KORU Medical Systems, Inc. (KRMD) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the RMS Medical Products First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your hosts Devin Sullivan, Senior Vice President of the Equity Group. Thank you, sir. You may begin.

Thank you, Jesse. Good morning, everyone and thank you for joining us for RMS Medical Products first quarter 2019 financial results conference call. The speakers for today's call are Don Pettigrew, President and Chief Executive Officer and Karen Fisher our Chief Financial Officer. Also on today's call is Dan Goldberger, Executive Chairman of RMS Medical. During this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the associated slide presentation and our most recent filings with the SEC along with associated press releases. We assume no obligation to update any forward-looking statements and the associated slide presentation will be posted to the Investor Relations section of our website at www.rmsmedicalproducts.com later today. I encourage listeners to have our press release in front of them, which includes our financial results as well as commentary on the quarter. During this call, management will discuss adjusted EBITDA, which is a non-GAAP financial measure in our press release and slide presentation accompanying this webcast and in our filings with the SEC, each of which is posted on our www.rmsmedicalproducts.com, you will find additional disclosures regarding this non-GAAP measure, including a reconciliation of this measure with a comparable GAAP measure. Our strategic plan goals and other plans incorporate the trends that we've seen today and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and maybe materially affected by many factors, including introduction of competitive products, availability of an insurance reimbursement, success of our research and development efforts, acceptance of and demand for new and existing products, expanded market acceptance of the Freedom system, the cost, duration and ultimate outcomes of litigation, general, economic and business conditions in the United States and abroad and other factors described in our filings with the SEC. Therefore our actual results could differ materially from the goals set forth in the strategic plan and in this presentation. For the benefit of those -- to the benefit of those of you listening to the replay, this call was held and recorded on Wednesday May 1, 2019 at approximately 9 AM Eastern time. Since then, the company may have made additional comments related to the topics discussed. Please reference the company's most recent press releases and filings with the SEC. With that said, I would now like to turn the call over to Don Pettigrew, President and CEO of RMS Medical Products. Don, please go ahead.

