InfuSystem Holdings, Inc Q4 FY2020 Earnings Call

Good day. And welcome to the InfuSystem Holdings Fourth Quarter and Full Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I’d now like to turn the conference over to Joe Dorame with Lytham Partners. Please go ahead, sir.

Thank you, Rocco. Good morning. And thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the fourth quarter and full year 2020 ended December 31, 2020. With us today on the call are Rich Dilorio, Chief Executive Officer; Barry Steele, Chief Financial Officer; and Carrie Lachance, President and Chief Operating 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, Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe and good morning, everyone. And welcome to our fourth quarter and full year 2020 earnings call. Thank you all for taking the time to join us this morning. I trust that you and your families are staying safe as we hopefully work through the final stages of this COVID-19 pandemic. Looking back, the year 2020 was an unprecedented time for all of us across every aspect of our lives. At InfuSystem, we focused on what’s important to us, the well-being and safety of our patients and our team members. We adapted in countless ways to keep our team as safe as possible while maintaining the highest levels of service to ensure our devices are available to our patients for uninterrupted medical treatments. I am extremely proud of our team and their ability to successfully adapt to so many changes and overcome so many challenges. It was their perseverance that makes it possible for us to report record results today. On this call, we will cover our financial results for the fourth quarter and full year 2020, reaffirm our 2021 annual guidance and provide an update on our business in 2021 and I will look for 2022 and beyond. During 2020, we found we are doing many things the old way had become impossible and that developing new ways of doing things would result in long-term advantages. Our team faced each challenge, adapted as necessary, often creating new efficiencies and continued to successfully execute on our growth strategy. The result of their outstanding efforts was evidenced by the record 2020 accomplishments that include the following: Record net revenue for the year of $97.4 million, an increase of 20% over 2019; adjusted EBITDA of $26.4 million, an increase of 45% from the prior year, with this translating into a net adjusted EBITDA margin for the year of 27.1%; operating income of $8.8 million, an increase of 150% over 2019; operating cash flow continued to grow, reaching $20 million, an increase of 44.4% over 2019. In the face of COVID-19, we grew our pain management therapy and treated a record number of patients, despite limited access to medical facilities and the broad postponement of elective surgeries during the year. We were also able to launch our partnership with Cardinal Health as we entered the $600 million wound care market with our Negative Pressure Wound Therapy Service. The COVID-19 pandemic has put a spotlight on the need to move patients out of the hospital environment and into their homes to continue their treatment. The increasing movement toward home-based treatment benefits the patient, the provider, and the payer. InfuSystem provides the services that make this possible. We bridge the gaps and enable the continuity of care for patients between the hospital and their home. Our integrated therapy services posted a record year of delivering growth of 18% over last year with strong gross margins of 65.1%, driven primarily by increased oncology therapy as we treated a record number of patients in 2020. Oncology remains the core of our ITS platform and it is the strength of that offering that allows us to expand into new therapies and develop new growth drivers. Our Durable Medical Equipment Services platform also delivered record results, with growth of 25% over last year and solid gross margin of 45.6%. Growth was driven by strong market demand for infusion pumps partly due to COVID-19, resulting in significant pump sales and new rentals. Although, pump sales are not likely to repeat at the same levels in 2020, we believe the new rental customers are here to stay and 2021 should be another strong year. Turning to our relatively new relationship with Cardinal Health, I am extremely pleased to report that despite the challenges of COVID, we have been able to accomplish a lot in a short period of time. Our sales teams are already working together and each company is leveraging the capabilities and relationships of the other to successfully deliver patient services. We are gaining traction in Negative Pressure Wound Therapy and I firmly believe we will capture 5% to 10% of the estimated $600 million Negative Pressure Home Healthcare market in the next three to five years. Back to InfuSystem, over the last 12 months, we were able to significantly strengthen and enhance the capabilities of our leadership team. This includes the appointment of Barry as our Chief Financial Officer last March and the recent promotion of Carrie as President in addition to her COO role. Barry continues to strengthen the financial foundation of the company, with his efforts perfectly evidenced by our new credit facility. InfuSystem has always generated strong operating cash flows, but our success in attracting a syndicate of premier banks to a $75 million credit facility shows how much progress we have made in the last few years. With the new and improved facility, we have the liquidity and financial flexibility to timely capitalize on a growing array of potential growth opportunities in each of our two operating platforms, ITS and DME. With Carrie’s expanded role, she will be leading the implementation of new therapies under both platforms and the integration of acquisitions. Now I’d like to take the opportunity for Carrie to introduce herself and provide some color around our acquisition of FilAMed.

