Good morning and welcome to the InfuSystem Holdings, Inc. Reports Third Quarter Fiscal Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame, Managing Partner of Lytham Partners. Please go ahead.

Thank you, Gran. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the third quarter of 2020 ended on September 30, 2020. With us today on the call are Rich Dilorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at www.infusystem.com or numerous other financial websites. Before we begin with prepared remarks, I would like to remind everyone, certain statements made by the management team of InfuSystem 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 Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2019. 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, whether as a result of new information, future events or otherwise. Now, I'd like to turn the call over to Rich Dilorio, President and Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe and good morning everybody, and thanks for joining our call today. I hope that you and your families remain safe and well as we continue to deal with the COVID-19 pandemic. Today we will cover our third quarter results, our revised 2020 guidance and we will provide an update on our business as we move toward year end and prepare for 2021. After our prepared remarks, we'll be happy to answer any questions you may have. Now on to the results. Our third quarter 2020 results demonstrated strong performance from our business once again, as we continue to execute on our mission to facilitate patient care from the clinic to home. Revenue in the quarter was $25.1 million an increase of 16.9% compared to the third quarter of 2019. And we delivered $7.5 million in adjusted EBITDA a 46% increase over last year. Operationally our focus remains on growing the top-line, while managing cost infrastructure. And during the third quarter we generated $8.5 million of free cash. Barry will provide more details later in his review on our liquidity and cash flow results. As we saw in the second quarter our core oncology business was not materially impacted by COVID-19 as volumes and revenue remain strong. As most of you know, we provide the gold standard in service and safety to approximately 2,100 oncology customers and this critical mass provides important advantages that have enabled us to grow during these challenging times. Three main elements drive the growth of our oncology business: first, we are continuing to increase our market share by adding new clinics; second, the number of treatments performed by providers is also increasing; and third, the efficiency of our revenue cycle management continues to improve each quarter resulting in a higher percentage of treatments that we provide delivering to the bottom-line. One of our major initiatives this year has been the rollout of our case management service which improves the workflow for our clinics and also positions us to better manage the billing and paperwork to process claims. To-date we have about 500 of our oncology customers live on this program and these process improvements continue to have a positive impact on both our top and bottom-lines. While the onetime $1.5 million pump sale that we booked during the second quarter did not repeat into the third quarter, the DME segment grew by over 18% due in part to a high number of rental pumps in the field servicing the ongoing COVID crisis. Most of the pumps that we deployed during the pandemic surge remain in the field and rental revenues continue to be strong. It's also worth noting that through a new agreement with Cardinal, we have added their enteral pumps to our fleet. They have been deployed to customers and are already generating rental revenue that we believe will continue post-COVID. Given the recent resurgence of the pandemic, we expect this trend to continue for the next few months. Importantly, the significant deployment of our pumps in the field during COVID has resulted in new customers for our business. And post-COVID, we believe that we have an opportunity to retain many of these new customers and grow our business with them. Our infusion pump business and the strength of our core oncology services have effectively hedged our business during COVID. And while we are making progress with our new therapies pain management and negative pressure, the pandemic has continued to slow our ability to gain traction as quickly as we would have liked with these therapies. Nevertheless, our pain management segment is showing good signs of recovery and growth with revenues increasing sequentially from the second quarter as elective surgeries have begun to come back online. In fact in September, we shipped more pumps for upcoming surgeries than in any other month prior since the inception of the program. Through October, we have shipped approximately 30% more devices for patients than we did for the same period last year. While the pandemic is on the rise again, hospitals and clinics have communicated to us that they have learned to better manage their COVID cases. And that they expect to continue performing elective surgeries by retaining as much capacity as possible for the procedures. We continue to make progress in bringing on new surgery centers, as we plan to replicate the leadership position that we have established in our oncology business. As we drive higher adoption of our pain management service, our sales team continues to hear that more physicians see value in doing their part to address the opioid crisis by changing their practices to avoid the use of oral pain medications. Given the positive momentum in adding surgery centers and the recovery in revenue that we saw from the second quarter, we remain optimistic in the growth of this business going forward. We are confident in our plan to double our pain management revenue next year and again in 2022. Our partnership with Cardinal Health and Negative Pressure Wound Therapy, also offers significant opportunity for growth in the future, yet we are still navigating through obstacles posed by COVID. Access to hospitals and clinics has improved from the spring, but it's still not where we want it to be. We continue to be enthusiastic about this therapy given the $600 million addressable market opportunity with our goal of gaining 5% to 10% market share. As mentioned last quarter, reimbursement is higher than we initially anticipated in certain cases and the pent-up demand for this therapy is building as our sales team increases activity and fills the sales pipeline. While the resurgence in the pandemic may continue to delay meaningful volume gains for a few more months, these factors indicate that once COVID becomes more controlled, this business has potential to grow and significantly contribute to our revenue beginning in 2021. And with that, I'd like to turn it over to our CFO, Barry Steele to provide a review of our third quarter financial results.