Thank you, Devin and I appreciate it. I hope everyone's having a wonderful morning. We appreciate you joining us today. I'll ask that if you would please note the slides addressing the safe harbor the non-GAAP measures and that we'll refer to today's call. So let me jump into Slide 4 which is I guess simply allows you to put a face with a name. But I'd really like to begin with the news on Slide 5, which is the Q1 operating highlights. So for the quarter, we're very pleased with our performance in the first quarter of 2019 as the progress we have made against our previously announced strategic plan, which takes us through 2022. What I'm most encouraged by is the momentum that began in 2018 both specific to RMS Medical and the industry has carried over into 2019. We acknowledge that there still is a lot of work to be done and that many of our initiatives and outcomes will take time to evolve. However, our progress to date is reflected in our results for the quarter. You will see net sales rose by more than 23% to $5 million over the prior year. This is the highest quarterly sales in our history. Our adjusted EBITDA rose more than 10% compared to the first quarter of 2018 and approached $1 million. A reconciliation of adjusted EBITDA to net loss appears on Slide 14. We also ended the first quarter in a strong financial position with cash, cash equivalents and CDs totaling $4.1 million and we are debt free. Karen will walk you through our results in greater detail shortly. We remain very optimistic in our ability to improve on these results as we progressed through 2019 in advance towards our strategic plan to become the preferred drug delivery partner for specific infusion therapies in select markets. The next couple of slides are important components of our strategic plan and we're very happy to share them with you. So as you'll see on Slide 6, we are very excited to say the least that we've announced a 510 K clearance for the HIgh-Flo Super26 needle sets in April. We continue to focus on evolving and improving our product portfolio and introducing products that improve the patient experience. The Super26 needle sets are indicated for subcutaneous infusion of medications in the home, hospital or ambulatory settings to facilitate high flow rates, including human plasma derived immunoglobulin such as Hizentra and Cuvitru, which treat PIDB and CIDB patients, markets to which we remain committed. The Super26 needle sets were clear to be offered from a single needle set up to six needle sets and using a wide connector, seven needle and eight needle sets may also be assembled. We are currently developing a launch plan for the Super26 needle sets that will consider a variety of stakeholder feedback, including from patients, caregivers, specialty pharmacies and pharmaceutical companies as well as clinical data. We will certainly keep you apprised of our progress with respect to the availability to the market. Advancing to Slide 7, here you'll see we've added significant strength to bolster both our management team and the board. On the fourth quarter call in February, I stated that we're in the process of hiring a seasoned veteran from the big pharma industry to lead our medical affairs function. We did just that with the appointment of Dr. Brian Schiller as Vice President of Medical Affairs. Brian is a proven leader in the pharmaceutical, medical affairs and clinical research base. He comes at RMS Medical after spending 10 years at Sanofi where he was a Senior Director and head of field medical North American Medical Affairs. Prior to that, he was with Avanir Pharmaceuticals, Amgen and Bristol-Myers Squibb. We expect that Brian will be a great help to RMS Medical as we pursue broader and deeper relationships with clinicians and potential pharmaceutical company partners to expand our market opportunity as well as provide an improved clinical data platform. These are key components of our strategic plan. At our Annual Meeting of Shareholders held on April 23, Kathy Frommer was elected to our board, a longtime shareholder of RMS Medical. Kathy has more than 30 years of experience in the Information Technology industry. She co-founded and was CEO of CRM Retail Systems, one of the largest providers of software for specialty store retailers in the U.S. and backed by private equity firm Excel, KKR. Her company solutions helped her customers worldwide drive sales, improve the customer service experience and reduce operating costs. Kathy is the latest addition to our Board, which has seen significant change in improvement over the last six months. As a reminder in December 2018, we announced the appointment of Rob Allen to our Board. Rob brings almost 40 years of home care and home infusion experience to our RMS Medical. He most recently served as President of Quorum, CBS Infusion Services a $1.4 billion infusion services business with 4,500 employees and operating in 42 states. We also added Jim Beck who brings over 30 years of home and alternate care services and distribution management experience to RMS Medical. Jim most recently served as Executive Chairman of Medical Specialty Distributors, a leading service solution provider serving the home infusion, home medical and oncology markets. He was also President and CEO of MSD, which was acquired by McKesson in 2018. Our board is compromised of accomplished and experienced executives and we view this as a significant asset and competitive advantage. On Slide 8, with that said, we did experience a tragic loss last week when Arthur J. Radin a Director since 2015 and Chair of our Audit Committee passed away unexpectedly, following the Annual Meeting of Shareholders. His business acumen and financial expertise helped shape a variety of issues that have been critical to the transformation of RMS Medical. He was a wonderful human being and we'll move forward with him and our thoughts. He will be deeply missed. Moving to Slide 9 we are operating two of the largest market segments for approved immunoglobulin therapy, both PIDD and CIDP. These are chronic disorders that have significant and at times debilitating impact on a person's life, with a total U.S. patient population estimated at 270,000, only 70,000 currently receive IGF therapy and just 20,000 have been converted to sub QIG using the Freedom system. We estimate that each patient using the Freedom system generates average recurring revenue north of $700 annually to RMS Medical. We believe the PIDD market for our Freedom system in the US to be $185 million to $260 million where the rest of the world could be two to three times that figure. With respect to the CIDP market we estimate the US population of approximately 25,000 patients with a value of $25 million to $36 million. In 2018, Hizentra received FDA clearance to treat CIDP and this should help drive market growth and awareness among physicians, the first and only subcutaneous immunoglobulin therapy approved to treat this disease stage and studied in the largest controlled clinical trial for CIDP Hizentra offers patients a more convenient treatment option with proven efficacy and flexibility and freedom to self infuse at home. We plan to devote the resources necessary to support this market as it grows and evolves. Revenue per patient compared to PIDD could be higher for CIDP because these CIDP therapies require more frequent doses of Hizentra. So moving to Slide 10, we are operating in a very healthy and growing market. This speaks the competitive nature of our industry as well as the significant opportunity we are presented with. We are actively pursuing the $500 million US home infusion market and if you look at the bottom of the chart, you'll see that our current share is just a fraction of the target market opportunity we are pursuing. We believe that we are building a platform of products and people that will expand our market share, drive growth and elevate our industry profile. On Slide 11 is what we view as our primary growth drivers for RMS Medical. We believe that newly diagnosed PIDD patients and growing physician awareness as well as patient awareness are helping to drive industry growth. We think that the vast majority of newly diagnosed PIDD patients will be prescribed IG therapy with subcutaneous as opposed to I.V. delivery. We also believe that the PIDD patients currently being treated with I.V. therapy will migrate over to subcutaneous therapy. In both cases this will be driven by among other factors, cost considerations, compliance concerns and personal preference. Major pharma companies including Takeda, formerly Shire and CSL Behring, Grifols, Octapharma etcetera are currently manufacturing immunoglobulin with a focus on developing new products and expanding applications. The previously discussed Hizentra approval for CIDP reflects our commitment in this regard. We believe that with respect to new therapy development, a rising tide will lift all boats as our growth to date has occurred in an environment in which drug supply is tight but thankfully expanding. We are working with other pharma companies that are developing subcutaneous indications for large molecules and biosimilars using the Freedom system. This is a real and potentially significant opportunity to expand the use of our Freedom system in the delivery of subcutaneous immunoglobulin. If these indications are approved, we could see an addressable markets approach a million plus patients representing a long term market opportunity in the $500 million to $1 billion range. As we go to Slide 12, this graphic shows the connection between Hizentra and Freedom 60 system as the preferred means of subcutaneous delivery. This graph is available at www.hizentra.com as well as national advertising campaigns. Quite simply our products allow patients who are dealing with complex medical issues to effectively treat these conditions, while allowing them the freedom to live their daily lives the way they see fit. We believe the ease, simplicity and reliability of our products increases compliance and leads to more favorable outcomes. We are very proud of the collaborative efforts with our industry partners in improving the patient experience as a guiding principle. On Slide 13, before I turn things over to Karen, this shows a significant macro growth driver for our business and the ongoing migration from the institutional setting such as the hospital to the home or alternate site setting. We believe that this is what the home care system of tomorrow will look like. It is a process that is being driven by healthcare consumers and payers. Providing services in a patient's home or easily accessible location is more convenient for patients, but also produces more comprehensive and effective care. Patients prefer being treated at home by a wide margin and understandably so. RMS Medical portfolio is easy to use -- RMS Medical portfolio is easy to use and reliable infusion therapy products support the shift away from hospitals. I'd now like to turn things over to Karen who will discuss our results in greater detail. Karen?

