Good day, and welcome to the InfuSystem Holdings, Inc. Reports Third Quarter Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead.

Thank you, Sarah. Good morning, and thank you for joining us today to review the InfuSystem Holdings financial results for the third quarter of 2022 ended September 30, 2022. With us today on the call are Rich DiIorio, Chief Executive Officer; Barry Steele, Chief Financial Officer; and Cary Lachance, President and Chief Operating Officer. After the conclusion of today's prepared remarks, we will 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 get prepared remarks, I'd 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, 2021. 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 DiIorio, Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe, and good morning, everyone, and welcome to InfuSystems third quarter 2022 earnings call. Thank you all for joining us today. Before providing some color around our new exciting partnership in Wound Care with Sanara MedTech, I would like to provide a quick overview on the recently completed quarter. In the third quarter, we once again achieved record revenue while improving on our gross margins from the prior year, resulting in a return to GAAP profitability. The quarter continued to demonstrate the strength of our core business and was led by our ITS segment, which grew 5% despite the continuing headwinds in Wound Care relating primarily to the availability of the Cardinal negative pressure devices for new customers. Our aggregate gross margin improved by 202 basis points year-over-year, operating income increased $1.3 million, and net income increased $900,000 for the third quarter. As we work steadily to expand our offerings and improve our long-term growth potential, we can see how InfuSystem's unique positioning in the market is drawing well-respected companies such as Sanara and GE Healthcare to partner with us. First, our 7 centers of excellence are strategically positioned to serve all of North America. Second, we are participating in network provider in over 770 health insurance networks covering more than 95% of the U.S. population. And third, there is our strong and growing reputation for white glove service and patient-focused care. Together, these and other attributes have helped InfuSystem to be increasingly recognized as a go-to partner for companies looking to upgrade their health care service offerings or to expand their marketplace reach. It is InfuSystem's unique problem-solving abilities and our growing reputation that attracted Sanara to partner with us. As I turn now to our new relationships and offerings related to Wound Care, I hope to be…

Thank you, Rich, and thank you, everyone, on the call for joining us today. I'm going to focus on three topics, the main drivers for the current quarter's results, some details related to our outlook for the fourth quarter and a discussion of the new Sanara partnership, including how we will account for this - for its activities. First, let me touch on our financial results for the third quarter, which will include both year-over-year and sequential improvements on various metrics. Net revenues for the third quarter of 2022 totaled $27.3 million, which was about a 3% increase from the prior year. While this fell short of our expectations, a topic which I'll talk more about in a moment, we set a new quarterly revenue record, the third time we've seen that this year. The year-over-year growth came from the IPS segment with oncology increasing by $550,000 or 4% and pain management increasing by $308,000 or 37%. Revenue for the DME segment was slightly down compared to the prior year, but that was due to lower medical equipment sales, which tend to vary from quarter-to-quarter due to the uneven timing of large orders. This decrease, which totaled $837,000 or 41%, was nearly offset by increases in rental and biomedical services revenue, which increased by $522,000 and $236,000, respectively, both of which saw double-digit increases of 13% for rentals and 16% for BioMed. The Biomedical Services revenue included initial amounts of revenue from the GE Biomedical Services agreement that was launched in April of this year. Revenue under that agreement totaled $414,000 for the quarter. You may recall that our revenue under this important contract is expected to grow as we continuously onboard locations and devices. As of September 30, we have cumulatively onboarded nearly 27,000 devices. This represents 13% of…

Thanks, Barry. We have tremendous opportunities to deliver on multiple therapies in our ITS segment, and we expect significant growth of biomedical services in our DME segment. In Wound Care, we have three critical components coming together, a leading-edge negative pressure device in Cork Medical, an advanced Wound Care product line with expertise from Sanara and our ITS services on the back end. The new combined partnership will give us a complete Wound Care solution, enabling us to capture market share and grow multiple synergenic revenue streams. We believe our focus on patient care that promotes healing lowers the cost of care and improve patient outcomes will give us a competitive advantage to gain market share in chronic and acute wound care. In closing, our model is safe, smart and trusted. And for more than 30 years, we 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 an even better InfuSystem. We have transformed InfuSystem into a leading health care service provider, improving the quality of care with the most cost-effective solutions for both clinic to home and acute care markets. The unique service solutions offered by our two service platforms, ITS and DME are well positioned for long-term success and meaningful revenue generation in 2023 and beyond. Before we take questions, as I mentioned in August, part of the executive team, including myself, were awarded stock options in the fall of 2017 that are now coming up on their 5th year anniversary and are set to expire on November 15. You will see a Form 4 filing for me before that date that - with respect to the expiring options, which will reflect a net option exercise. This transaction is absolutely in no way a reflection of my confidence in this business for the future of this great company. And we are now happy to answer any questions.

