KORU Medical Systems, Inc.

Greetings. Welcome to the Coru Medical System's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Greg Hodicek. You may begin.

Thank you, Alex, and good afternoon, everyone. Earlier today, Kourou Medical Systems released financial results for the fourth quarter and year ended December 31st, 2020. A copy of the press release is available on the company's website. During this call, we will discuss our business outlook and make certain forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to several risks and uncertainties, including those mentioned in the associated slide presentation, and our most recent filings with the FCC, along with the associated press releases. We assume no obligation to update any forward-looking statements. The associated slide presentation will be posted in the investor relations section on our website at www.corumedical.com. I encourage listeners to have our press release in front of you, which includes our financial results as well as commentary on the quarter and full year. During the call, management will discuss certain non-GAAP financial measures in our press release and slide presentation accompanying this website and our filings with the SEC, each of which are posted on our website. You will find additional disclosure regarding these non-GAAP measures, including reconciliations of these measures with the comparable GAAP measures. Our results are inherently unpredictable and may be materially affected by many factors. including the introduction of competitive products, the availability of insurance reimbursement, the success of our research and development efforts, acceptance of and demand for our new and existing products, expanded marketing acceptance of the freedom system, the cost, duration, and ultimate outcomes of any litigation, general economic and business conditions in the United States and abroad, the impact of COVID-19 and other factors described in our filings with the SEC. Therefore, Our actual results could differ materially from those goals. For the benefit of those listening to the replay, this call was held and recorded on Tuesday, March 23, 2021 at approximately 4.30 p.m. Eastern Time. Since then, the company may have made additional comments related to the topics discussed. And please reference the company's most recent press releases and filings with the SEC. With that said, I'd like to turn the call over to Jim Beck, interim CEO of Koru Medical Systems. Jim, please go ahead.

Thanks, Greg, and good afternoon, everyone. We appreciate you taking the time to join us today. Before reviewing our year 2020 operational highlights, I would like to thank the Koru Medical Systems team for their hard work and dedication throughout the past 12 months. Despite the many challenges that they encountered this past year, the team rose to the occasion. KORU is stronger and more dedicated than ever. And we look to use this perseverance to drive more robust outcomes in 2021. We are also excited about our new CEO announced last week. We are confident that under Linda Tharby's leadership, KORU Medical is well positioned for our next phase of growth. I would now like to turn to our results. I'd like to take a few minutes to talk about our net sales and add some transparency to our business. We break down our net sales into three categories, domestic core, novel therapies, which currently includes clinical trial sales and international core. The largest of the three is our domestic core net sales, which is derived from sales of our easy to use mechanical infusion pumps and their corresponding consumables. These pumps are currently used to deliver subcutaneous IG therapy to patients suffering from chronic primary immune deficiency disorders. Net sales growth in all three of these categories was disrupted in 2020. Starting with domestic core net sales, the disruptions related to both pricing and volume dynamics. Beginning January 1st, 2020, KORU decided to strengthen its contractual position as a vendor of choice with key customers by providing allowances, including growth rebates. As of the beginning of 2021, we have lapped these allowance agreements, and our net sales will more closely track our actual volume growth going forward. Regarding the quarterly cadence of our domestic core net sales, the emergence of COVID-19 in the U.S., altered the ordering patterns of our largest customers. At the beginning of the pandemic, these customers, including our largest distributor, increased their inventory of our products. In the second half of the year, and especially the fourth quarter, those customers and distributor reduced their inventories by purchasing less product from us. Based on our conversation with these customers, we believe that purchases in the first half of the year were because customers and distributor were concerned about future availability and that their inventory levels have now returned to normal levels. Switching to our novel therapy sales, although novel therapies, which currently include sales into clinical trials, was $900,000 higher than last year, this revenue experienced purchase volume variability throughout the year. Further, we were made aware of delays in trial activity due to COVID-19. We continue to advance the strategy of novel therapies with potential pharma customers, although we anticipate novel therapies will continue to be an unpredictable portion of our overall revenue. 2020 was also a challenging year for our international business, as COVID-19 hampered our ability to create new opportunities for our products overseas. We believe there is demand for our infusion systems in Europe and Asia, and we will continue to pursue these opportunities. This past year, Coral Road Medical had several significant accomplishments, including entering into an agreement with Command Medical Products to manufacture our subassemblies, needle sets, and tubing for future supply continuity and cost savings. In addition, the completion of a capital raise of net $26.6 million and the announcement of a stock repurchase program through December of 2021. The company remains committed to growth over the long term as we make short-term investments to execute on our strategic initiatives. The company's primary areas of focus for the year 2021 will include continued focus on improving the customer and patient experience, continued research and development efforts to introduce compelling products into the markets we serve, expansion of sales into other drug therapies, both existing and new, and an expanded presence in international markets, and the implementation of secondary sourcing of our needle and tubing sets. Before turning things over to Karen, I just want to add that I'm thrilled about the appointment of Linda Tharvey as CORU Medical's President and Chief Executive Officer effective April 12th. Linda brings our company a wealth of relevant executive experience and a successful track record of building and leading robust global organizations. Throughout her 24 years at Beckman Dickinson, Linda had developed and commercialized multiple product and service innovations and delivered solutions to patients in the home setting. The board and I look forward to working with Linda as Cobra Medical enters its next stage of growth. I would now like to turn the call over to Karen to review our 2020 financial summary.