Thanks Don. Hello everybody. Beginning on Slide 14, net sales rose 23.3% to $5 million in Q1 2019 from $4 million in Q1 2018, driven primarily by our focus on expanding national accounts, growth in the PIDD market and expansion into the neurology market following the 2018 approval of Hizentra to treat PIDP. Gross profit in Q1 2019 was $3 million or 61.3% of net sales compared to $2.5 million or 61.1% of net sales in Q1 2018. Gross Profit dollars increased approximately $600,000 in Q1 2019. However, gross margin remained consistent with last year's first quarter. Total operating expenses for Q1 2019 rose to $3.2 million from $2 million in Q1 2018. Approximately, $1.1 million of the $1.2 million increase in operating costs was included in SG&A expenses and comprised the following. Reorganization costs of $355,000 an increase of more than $282,000 from Q1 2018. These costs included executive compensation related to the recent management changes and legal fees for the resale registration statement we filed during the quarter. We do not expect to incorrect any material reorganization expenses for the balance of 2019. Litigation expense increase to $493,000 from $156,000 in Q1 2018. As noted in our public filings, this is related to ongoing litigation with a competitor. As we have also noted our 10K filing, we expect the first case to proceed to trial during Q3 2019. As such we will likely incur higher legal fees in 2019 associated with this dispute. Non-cash stock compensation expense rose to $122,000 from $27,000 in Q1 2018. Because of these higher costs net loss for Q1 2019 was $85,000 or $0.00 per diluted share compared to net income of $403,000 or $0.01 per diluted share in Q1 2018. Excluding these charges and on a non-GAAP basis, Q1 2019 adjusted EBITDA rose to $928,000 or 18.7% of net sales up from $841,000 or 20.8% of net sales in Q1 2018. Here on Slide 15, you can see the reconciliation of net loss to adjusted EBITDA for Q1 2019 along with a metric that comprises calculation. Slide 16 moving on to our balance sheet, cash declined by about $1.2 million from December 31, 2018. This was the result of a large distributor changing a payment terms from 30 days to net 60 days. If you refer to the cash flow statement in the press release, you can see the accounts receivable increased significantly from year end reflecting this change in payment pattern. The increase in receivables was partially offset by an increase in payables as we manage our working capital. With our cash on hand we were easily able to absorb this change and we do not anticipate any other large distributors making a similar change. We also implemented the new lease accounting standard in the quarter, which increased assets and liabilities $472,000 and $341,000 respectively and had virtually zero impact on the income statement. We continue to maintain a clean capital structure. We ended the quarter with 38.2 million basic shares outstanding, $3.5 million options with a weighted average exercise price of $1.17 and an additional $1 million of warrants with a weighted average exercise price of $0.45 bringing our total diluted share count to $42.7 million. As we have previously disclosed the $1 million of warrants are scheduled to expire in August of 2019 and we have been informed that the owner plans to exercise them. Thank you for your attention and I'll turn the conversation back over to Don.

