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Operator
Hello and welcome to the IMFU System Holdings Incorporated second quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Please note this event is being recorded. I would like now to turn the conference over to Joe Dorme, Managing Partner. Please go ahead.
Joe Dorme
Good morning, and thank you for joining us today to review NFU Systems' financial results for the second quarter of 2023 and in June 30, 2023. With us today on the call are Rich DiIorio, Chief Executive Officer, Barry Steele, Chief Financial Officer, and Carrie LeChance, President and Chief Operating Officer. After the conclusion of today's prepared remarks, we will open the call for questions. Before we begin with prepared remarks, I would like to remind everyone, certain statements made by the management team of IFE Systems during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under risk factors and documents filed by the company with the Security and Exchange Commission, including the annual report on Form 10-K for the year ended December 31st, 2022. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. INFUSYSTEM does not undertake and specifically disclaims any obligation to update any forward-looking statements except as required by law. Now I'd like to turn the call to Rich DiIorio, Chief Executive Officer of INFUSYSTEM. Rich?
Rich DiIorio
Thanks, Joe, and good morning, everyone, and welcome to INFUSYSTEM's second quarter 2023 earnings call. Thank you all for joining us today. I'll start by noting that a key theme in our prior two calls this year was that 2023 is going to be an execution year. With this morning's press release, we now see strong second quarter numbers building on those from the first quarter and delivering results for the first half of the year that meet or exceed expectations. Barry will cover the specifics of the quarter in a few minutes, but I will point out that Q1 2023 was the first quarter in our history where revenue exceeded $30 million. And the recently completed second quarter was the first ever above 31 million, coming in at 31.7 million, which reflects 17% growth year over year. Our growth in the first half of the year is the result of strong execution in our biomed and wound care businesses, specifically the rollout under the initial master services agreement with GE, and it's moving rapidly and has achieved the desired momentum. In wound care, we saw another strong quarter of negative pressure device placements as part of our relationship with Cork Medical. As a reminder, these device placements not only contribute to our top line, but they are also important to establish our customer base as we prepare for the introduction of Senera products that we hope will be a growth driver starting in 2024. I'd like to do a quick review of the strategic decisions that paved the way for the performance that we are seeing in 2023. Prior to 2020, InfuSystem had a long history as primarily an oncology pump company. Hidden within that business was a collection of underappreciated and underutilized assets and capabilities. These include our national payer contracts covering 96% of the US population, a strong and scalable revenue cycle management team, and great biomedical services capabilities. Starting just a few years ago, we began looking beyond oncology and infusion pumps to expand the potential of both of our business units, patient services and device solutions. And this has led to material growth opportunities first involving McKesson, then Cardinal, GE, and most recently Cork and Sonera. To understand how these partnerships and opportunities grow our business, it is important to emphasize that InfiSystem is a service company. We provide services that solve difficult problems for manufacturers, healthcare providers, patients, and payers. What we do is challenging, requiring a long-term vision built around a culture dedicated to patient care. All this is to explain why it often takes time between when we announce new business initiatives and when the revenue from these initiatives begins to ramp. We attempt to be as transparent as possible. Often our initiatives require investments be made several quarters in advance of anticipated revenue. In this, we would like to thank you for your patience as we've all waited for some of the big initiatives we've been pursuing to begin bearing fruit. 2023 is a year where the benefits of the hard work and effort in prior years is beginning to show up. With GE, that work began back in 2021 when we started talking about what would become the master services agreement. We signed that deal and started work in 22, and now in 23, we see how impactful the relationship is and will continue to be. The next big initiative is the joint venture with Sonera. The nature of that relationship was developed through 22, and in 2023, we are steadily working towards the necessary preparation to allow a material revenue ramp to start in 24. GE and the Sonera Joint Venture are not the only projects we are working on, but they are currently the biggest and are expected to be the most impactful. The total addressable market for biomedical services is huge, especially in acute care, and the GE opportunity will open doors for us as we execute on the existing agreement and place our technicians in hospitals all over the country. The new initiative with Sonera is a much larger opportunity than our initial project a few years ago that involved only negative pressure wound therapy. But it was that early work with Cardinal that brought Cenara to us and led to the joint venture. Cenara has incredible products and a disruptive model that can greatly benefit patients and payers focused on healing patients. The partnership brings together these products with our national payer contracts, robust RCM capabilities, and the logistics backbone that are needed to address the opportunities that Cenara has long seen in skilled nursing and long-term care facilities. That will be a 2024 story. and I'm happy to report that the progress and preparations remain on schedule. Now I would like to update everyone on our guidance. At the beginning of the year, we gave guidance for the full year estimating net revenue growth of 8% to 10% and greater than 19% adjusted EBITDA margin. Through the first half of this year, our revenue has grown at a pace above the 8% to 10% rate we guided for the full year. We expect our revenue to come in above the range previously provided. How much above depends on a variety of factors, some of which are outside of our control. Accordingly, we are taking a conservative approach and raising our full-year guidance to have net revenue growth of 10-plus percent. We should have even greater visibility when we speak again after our Q3 results in the fall, and we'll give you more color and updated numbers. Barry will now take us through the financial results for the second quarter, and then Carrie will provide additional color on operations involving GE and Sonera.
