Good day and welcome to the InfuSystem Holdings Incorporated Reports Second Quarter Fiscal Year 2022 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, this event is being recorded. I would now like to turn the conference over to managing partner Mr. Joe Dorame. Please go ahead.

Thank you, Ian. Good morning and thank you for joining us today to review InfuSystem Holdings, Inc. financial results for the second quarter of 2022 ended June 30th, 2022. With us today on the call are Rich DiIorio, 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'll open the call for questions. 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 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 in documents filed by the company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31st, 2021. Forward-looking statements speak only as of the date of 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 DiIorio, Chief Executive Officer of InfuSystem. Rich?

Thanks Joe and good morning everyone. Welcome to our second quarter 2022 earnings call. Thank you all for taking the time to join us today. As mentioned in this morning's press release, InfuSystem's core business segments delivered strong second quarter results. Our ITS business, driven by ongoing strength in oncology, grew revenue by 6% year-over-year. Our DME business, which includes rentals and related pump and consumable product sales, saw top-line growth of 15%. Combined, our two business units had a 9% growth in the second quarter compared to the previous year. Operating cash flow for the first half of the year increased 8% to $9.5 million, with quarterly cash flow rising by 33% from the first quarter. If we were still the InfuSystem of a couple of years ago, the second quarter would likely be viewed as a tremendous success. However, we're no longer that company. We now view ourselves as a growth company with several exciting initiatives in Pain Management, Wound Care, and biomedical services. While a 9% growth in the second quarter is solid, it falls short of our expectations for this point in the year. We have successfully repositioned InfuSystem from a niche oncology company to a specialist in providing last-mile solutions for Durable Medical Equipment, opening up numerous growth opportunities. More large healthcare companies are recognizing InfuSystem's capabilities and dedication to quality, leading to a steady inflow of significant opportunities for business growth. We analyze these opportunities carefully, opting for those aligned with our strengths and that promise sustainable, profitable long-term growth. As pleased as we are with our new positioning and the opportunities it presents, transitioning our business and collaborating with much larger industry leaders comes with challenges. In healthcare, progress can often be slow. InfuSystem, as a relatively small but nimble company, frequently experiences a cycle of readiness to execute while waiting for our larger partners to navigate their complex internal processes. Historically, we have understood that investments in new business must be made in advance of new revenue appearing on our income statement. What has changed is the anticipated scale of our new business initiatives. In the past, a new customer win might have brought tens of thousands of dollars in revenue per quarter, but this year, one contract with GE is expected to ramp up to more than $10 million annually. It is challenging to maintain patience with such significant opportunities, and we are currently experiencing growing pains as we adapt to the scale of our new business prospects. Last year, as we made significant investments in preparation for the large biomed services contract, we were able to draw parallels to our earlier experience when a major competitor exited the third-party payer oncology market, and we took on much of their business. We emphasized transparency, explaining that rising expenses were due to anticipated material revenue growth over a year or more. This was when InfuSystem first started providing annual guidance, and we followed this approach again in 2021, but with less favorable outcomes. We anticipated new business that required us to invest to be ready, but as investors, you wanted clarity. We communicated as transparently as possible while waiting for the contracting process, which unfortunately took longer than anticipated, finalizing in April of this year. Now, in August 2022, we are pleased to report that work under the large biomed services contract commenced in the second quarter. However, as noted in this morning's press release, the ramp-up has been below expectations. On the positive side, our thorough approach identified a greater need for device repair as part of onboarding, with the first contract potentially involving upwards of 300,000 devices. Although collaborating with a large company like