Thanks, Rich, and good morning, everyone. I am very happy to be on the call today and honored to serve the company as President and Chief Operating Officer. I have held numerous management roles during my time working at InfuSystem, with each new one giving me greater ability to contribute to the strategic objectives of the organization. In addition to helping drive new revenue opportunities, my role is often to identify and execute on streamlining operations to improve efficiencies and increase margins and net cash flows. I look forward to working with Rich in the leadership team and growing our ITS and DME platforms and making InfuSystem a leading healthcare service provider for outpatient care across many markets. Rich mentioned our synergistic acquisition of FilAMed in February 2021. This small acquisition was pursued primarily as a means to expand our DME service capabilities. This acquisition broadens and enhances our scope of biomedical services, particularly in areas such as compression devices, defibrillators, electrosurgical units, and patient monitors. Adding FilAMed also provides us with the opportunity to enter into the acute care market. We believe there is an opportunity to expand our biomedical service offerings, with the potential impact being adding double-digit millions of dollars to our top-line over the next few years. This year, the incremental revenue being contributed by biomedical services might be enough to push us to the higher end of our 2021 guidance, which Rich will discuss in a few minutes.

Thanks, Carrie. For the last several years, I have been firmly committed to building a strong leadership team with deep industry knowledge and proven execution abilities. I believe now we have the team in place to make InfuSystem a leading healthcare services company for years to come. Again, I am extremely proud of the entire InfuSystem team and the way that they adapted and executed on our growth plan even during extreme conditions. The patient is at the center of everything we do in delivering patient wellness and our team did an outstanding job meeting this commitment. And with that, I’d like to turn it over to our CFO, Barry Steele, to provide a review of our financial results.