Good morning, everyone. I have a few questions. I guess I'd like to start off with Wound Care. And I'm curious if you believe that the new arrangements with Cork and Sanara positioned you reasonably well to compete with the industry leader, my friends at 3M? And if so, what are the key things you think puts you in that position?

Good Morning Brooks. Absolutely, it puts us in a position to compete against 3M and anyone in the Wound Care market. I think as I mentioned earlier, just having a negative pressure device was a tough road for the sales guys, right, having a single product in a market where we have a competitor like 3M that has multiple products. I think the difference maker for this relationship versus a company like those guys is we're not going to just treat the patients, right? This isn't gauze pads and band-aids. These are products that actually heal wounds. And I think that's how we're going to attack the market, right? So you combine a great product or a great device from Cork is a replacement for Cardinal. You put the experience that the Sanara team has in wound care with their products that can heal wounds and then all of our back-end support that we have on this ITS platform. You put those three things together, and that's pretty powerful. And that's not just to go nibble at the edges of the market. This is to go in and change the way that patients are treated and healed in wound care. And that's what we're trying to accomplish here. It's a totally different approach and we started with 2.5 years ago, what was at February of '20 with the Cardinal announcement. So totally different approach. Absolutely, we believe and know that we can go compete with the big guys now.

Great. I'm excited about that. So just tell me, I mean, it sounds like this arrangement it puts you in a position to be more clinically oriented. I don't necessarily want to go so further to say you're going to put hands on the patient. But I've always tout the ITS opportunity and business platform and the DME was more of a distribution and financing arrangement with the payers. But this sounds like you're actually going to get very involved in treating patients. And A, am I right about that? And B, what gives you confidence that you can extend the company in that direction?

Yeah. So I think it's more of a clinical sale to the customer for sure, right? So historically, it's been our device versus KCI's device, right? And these devices, they're all pretty simple. So device to device, we really - there was no winner lose there. Where we were winning when we did with - against KCI was really a service sale, right? I think with the products that Sanara with BIOCOS and Hycol, it is more of a clinical sale because the product actually does something different than everything else in the market, right? So this isn't - we're going to put some needs for it on and put a band-aid on it. These are products that are actually going to heal the wound, keep them clean, eliminate or reduce infection. So it's more of a clinical sale, but I wouldn't say there's any more clinical hands on other than the call points will be a more clinical call point than they have in the past.

Okay. That's helpful. And then just one more for me. If I'm hearing you correctly, we're a little behind in biomedical services, but you're still pretty optimistic about the outlook and the opportunity. Is that the right way to characterize it?

Yeah. I think that's a good way to look at it. I mean, August and September definitely ramped up, and we're going to continue that ramp. We actually see some things, especially into next year where it starts to really accelerate. I think the good news is we always thought that there'd be other opportunities with GE and this RFID tagging, for example, is a good way to look at that. So I think Barry and I mentioned in our prepared comments that the $10 million to $12 million, the initial number that we were looking at, we already can see that it's going to be bigger than that long term once we're fully up and running. So yes, I mean, it's a little bit slower, especially in the middle of the year, right, that May, June time frame, maybe even into July. But long term, it doesn't change the outlook other than probably gets better. If we're sitting here in a year, we're going to be better off than we thought we were six months ago.

Great. And I guess you really do that, I apologize. But would you say that there are additional opportunities beyond even RFID with GE? And/or are you seeing any other companies recognizing what you have with GE and seeking to take advantage of your platform in those areas?

Yeah. So I think we don't see another GE specifically, but there's a lot of manufacturers that have approached us and have been for the last year or so to work on their devices for them, whether it's recalls, remediations, preventative vein and those sorts of things. So those are out there, and I think we'll win some of those over time, none to the scale of GE though, certainly not $10-plus million. I think within GE, yes, the RFID tagging is probably the first new program outside of the preventative maintenance. But GE touches a lot of devices and in these hospitals. So over time, do we end up working on more devices outside of infusion pumps. Yes. I mean I could foresee that happening. But we still have some time to go and some things to prove to GE and their customers and ourselves. And when we get there, I think there'll be more opportunities for sure.

Cool. Thanks a lot for taking my questions.

Thanks, Brooks.

Our next question comes from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.