GE took considerable time, we believe the eventual revenue could exceed our original forecasts. Unfortunately, less of that revenue materialized during the second quarter, making it necessary for Barry to explain shortly how this affects our guidance for the remainder of 2022. Looking beyond this specific contract, InfuSystem is seeing numerous opportunities. We are confident in our ability to sustain average long-term growth of around 20% per year. We can select which opportunities to pursue and manage the timing and extent of our investments. However, working with larger, more complex healthcare organizations often leaves us with limited control over the contract timeline and the revenue ramp from these initiatives. As a result, while our average growth rate may target 20%, the growth will be uneven, influenced by when new business initiatives launch and achieve their potential. Our transition to a services company providing last-mile solutions has indeed opened doors to exciting growth opportunities, many originating from large healthcare firms approaching us. Given the challenges of pandemic-related supply chains and prolonged negotiation periods, we have decided to overhaul how InfuSystem provides financial guidance. Starting today, our annual revenue guidance will only include revenue for work already completed and will focus on growth areas with high visibility and confidence regarding revenue ramp-up. This change is intended to allow us to discuss strategies and business developments without relying on precise predictions of the timing and revenue impact of new projects. We believe this adjustment will help us return to the operational rhythm InfuSystem enjoyed before 2021. Regarding the second quarter, we see numerous examples of the challenges we have faced in providing guidance related to our larger growth initiatives. It’s important to remember that despite these challenges, the second quarter still showed a commendable 9% year-over-year growth. I have already shared some details from the initial months of our large biomed services contract with GE Healthcare, where we found an unexpectedly high amount of repair work in addition to regular maintenance. This necessitated a pause as we aligned with GE on the required work scope. As of August, we are back on track with onboarding facilities and pumps at an increased pace, with a project timeline of about 15 months to complete all anticipated work and locations. In terms of our annual guidance, we are modeling cautiously, with no assumptions regarding incremental revenue from increased service levels due to more extensive pump repair work. In our Pain Management business, we are optimistic about the program's near-term prospects. We faced some supply chain issues in the second quarter, which limited our ability to onboard our growing backlog in new accounts. However, the issue is resolved, and we still achieved record patient treatments in June, up over 50% compared to June 2021. We have adjusted our forecast for the year to account for the interruptions in the first half, but we anticipate strong growth in our core pain management program for the remainder of the year. Similarly, our Wound Care business encountered significant supply challenges, prompting a shift in strategy aligned with our long-term plan to broaden our service offerings in both pain and wound care through diversifying our OEM equipment partners. We are set to introduce multiple best-in-class products to expand our market share, having made notable strides in this direction and planning to announce a new partnership soon. In light of this new supplier relationship, we've placed our two large lease opportunities on hold and excluded projected revenues from those deals from our guidance. As we await the new partnership to materialize, we've already begun assessing customer needs regarding alternative devices. Overall, the adjustments we’ve made to our guidance, together with the supply chain challenges and other considerations we’ve discussed, lead us to revise our full-year 2022 revenue growth guidance to between 10% and 13%, with adjusted EBITDA anticipated in the range of 20% to 21%. These numbers reflect current trends in our core services and newer revenue-generating businesses. We’ve excluded new initiatives with uncertain ramp and timing from our forecasts and will update as the timing and growth rates become clearer. By removing the uncertain revenue from our guidance, we can also eliminate the anticipated expenses tied to that revenue. We will remain transparent about our investments, discussing the potential of our new business initiatives without forecasting future revenue until we have a well-defined understanding and confidence in its growth rate. I would now like to hand the call over to our CFO, Barry Steele, for a review of our second quarter financial results.