Thank you, Jim, and good afternoon, everyone. Total net sales for the fourth quarter were 4.1 million, a decrease of 35% from the fourth quarter of 2019. This decrease in net sales is due to tighter inventory management by several large customers after precautionary buying in the first half of 2020. A large early order placed in the third quarter lower novel therapy sales, and lower international sales. Higher allowances also unfavorably impacted the quarter. Net sales for the full year 2020 increased 4% over the full year 2019. The increase is principally due to an increase in domestic core product sales volume, as well as higher domestic novel therapies of 800,000. Offsetting this increase were higher allowances, which include rebates resulting from the net impact of pricing increases at our largest distributor in the second half of 2019, and pricing decreases and growth rebates to strengthen our contractual position with several large customers in 2020. Further increasing allowances were payment discounts and distribution fees at our largest distributor under new contract terms entered into in the fourth quarter of 2019. Gross profit as a percentage of revenue, which we refer to as gross margin, was 57% in the fourth quarter, down from 63% in the same period in 2019, impacted by scale and higher allowances. For the full year 2020, gross margin was 62%, down from 64% in 2019, impacted by higher allowances, overtime costs related to COVID-19, absenteeism, and a discontinued product line reserve, offset by some favorable production variances. Selling general and administrative expenses were $3 million in the fourth quarter of 2020, compared to $2.8 million in the same period in 2019, slightly higher due to consulting fees related to sustainability and strategic initiatives, partially offset by a lower bonus expense compared with last year. For the full year 2020, selling, general, and administrative expenses were $12 million compared to $9.8 million in 2019. The increase was primarily driven by new hires and consulting fees related to sustainability and strategic initiatives, partially offset by lower trade show and T&E expenses due to COVID-19 travel restrictions. R&D expenses were $352,000 in the fourth quarter of 2020 and $1.3 million for the full year 2020. Fourth quarter and full year 2020 R&D costs were $62,000 and $556,000 higher respectively, mostly due to development initiatives and new hires. Net loss in the fourth quarter was $835,000 compared to net loss of $80,000 in the fourth quarter of 2019. For the full year 2020, net loss was 1.2 million compared to net income of $564,000 for the full year 2019, which 2020 included a $2.2 million non-cash litigation settlement expense with our competitor. Turning to our balance sheet, we ended 2020 with $27.3 million in cash and cash equivalents compared to $5.9 million at the end of the year 2019. This increase includes net proceeds of approximately 26.6 million from the company's public offering, completed in June of 2020, and is net of stock repurchases of 3.5 million. As of March 23, 2021, we may repurchase up to an additional 6.5 million under the stock repurchase program through December 2021. Our inventory position grew from 2.4 million at December 31st, 2019 to 6.8 million at December 31st, 2020, mostly to ensure timely order fulfillment as we transition manufacturing of our needle sets and tubing products for supply continuity to command. As transition is completed, this inventory is expected to convert to a source of cash in the future. Now turning to the outlook for the first quarter of 2021. While we do not intend to provide quarterly guidance in the future, given the timing of our release in the quarter, we expect our net sales for the first quarter of 2021 to be at least 5 million. I'll now turn the call back over to Jim.