Thank you, Rich, and thank you everyone for joining the call today. As Rich mentioned, during the quarter, we overachieved our revenue and profitability expectations while becoming cash flow positive and reducing balance sheet leverage. Net revenues for the current year third quarter of $25 million, represented an increase of $3.6 million or 17% over the prior year third quarter. ITS segment net revenue growth of $2.2 million or 16%, outpaced the net revenue growth of the smaller DME services segment, which increased by $1.5 million. However, the DME services team was not to be completely outdone by the ITS segment as this represented an 18% increase from the prior year third quarter. ITS growth continued to be driven by favorable market penetration in the oncology business, resulting from an improved competitive landscape. Pain management net revenues, which are part of the ITS segment continued to recover during the quarter from the COVID-19 shutdowns, nearly doubling on a sequential basis from the 2020 second quarter and staying in pace with an increasingly tougher comparison to the prior year. The DME services segment net revenue growth was led by increased rental revenue, which increased by $1.1 million. Some of the DME services segment growth was the result of the COVID-19-driven increase in market demand, which may moderate when the pandemic subsides. However, a greater portion of the growth was represented by an expansion in market share with national home infusion service providers and the addition of new devices to our product portfolio stemming from new partnerships and device manufacturers. The higher revenues translated into both higher adjusted EBITDA, which increased by nearly $2.5 million or 46% to $7.5 million during the quarter; and improved adjusted EBITDA margin, which grew to 30% during the current quarter compared to 24% in the prior year, once again demonstrating the company's ability to convert net revenue growth to improved earnings. The improvements were driven by both an improved margin mix and fixed selling general and administrative cost coverage. During the 2020 third quarter, operating cash flow totaled $8.4 million, which nearly doubled operating cash flow during the first two quarters of this year on a combined basis. The amount was also 61% higher than the operating cash flow from the prior year third quarter of $5.2 million. The improvement was due to both much higher net income adjusted for non-cash items and due to a reduction in working capital. Lower working capital was mainly due to the return of normal levels after having increased in the first half of the year as we prepared for the effects of COVID-19. You may recall that due to our COVID-19 preparations, we accelerated our purchases of medical devices into the first half of the year. Because of this, net capital expenditures totaled only $0.5 million for the 2020 third quarter, which was much less than either the prior year amount of $7.6 million or that of this year's first and second quarters, which totaled $4 million and $4.5 million respectively. This reduction along with higher operating cash flow allowed us to repay 100% of our outstanding revolving line of credit borrowings, increase our cash on hand, a combined net improvement of $5.8 million while also making $1.7 million in regularly scheduled amortization payments due under our term debt facilities. As a result, our ratio of funded debt to adjusted EBITDA, as of September 30 2020, decreased to 1.36 times, down from 1.77 times as of June 30 2020, and down from 2.11 times at the end of 2019. Our total available liquidity at the end of the quarter, which totaled $17.5 million, consisted of $9.8 million in availability on our revolving line of credit, $5.7 million available under an open capital expenditures facility and nearly $2 million in cash. The amount represented an increase from our available liquidity of $11.7 million at the end of this year's second quarter, but down from $20.9 million as of December 31, 2019. We estimate that our liquidity position will continue to improve in the fourth quarter of this year as our working capital position continues to level off and operating cash flows continue to outpace our capital expenditures as we round out the year.