Hi, great. Good morning, everyone. All the efforts that went into the Cardinal device, could you transfer that immediately to the Cork medical device? Or is there - the sales processes need to restart there? Is that something that happens pretty immediately? And then just clarification, is Cardinal still going to be a supplier of negative pressure devices for you? Or are you pretty much exiting that relationship completely what's the status of Cardinal?

Yes. So I guess I'll go in reverse. So Cardinal announced their customers about a month or so ago that they wouldn't be selling any additional devices affected immediately and no more supplies at the end of the year. So Cardinal is going to be kind of a dead product in the market, not just infi [ph] system, but in the marketplace. As far as does that - is there all the work we put into Cardinal transfer, it absolutely does. I think we still need to retrain our biomed guys on new device, which isn't super complex. We need to train the sales guys on the device itself. But we're able to walk into most of those opportunities that were out there in our pipeline with the Cardinal device, we're going to flip those to the Cork device. These devices, there's some bells and whistles here and there that are a little bit different, but they're relatively simple devices. So as long as they work, people are okay with as long as they work, they're easy to use those sorts of things. And the Cork device absolutely meets all those requirements. So the work we put in the pipeline, all the back-end support, the back-end stuff is all agnostic, right? It doesn't matter what the device is. It doesn't matter what model number or serial number it is, how we bill it and how our clinical team triages it and all those things remain the same. So those aren't lost efforts. We get to use those in building blocks. We just need to train the sales guys and the biomed team on the new device.

Okay. Understood. And then I just want to make sure I have all the logistics with the new LLC and the two different agreements here. So am I correct to say that all of the all the Sanara distribution sales is going to show up through the LLC has been reported in InfuSystem's revenue line, but below the revenue line. And - but the negative pressure devices from Cork will still show up in the Infuse revenue line. I'm not sure I got the...

No. All the revenue that we have for all those products won't be in our top line. But we'll have a very skinny gross margin because we're going to be paying close to what we're selling for so that we can capture the margin in the joint venture. So the profits basically will come to our P&L through the equity line.

And that joint venture include the Cork Medical to or just the Sanara pieces?

No. The partnership will buy the products from Cork and sell them to InfuSystem.

Got it. Okay. So the revenue - all the revenue will be consolidated through InfuSystem or your component of the revenue will be? And then the operating - it will show up as an operating income line item, not through gross profit?

That's right. There'll be a little bit of gross margin just to cover our direct expenses that we'll have, and there are some expenses down in G&A that will charge back to the partnership. But for the most part, the bulk of the earnings that we'll have will come through the equity line.

Okay. Understood. And then maybe on the pain side, just what is driving the kind of the slower uptake there. We're starting to see procedure volumes rebound here has been too busy working on something else to necessarily bring up a new pain solution? Is there anything from competition or reimbursement that slow the uptake there?

No. So I don't think it's anything in the competitive environment. I think it's just the nature of the business. So we came out of the supply chain issues late in the second quarter. You kind of have to restart that kind of customer intake and onboarding process. And that just - it takes a quarter or so to see that happen, right? So you got to go in, you got to set up appointments. You got to in-service the customer. They have to you have to train their entire nursing staff and team and then they start using the product. So it just kind of starts and ramps slow, but we almost had to restart the entire engine, right? On supply chain, we had to shut it off. So we were able to keep our existing customer base and treat all of their existing patients, but we couldn't add any new ones in that second quarter or for the majority of the second quarter. So it's just a timing issue and an onboarding process. It just takes a little bit of time. And then the revenue itself can take a month, 2 months, 3 months to start showing up. So that's all it is, but it's nothing in the market. I mean we still, by far, have the best offering when it comes to the continuous peripheral nerve block market. I mean it's not even close to the next best competitor. So nothing competitive. Nothing has changed in reimbursement. It's just a - it's an onboarding kind of slower uptake than we would have liked because of the supply chain issues in the second quarter.

Okay. Understood. And then maybe just thinking about next year, there's been a lot of moving parts this year. But for next year, you got the oncology business, and you called stable mid-single digits. The GE business is ramping the Sanara agreement, the Cork medical – the pain as well, which you just talked on. Just how are you thinking about growth into next year, but also the expense growth as well to support that?

So I'll let Barry address the expense side. I think on the top line growth, we're still going through our budget process now. It's going to be solid, right, for everything you just said, Alex, right, whether it's the kind of organic business in DME sales, rentals, oncology. We know what those businesses are going to do. We know pain is going to grow. We know the GE agreement is going to generate revenue. Sanara's going to - the Sanara partnership is going to generate something as well. So there's going to be some solid growth there. I just don't have a sense of it yet until we go through this process. And Barry, I don't know if you want to address the margin side?