In summary, again, I want to thank everyone again for your time this afternoon and for your interest in KORU. Over the past few months, I've had the opportunity to work with the Coru team. We have a talented group at Coru who are very dedicated to providing life-sustaining products to the patients we serve. The market opportunities for our infusion pumps are significant, and our balance sheet is solid. It's been my pleasure to be the interim CEO of Coru Medical, and I look forward to assisting Linda as she assumes leadership of Coru Medical.

We can now turn it back over to the operator for Q&A.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Alex Nowak with Craig Hallam Capital Group. Please proceed with your question.

Good afternoon, everyone. Jim, I want to touch on that last point you mentioned there. As Linda joins the company next month, what are you and the board directing her to be the primary focus over the next 12 months? And then what are the primary goals for the next few years here?

Well, Linda would advise that she has two mandates, growth and innovation. And you might have seen that we've referenced that we're going to spend a good deal of time with Linda to reframe the strategic plan that we laid out, fully committed to achieving the same targets that we had set, just reset in terms of the timing. We've also got a pretty comprehensive transition plan laid out with information is already flowing back and forth introductions are occurring so we're we're out ahead of our April 12th start date and the board particularly the nominating governing committee has been way out ahead of us have a very well-defined very disciplined transition plan now that that's great

maybe go into the guidance for Q1, you know, just given everything we saw in 2020 with the first half 2020 up and then second half coming down as you're going into Q1 here, is it fair to say that all the access inventory in the channel has been washed out? And then I guess as you're going through 2021, what's the threat that we see a similar effect where we see lumpy sales occur in Q1, Q2, And then all that inventory gets flushed out again in the second half of 2021. What sort of protections are you putting into business there?

We believe that information we've gleaned from our customers and our largest distributor, that their inventories have been returned to normal levels. I'd also add that we think that we've lapped through all of the allowance noise that happened throughout this past year. If there is going to be anything lumpy going forward, Alex, I think it all fits within the context and the comments I made earlier about the novel therapy revenues. They're unpredictable. They could be lumpy. And they've also been impacted by trial efforts for COVID-19. So they're also going to be a bit unpredictable.

Yep, that makes sense. And then just last question for me, the hematology drug is expected to launch sometime this year, and they've already been out there doing an early access launch. Do you know how much of the Kuru inventory is out there already in the channel for that drug? And then the follow-up question to that is, what is the expectation for sales to start to flow to Kuru as that drug begins selling into the market?

I'd have to defer to Karen if she can help me with how much inventory is out there.

Karen, do we, if we even... Yeah, we don't really know what they have sitting on the shelf at this point, Alex.

Okay, got it. And just last thing, any clinical trial revenue in the Q1 guide?

It's flat. Yeah. Yeah.

I think no.

Okay, from Q1 2020, not Q4 2020.

Oh, Q1 at zero. Sorry. Q1 of 2021. Karen's reference to the target for revenues for the first quarter does not include any clinical trial revenues. Got it. Okay, perfect. Thank you. Appreciate it.

Thank you. Our next question is from Kyle Rose with Canaccord. Please proceed with your question.

Great. Thank you for taking the question. I wanted to ask another question, just kind of follow up on Alex there, just about how you think about guidance. So when I think about the $5 million, can you help us understand how – how that breaks down U.S. versus O.U.S., because I'm just trying to get a baseline on the business when we think about moving forward. If you're comfortable with where the channel inventory is, you're comfortable with the pricing dynamics, it feels like $5 million is a fair place to start moving forward. Obviously, you don't know about novel therapies, but consider that upside. But maybe help level set what the U.S.-O.U.S. mix should be moving forward, and is this kind of the baseline, $5 million, that we should think about on a go-forward basis?

Let me make a run at it, and then you can add in, Karen. We're not expecting a lot out of the international sales given the impacts of the pandemic throughout this past year and the supply constraints to our distributor group over in Europe. So the mix is going to be an increase of what we refer to as the domestic core.