Thank you, Rich and everyone on the call for joining us today. I will focus on three topics: the main drivers for the current quarter results, some details about the changes in our revenue and financial guidance for the remainder of 2022, and the status of our financial resource reserves. First, let’s look at our financial results for the second quarter, which showed year-over-year and sequential improvements across various metrics. Net revenues for the second quarter of 2022 reached $27 million, marking a 9% increase from the previous year and establishing a new revenue record for the second quarter for the second consecutive year. The year-over-year growth stemmed from both of our operating segments, with Oncology and Pain Management leading the way in our ITS segments, and equipment rentals and biomed services advancing us in the DME segment. On a product basis, the highest growth contributors were biomed services at 36% and pain management at 26%. The biomedical services revenue included initial amounts from a new master services agreement with a prominent global healthcare technology diagnostic company initiated in April 2022. Although revenue from this agreement was not significant during the second quarter, we expect it to reach about $10 million to $12 million annually after our initial ramp-up of approximately 15 months. Preparations for this extensive biomedical services agreement and other expected biomedical service volume have generated additional costs in both cost of sales and general administrative expenses during the quarter. These costs slightly reduced the gross profit margin percentage for the DME services segment and increased our general and administrative expenses. Increased expenses, which comprise a rise in our biomed workforce among other costs, were somewhat offset by higher biomed revenue during the quarter and are anticipated to be fully absorbed as we continue to grow these revenues. To put it differently, in the short term, additional revenue will be highly beneficial, given that the cost basis for this increased revenue is basically fixed in the short term. Three additional factors negatively affected profit margins: first, we raised our estimated reserves for missing pumps by $721,000 during the quarter. This adjustment was partly due to recent physical inventory taken at various customers, and changes in assumptions used to calculate the estimated reserve amount. Second, equipment maintenance expenses for the ITS segment, which can vary quarter to quarter depending on repair timing, were slightly elevated this quarter. Without the pump reserve adjustment and the slightly higher equipment maintenance expenses, the gross margin for the ITS segment would have been a bit higher on both a year-over-year and sequential basis. Third, we incurred additional costs of $400,000 related to the expanded sales team for Negative Pressure Wound Therapy and Pain Management, which started in the second quarter of 2021, alongside related marketing expenses. These costs were evenly split between selling and general administrative expenses. Partially offsetting these were decreases in our stock-based compensation expense due to lower stock valuations on new awards. Lower selling expenses resulted from the timing of marketing activities, which are now being conducted in-person and are generally higher during the first quarter, and a decrease in accrued short-term incentive plan expenses related to the lower 2022 outlook. Consequently, our adjusted EBITDA for the second quarter was $5.4 million, or 20.6% of net revenue. This amount was $300,000 lower than the second quarter of 2021 but represented a $1.4 million, or 34% sequential increase from the first quarter of 2022. Now, regarding our outlook for the rest of the year, we are forecasting 2022 net revenue to be between $113 million and $116 million, which is an increase of 10% to 13% over the previous year. This projection is about $5 million to $7 million lower than our previous estimate. Although this is a substantial reduction, it stems from a few specific developments. The most significant factor is that we have put equipment leases on hold due to a supply disruption, which led us to move all leasing revenue out of our forecast model and into our opportunities list, resulting in a revenue drop of $3 million to $4 million for 2022. Additionally, we revised our estimate for current year onboarding ramp related to the large biomed contract started in early May, reducing the revenue estimate for 2022 by $1 million to $2 million. Moreover, while we delayed the start date for two other biomed contracts, we maintained our confidence level for these contracts, impacting the outlook by approximately $1 million. Lastly, our previous estimates underestimated the impact of supply chain challenges, particularly affecting the pain management new customer pipeline. While these issues were largely resolved in the latter weeks of the second quarter, the heightened delays resulted in a $1 million reduction in the 2022 revenue. On a positive note, we also expect an increase in equipment rental revenue, which exceeded our expectations for the quarter, contributing an additional $1 million to our full year revenue forecasts. Ironically, this improvement partly arose from the same market-wide supply disruption that negatively affected us in pain management. Thus, due to these reduced revenues, we anticipate adjusted EBITDA for 2022 to fall within the range of $23 million to $24 million, with the adjusted EBITDA margin expected to be between 20% and 21%. Reflecting on our financial position and capital reserves, we remain well-positioned to support revenue growth with robust cash flow from operations and significant liquidity from a revolving line of credit, alongside manageable leverage and debt service obligations. Our net debt decreased by $1.2 million during the quarter to $33.4 million, and our available liquidity also increased by that same amount to $41 million at quarter-end. The decline in total debt, partially offset by lower 2022 EBITDA, increased our total debt to adjusted EBITDA ratio over the last 12 months to 1.54 times at the end of the quarter, compared to 1.37 times at the end of the fourth quarter of 2021. This increase mainly stems from a $4 million stock repurchase; without those repurchases, funds would have been allocated to paying down the revolver and reducing the debt ratio to 1.31 times. Our debt comprises borrowings on a revolving credit line with no required term payments, nearly three and a half years remaining on a term, and $20 million of which is shielded from rising interest rates through an interest rate swap with the same duration. Now, I would like to hand it back to Mr. DiIorio.

