On May 26th Crescita Q1 2020 results were released. Crescita was cash-flow positive without any milestone or upfront payments from Pliagis agreements. This quarter gives us a good look at a more repeatable version of Crescita Therapeutics.
Revenue was down in two of three segments. One of the metrics I have been following, commercial skincare gross profit, also had a significant decline.
Crescita was not materially impacted by COVID-19 so Q2 will likely show the brunt of the COVID-19 impact. The company has started to produce hand sanitizer. I don’t foresee this becoming a substantial part of their business but any additional cash-flow can’t hurt.
For my Crescita Therapeutics 2019 full year results review click here.
Disclosure: I own shares of Crescita Therapeutics CTX.TO.
1.1 Crescita Q1 2020 Results
1.2 Balance Sheet
Crescita has a pristine balance sheet. They have $9.3 million in cash and minimal debt. Nothing else jumps out at me as being a concern.
1.2 Income Statement
Revenue was down 10.2% year over year (YoY) but consistent with Q4 revenue. Q4 2020 also included a $1 million milestone payment but almost zero Pliaglis royalty revenue.
Selling, general and administrative expenses increased 13% YoY but again were nearly identical to Q4. I don’t address expenses in the MD&A portion of my post so I’ll include the companies explanation.
“The increase was mainly driven by higher advertising and promotion expenses to support our branded product portfolio, an increase in overall compensation expenses as a result of certain vacancies in the prior year’s quarter, as well as an increase in consulting fees.“
It looks like Crescita is upping its advertising and promotion. If done effectively this could boost commercial product sales. I think it’s going to be difficult to properly assess this initiative with COVID-19 complicating the world. It will take some time to see if this was a wise investment.
Interest expense decreased $67,000 in the quarter. This is due to the repayment of the Knight Therapeutics loan that was repaid in Q4. I thought this was a wise use of capital. It makes even more sense when Crescita was approved for a credit facility with the Royal Bank of Canada for $3.5 million. The Knight loan had an interest rate of 9% while the RBC loan is prime + 0.25%. Crescita maintains the same liquidity while reducing interest-bearing debt and gaining access to debt at a much lower interest rate.
Crescita had a $494,000 loss in Q1. Crescita’s depreciation and amortization expense hover around 10% of revenue per quarter. They will likely continue this amortization of their intangible assets limiting profitability. SG&A is climbing which is hurting profitability. If they cannot control SG&A expenses it will be difficult to consistently reach profitability without milestone and upfront payments.
1.3 Cash Flow Statement
Crescita Q1 2020 results give us a look at what a baseline quarter looks like. Pliagis royalty revenue fluctuates quarterly due to the timing of inventory purchases. This should smooth out with successful launches in Canada, Spain, France and Portugal.
Crescita generated $266,000 in cash from operations and had a net change in cash of $66,000. $68,000 was spent buying back shares. The company has not been buying back shares to preserve cash during COVID-19. Now that their facility is being reopened I’m interested to see if the share buyback is commenced again.
Cash flow wise I thought it was a good quarter but by the companies own assessment they were not materially impacted by COVID-19.
2.2 Page #11: COVID-19 Impact
Surprisingly the company states that their Q1 results were not materially impacted by COVID-19. They were ordered to close at the end of Q1. This likely means that Q2 will show the most dramatic impact of COVID-19.
I am interested to know what their new digital commercial strategy is. My main concern with Crescita is that they will invest all the cash flow into the commercial skincare business line and not see the desired results.
I flip flop back and forth about my opinion on the commercial skincare business. I like that Crescita is not competing with over the counter brands that spend millions on marketing, instead, they focus on the higher-margin spa clientele. Crescita also has loads of experience in upper management. Many of them have over 20 years of experience in the cosmeceutical industry.
However, even with all the experience, the commercial skincare line loses money every quarter. Their Laboratoire Dr. Renaud seems to fluctuate between growth and decline. Now Crescita is investing further in sales and marketing. Every review I have found, including my own wife’s review of the products we bought, are all very good. Maybe some additional investment in marketing is what the brands need.