Does that help, Kyle?

Yeah, so the fair way to think about it is that $5 million is reflective of the U.S.

core business moving forward. And a relatively year-over-year stable international look. Okay.

Okay.

And then just your overall confidence with where the market is now with respect to underlying growth dynamics of the IG market from a patient perspective. Obviously, there's a lot of disruption in 2020, just getting in to see physicians, getting diagnosed for PIDD was a challenge to begin with. I'm sure it was exacerbated this year. Maybe just help us understand how you think about the market growth broadly. And then secondarily, how we should think about that translating to KORU growth with the backdrop of, you know, potential IG constraints and things of that sort.

As we closed 2020, that IG growth was in the low double digits, if you'll recall. And it's remained relatively flat over the past six months, flat at that low-digit growth. a low double-digit growth, if you would. That's from the only external data source that we have. We also have anecdotal information from a few customers. Some that we hear from say that they're seeing fewer patients. The difficulty with leaning in on a few customers is that you're not quite so sure whether they're losing share or it's a real true indication of the marketplace.

Okay. And then I just, you know, I don't mean to put words in either of yours, your mouth, particularly given you've got a new CEO joining, but I'm just trying to, we think about all the moving pieces in the business. You kind of balance their baseline to us here at about 5 million. Is it fair to think, you know, obviously there's quarter to quarter volatility and ordering patterns, but 5 million, and then you're going to have the end market patient growth in low double digits, and that's kind of how we should think about this business on an annual basis moving forward?

I would think so.

I think the earlier comments would suggest that the novel therapy revenues are unpredictable, that the international markets have been impacted significantly by COVID-19, so we're not expecting it. a significant amount of growth in 2021. So we lean heavily in terms of our domestic core, the largest component of our revenue stream.

Okay.

Thank you very much. I appreciate you taking the questions. That's all I've got.

Thank you. Our final question is from Matthew O'Brien with Piper Jaffray. Please proceed with your questions.

Uh, thanks for taking that questions. Um, I guess just to follow up on Kyle's question a little bit, Jim or Karen, can the overall business grow here in 2020? It kind of feels like we should assume it's kind of a down year from a revenue perspective this year, unless a couple of things break, you know, elsewhere in the, uh, in the business.

We have, we, we have, um, put forth a budget that does show growth to Matthew. It's, uh, I think that the size of the domestic core business and moving at a low double digits would carry forward full total sales growth for 2021. Got it.

Okay. For a total company basis versus the 24 you did last year in total? Yes. Got it. Okay. Okay. And then how do we think about the EBITDA line? I mean, you know, a little bit of a loss here in Q4, which typically is a pretty strong two and a quarter for you. Is this something that can be flat again to last year to up slightly, or is it something that could continue to contract a bit versus what we saw in 20 and down again versus 19? Or how do we think about that metric?

No, no, let's... Karen, answer that question.

Yeah, we should see some improvement on that line this year. Remember, we had some anomalies in 2020, and our costs are slightly better coming into the year, so we should see an improvement there.

Okay, but Karen, those anomalies, are they included or excluded from the adjusted EBITDA number?

Yeah, they're excluded.

Okay. And then I guess, well, just curious about the tone within the business at the moment, you know, in terms of employee turnover, you know, how stable are things? You know, what's the enthusiasm with Linda coming in? And I guess maybe to Alex's first question, what is she really going to be tasked with right off the bat? Is it really the core business? or is it going to be all these potential other applications for the technology?

Well, from a culture standpoint, I'll tell you, first of all, this is a solid business. There are good people in this organization, and they do a nice job. I've said it earlier. They've been through a whole lot. They're a dedicated group. So I think one – side of it, Linda's very fortunate to have this opportunity to work with Fitz's team. And the other side of it, Matt, when you finally, when you get to hear from Linda, the energy and the enthusiasm is just tremendous. And she's, she has met a few people who have had only overwhelmingly positive comments about it. So, so we're, we're the board and, is excited. I'm excited to turn the business over to her. I think this is going to be a winning team going forward.

Got it.

And any turnover of note in the organization versus traditional numbers?

Nothing of note. Got it.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a great day.