KORU Medical Systems, Inc. (KRMD) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the RMS Medical Second Quarter 2019 Financial Results conference call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may begin.

Thank you. Good morning, everyone and thank you for joining us for RMS Medical Products 2019 second quarter 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 several 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. I encourage listeners to have our press release in front of you, which includes our financial results as well as commentary on the quarter. During the call, management will also discuss certain non-GAAP financial measures in our press release and slide presentation accompanying this webcast and in our filings with the SEC, each of which is posted on our website. You will find additional disclosures regarding these non-GAAP measure, including a reconciliations of this measure with a comparable GAAP measure. Our strategic planned goals 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. For the benefit of those of you listening to the replay, this call was held and recorded on Wednesday August 07, 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. Hope everyone is having a wonderful morning. We certainly appreciate you joining today. I'll ask you please note the slides addressing Safe Harbor and the non-GAAP measures we will refer to on today's call. I'd like to discuss a number of items today including our results from the second quarter of 2019. The continued expansion of our leadership team and two important business developments, one related ongoing litigation and the other related to new drug approval that we believe validates our strategy and supports our growth. I want to start with slide 4, which shows our net sales CAGR of 22% over the last 10 years from 2.4 million in 2008 to over 17.4 million in 2018. The upward net sales trend has continued for RMS Medical with the first half net sales up over 20% and net sales for the trailing 12 months end of June 30, of 19.1 million. This chart demonstrates the building momentum of our products. We view ourselves as a growth story and we are building a platform to expand our presence as the leading provider of home and specialty in infusion products. We are assembling a very talented team of executives, are implementing a refreshed and proactive operating strategy and have the benefit of multiple industry tailwinds. We are very excited about the future to say the least. On slide 4, you'll see after reporting record next net sales of 5 million in Q1 of 2019. I'm very pleased to say that we exceeded that figure in Q2, net sales for Q2, 2019 increased nearly 19% to a record $5.3 million, gross profit rose by over 400 basis points to 65% and we were profitable on a GAAP basis with net income of $78,000 now down from $476,000 in last year's second quarter due primarily to higher legal expenses. Adjusted EBITDA increased by 60% to 1.5 million. Note that our adjusted EBITDA margin is more than 28% demonstrating the inherent leverage in our income statement as our business grows. We also ended the second quarter in a strong financial position with $3.8 million in cash and we remain debt free. Karen will walk you through our results in greater detail shortly. We are confident in our ability to improve in these results as we progress through 2019. Slide 6, you'll see we continue to add significant strength to our leadership team. We believe that the quality and experience of our colleagues and board members is among the best in the industry. First and foremost, John Toomey joined us as the newly created role of Vice President of Growth and Innovation, where he will be responsible for research and development, product innovation and business development and integrating these capabilities across the enterprise. He will also play a key role in building a robust IP platform. Secondly, Craig Ross comes to RMS Medical as Vice President of Sales and Marketing with nearly 25 years of healthcare industry experience, including 20 years at Baxalta, now Takeda, Coram/CVS Specialty Infusion Services and Schering-Plough. Craig's background includes IV therapies, specialty care biotechnology, pharmaceuticals, nutrition, supply chain and healthcare transportation. The addition of Craig is a key component of our strategic plan to move towards an organization that is focused on large opportunities that will accelerate our growth in a sustainable fashion. The past sales efforts have focused on national and regional specialty pharmacy branches for customer service, education and training have been the priority. The support will continue with more efficient training and marketing tools. Our sales approach is evolving to where our efforts center around earning our customers trust as a business and clinical partner. My vision for the selling organization is that they become industry consultants where market share growth and expansion of the immunoglobulin and subQ becomes our primary drivers. Our sales focus also shifts heavily towards collaboration with pharma companies, distribution partners or home infusion sales teams and patient advocates. The support of pharma companies continues to extend our reach to patients in prescribing physicians, where awareness is the key to increase diagnosis of immune deficiencies and neurological disorders. This leads to faster diagnosis and more specific subQ therapy prescriptions. Thirdly, John Fletcher joined our Board in May. He is one of the most highly regarded healthcare leaders in our industry. John was Chairman of Spectranetics Corporation for the seven years prior to its acquisition by Royal Philips in 2017 and the transaction valued at $2.2 billion. John was named 2018, Director of the Year by the National Association of Corporate Directors for his work at Spectranetics. Moving to slide 7, you'll find that this might be familiar to some of you but there are a few points that I wanted to highlight here with respect to RMS Medical's current business opportunities in two growing markets. We're operating in two of the largest markets for subQ therapy today, both PIDD and CIDP. These are chronic ailments for which there are currently no cures. As a result, the proper management of these conditions involves regular IV infusions, either IV or subQ. We believe that subQ offers more compelling