Yeah. Clearly, costs will go up as we grow the revenue. But overall, we believe that the cost will grow slower for a couple of reasons. As we have already pointed out, we still have some spending to absorb in sales on the sales line, for example, and some other areas as well. We'll be continuously fighting the inflation that you see in the marketplace, which hasn't hurt us too much so far. So those might be wild cards a little about on the cost side. But for the most part, we think we'll grow margins being back to normal where we were a couple of years ago.

Okay. That's fantastic. Thanks for the update. Appreciate it.

Thanks, Alex.

Our next question comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Good morning and thanks for taking the questions. With regards to GE, you seem pretty confident in that $10 million to $12 million number. But how long do you think it will be? Is that something that would take 3 or 4 years to get to that level? Or do you think it will be quicker than that?

I would say a bit quicker.

Okay...

I think we had originally put out 15 months. We still may come in at that number or pretty close. So 15 months puts us from the original agreement sometime next summer, early fall somewhere in that range. So I think we're still pretty close to that give or take a month or two.

And the RFID tagging project, is that related to the infusion pumps? Or is that other GE equipment as well that you'll be tagging?

All the equipment in the hospital. So it's putting stickers on. It's getting the Beacon set up so that the system knows where the devices are. So it's not just infusion pumps. It's any device in that hospital if they want to tag. So it could be a defibrillator, a pump a bed, a stretcher. I mean anything that they want to put these tags on, they'll do it, and we'll help them do that.

And so it feels like maybe there'll be other opportunities with GE as well. I mean if they're using it for this, that if this goes as well, there's other potential there?

Yeah. I think if you prove you're a good partner and you're going to do what you say you're going to do and you do it well, it's like any good partnership, right, that they're going to open that up to other opportunities where maybe they need some help, and we can do it the right way. So yes, I would expect there's going to be opportunities. There's no guarantee, but if we do what we're supposed to do and what we think we can do, I wouldn't be surprised to see more of these types of projects come on board.

All right. And then the last one for me. A lot of the other companies in the space have had difficulty getting enough manpower in place to meet demand. You've invested quite a bit, though, in headcount over the past couple of years. Do you think your staff is adequate now to meet the anticipated demand in '23 and '24?

Not yet. So I think we still have some hiring to do on the Biomed side. As we ramp up GE, we're definitely going to have to add some more people. We added some, obviously, ahead of that agreement end of last year and early this year for sure, just have enough to get us started. But as this ramp picks up this quarter, next quarter and in future quarters, we're going to have to definitely add some more people. And it's not easy, right? It's not easy for anybody. But it's certainly not impossible. We are very picky on who we hire. We want people that are going to be here for years and fit the culture and have the right skill sets. So we kept that philosophy and culture here. So it's not easy. But when we need to get people on board, we get people on board. We also don't have a lot of turnover, which helps - we're not kind of backfilling a ton of spots just to get to the baseline. So overall, definitely tougher than it was pre-COVID, but not an impossible task for us, and we've been able to execute on it over the last 6 to 12 months.

How about outside of direct labor? Do you have the sales staff, the reimbursement staff in place for the anticipated revenue growth?

Yeah. So I think the sales team, we're in great shape. We might add a person here or there. But generally speaking, across the board, oncology all the way to wound care, we're pretty well staffed up for a while, and that's part of what Barry's answer to Alex was about. We still have some costs to cover there as we grow. So the margin should expand. I think on the wound care side, we may need some back-end support in revenue cycle. If we grow this the way we think we're going to. We'll need some support back in there, but that will be based on how much revenue comes in and how many pumps are out the door. It's all variable costs. So as we grow that team will grow.

But in general, it sounds like you think that the bottom line is going to start grow faster than the bottom than the top line at this point?

That's the idea for sure.

Okay.

Thank you.

Our next question comes from Aaron Warwick with Breakout Investors. Please go ahead.

Hey, guys. I wanted to dig a little deeper here on the numbers. Obviously, third quarter was a little soft compared to the full year guidance. But looking ahead in the fourth quarter, it looks like back into the numbers, you're estimating over $30 million of revenue, and that would be 16%, 17% top line growth. Is that accurate?

That's correct.

So is that kind of like getting to the cadence that you're expecting roughly going into 2023 to be up more or closer to that area?

I think it'd be - you should be a little cautious on that because we do have some equipment deals that come at different times of the year. So I don't think I would take that number multiplied by four as a baseline. As said, there's things like the GE contract will continue to ramp. Every time we add a pump, that's an additional annual fee that we'll have, so it just grows and grows. So there'll be other things that get us there won't actually be some of the things we've seen in the fourth quarter.

