnerships, should I say and the establishment of new product lines, treatment lines rather than simply traditional unpaid customer invoices. So Hydreight and obviously, it's underlying medical practice health care ProSoft, we work and support compound pharmacies, both directly and indirectly through funding or medical or infrastructure via our ecosystem. Sometimes that could be formulation, it could be just purely structural. And that helps us establish new product and treatment lines, of course, and gives us greater control over pricing while helping to ensure the appropriate inventory is there. With the expansion of licensees, of course, capacity becomes one of your #1 things that you have to watch, operational regulatory and compliance structures are already in place. So that investment in working capital is one of the reasons you've seen the balance grow as rapidly as it has. Importantly, we ended the quarter with approximately $20 million of cash and $35 million of working capital and the business still remain profitable. So I hope that kind of makes sense.

Thank you. And now I will turn to Tania Armstrong at Canaccord.

First one for me, guys. The pharmacy gross margin, I think it declined 14% in Q2. You attributed some of the pressure to pricing concessions on new pharmacy partnerships. How should we be thinking about the timeline for those concessions rolling off and pharmacy margin normalizing back towards that 20% target?