Thank you, Rich, and thank you to everyone joining the call today. As Rich mentioned, during the quarter, we met our revenue and profitability expectations while continuing to be cash flow positive and further reducing balance sheet leverage. Net revenues for the fourth quarter of 2020 totaled $24.7 million and represented an increase of $3 million or nearly 14% over the fourth quarter of 2019. The DME Services segment led the way with net revenue growth of $1.7 million or 25%. While the net revenue of a larger ITS segment increased by $1.3 million or 9%. Similar to the 2020 second and third quarters, the DME Services segment net revenue growth was favorably impacted by higher rental revenue, which increased by $1.1 million, and higher equipment sales, which increased by about $0.5 million during the quarter. Much of the rental revenue growth was represented by an expansion in the market share with national home infusion service providers and the addition of new devices to our product portfolio stemming from partnerships with device manufacturers. In addition to the increases resulting from the COVID-19 driven market demand, which currently shows no signs of moderating as the pandemic resides. ITS growth continued to be driven by favorable market penetration in the oncology business, resulting from an improved market competitive landscape. Pain management net revenues, which are part of the ITS segment, continued to recover during the quarter from COVID-19 shutdowns growing by 22% compared to the prior year’s fourth quarter and 17% sequentially from the 2020 third quarter. The higher net revenues translated into higher adjusted EBITDA, which increased by $750,000 or 14% to $6.2 million during the 2020 fourth quarter as compared to the prior year. The adjusted EBITDA margin for the quarter of the fourth quarter of 2020 was 24.9%, which was about the same as the prior year adjusted EBITDA margins. This represented a sequential decrease from the 2020 third quarter, mainly due to an increase in the annual bonus accrual and higher bad debt expenses during the fourth quarter. These expenses are expected to return to lower levels during the 2021 first quarter. During the fourth quarter of 2020, the company recorded a tax benefit totaling $9.9 million. This included a benefit associated with a one-time reversal of a deferred tax valuation allowance totaling $11.2 million. The valuation allowance reversal was prompted by having generated significant pretax income on a three-year cumulative basis. We now believe that the company will realize the benefits of its significant federal and state net deferred tax assets, including our significant net operating loss carry-forwards. Also, because of the full valuation allowance reversal, we will be recording a more normal tax provision in future reporting periods. However, these provisions are likely to be largely deferred provisions, meaning that we do not expect to be a significant payer of cash taxes in the next few years. Without the valuation allowance reversal, the company would have recorded a provision for income taxes of $1.5 million, which would have represented an effective tax rate of 19.4%. This adjusted effective tax rate differed from the U.S. statutory rate mainly due to permit differences in the amount of equity compensation expense recognized for book versus tax purposes. We estimate that our regular effective tax rate for future periods will be between 25% and 30%, although there are likely to be periods where this amount is lower due to significant windfall gains currently existing in outstanding employee equity awards. During the 2020 fourth quarter operating cash flow totaled $7.6 million, which exceeded our guidance and was 75% higher than operating cash flow in the fourth quarter of 2019. The improvement was both due to much higher net income adjusted for non-cash items and due to a continued reduction in working capital with return to more normal levels after the COVID-19 related peak during the first half of the year. Net capital expenditures totaled $3.2 million during the 2020 fourth quarter and also approached normal levels. This represented a significant reduction, however, from the fourth quarter of 2019 during which net capital expenditures were $5.6 million. Finally, our outstanding debt increased by $4 million during the 2020 fourth quarter, due mainly to a $5.7 million drawdown on an open equipment line that was otherwise scheduled to close at the end of the year, offset partially by quarterly amortization payments of $1.5 million on our then outstanding term debt. The net result of all this activity, the strong operating cash flow, the normalized net capital expenditure levels and the net borrowing at our bank debt resulted in a $7.7 million increase in our cash balance during the quarter to $9.6 million at December 31st. As a result, our ratio of funded debt net debt to adjusted EBITDA as of December 31, 2020, decreased to 1.11 times down from 1.36 times as of September 30, 2020, and 2.11 times at the end of 2019. Our total available liquidity at the end of the quarter, which totaled $19.7 million, consisted of $10 million in availability on our revolving line of credit and $9.6 million in cash. This amount represented an increase in our available liquidity of $17.5 million at the end of this year’s third quarter. As we announced in February this year, our available liquidity more than doubled from this amount as a result of the refinancing of our bank debt which Rich mentioned. In addition to the improved liquidity, this new revolver credit facility provides much improved flexibility to pursue our growth strategy and capital allocation priorities by eliminating amortization payments, raising our maximum leverage covenant and bringing in additional banking partners.

Thanks, Barry. Looking ahead, we expect 2021 will be another record year for InfuSystem, with strong double-digit growth in both net revenue and adjusted EBITDA, driven by strong growth in our ITS segment, where pain management and Negative Pressure Wound Therapy will begin to present as growth drivers. Our focus in 2021 will be on the following: growing the three new therapies currently on our ITS platform, oncology, pain management, and Negative Pressure, launching a new fourth therapy on our ITS platform in the first half of 2021, adding new products and services to our DME platform, successfully executing on a new cross-selling initiative to capitalize on our over 2,100 sites of care in oncology, developing a new strategic partnership to grow our platforms, and identifying small tuck-in acquisitions that will enhance and expand our current capabilities and offerings. Based on the confidence in our business, I am reaffirming our annual full year 2021 guidance. We are projecting net revenues to be within the range of $107 million to $110 million, adjusted EBITDA to be within the range of $29 million to $30 million, operating cash flow to be within the range of $21 million to $23 million. We are also forecasting adjusted EBITDA margin to be 27%. Our 2021 guidance does not include any potential one-time large pump sales. Driving growth in 2021 will be our pain management and Negative Pressure businesses with net revenues to be in the range of $8 million to $10 million combined. When we exit 2021, we are projecting a $12 million run rate for net revenue in pain and Negative Pressure combined. We are at the beginning of the next phase of growth for the company and these two therapies will allow us to sustain 15% growth with solid gross margin for years to come. We have seen some recent disruption in the wound care space regarding service levels from one of our competitors. While we are still evaluating the exact impact of the market, we plan on capitalizing on the opportunity, which we believe may allow us to accelerate our growth in that market if that disruption becomes significant. We have a very strong and experienced team in place to continue to successfully execute on our strategic business plan. Our service platforms are device agnostic and I believe we are operating in a position of strength as we leverage our two operating platforms facilitating outpatient care. I am confident InfuSystem is uniquely positioned to meet the rising demand for in-home health services, as we successfully expand our two operating platforms with new therapies and products to improve patient outcomes. I am very excited for the future of InfuSystem. And with that, I am happy to answer any questions.