Okay. And then just on the Wound Care, really positive to hear the developments there. And then also specifically, do you think you have the ability to compete with the big boys. So just going back, looking earlier, I think it was in 2021, you guys had kind of said that the TAM in Wound Care was $600 million and that you thought you could win 10% of that. And obviously, it was a different situation back then, not necessarily asking for a precise number or anything, but is it just roughly that 10% of that TAM attainable and potentially more now that some of these developments have happened over the last 12, 14 months?

Yeah, Aaron, that's a great question. So I think the TAM is completely different. So the $600 million was specific to a little bit of acute care, but really patients going home with a negative pressure device. It was kind of a small subset of even within negative pressure, right? I mean KCI before they get bought by 3M was what, $1.5 billion, $2 billion in revenue, just a negative pressure. So the TAM has grown considerably because we're not only in the negative pressure world anymore. We have these other products with the Sanara relationship. I don't want to put a percentage or a number, but this has been a long time in the making for a reason. We were very deliberate with this partnership with Sanara. And by the way, they're an awesome partner. They already have been from the people and the culture to the products and expertise. I think we're creating something special here in the wound care space, and we're not just going after one sliver of it anymore. We really think we can do some special things and take care of some patients and heal some patients that have been struggling for years in some cases, with wounds. So can I put a number on it, not really not right now other than we're going after a much broader market because the product offering is that much broader. And we're not just pigeonholed into this negative pressure device anymore.

Well, I think that answer speaks for itself. Again, not necessarily looking for a precise number right now, but the opportunity is obviously a lot larger than it was. So that's fantastic for you. And I mean it sounds to me, I know you probably can't comment on this, but I mean it sounds like it's just as good of an opportunity. I think you both have a lot to gain from that partnership. So I think that's fantastic for you guys as well. As it relates to the GE deal, are you able to give any numbers on that? I mean, you said it would be more than $10 million to $12 million, but what - how much more than that? I mean are we talking double that? Are we talking 20% more and were just some rough ideas?

Yeah. I think it's an incremental single-digit million number - it's not - it doesn't go from 10 to 12 to 20 to 25, right? I mean it's low teen kind of number. It's just - the good news is it's still there and it's better than it was. And we're just going to onboard more pumps, I think, is ultimately what we're going to do. And I think Barry has a comment, too.

One way to maybe look at it is that our 10 to 12 implied around 60% of devices that they control of getting. So we know we don't - we won't get all of them for various reasons, but that just gives you something to measure. But then that doesn't even count the other opportunities like the RFID tagging and other things.

Okay. Back to the Sanara deal, in terms of sales support there, what are they providing? What's their role in that?

Yes. So sales is going to - so we have our team that we built out, I guess it was the middle of last year, still intact and ready to go and starting training here shortly. Sanara has - I think it's like 30 plus, almost 40, I think they call them regional managers, regional account managers. Most of what they do is tied to their surgical part of the business, but they are going to help on the negative pressure in wound care side as well. So we're going to leverage their team in addition to our team and hit the market that way.

Okay. Final one for me then is just what are you thinking of in terms of longer term with your EBITDA margins? It sounded like those would probably be increasing based upon what was mentioned earlier about obviously revenue growing, but then expenses will also grow, but at a lesser degree. What are you kind of looking at longer term for those margins?

I think it would be the same as what we've indicated before that if you pale back the investments we currently have in our P&L, we should be led to mid- to low 20% EBITDA margin. As you look at the contribution margin from any one of our businesses, including the Biomed, which is the lower end of the range those are all in north of that amount. So we should be able to grow that margin as we grow the top line. The key will be how fast we do it, right? Because we're going to see cost pressure on other things that we got to overcome over time.

Sure. So you're thinking like - just to be clear, you're thinking like 22 to 25 or something like that in the long run, like if it was a steady state and no more investment?

Yes. I think that if you were more like 22 to 25 right now, if you're able to get the volume to overcome the extra expenses that we're incurring just to help grow the business. Well there are probably more things in the future we want to invest in, so that will help - that will keep it down a bit. But underlying is a much better contribution margin. So that should come through at some point.

Excellent. Thank you, guys. Very happy with the direct [ph] you guys had. I hope you have a good holiday season.

Thanks, Aaron.

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

Thank you, Sarah. I want to thank everyone for participating on today's call. I hope everyone has a great day, and I look forward to talking with you again when we host our fourth quarter and year-end call. Please stay safe, and thank you.

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