proposition for patients, physicians and payers and I'll outline these reasons in a moment. Today, about 70,000 patients or 26% of the estimated 270,000 patients afflicted with PIDD are undergoing some form of IG therapy. Off these 70,000 patients less than 30% or 20,000 patients use RMS Medical's Freedom system for subQIG infusion. This means 50,000 patients at a minimum could potentially convert to using the Freedom 60 system. We believe that newly diagnosed PIDD patients and growing physician awareness are helping to drive industry growth and that newly diagnosed PIDD patients will be prescribed IG therapy with subQ as opposed to IV delivery. We also believe that PIDD patients currently being treated with IV therapy will migrate over to subQ therapy. Our goal is to make our Freedom 60 system the delivery method of choice for these patients. We estimate that each patient using the Freedom system currently generates average recurring revenue to RMS Medical of about $750 annually. Revenue per patient could be higher for CIDP patients compared to PIDD because this therapy requires more frequent doses of Hizentra. On slide 8, you'll see immunoglobulin are indicated as a successful treatment in the areas of neurology, hematology, immunology, and rheumatology, among others. Major pharma companies including some of the ones on this slide, are manufacturing IG with a focus on developing new products and expanding application. We continue to work with pharma companies that are developing subQ indications for large molecule drugs using the Freedom system as a method of delivery. We have evolved our medical affairs efforts from simply supporting clinical trials to actively pursuing drug trials and expanding indications of current drugs. We have a proven delivery platform with an opportunity to expand well beyond our current footprint. Brian Schiller, our VP of Medical Affairs is laser focused on this strategy and I look forward to reporting on exciting developments. He is also focused on the clinical performance of our previously announced Super26 product. At the present, we are focused on the subQ and I've-IG market. The Freedom 60 system is a proven and reliable drug delivery system with the potential to be applied to other drugs and disease stage. On slide 9, you'll see that both types of therapy IV and in sub-QIG are effective. We feel that sub-QIG is a better choice than IV therapy when applicable. Slide 9 highlights the differences and you'll see many advantages of sub-QIG and I'll highlight two, one is more consistent IG levels and two is patient administered therapy. Shifting to slide 10, collaboration with pharma companies is a vital component of our growth strategy. You can see in the slide the connection between Hizentra and the Freedom 60 system as the preferred means of subcutaneous delivery. Hizentra was approved in 2015 to treat PIDD and in 2018, the label was expanded to treat CIDP. Hizentra the first sub-QIG formula in a 20% concentration which is allowed for infusion at an about an hour as opposed to several hours required by other drugs. We are using our relationship with Hizentra as a template to work with these drug companies as new subQ therapies come to market. To that end, I'll ask you to turn to slide 11. In July Grifols announced the clearance of Xembify by the FDA to treat PIDD. We view this as very good news from an industry and patient perspective specific to RMS Medical. Xembify is Grifols first 20% subQ therapy for the treatment of PIDD and the fifth sub-QIG therapy cleared by the FDA to treat PIDD. It's interesting to note that up until now Grifols has solely focused their efforts on IVIG therapy. We believe the approval of Xembify marks their shift in strategy towards subQ and will continue for the foreseeable future. On a macro level, we view any new subQ therapy as a positive. We think it validates subQ therapy as a treatment protocol and RMS Medical's strategy to become the preferred provider in this growing market. It should help elevate awareness of PIDD among patients and physicians and promote improvement diagnosis of PIDD. We also believe that Xembify will have a very positive impact on IG supply which is not keeping up with demand. All those Xembify could be characterized as a competitor to Hizentra in other subQ formulations. We believe that Xembify would be prescribed primarily to newly diagnosed patients and would not be used as a replacement for patients currently undergoing treatment with Hizentra or other subQ drugs. Collaborating with pharmaceutical companies is a primary component of our strategic plan and we will continue to do so. Although we cannot at this time quantify any potential impact to our business we will continue to work with Grifols in support of the launch of Xembify and use of the Freedom 60 system as the preferred method of delivery. As background Xembify is the fifth sub-QIG drug to be approved for U.S. market following Hizentra, Cuvitru, HyQvia and Cutaquig. There are 10 IVIG drugs with U.S. clearance however, subQ is more preferred by patients and more frequently prescribed. Their primary factors constraining additional subQ growth or IG supply and formulation. Large molecule drug activity was subQ as a preferred delivery method is growing rapidly. Our medical affairs and growth and innovation teams are actively pursuing these opportunities. Before turning things over to Karen, here's our roadmap to becoming the preferred drug delivery partner for specific infusion therapies in select markets. As you can see, this multi-year multifaceted approach involves our entire team in RMS Medical. Right now we're actively in Phase 1 with a focus on growing the baseline business, further penetrating PIDD and CIDP, developing and launching new products and pursuing collaboration with pharma companies for clinical trial usage. We've had a number of successes in helping us reach these goals, including the addition of experienced executives and board members, good sales traction towards our goal of a $50 million run rate by year end 2022. Improving our operational efficiencies to drive us towards our 70% margin goal and increasing our collaboration with pharmaceutical companies as they introduce new therapies for which our Freedom system can be the method of delivery. I'll now turn things over to Karen for discussion on the quarter. Karen?