2.3 Page #15: Cost Cutting
Crescita was required to close its manufacturing facility due to COVID-19. Management took a pay cut and the company terminated the automatic securities purchase plan. As per my conversation with management they would not be buying back more shares while the staff was laid off. The results of these cost-cutting measures will be seen in Q2.
2.4 Page #18: Revenue By Segment
This was the worst quarter for commercial skincare since Q3 of 2018. This in combination with the lower gross margin below is concerning. The lower commercial skincare revenue was due to due to lower sales of Laboratoire Dr. Renaud. The low sales for LDR were caused by aesthetic and medical aesthetic clinics being closed due to COVID-19.
A 10% decline in revenue YoY and the worst quarter of revenue from the commercial skincare line sure seems like a material impact from COVID-19 contradictory to the claims of the company.
Licensing and royalties were also down YoY however when comparing apples to apples royalty revenue was up. In Q1 2019 royalty revenue on the sale of Pliaglis was $482,000 and $1.3 million was a sales milestone. As you will see below the royalty revenue generated by Pliaglis is almost pure profit with 100% gross margins.
The $1.4 million in royalty revenue was entirely composed of U.S revenue. In Q4 Crescita had minimal sales to Taro (who sells Pliaglis in the U.S.) because they had enough inventory. This is likely a refill of inventory so Q2 may have minimal U.S Pliaglis revenue.
It is good to see a significant order from Taro since there were restrictive amendments placed on Pliaglis. While the long term effects of these restrictions aren’t known it is a good sign that Taro replaced their Pliaglis inventory. For more info on the restrictive amendments check out section 3.5 in my full year 2019 write up.
Manufacturing and services revenue fluctuates from quarter to quarter. Based on my conversation with management they are more focused on the development side of the CDMO business as opposed to the manufacturing side. The lack of development work in Q1 reflected in the gross margins of the segment seen below.
2.5 Page #21: Segments Gross Margin
Now that Crescita is reporting each segment separately we get a breakdown of each business line’s gross margins.
I’ve been watching the commercial skincare gross margins closely. The decline YoY isn’t great but 48.8% gross margin is a slight improvement over full-year 2019 gross margin of 47.2%. I will continue to watch quarterly commercial skincare gross margin but while weight it accordingly. The full-year gross margin is a more meaningful number. It smooths out the quarterly variances and gives a more accurate picture of gross margins.
In licensing and royalty revenue we see why it is so important to the company. With a 100% gross margin royalty revenue is nearly pure profit. I’m sure there is employee time allocated to managing Pliaglis but there is no manufacturing required. The profits from Pliaglis are used to fund the commercial skincare business. I look forward to seeing some revenue from additional country sales, Canada, Portugal, Spain and France. I was told by management that revenue from the European expansion wouldn’t be seen until Q4 or early 2021.
I was happy to see that Crescita was cash flow positive in the quarter without any milestone or upfront payments. Revenue was consistent with Q4 2019 but down 10% year over year.
$1.4 million in Pliaglis sales in the U.S. was positive. With the concern of the restrictive amendments placed on Pliaglis, it could have been very harmful to sales. If this change is going to affect Pliaglis sales in the U.S. we haven’t seen the impact yet.
The wording from Crescita on the impact of COVID-19 was slightly confusing. While they said COVID-19 caused no material impact on their results they also stated COVID-19 caused the 10% decrease in commercial skincare sales. This was the worst month of revenue for commercial skincare since Q3 of 2018. So I guess it did have a material effect.
My prediction is Q2 is going to be a very difficult quarter. Spas and medispas were closed in Canada for much of Q2 and Taro resupplied their Pliaglis inventory. The Crescita facility was closed for part of Q2 as well. Hopefully, the additional money spent on launching new digital commercial activities and manufacturing hand sanitizer can lessen the damage. The Q2 2019 quarter had over $9 million in revenue giving Q2 2020 a very difficult comparable.
I would like to thank Crescita for their exceptional disclosures. They put tons of information in both their financial results and MD&A. This takes time and effort and I appreciate it.
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