Thank you. Today's first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Good morning, Rich and Barry, and congratulations, Carrie. Welcome to the call this morning.

Thanks, Brooks.

So I was going to put Carrie on the spot first and ask if you have kind of a current idea about your priorities for 2021. Are there big things you need to accomplish or is it kind of a continuation of the current activities for the company?

Yeah. Good morning. Thanks for the question. I would say, priorities are definitely operating efficiently. The integration of FilAMed is certainly a priority and streamlining our workflows in Negative Pressure.

Great. Rich, you mentioned the disruption in the Negative Pressure market, has your enthusiasm for the opportunity in that business increased in recent months?

I still believe we are likely to capture 5% to 10% of the addressable market, which translates to a potential revenue range of $30 million to $60 million. We're still assessing the market disruption to understand its extent and impact. The positive news is that, regardless of the size of the opportunity, we intend to capitalize on it, and that’s what the team is currently evaluating. It's uncertain whether we will exceed the 5% to 10%, but it might allow us to reach those figures more quickly. Instead of the timeframe being three to five years, it could shorten to two to three years to achieve that growth. Our response and how we execute will be crucial, and while we are still finalizing the details, we plan to discuss more in a couple of months, likely in May, when we release our first quarter results. By then, we should have better insights into the situation and our expectations. Whenever there's market disruption that can benefit us as an organization, it's a promising sign, and we will see how significant it is. Overall, it's all positive news.

Can you discuss the opportunity you see in the Negative Pressure space, estimated between $30 million and $60 million? Additionally, what is the size of the opportunities you perceive in the pain market?

The market we are focusing on currently is approximately $125 million. Our pain business has the potential to reach double-digit millions, and I mentioned in November that by the end of 2022, we should exceed $10 million. The future growth could be impacted by reimbursement challenges for physicians, which I hope will change in the next couple of years. If that occurs, it could significantly expand the addressable market for everyone in that sector. At that point, the potential could double or triple. So, could it become a $20 million or $30 million business? Yes. Do I anticipate that in the next couple of years? No. However, I believe we can achieve that over time.

Right. And if I remember correctly, your pain therapy essentially eliminate the need to prescribe opioids, is that right? Isn’t that something that government’s going to want to promote?

You would think that would help us get reimbursement for the physicians. It doesn’t always eliminate the need for opioids, but it greatly reduces it and in many cases eliminates it. Our conversation with CMS is that instead of treating a patient after they become addicted, which costs over $500,000, for a few hundred dollars, you can reimburse the doctor to place a catheter and hopefully eliminate the addiction altogether. Financially, it makes total sense. I believe we will get there eventually, and when we do, it will expand the addressable market for everyone involved.

Absolutely. Okay. Can you give us any color on the size or the type of opportunities you are looking for the fourth platform?

Sure. We currently have a significant number of opportunities ahead of us. While I wouldn't say they are unlimited, they certainly feel that way. There are many products, therapies, and devices being offered to patients at home. Manufacturers are reaching out to us, and we are exploring various markets to enter. The challenge will be identifying the right market at the right time with the right partner, ensuring that it makes sense economically. We are considering addressable markets that range from millions to billions of dollars. We are open to entering either if the timing is right and we believe there is a valuable opportunity, even in smaller markets, depending on the effort involved. However, we anticipate that the next market we focus on will be one that has a potential of over a billion dollars. We have already narrowed it down to a few candidates for our next therapy. Currently, we are discussing agreement terms, licensing requirements, and our rollout strategy. We're making progress towards a promising addressable market.

Great. That’s very helpful. Thanks a lot and keep up all the great work.