Joe
Thank you, Rich, and thank you, everyone, on the call for joining us today. I'm going to focus on three topics. the main drivers for the current quarter's results, our forecast for the rest of the year, and our progress towards clearing the internal control deficiencies identified during the 2022 audit. First, let me touch on our financial results for the period. Net revenues for the second quarter of 2023 totaled $31.7 million, representing a 17.4% increase from the prior year. This was the sixth straight quarter, setting a new all-time revenue record and the seventh record in the last eight quarters. Both of our operating segments contributed to this growth with device solutions leading the way with increased revenues totaling $2.6 million, up 27%, while the patient services segment delivered an improvement of $2.1 million, or 12%. In device solutions, revenue growth was primarily attributed to the continued ramp-up of the biomedical services contract with GE Healthcare, which booked revenue of $2.4 million during the 2023 second quarter, compared to only $145,000 in the prior year second quarter, which was the quarter when the program was first launched. On June 30th, the annualized revenue run rate for devices onboarded to the contract stood at approximately $9 million, and we continue to march towards our current target of $12 million. The improvement in patient services was driven by negative pressure equipment sales on lease, which totaled $1.3 million. This was nearly triple the amount from the 2023 first quarter. We had no negative pressure equipment sales during the second quarter of 2022. Most of these sales were to one customer, and this channel is expected to taper off in the next couple quarters. Most of the rest of the improvement in patient services was in oncology, which increased by 900,000, or almost 6%. Gross profit for the second quarter of 2023 was $16.4 million, which was $1.5 million, or 10% higher than the prior year's second quarter, and an increase of 900,000, or 6%, from the gross profit of this year's first quarter. This was mainly driven by the higher sales, but was partially offset by a lower gross margin percentage, which was 51.8% during the second quarter of 2023, down from 55.1% from the prior year, but up slightly from this year's first quarter. The year-over-year decrease was mainly due to unfavorable product exchanges and additional startup costs for the GE Healthcare Biomedical Services Contract, The product mix impact is due to higher biomedical services revenue and the negative pressure equipment sales growth, both of which have a lower gross margin than the company average. GE Healthcare startup costs are estimated to have been about $900,000 for the 2023 second quarter. While this amount is still higher than we originally planned, it is significantly lower than the amount we started off with during the first quarter, when we also had lower amounts of revenue on the contract. You may recall In this case, startup costs largely include employee acquisition and development costs such as recruiting fees and hiring bonuses, training time, lower initial productivity in the field, and higher travel expenses for the travel team. These upfront expenses were higher than originally planned due to the decision to accelerate the onboarding process when that opportunity was presented. We anticipate that these higher-than-planned expenses will continue to dissipate over the next several quarters and that our margin will approach our original estimates once we reach full ramp. Selling general and administrative expenses for the second quarter of 2023 totaled 15.6 million, representing an increase of 500,000, or 3%, as compared to the prior year. However, the amount was 47.9% of revenue during 2023, which represented a 6.4% decrease from the prior year ratio, which was 54.3%. As a result of these impacts, our adjusted EBITDA was 5.8 million, or 18% of net revenue, during the second quarter of 2023, which represented a slight increase in dollars from the prior year, totaling $200,000, but a decrease in margin of 2.2%. Sequentially from the first quarter, the dollar amount was $1.6 million better, and the margin percentage improved by 4.4% to 18.3%. Turning to the prospects for the rest of the year, as Rich stated, we now expect to exceed our previously stated revenue growth outlook of 8% to 10%. However, we expect to fall slightly short of our adjusted EBITDA expectations. Important factors that have contributed to the improvement in revenue growth include a faster than originally planned ramp rate for the GE contract and a significant amount of negative pressure wound therapy equipment sales. As we look towards the second half, we anticipate a continued steady ramp for the GE contract, but lower shipments of negative pressure wound therapy equipment. Our adjusted EBITDA outlook is now expected to be 17% to 18%, mainly due to the higher GE contract startup expenses, which fell heaviest in the first quarter. We anticipate the adjusted EBITDA margin for the second half to meet or exceed the original 19 plus level. Finally, let me update you on the progress of remediating our material weaknesses, and while I'm at it, I'll tell you a little bit more about an important change in our annual audit process. When we filed our annual report, we told you about three material deficiencies in our internal controls. They include deficiencies in the design of controls over the completeness and accuracy of information produced by the entity and used