Thanks Barry. In closing, our motto is safe, smart, and trusted, and for more than 30 years, we have worked hard to build a culture that embodies the patient at the center of everything we do. The foundation of the company has never been stronger and we are confident in our growth plans to build a bigger and better InfuSystem. We're making progress in transforming InfuSystem into a leading healthcare service provider, improving the quality of care by enabling continuity of care for clinic to home and acute care markets. We're well-positioned for multiple growth opportunities, and we are highly focused on executing our plans and driving operational excellence for long-term success. I want to thank the entire InfuSystem team for their hard work and dedication in ensuring our customers, partners, and patients receive our industry-leading service. Before we take questions, I would like to let everybody know that as part of our compensation, some members of the executive team, including myself, were awarded stock options in the fall of 2017 that are now coming up on their fifth-year anniversary and are set to expire. We will likely see some Form 4 filings as the team needs to execute some type of transaction with respect to those options before they expire. It is in no way a reflection of our confidence in the business or the future of this great company. And now, we're happy to answer any questions.

We will now begin the question-and-answer session. Our first question is from Alex Nowak of Craig-Hallum Capital Group. Please go ahead.

Good morning, everyone. This is Jason for Alex. So, just starting out, just wanted to dig in a little bit more on the full year guidance. So, just for what's included in that biomed contract, so is that $1 million $2.5 million we're expecting for the year now? And then if we could get a bit more linear on growth assumptions for ITS and DME, growth assumptions for each business? And then where do you think end of the year run rate is for Pain and Wound, just kind of some outdated assumptions there would be helpful to know. Thanks.

Regarding the biomed contract, our previous guidance was between $3 million and $4.5 million, possibly up to $4.8 million. We have revised that down, and the current estimate is now around $2 million to $2.5 million.

Yes, coming out of the fourth quarter, the run rate for Pain is likely around $10 million on its own, possibly between $8 million and $9 million. When we look at the forecast for the Pain business and our customers in the pipeline, including those we've recently serviced and those we are about to service, we are more optimistic about the Pain business than ever before. We've maintained a positive outlook for it, but without significant COVID impact that we can identify and with supply issues largely resolved, we expect it to reach an $8 million to $10 million business at the end of the fourth quarter from a run rate perspective.

Could you elaborate on the performance of the Pain and Wound segment from July to August? It seems like there has been a recovery, and I want to understand how this aligns with the guidance revisions. What dynamics are at play? Your enthusiasm about the situation is clear, so any additional insights would be appreciated.

Yes, I think Barry can give you the numbers. But on the Wound Care side, largely what's been taken out of guidance is the leases. We had a supply chain issue where we just couldn't get the devices we needed. It's kind of fortuitous that we're already looking at another manufacturer to have a second device. So, the leases, although we're still hopeful, we're going to get them, we don't know if they're going to come in the third quarter or the fourth quarter next year. So, we pulled that out of the Wound Care and that's largely what we pulled out of that segment or out of that business. On the pain side, it was really the delay with COVID at the beginning of the year and then the supply chain issue mostly in April and May. We just had to push that revenue out. And Barry, I don't know if you have the number on Pain, I think we pulled a $1 million or $2 million out of Pain?

Yes, we took about $1 million out of Pain.

Yes.

And just lastly from me, it'd be great to get your guys thoughts on the reimbursement changes we've seen within home health recently. Do they have any impact on your business? And how does it impact the move to more care in the home that you guys are enabling?

Yes, so the changes themselves have had no impact on us. We build different codes. We're licensed differently than home health agencies. So, we've seen zero impact and shouldn't see any. The fact is people are still trying to get patients out of the hospital. It's better for the patient from a recovery standpoint, it's cheaper for the system overall. So, that move hasn't changed. So, I don't think these will impact us really in any way.

Awesome. Thanks guys. I'll hop back in the queue.

Our second question will come from Brooks O'Neil of Lake Street Capital. Please go ahead.

Good morning, guys. Thanks for all the color. Really appreciate that. I guess I'd start off Rich by just asking you obviously got a lot on your plate and you're managing through it very well. But how do you think about adding additional new business opportunities maybe beyond the three or four silos you have today? And how important is taking advantage of those opportunities right now versus perhaps solidifying your position and your existing areas of focus before you move forward with new ones?

Thanks, Brooks. That's a great question. I can address this in a few ways. I don't anticipate us pursuing a new therapy or entering an unfamiliar market anytime soon. However, we will consider expanding our current product lines within Pain, Wound Care, and Oncology. You may see a new therapy or product in those areas where we can utilize our existing sales team and customer relationships, rather than starting from scratch. We aim to solidify our current market positions and products first. The opportunities in biomed, Pain, and Wound Care are significant, and we don’t want to distract our team with new and different initiatives just for the sake of novelty. Therefore, we will concentrate on what we have, but you can expect to see some new products in those three markets over the next six to twelve months.

Cool. And just curious, have you moved away from your thought of moving into the lymphedema space? Or is that just something that's pushed out into the future a little bit?

I think it got pushed out a little bit. We still have some resources dedicated in the background to working through the program. But I think with GE and the biomed opportunity, coming front and center with the Pain expansion we're seeing, and with what we'll talk about hopefully soon on the Wound Care side, we don't need to rush lymphedema. There's just no reason to. I think the TAM in the businesses we're in and the potential that we have to go get a good chunk of it, is plenty for us in the short term. But lymphedema is still out there. And when we're ready, we'll go attack that market. My thoughts on the market itself haven't changed at all and our ability to go after it. I just don't want to spread this team too thin.