Thanks, Brooks.

And our next question today comes from Alex Nowak with Craig-Hallum Capital. Please go ahead.

Good morning, everyone. I would like to follow up on Brooks' question and elaborate on the disruption in the wound care space. Could you provide specific details on what you are observing? Is the disruption related to the shift towards care being provided temporarily in physician offices instead of wound care clinics? How is this affecting your competitors? I would appreciate some additional insights into the levels of disruption you are encountering.

Good morning, Alex. We are currently in the discovery phase regarding the situation. We've noticed disruptions at the customer level in terms of service. Relationships are being affected, and the clinical standards of our competitor have declined. This situation is similar to what we see in our Oncology business, which is entirely focused on service. The device itself is secondary as long as it performs adequately; the emphasis is on the service component, whether that involves the clinical team, the biomed team, or the sales relationships. This service aspect is the foundation of our business and is what has driven our success in oncology, and will also enable us to thrive in the Negative Pressure segment. The reduction in service quality from competitors presents a significant advantage for a company like InfuSystem. Having refined our service levels over more than 30 years, I have been optimistic about our potential in this market. The decline in a competitor's service levels gives us a great opportunity to capture market share quickly.

Okay. No. That makes sense and maybe staying on that and actually switching over to the Oncology business. There are some big competitive wins throughout 2020 that you were able to benefit from. How do you think about the competitive environment now and continuous chemo? Anything really changed there, do you still expect more competitive wins, is there anything that might reverse? Just any help there for 2021?

There’s nothing significantly new to report. The situation remains stable, and we still hold a dominant position in the market in terms of market share and service level. Currently, we do not have any direct competitors as they have exited the market. Our competition now consists of home infusion companies that have established relationships with customers for a considerable time. Thus, our approach will return to traditional sales strategies, securing one account at a time to increase market share, and I am confident that this market will continue to grow. However, the growth will not be as rapid as the 20% increase seen in the past couple of years. I have complete faith in our team’s ability to attract new customers. We rarely lose customers in this segment, with our retention rate around 98% to 99% annually. Therefore, we expect to see gradual growth in this market over time since it is well-established, and we hold a significant share.

Okay. That’s great. And I know InfuSystem was a legacy infusion service provider DME route, and as you are starting to go into these other therapies, you are doing it in wound, but you happened to go beyond traditional infusion. And you made the FilAMed acquisition that gets you into some more capabilities. So I guess, the question is, do you need to make more acquisitions to go into these new areas that you are looking at which are beyond the infusion?

Not necessarily. There are kind of two ways that we are going to get into new therapies on the ITS side. It could be an acquisition for sure. If there is a therapy that we like and a product we like, and a manufacturer that it makes sense to acquire to take on those skill sets, we will go do that. The kind of better option for us from an investment standpoint at least upfront investment is something similar to Negative Pressure in Cardinal, where we found a great partner with a great product that we can layer on our service and enter the market without a huge investment upfront but with a lot of cachet in that market to go take market share.

Okay. Makes sense. And then just last question and maybe I missed this or I got the interpretation wrong. But did you mention with the acquisition that you made in February and you look at the guidance that you are probably closer to the upper end of that guidance now? Is that the right way to think about it?

It's not a $10 million acquisition; it's relatively small. We believe that the enhanced capabilities we gain this year could help us reach the top half of our guidance if everything goes as planned. That's why we're maintaining that number. We aren't ready to exceed it yet because it's still early in the year. For now, we feel confident with that figure, and we expect that FilAMed will help us achieve the upper end of that range.

All right. That’s great. Appreciate the update. Thank you.

Thanks, Alex.

And our next question today comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Hi. Good morning. Can you hear me?

Yeah. Good morning, Jim.

Great. Happy St. Patrick’s Day. So, two questions for me. One, it seems to me like you got a boost last year for some of the businesses because of COVID and the trend to treat people at home. As COVID subsides, do you think that some of that sticks as doctors and patients see the benefits of home treatment?