by control owners, so-called IPE, general information technology controls over access rights within certain financial reporting and accounting applications, and a deficiency in controls over management review of established pricing and contract terms to support recorded revenue and accounts receivable for some of our revenue categories. These general deficiency categories were the aggregate result of a number of individual specific control findings. We have addressed many of these individual underlying items by redesigning and implementing new procedures and policies and adding specific steps to our existing process. We have made many of the necessary corrections and are working to complete the remainder. In addition, we still need to validate that the new activities are operating as intended, which is a testing and review process that we will be performing in the coming weeks and months. Given our current progress, we continue to anticipate that the mature weaknesses will be completely mitigated by December 31st of this year. The update to our annual audit process I want to tell you about is the recently announced appointment of Deloitte as our independent registered public accountant for the 2023 annual audit. Deloitte has been completely engaged and we are working to complete the second quarter review process before we file the second quarter 10-Q next week. Next up is our President and Chief Operating Officer, Carrie LeChant, who will provide some additional color on developments in biomedical services and our wound care business.
Rich
Thanks, Barry, and good morning, everyone. I'd like to provide more details on the rollout under the current MSA with GE and update the status of the JV with Sonera. During the second quarter, we accelerated the pace of onboarding and increased the number of devices generating revenue under the MSA to nearly 170,000. As a reminder, we recognize an initial fee when each pump is onboarded and then a monthly maintenance fee that will continue for the life of the contract. We currently estimate that the initial phase of the MSA will involve approximately 230,000 devices and that the initial onboarding process will be substantially completed by the end of the first quarter in 2024. As Rich mentioned, a key part of the GE rollout involves building a national network of biomed technicians that will perform ongoing maintenance and complement our mobile strike teams. The strike teams are responsible for the onboarding process as well as the annual return to each facility to perform required preventative maintenance. While we are still very much focused on delivering white glove levels of service under the initial phase of the MSA, GE has made clear its own intention to leverage INFU systems rapidly scaling capabilities. This may include adding different types of devices such as ETCO2s and sequential compression devices and adding additional services that our teams can perform within the hospitals. A good example of this is the RFID inventory project that we have already started. As our national network is built out, both that network and our strike teams can and will be leveraged to perform biomedical services for manufacturers and facilities outside of the work we are doing for GE. We believe it's strategic to defer such opportunities into next year so as to focus on delivering superior services under the GEMSA and building our reputation for quality that will benefit our future business initiatives. Turning to wound care, we had another strong quarter of negative pressure device placements. This was partly the result of the backlog that developed due to the supply chain issues experienced by our supplier, Cork Medical, at the end of last year. Cork has resolved all issues, and we are currently receiving delivery of devices as expected. However, I'll take this opportunity to remind everyone that we added a second negative pressure device supplier, Genedyne, in the first quarter. The vast majority of pumps we have been placing have been going into long-term care facilities. This is strategic, as it allows us to distribute Senera's advanced wound care products into these same facilities. With regard to that, I'm happy to report we are making steady progress, with our revenue cycle team taking the lead in establishing the processes and connections necessary to successfully implement third-party payer billing. We are on schedule and expect testing and other selling efforts to begin before the end of this year. At this point, I would like to turn the call back over to Rich.
Rich DiIorio
Thanks, Gary. As we sit today, a little over halfway through 2023, we are in a very good place. The GE rollout continues to ramp and is expected to help drive strong revenue growth for the rest of this year and into 2024. Our relationship with GE is excellent, and there are regular discussions on how to expand beyond the scope of the initial MSA. We expect to be aggressive next year, identifying the best opportunities to leverage the national service network we are building, and this will involve opportunities both inside and outside of GE. As I said, Cenera should start materially contributing before the end of 2024, as our other businesses continue making steady progress. Oncology has been a great contributor this year, and pain continues to ramp as we target strategically important surgery centers. Equipment sales, rentals, and consumables are holding their own and are ready to make bigger contributions if and when opportunities emerge in acute care.