Sure, that makes total sense to me. It sounds like you have significant opportunities in your core areas, and that seems like the best way to allocate your resources. I have one last question. I'm curious about the new relationships in Wound Care. Do you think that will affect your relationship with Cardinal? Can you share a bit about how things are progressing with Cardinal?

I don’t believe a new relationship will impact our situation with Cardinal, and this applies to us broadly. We sell products from every pump manufacturer in the market because we aim to be neutral in device selection to meet both patient and customer needs without being tied to a single product. We don’t have an exclusive agreement with Cardinal, which has allowed us to explore other options for some time now. However, our experience with Cardinal has been challenging recently. We've encountered difficulties in obtaining their devices, and while we have some theories, I don't want to speculate on their actions. This situation led us to withdraw from lease agreements we were close to finalizing because we couldn't acquire the necessary devices. Our customer is now considering another device from a manufacturer that we are likely to partner with soon. There’s some strain in our relationship since we lack clarity on the situation with Cardinal, particularly regarding device availability. We can still receive supplies for our current patients, but additional devices are currently unavailable, which is why we adjusted our forecasts. I'm optimistic we’ll find a solution soon, and the leases will be reinstated, although I won't speculate on the timing of that return.

Sure. Makes total sense. And then maybe just for Barry quickly, obviously, you went through the status of the balance sheet, the cash flows. But in general, how do you feel about capital allocation and your ability to manage through all the great opportunities you have in front of you?

I think we have a wealth of dry powder to invest in this business. We're very well set to take on anything that comes our way as far as beyond finance. So, we're very comfortable.

Great. Thank you very much. Congratulations.

Thanks Brooks.

Our next question will come from Jim Sidoti of Sidoti & Company. Please go ahead.

Good morning. Thank you for taking the questions. It seems that the main reason for the guidance reduction was the delay in revenue from GE. Could you explain again why those initial homes required more service than anticipated, which led to the delay in the revenue ramp?

We entered a large hospital that had around 4,000 to 5,000 devices, which were in disarray. Devices were scattered everywhere and many were broken. Our program aimed to repair some devices while maintaining others. We managed to repair a significant number, and we benefit financially from that. The downside was that GE was somewhat surprised by the disorganization of their customer. We collaborated to review our actions and ensure our systems were aligned, which delayed the rollout by about 30 to 45 days. The positive outcome is that everything has been resolved. This month, we anticipate onboarding approximately double the number of devices we brought on in June and July combined. We have worked through the issues, pausing the program until we could clearly assess the situation. We do not expect this level of disarray at every hospital, but some will undoubtedly be messier than others. It likely surprised GE more than it did us. The bright side is that the customer is pleased to have their devices repaired, maintained, and ready to be redeployed in patient care to fulfill their needs.

Although the initial revenue from the contract is going to be slightly lower than expected, it seems that the revenue potential over the next three to four years may actually be higher than anticipated. Would that be correct?

I wouldn't say that the revenue from the initial contract is going to be lower. It's just going to be delayed by a few months, but we're still looking at $10 million to $12 million in revenue from that initial contract with potential for more beyond that.

I think one way to look at it is that it's like the front half of the tail, which has just been pushed back a bit. The tail is a little shorter this year, and it depends on when it cuts off for 2022 in terms of the speed of ramp-up in the first few months. The outlook is actually as strong or better, and the upfront revenue, which is somewhat of a one-time occurrence, is also expected to improve over time. We just need to get the pumps onboard to generate the revenue.

And then looking at the balance sheet, it looks like inventory is up about 20% since the beginning of the year. Is that finished goods, components, and is that something you do with the hedge against some of the supply chain issues?

Yes, it's mostly our supplies that we use in both businesses and components and parts that we use to repair devices. So, it actually for us has a pretty small number generally, so a little bit of a change can be a high percentage. But yes, just building our stock up in order to be prepared for any potential future supply issues.

All right. That was it for me. Thank you.

Thanks Jim.

This concludes our question-and-answer session. At this time, I'd now like to turn the conference back over to Mr. Rich DiIorio for any closing remarks. Please go ahead.

Thanks Ian. I want to thank everyone for participating in today's call. I hope everyone has a good day and I look forward to talking with you again when we host our third quarter call. Please stay safe and have a great day.

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