Thank you, Karen. On Slide 17, this is our roadmap to becoming a preferred drug delivery partner for specific infusion therapies in select markets, which we shared with you in February. We expect to get here via a combination of sales growth and margin improvement, driven by Manny Marquez, our Chief Operating Officer and his initiatives, including investment in automation, supply chain, reducing material costs and streamlining operations. We've broken this down into three distinct phases. Phase one is grow the baseline business, further penetrate the PIDD and CIDP markets, develop and launch new products, pursue collaboration with pharma companies for clinical trial usage and product adoption and commercialization. Phase 2 is focusing on new products, developing the post acute care market and targeting European expansion and Phase 3 is focus on new drugs and indications to grow the sales of our Freedom products, pursue global expansion initiatives and drive market share growth. If you go to Slide 18, this is our report card. How are we doing against our stated goals? From a new product development perspective, as I mentioned earlier, we received 510k clearance in April for our Super26 needle sets. We added depth and experience to our board and management team, we are implementing a number of initiatives under the direction of Manny Marquez to reduce the cost of goods and drive us towards our 70% margin goal, we made good headway in collaborating with pharmaceutical companies as they introduce new therapies for which our Freedom system can be the method of delivery. This is a process but a process we are very committed to. There is more to come and I can assure you that we are confident in our ability to execute. I'd like to thank all of you for your participation today. Our mission statement truly does drive what we do here every day. If we focus on the patient, then success will follow. We think we have a good tailwind to continue to advance towards our stated operational and financial goals and we are focused on improving the quality of life for patients around the world and delivering value to our shareholders. Thank you again for your participation. I'd like open things up for questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Good morning and congratulations on the progress you're making. I'm curious obviously there's a big pending merger in the infusion sector. Do you guys think that will affect your business either positively or negatively in the future?

So this is Don Pettigrew, let me answer that. Thanks for attending Brooks and a very good question. I think the merger you're referring to is Bio Scrip an Option Care, both very good customers of ours. There has been a lot of consolidation in the past in the home infusion industry. We do exceptionally well with our national accounts and feel this will be a net positive for us. I think the industry is very used to this sort of consolidation, but at the end of the day, patient preference and physician prescriptions really drive the use of our products. So we feel this will remain largely unchanged.

Perfect. Thank you very much.

[Operator Instructions] Our next question is from the line of Michael Potter with Monarch Capital Group. Please proceed with your question.

Hi guys. Congratulations on a great quarter and a very thorough presentation. Just a couple of quick questions the 510k approval for the Super26 needle set, Don, can you give us some more color of what exactly that means to the company?

So it means a handful of things. The main one is showing our commitment to product innovation and development. We -- more detail will follow as to our launch plans for Super26. But what I will say is this marks a change in our organization where we're really going to let the feedback from stakeholders, I mentioned earlier from caregivers, physicians, nurses, patient advocates and patients helped drive our direction here. So our focus right now is heavily on clinical data in the clinical data will direct our path going forward, but ultimately we think it offers a competitive advantage where we round out our product portfolio and build on our reputation for innovators in the industry.

Okay. And then I guess a follow up question to that, what is the plan to work with drug developers during their clinical trials? Is there an opportunity to become potential preferred provider designations and the potential opportunity from that?

So one of the key hires I just announced which was Brian Schiller as our VP of Medical Affairs. This is a huge component of our plan going forward. I think if you look at what's made it successful it's really having the adoption of pharma company support and being the preferred drug delivery system. We are actively involved with other providers of immunoglobulin and we are involved in exploring additional relationships to help solidify our position going forward.

Okay. Thanks guys. I'll get back in queue.

Thank you. Our next question is from the line of Maj Soueidan with GeoInvesting. Please proceed with your question.

Hello. Thanks for taking my call. I have a really quick question here. When was the last time you retooled your products and I'm curious if there's improvements that can be made in terms of the manufacturing process to maybe increase gross margins.

So you can you clarify your question as far as retooling the products or are you referring to new products or evolution of the current product platform.

I guess evolution of the current front line yet. Have you -- in the manufacturing the components that go into the products that you've been selling for years. Is there any manufacturing efficiencies in terms of the other components, the number of components being used in the products that you can maybe hopefully, potentially increase gross margins by revisiting those things?

So. Okay. Thanks for the clarification. So this is a key component of our gross margin initiative to get to 70 %. As I mentioned our Chief Operating Officer, Manny Marquez is exploring a lot of different opportunities for cog reduction and automation and things of that nature. But we're looking to improve operational efficiencies to drive that margin. So any and all things are considered that help us achieve that goal.

Okay. Thank you.

Thanks for the question.

Thank you. It appears we have no further questions at this time. So I'd like to pass the floor back over to management for any additional concluding comments.

So I think we are a good unless anybody has additional questions.

There are no further questions at this time. This will conclude today's teleconference. Ladies and gentlemen, we thank you for your participation and you may disconnect your lines at this time.