Thanks, Barry. We're very pleased with our third quarter and year-to-date performance and the continued strong momentum as we begin the fourth quarter. Our core business continues to perform well with approximately 16% revenue growth this year, not including the $2 million to $3 million tailwind from COVID-19 and that's even after the impact that COVID has had on slowing the growth of our pain management and wound care sales. With continued growth of our core oncology business, rental revenues from our infusion pump fleet remains strong. And the progress we are making in pain management and wound care therapy segments, we are increasing our 2020 financial guidance ranges by tightening our revenue expectation toward the high end of prior guidance and raising our expectations on adjusted EBITDA and operating cash flow. Our new financial targets for 2020 are as follows. Revenue for the year is now anticipated to be in the range of $96 million to $97 million compared to the prior range of $94 million to $97 million. Adjusted EBITDA is now expected to be in the range of $26 million to $27 million up from $23 million to $26 million and our anticipated operating cash flow for 2020 is now expected to be in the range of $18 million to $19 million up from the $16 million to $18 million range. InfuSystem has turned the corner and we believe that our trajectory as we exit this year is a good indicator of our expected performance in 2021. Early indications are for another solid year with double-digit growth from a variety of revenue sources, and this does not factor in any significant COVID-19-related infusion pump revenue like we had in 2020. Our capital allocation strategy will be key to growing our powered platforms and unlocking the opportunities that we have to expand our business and create additional shareholder value. InfuSystem is uniquely positioned for these opportunities and I'm very excited for the future of the company. And with that I'm happy to answer any questions.

Our first question today will come from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Good morning, guys. Terrific quarter. I appreciate the significant positive drivers in the business. And I also appreciate the obvious concerns related to the uncertainty of COVID and people's response to it. It looks to me like there's some implied conservatism in Q4 guidance or the implied guidance. And I'm just curious if you could just sort of walk through where you're most concerned as we look forward to the end of the year?

So I don't think we're overly concerned with the last six or seven weeks of the year. COVID has bounced back pretty significantly in the last couple of weeks. So the impact on pain management is still a little bit to be determined. But we do know that a lot of hospitals and clinics have told us that even if elective surgeries come offline, it won't be to the extent they were in the spring and early summer. Access to hospitals in Negative Pressure is still a little bit slow, but our core oncology business is still strong. DME revenue is still strong. I don't think it's overly conservative. But I also don't think that there's anything major that we see in the next six or seven weeks that could lead to real loss either.

Great. That's fantastic. Were you surprised that Negative Pressure is now out of competitive bidding? And do you think that's a meaningful positive or just sort of an ongoing state of the Negative Pressure business?

I wouldn't say we were surprised by it. Overall, it's a positive for anyone in that market because currently there is no reduction in reimbursement. That's definitely a positive. If they consider another round of competitive bidding, it will take some time. So we have some time here without concerns about our reimbursement levels, allowing us to focus on gaining market share instead. Overall, it's beneficial. We didn't experience any cuts and didn't have to worry about the bidding process, so it's a complete positive for everyone in the market.

Yes. That's great. So it sounds like the relationship with Cardinal continues to progress well. The opportunity with Enteral Pump sounds good. Could you just comment on that? And then talk a little bit about whether we should expect to see any additional new product platforms in 2021, or are you going to be focused on building out the Negative Pressure and pain businesses primarily?

Yes. So the relationship with Cardinal has been great. They've been a fantastic partner on the Negative Pressure side. And the Enteral Pump relationship started sometime late in the second quarter into the third quarter. We were able to help them out in some accounts that they needed some help with. And so that's grown which is great. As far as new therapies, my expectation is we'll have another one next year. We would have probably had one this year if it weren't for COVID. We will still roll one out even with the focus on Negative Pressure and pain, but those two therapies, pain and Negative Pressure, are going to be a huge part of our growth for next year. So that will be the focus of the team for sure. But rolling out a new therapy, we'll make sure we do it at the right time and we don't distract the team and make sure that we're able to execute on the new therapy as well as the existing ones.