Gary
We are now ready to begin the Q&A portion of the call. We will now begin the question and answer session.
Operator
To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
Gary
Our first question comes from Brooks O'Neill of Lake Street Capital Markets.
Operator
Go ahead.
Cenera
Hi, good morning, everyone. This is Aaron walking around the line for Brooks. So just a couple of questions here. You guys mentioned in the long-term care facilities, those opportunities in the wound care area. I'm wondering if you could just provide a little more color on that. Do you see any opportunities in the home as well, or are you mainly just focusing on those long-term care facilities?
Rich DiIorio
So it's a little bit of both. When a patient gets discharged from the hospital and they go down to the step-downs, whether it's a skilled nursing facility or a long-term care facility, they need their wounds treated. So a lot of the care is done at that facility, but when they go home as well, if they need continued care, we can place the Cenera products there as well.
Cenera
Okay, awesome. Thanks. And then just a quick follow-up on Cenera, actually. So you mentioned that you're planning for a revenue ramp in... Do you have any, you know, specific guidance as to whether that be, you know, first half or second half or anything like that?
Rich DiIorio
Nothing yet. As we build on our budget for the year, we'll start to roll that in. But, you know, the team's already out there building the pipeline. So we'll see some revenue probably early in the year. But, you know, it should really kick in, you know, second half towards the end. But we don't have anything specific yet. We haven't built that out for 2024 just yet.
Cenera
Okay, very helpful. Congrats, you guys, on the print.
Gary
Thanks, Eric.
Operator
Our next question comes from Alex Nowick of Craig Hallam Capital Group. Go ahead.
Alex Nowick
Okay, great. Good morning, everyone. Rich, I was just curious, how much of the strength here in Q, you know, first in Q1, now in Q2, is really just getting these hospital environments and staffing back to normal, allowing any few systems now to hopefully get out there and secure these deals and get these deals ramped?
Rich DiIorio
Yeah, I guess on the nursing side in hospitals, it's definitely not back to normal. I don't know if it ever will get to where it was, but it's really not having an impact on us anymore. You know, in our core businesses, we're very much viewed as a partner, so the access even during COVID wasn't terrible. With the new businesses, I wouldn't say it's back to normal, but it's good enough to get the access we need to go place products and talk to customers and service them and that sort of thing. But there's definitely still a national nursing issue. in acute care sites for sure. But in general, not really a concern for us anymore.
Alex Nowick
Okay. That's great to hear. And, you know, at the business ramps here, is it still fair to assume that you've made most of the investments that you've needed to do so far and we're going to start to see some leverage, whether it be in the second half of this year or into 2024? Yeah.
Gary
just in general.
Joe
Yeah, so we're talking about investing in the initiatives like GE. Certainly that's tapering down of the cost to hire people and things like that and the efficiencies in training. It'll probably be until we're totally onboarded and have even some more time to completely hone the effort to get to where we think we ultimately be on that contract. That said, there's other investments that are looming out there for other things that could come up. So we would never say that we wouldn't be making investments to grow the business. But just that being said, the things that we're doing now, for the most part, will get passed pretty quickly.
Rich DiIorio
Yeah, and just to add to that, Alex, on the wound care and pain side, the big investments are the team, the sales teams, and those investments are already in. So we can grow those businesses a fair amount over the next couple of years without adding to that cost because I think the team's in place that we need for quite a bit.
Alex Nowick
Okay. Got it. Makes sense. And I appreciate the update on GE. What other Biomed deals are out there being discussed in the background? Is there a handful of GE-like names that would make sense to ultimately partner with InfuSystem to help with their devices out there in the market?
Rich DiIorio
Yeah, so we are taking on some smaller kind of hospital-based, individual hospitals outside of GE just when we have time and then our techs have a gap in their schedule. But we're still trying to focus on the GE stuff this year just to get our feet completely under us and get that stabilized going into 2024. I think when we look out, we're going to see individual hospital deals, right, where a hospital just needs us to come in and help them out. We're going to see manufacturers that we're going to help out. And there's a couple guys out there that, you know, maybe not the name like GE, but, you know, we could partner with. Nothing kind of imminent. But certainly once our footprint is out there and that capability is there from a logistics standpoint, you know, we can partner with any of the above and hopefully all of the above.