Yeah. So, I think the push to treat patients at home has been going on for a while. This isn’t a new kind of concept. I think COVID just gave it a little bit of a push, right? It was gas on the fire. So, it’s been a few years now at least that physicians understand patients recover better at home. Patient satisfaction goes through the roof when they are at home versus being in a hospital and the payers like it because it’s less expensive to the healthcare system. So none of that is new news, but I think COVID gave it the push that it needed and really opened some people’s eyes that let’s look at all the potential we have to send patients home. I also think that technology has caught up with that concept where some of these devices now become small enough that you can actually take them home and they are portable, whereas before it was like an air-conditioning unit next to your bed. Now you can actually carry something home. I think all of that has kind of merged perfectly and I think that’s here to stay. I think it’s going to just accelerate the move to the patient’s home. And that’s what COVID has really helped. From a boost standpoint within our businesses, it was definitely felt more on the DME side in pump sales and rentals. The good news is the boost in pump rentals was from newer customers and we really believe now that we are basically a year out that those customers are here to stay. So we might have won the customer because of COVID, but that rental revenue for the most part is here to stay and it’s part of our new kind of baseline and foundation of our revenue.

All right. And then I have a similar question on the cost side. I am sure that you guys reacted to COVID like everybody else and figured out ways to reduce costs and we weren’t sure where the businesses were headed. Are some of those initiatives going to stick in 2021?

Sure. So, yeah, I think, I mentioned earlier on that doing things, look, pre-COVID and post-COVID are much different. Some of the things we used to do don’t work anymore and the good news is some of the adaptations we have made have allowed us to do business better and smarter and more efficiently, and absolutely, those are going to stay. So, there’s no need to change things back if they are working now and we think they will work post-COVID, as hopefully, it loosens its grip on all of us here pretty soon. But, yeah, just like customers, it forced every company to adapt. Fortunately, for InfuSystem, we are extremely nimble as a company and we were able to adapt really quickly and make a lot of really good decisions early on that I think are here to stay, which will just help us in the long-term.

All right. And then the last one for me is in regard to this the fourth therapy you think you will enter in 2021 in it. It sounds like you have a pretty good idea where you are going. So, the question is, are you going to be able to use the same infrastructure you have in place already for reimbursement and to sell this therapy or do you think you are going to have to build out and people build out new infrastructure for this fourth therapy?

Yeah. Great questions. So, the whole concept of adding therapies especially on the ITS platform is that we are going to leverage the infrastructure we have. We are not going to have to build plants and buy machinery to make things. That’s just not who we are. We are not a manufacturer. Our revenue cycle team, our clinical team, our biomed team, the core structures are already there, even the sales team in some cases. We will supplement that as new revenue comes in and more paperwork is processed and more customers are online. But it’s an incremental add as opposed to rebuilding or even building something from scratch. So, we are absolutely going to leverage what we have in place and that’s part of the art of picking the next therapy. So it’s not just about the right market, the right time, the right partner. A lot of it is, how does it fit into our core competencies today and the less we have to change or tweak, the better off we are and the more we can leverage. So, absolutely, it’s part of how we look at this moving forward.

Great. Thank you.

Thanks, Jim.

Today's next question comes from Aaron Warwick with ES Capital. Please go ahead.

Hey. Good morning, guys, and Carrie congratulations on your promotion. I hope your families are well, like you said hopefully we are on the backside of this pandemic. Before this call, I went back to your dialogue, Rich, on the transcript from last May. At that time, you set your target or your guidance for $89 million in revenue, and I was doing the math and saying you know it should be closer to $95 million and you pushed back and here we are. Not quite a year later, you guys did $97 million. So congratulations on that. But I kind of bring this up, the second guy in the call as well mentioned this. Your target now the upper end of it $110 million, obviously, nice growth rate, but I am kind of surprised you haven’t raised that since November given everything that you have been saying on today’s call. I don’t know if you could provide a little more why you are sticking with that rather than raising it?