Great. And then I just have one more and I appreciate Barry's comments on the capital position. But as you look forward to 2021 and the growth opportunities you have, do you feel pretty good about your available capital?

Yeah. I think we feel good about our available capital as well as our ability to raise more if we need it. I don't think that we need it in the very short term, but we're feeling pretty good right now. We'd definitely turned the corner and be able to generate cash.

You bet. That’s fantastic. Thanks a lot for taking my questions.

Thanks, Brooks.

Our next question will come from Alex Nowak with Craig-Hallum Capital. Please go ahead.

All right, great. Good morning everyone. Kind of, going off of Brook's comments on the Negative Pressure Wound business. I know it's early, but can you just give a few case examples of that business with Cardinal, where and which facilities are you seeing the early success in? And how was a wound facility handling their therapy before you? And now after you and Cardinal came in, what does their wound care business starting to look like in that practice?

So all the businesses coming out of acute care hospitals, most of the wins if not all are from the competition. So we're winning market share from existing competition in the market. I think we have a lot of relationships in hospitals with our oncology business. It's been around for 30 years. And obviously, Cardinal is extremely strong in the acute care market. So between the two of us, we have a lot of relationships in hospitals that we can walk into and start the discussion. So that's really where it started. We didn't have to plant any new seeds or anything. It was customers we already knew that have used one of us and are happy with the service. So now they're using in a lot of cases Cardinal for their inpatient and InfuSystem for their outpatient wound therapy.

No, that's great. And then on the oncology business, what do you think about the growth there? I mean, obviously, you're pegging the growth for next year more on the pain and the Negative Pressure Wound Therapy, which makes sense just given your market share already in oncology, but is there still share to be taken there? And you also mentioned you're seeing more prescriptions per clinic. So are there any new drugs or other indication expansions coming along for the cancers that we should be watching for?

Yeah. So let me take the second one first. So from a new indication standpoint, there's nothing that we see that's dramatic in the market in the pipeline anywhere. There are a lot of smaller orphan drugs that are delivered via continuous infusion. We've had a pickup of those over the last couple of years. Janssen came out with a drug and I’m drawing a blank on the other company. But there has been a couple of drugs; because we already own that market, it's an easy transition for the customer to just continue to use our pumps for more indications. So as those roll out that will certainly help. The first part of the question regarding taking share as a potential there in oncology. Yeah, oncology is going to grow mid-single digits 5%, 6%, 7% for a long time. It's not going to be the 20% we saw when our competitor exited the market or effectively got out of the market. But it's going to be a solid growth driver for us. It throws off a lot of cash to fund new therapies and our investments. And it will continue to grow just at a steady consistent pace of probably mid-single digits. The real growth is going to come from the new therapies. And for 2021 specifically it will be Negative Pressure and pain for sure. Even if we add a new therapy next year just the time it takes to roll it out and launch it and get customers on board will take a while. So the 2021 revenue is going to come from pain and Negative Pressure for the most part.

Okay. That makes sense. And going back to the pain business, in wound therapy of Cardinal, which is certainly helping out it sounds like. In the pain you're doing this obviously yourself. So maybe speak to what needs to be done from either an investment standpoint, or is this just a pure block-and-tackle effort to double the business the next couple of years in pain?

Yeah. So it's a little bit of both. I think the service is really well established. The team has done a great job building a model that is super competitive in the market. We're making a small investment in an additional sales rep. But that's really it for investments. And then a couple on the backend side to support the team, but it is a lot of blocking and tackling. We would have had pain had a phenomenal year this year if it weren't for the elective surgeries coming offline in the second quarter. But that's out of our control and we'll just roll with it. So what we would have expected this year we expect to see in 2021. Even with the COVID rebound, hospitals have stocked up on PPEs. So they don't have to pull it from other spots specifically the ORs. They don't have to pull their team away necessarily. So even if it gets affected, it's not going to be what it was before. I think everybody in the elective surgery world probably saw an 80% decline if not more in their inpatient cases. We don't expect to see anything near that in the future, and we haven't seen it. So overall we think we're going to be in a lot better off position, even if COVID sticks around which, although it looks like it's here to stay, it looks like there's some good news on the horizon too as far as a vaccine. So next year, I expect great things from that team – they are ready to execute and it will be fun to watch next year.