Alex Nowick
Okay, got it. And then just... One more, and then I want to get to the guidance just real quick. You know, Sonara is obviously building up, I think, a pretty unique wound portfolio. You know, just how integral is InfuSystems to that setup? Is Sonara looking at, you know, maybe multiple vendors that can provide the same sort of services that InfuSystems can provide? Or is Infu really the sole source provider, really the only one that, you know, I think could provide the service out there?
Rich DiIorio
Yeah, so we're definitely sole source, and that's why we went the JV route, so that we're both integrated with each other, and we have a negative incentive in theory, right, to go out and get another supplier of products, and they're in the same boat as far as getting another company to go out and do their revenue cycle and clinical and logistics and all that and biomed and everything. So the JV really locks us at the hip, which is great. That's what we both wanted when we entered that agreement.
Alex Nowick
Okay, that's good. And then on the guidance front, obviously we're not getting a new range here, but in the past we've had guidance issued and we've maybe fallen a little bit short of it or have just met it. So as you're looking about growing above the range, is it a meaningful amount above the range versus setting a new range and what sort of – I guess, cushion did you leave yourself if a couple items didn't pan out in the second half to still get above the range?
Rich DiIorio
Well, I guess meaningful is a subjective term, right? You know, we're going to beat 10%, right? You can see it in the numbers already. There's always risk to our business. You know, we've seen it over the last couple years, right? Supplier issues, things that are out of our control, deals don't come in, and we're small enough that a million or $2 will make a difference. So we wanted to give ourselves a little bit of cushion. You know, we're not going to show up with 20% growth this year. Like that's not on the table. But can we beat 10%? Sure. How much we beat it by will be a combination of factors. Our hope is that in November, you know, early November when we announce Q3, we'll have that much more runway behind us, better visibility with only, you know, six or eight weeks left in the year. that we'll be able to tighten up the range for you guys and give you better visibility. But you're absolutely right. The last couple of years, we've all lived through it, and we want to be conservative so that we, at a minimum, hit the number and hopefully beat it.
Alex Nowick
Absolutely. Well, congrats on the good results. Keep up the work, and thanks for the update.
Operator
Thanks, Alex. Again, if you have a question, please press star, then 1. Our next question comes from Jim Sidoti of Sidoti & Company.
Alex
Go ahead. Hi, good morning, and thanks for taking the questions. I think I heard Barry say that equipment sales for the negative pressure pumps was $1.3 million in the quarter. Were there other what you would consider maybe one-time sales in the quarter beyond that?
Joe
No, nothing that really stands out as sort of lumpy-ish. That said, our normal equipment, our other equipment sales, does have a tendency to jump around. This was a healthy quarter for regular equipment sales. Nothing that is really outside the norm of what we can do in the next coming quarters. On the negative pressure equipment, as Kerry pointed out, we're filling a backlog. It doesn't mean it will go to zero as we go forward. We certainly have some more, but we just... It could be a big number. It could be a small number.
Alex
Okay. So other than that $1.3 million, it was a pretty, you would say, sustainable quarter in terms of revenue. I agree. Yes. Okay. And then you've dealt with, you know, as has come up on several calls, you've dealt with a lot of supply chain issues in the past between the pumps and whatnot. Okay. Is there anything right now that you're concerned about, or do you feel like you've got dual sources for most of the equipment you have in place?
Rich DiIorio
I think from a supply chain standpoint, we're in good shape. Certainly a lot better than we have been in the last couple of years. Jim, you're dead on on the negative pressure side. We ran into the single source issue at the end of last year. That was solved with the Gennady agreement this year. So we're in a pretty stable position. That being said, we don't know what phone call we're going to get tomorrow, next week, or at the end of the year. But right now, we're in a very good position.
Alex
All right, and then this next question, I think it's been asked already, but I just want to be clear. When Scenera starts to ramp up, you already have the team in place to deal with that, or will you have to go out and hire more folks as that revenue starts to come in?
Rich DiIorio
Yeah, so on the sales side, for sure, we're in good shape. That team is in place. You know, they can do some order of magnitude, millions of dollars before we have to add people. We will have to add some back-end support, right, customer service, revenue cycle team. But that's, you know, as the business comes in, we'll add those positions. But as far as the big investments in the sales team, that's in place and ready to go. And we have quite a while before we have to add to that team.
Gary
Okay. All right. That was it for me. Thank you. Thanks, Chip.
Operator
This concludes our question and answer session. I would like now to turn the conference back over to Richard Di Iorio for any closing remarks.
Gary
I want to thank everyone for participating on today's call, and we look forward to our call in the fall to discuss our third quarter results. I hope everyone has a great day. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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