Yeah. So, it’s still early in the year, right? We are only halfway through March. We are not done with the first quarter yet. I think what people have learned about us over time is that when we put out a number, it’s a number that we know we can hit, right? There’s inherent risk in there. There’s a little bit of upside in there, especially with the range this year, which is a newer kind of concept for us over the last six to nine months. Going outside of that guidance right now I am just not comfortable doing. That doesn’t mean when we talk in May that we don’t raise it. I think each of the last two years or three years we have raised our guidance throughout the year. I think you guys can be confident that we are comfortable that we are in the number that we gave out already, the $107 million to $110 million on the top line. As we see opportunities and they start to crystallize for us, we will give you guys visibility into that by raising the guidance. So, we are not against moving the number as we get clearer, more clarity throughout the year and I think over the last couple of years we have raised it more than once during the year. But for now, it’s still early enough that there’s always inherent risk out there just like there’s opportunities. So, I would say for now, we are kind of a little bit more conservative. But we will stick to it for now and we will see what happens in May in future calls.

Yeah. And I give you guys credit for that, I mean, you are very reliable as it relates to that. So I kind of use that as a bottom number in my own assessment. Listening to you guys talk about the FilAMed acquisition that you announced back in February and even looking at that press release, it mentioned something about how it allows you the opportunity to enter the acute care market. You kind of pitched this and announced this as an acquisition on the DME side of your business. But, I mean, it sounds to me like it presents what I would consider perhaps a materially relevant new therapy on the ITS side. Is that a fair way to think about it?

We would categorize the new therapies mainly in the ITS sector. In the DME area, it typically involves more products and services. FilAMed is effectively a new product or service within the DME category. Our biomed offering is an existing capability as we manage a fleet of over 100,000 pumps along with customer devices. The FilAMed acquisition enables us to enter the acute care market with enhanced capabilities for existing pumps we already service as well as for devices we previously lacked the skill set for. Given the current circumstances with COVID and the financial strain on hospitals, we anticipate that hospitals may not have the funds to purchase new devices. Instead, they will likely focus on maintaining and repairing their existing equipment. This acquisition positions us to support them in that regard. Therefore, the timing of the acquisition is ideal and strategic. It has the potential to generate $10 million to $30 million in revenue over the next three to six years, without requiring significant upfront investment since we are not purchasing new devices, just providing the manpower for maintenance and service.

Okay.

There is no significant upfront investment required. We are not purchasing devices; it mainly involves manpower to perform maintenance and service on the devices. There’s no significant upfront investment required. We are not purchasing devices. It mainly involves manpower to handle the maintenance and service of the devices. There’s no huge upfront investment. We are not buying devices. It’s really just manpower to perform the maintenance and service on the devices.

Great. Then final one for me, you mentioned, it sounds very promising with the addressable market for this new therapy in the first half of 2021. And it sounds like in your response to Brooks, you have got a promising pipeline there and I am just wondering if we should expect maybe in the back half of the year another therapy to be added to the ITS side, are you looking kind of further down the road for that? What’s the timeline looking like there for you?

Yeah. So, we are not really forcing a timeline on new therapies for a couple of reasons. Number one, we could come up with a new therapy and a new device almost every month for the next two years if we wanted to, but if we don’t execute on it what’s the point, right? So, I think what we are looking at is we are going to be methodical and deliberate on rolling out new therapies. We are not in any rush especially if there’s an opportunity in Negative Pressure here in the short-term and that we have to focus our energy there. But we want to rollout a therapy. Carrie is going to make sure that on the back end we are efficient, when we have everything in line so that we are really up and running during the rollout. Once we get to that point, then we are more willing to kind of roll the next therapy in. So, it will depend on the next one and that’s kind of how it will be. The next one will depend on the one we just rolled out and how fast we get it up and running, and how successful it is before we rollout future ones. That being said, can we rollout one in the second half of the year? Sure. I mean, if we think that it’s something that really just kind of lays into our existing infrastructure, to Jim’s point, leveraging our existing team and infrastructure that’s in place, then it’s easier to rollout. Yeah, it’s not crazy to think we will have one in the second half of the year. But I don’t want to put a timeline on it either. I want to make sure that Negative Pressure is up and running, pain continues their momentum, which is at a torrid pace right now and that the next therapy really gets up and running and integrated on the back end of our system and then we will talk about the next one.

Okay. That sounds like a good approach. Just to clarify, did Cardinal reach out to you? It seems like you mentioned that this is happening more often now, with others approaching you. Did I understand that correctly?