No that's great. And then just two quick questions for Barry. The first one, looks like better SG&A control in the quarter. Is there just anything to call out there? And then second, it was mentioned in the prepared remarks about better collections with your oncology customers that are on this case management service platform. Maybe any metrics about what sort of better reimbursement level or better ASP you're getting from those customers versus those who aren't on that service?

Yeah. So on the first question, well, let me take the second one first. In the reimbursement world, we're seeing a better ability to get our – actually harvest collections from existing treatments. So we don’t always collect every single treatment and we're doing better and better with the improvements in the revenue cycle process to get more. It's hard to really say a specific amount, but it's hundreds of thousands of dollars that we're seeing as an opportunity and we're starting to get some of that. On SG&A, you did see in the quarter a little bit higher spend just mostly related to just adjusting our short- and long-term comp programs. We also saw on the opposite side a benefit from decreased bad debt adjustments that we had in the quarter.

But you feel pretty good about the SG&A level kind of on a go-forward basis maybe some small increases but nothing too drastic?

Yeah. I think that as we grow this company from the $100 million range to something much, much more, we see as a possibility. There'll be some investments that we need to make, but there's also at a higher scale some leverage, I think we can get not only in just our existing infrastructure already being in place, but improving processes that we can take out cost and just more of a scaling benefit.

Our next question will come from Douglas Weiss with DSW Investment. Please go ahead.

Hey. Good morning. I wanted to just touch base quickly on bad debt, which is really low. And I guess, you sort of alluded to it in the last answer, but could you just talk a little more generally about whether the current quarter rate which is basically zero is a one-off? And also, just in general why that debt has come down so much over the last couple of years?

I didn't quite get the question, is it – which metric are we talking about?

The allowances, the bad debt customer allowances.

Yeah. It hasn't been a real significant issue for us. We did see some degradation in some of our agings and part of the business early in the year, and that's sort of reversed. And then we had on the DME side a little bit of degradation in our agings. We don't view it as necessarily things we can't recover from, but our accounting policies dictate that we make – put reserves in play. So again, in the first couple of quarters we had a higher levels, but compared to really tough comps in the prior year, because there were some reversals and then we had a partial reversal on one of our revenue streams in the third quarter, but still elevated levels in the other part of the business. So I think that as we go through time, it will continue to be a very small ratio to our overall revenue.

I mean, I guess, because if I look back to 2017, that was actually a pretty large line item. I believe in 2017 that was $5.6 million. So I was – and I know you shifted to more larger percent of your sales are now direct to hospitals, which I assume have very low default. But,

I think you're looking at accounting change, where under revenue recognition rules we don't book things exactly the same way. The things are putting netted in revenue now that were not before.

Okay. Okay. That was the question. Then looking at 2021 in terms of what the right base would be to use and maybe in one quarter too early, but I know you had a couple of onetime events this year. I mean, when you – when I sort of think about growth in 2021 should I shave a couple of million off the starting point for one-time COVID effects?

Yeah. So what you saw in the guidance for 2020 is a $2 million to $3 million number which actually is a pretty similar number on the top line as well as the EBITDA line, because we're – a lot of it – we had a onetime sale in Q2 that was equipment that we already had depreciated almost fully. We have some costs to make it patient-ready. So that's one that won't necessarily return. That said, we see elevated levels and rentals and things that probably will repeat somewhat in 2021. So I think that when we kind of step back, we'll see that onetime sale in Q2 has really been a tough comp, but everything else probably as we compare 2021 to 2020, it will be more or less breakeven. Those effects will be equally in each year more or less.

Okay. So, basically it is reasonable base to start with maybe $1 million.

Yes. Yes, I think that's right. I think that, as you look at growth for next year, it will end up being not a huge consequence to us. There's a little bit of headwind, obviously, especially in Q2, but it won't be a huge consequence.

Okay. On the enteral pumps, is that a potentially larger business, or is that just sort of a one-off?

So, we have other manufacturers' enteral pumps and it's a significant number from a rental revenue standpoint already. The relationship with Cardinal is new. We didn't have their devices before. It's potentially a big amount. I mean, it's not massive now, but it’s certainly contributing to the numbers. So, it's something that when any time you can add a new device from a manufacturer or a company like Cardinal, it's always a benefit. So we expect it to grow over time for sure. I think right now, there were some pumps needed in the field that we sent out. But over time, we expect that relationship specifically on the enteral pump side to bear more fruit for us.

Okay. And then, how about your expectation for CapEx for the fourth quarter?

Yes, you will see it return to a level slightly higher than what we observed in Q3. As I mentioned, we significantly ramped up during the first four months of the year. This includes some pumps for COVID patients and reflects our overall business growth. Therefore, it will be a bit higher, but we expect to finish the year in the $15 million range, possibly a bit more. Clearly, we will be generating cash in the fourth quarter.

Okay. All right. Thanks. That’s all I got. Good quarter.

Thanks, Doug.

Our next question will come from Aaron Warwick with ES Capital. Please go ahead.

Hi guys, good morning. Glad you’re doing well. I've looked to me like one of the most impressive things about your quarter was the $8 million plus in operating cash flow. And then, it looks like you used $7.5 million of that you paid down about 20% of your debt. Is that correct? And then, what should we expect going forward in terms of that cash flow number?

So yes, you're exactly right. We have revolving borrowings that we were able to pay back and we had a billable cash up as well because we have term debt out there as well. As we look at next year, and obviously, we have more coming to give you some guidance here, we suspect that we'll continue to generate cash, not quite as much as you saw here in the third quarter because that's more – our cash generation for the current year sort of piled up in the third quarter because of the acceleration into the first half of the year of working capital growth and capital expenditures. We think that will still be cash flow positive next year as well.

I guess, the way that I'm reading it is, if you guys weren't choosing to grow, which obviously is a smart strategy at this point, you'd be throwing off a lot of cash. I mean that's kind of what's coming out of this quarter to me is that, a good way to look at it you think?

Yes. So I...

I think what I was. Go ahead.

I believe that during periods of growth, cash flow may decrease slightly. In times when we're not purchasing a lot of pumps and supplies, we will generate more cash, and this will fluctuate from year to year and even within the same year, similar to what we experienced this year.

Right. Right. Okay. Thank you. Can you tell me, I don't remember, what is the current run rate on the pain management business or revenue?

So, we don't break it out as part of the ITS segment with Negative Pressure in oncology. But right now, it's in the single-digit millions. And that's why we expect it to double and then double again. So, it will be double-digit millions here in the next couple of years.

Okay. What I was trying to understand is when you mention doubling next year, I received a figure. Currently, I don’t know that there’s $5 million this year. Would you expect $10 million next year and then $20 million the following year? Or are you suggesting an additional $5 million next year and another $5 million the year after? I'm just trying to clarify that guidance.

Yes. So, it's the first scenario. Yes, it's the first scenario, double and then double.

Yes. Okay. Regarding the Negative Pressure Wound Therapy, based on your guidance, it seems that you anticipate achieving $30 million to $60 million in that area over the next three to five years. Is that correct?

Yes. So that's a 5% to 10% of the addressable market of $600 million.

Okay.

As long as we can execute and the customer adoption meets our expectations, that’s what we are aiming for.

Great. Thank you, guys. Appreciate it.

Thanks, Aaron.

This will conclude our question-and-answer session. I would like to turn the conference back over to Rich Dilorio for any closing remarks.

Thank you all for participating in today's call and for your interest in InfuSystem. We look forward to sharing our progress on our next quarterly conference call, when we report our fourth quarter results in early 2021. Thanks and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.