Yeah. So it’s both. There are some markets we want to get into that we think we have some real core competencies that we can do some damage in that market. But there are a lot of manufacturers coming to us for help, whether it’s on the logistic side, the sales team relationship side, or our operational capabilities, our revenue cycle capabilities. It’s any and all of the above. So, like I mentioned earlier, I wouldn’t say it’s unlimited, but it kind of feels that way, some days that there’s a lot of opportunity out there and now it’s the trust in the team to pick the right one for the next one and I have 100% faith that we are going to do that and we are going to execute on the next therapy.

Great. You certainly have the track record to speak to that. So look forward to watching this play out and seeing what happens this year. Thank you, guys.

Thanks, Aaron.

And our question today comes from Douglas Weiss with DSW Investment. Please go ahead.

Good morning. Could you provide more details about the wound therapy market? Specifically, how is the $600 million addressable market divided between third-party providers and doctors purchasing devices directly? Additionally, what is your perspective on the competition and the directly addressable market?

The $600 million represents a segment of the overall wound care market, specifically focusing on negative pressure therapy for patients transitioning from the hospital to their homes. If we consider patients in various settings including home care, hospital, and long-term care facilities, the total addressable market is around $2 billion. Our strategy is dedicated exclusively to patients being discharged from the hospital and receiving their devices at home, which constitutes the $600 million market. Within this area, there are four or five competitors, with us and Cardinal anticipating a share increase over time. The leading competitor is KCI, now part of 3M, which has dominated this market for years. Their presence is akin to our position in oncology regarding negative pressure therapy. While hospitals do purchase and own their own devices, this falls outside our target market, which concentrates on outpatient care within patients' homes.

Okay. Thanks. And what do you expect as far as capital investment to reach if you get to that 5% to 10% level?

Our capital investment will be less demanding than it has been in the past because we have more revenue sources that don't rely on devices. As we are experiencing growth around 20%, we don't have sufficient cash flow to fully cover the expenses for purchasing devices. Even while growing at this rate or in the mid double-digit range, we will still generate cash. In these situations, we won't need to acquire as many devices. I hope that clarifies things.

Is it possible to speak directly to the wound care investment regarding what it will cost?

Yeah. I think I can answer that. So, the devices are a couple of thousand dollars. We have only been in that market for a year, so we don’t know what the lifespan is going to be. Our infusion pumps we depreciate them over seven years. Some of them last 10 years or 12 years. But for every new patient, because we didn’t have to go buy a whole bunch of them and stick them on the shelf. So as we get new customers and new patients, we go and buy new devices. The way it works in the pump side is, basically for every dollar you spend on a pump in the first year that’s what you are going to get back in revenue and then obviously the pump lasts another six years to 10 years. So the economics get a lot better after year one. I would say it’s similar if not even faster on the negative pressures. The reimbursement is just more. So the device is a little bit more, but the reimbursement better. So, same kind of thing, for every dollar Negative Pressure revenue roughly in the first year of new revenue you are going to spend about $1 on a device.

Okay. Regarding the guidance, it seems you are projecting similar margins on the additional revenues you expect to generate on an EBITDA basis. It appears that your margins will remain relatively steady, possibly increasing slightly. Could you clarify this? I had thought that many of these new revenues would make use of your existing infrastructure and result in higher margins.

From a contribution margin perspective, the ITS segment has a gross margin in the 60% range. However, we need to hire more clinicians, revenue cycle team members, and make other investments that will contribute to our SG&A expenses. Despite this, we anticipate that as we increase revenue, the contribution margin will exceed the current EBITDA margin. We will need to invest in our infrastructure to handle the higher volumes expected over time, but we do not foresee the necessity for large SG&A investments to introduce new therapies, which is where we expect to gain leverage. Our expectation is that our EBITDA margin will steadily increase, potentially reaching double digits, as we bring in new revenue.

Okay. Okay. Thanks. Nice quarter.

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back to Rich Dilorio for closing remarks.

Thanks, Rocco. I’d like to thank everybody for participating in today’s call. I hope everyone has a good day and I look forward to talking to you again when we report our first quarter 2021 results. Please stay safe and thank you.

And thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.