Thanks, Don. Good morning, everybody. Beginning on slide 13, net sales rose 18.8% to 5.3 million in Q2 2019 up from 4.5 million in Q2, 2018 driven primarily by our focus on growth in the PIDD market and expansion into the neurology market following the 2018 approval of Hizentra to treat CIDP. Gross profit and gross margin each improved in Q2, 2019 compared to the same period last year driven by higher sales and production efficiencies. As Don just noted, remain focused on achieving 70% plus gross margin by year end 2022. Manuel Marques, our Chief Operating Officer and his team are pursuing several initiatives to help us continue along the path towards that goal. Total operating expenses for Q2, 2019 rose to 3.5 million up from 2.1 million in Q2, 2018. The increase of 1.3 million was due primarily to a $1 million increase in legal costs associated with ongoing litigation against a competitor that is included in selling, general and administrative expenses. Total operating expenses for Q2, 2019 also included a $200,000 increase in research and development expenses compared to the prior year period associated with increased headcount and expanded product development activity as we continue to invest in innovation. We generated net income in Q2, 2019 of $78,000 compared to a $478,000 in Q2, 2018. Adjusted EBITDA in Q2, 2019 rose by 60% to $1.5 million up from $900,000 in last year second quarter. As previously announced, we received some good news on the legal front from last month with respect to our ongoing litigation with EMed Technologies. The Texas Court dismissed was prejudiced EMed case against our RMS Medical awarding us court costs of $16,000. Subsequent to the Texas ruling we authorized our legal counsel to pursue the recovery of significant legal fees from EMed. Not surprisingly, EMed has appealed the court's decision and challenged our motion to recover legal expenses. Several cases remain pending between RMS Medical and EMed and are in various stages of reviewing courts in California and New York. We are vigorously defending against all these lawsuits and while there can be no assurances, we believe we have meritorious defensive tool of EMed claims. Please refer to our filings for additional details. Our total legal expenditure is related to outstanding legal litigation with EMed was $300,000 for the first half of 2018 and $1.6 million for the first half of 2019. Although we had a win in the period, we are not estimating our legal fees to be much lower in the second half of the year due to the other pending cases. Operating expenses exclusive of legal fees will also likely trend higher with the new leadership fully on board going into the second half of the year but operating leverage from a margin standpoint should continue. On slide 14, moving to our balance sheet we ended the quarter with 3.8 million of cash which includes 1.5 million from the CD that expired in May. A review of our cash flow statement at June 30, 2019 reflected both a 1.8 million increase in accounts receivable reflecting a change in payment terms by a large distributor of our products from net 30 days to net 60 days, and a $400 million increase in inventory as we prepare for anticipated growth and strengthen our ability to satisfy customer demand for our products. These increases were partially offset by the 1.5 million in proceeds realized from maturation of the certificate of deposit in Q2, 2019. We believe our cash on hand and cash expected to be generated from operating activities will be sufficient to fund our operations. We also have access to a $1.5 million line of credit with no outstanding amounts against us. We continue to maintain a clean capital structure. We ended the quarter with 38.3 million basic shares outstanding, 4.7 million options with a weighted average exercised price of $1 34 and an additional 1 million warrants with a weighted average exercised price of $0.45 bringing a total diluted share count to 44 million. As of today, the $1 million warrants or 1 million warrants were exercised. Here on slide 15, you can see the reconciliation of net income to adjusted EBITDA for Q2, 2019 along with the metrics that comprise this calculation. Thank you for your attention, and I'll turn the conversation back to Don.

Thanks, Karen. I'd like to thank all of you for your participation on today's call. And I'd now like to open things up for questions.

[Operator Instructions]. Our first question comes from Alex Nowak with Craig-Hallum. Please proceed with your question.

I know you don't want to quantify the exemplified benefit too much here. But you know, how should we be thinking about this drug launch a few years out? You know, is it fair to assume Hizentra can continue this growth of about 10% to 20% and the Xembify scripts will just be added on top of that?

The big challenge right now in the market is IG supply. So we feel the rising tide will lift all boats. So right now they're as I mentioned earlier, less than 30% of the patients with PIDD have actually been diagnosed and are receiving IG replacement. We feel strongly that the presence of a large company like Grifols in the subQ market will help increase supply which will therefore increase patient diagnosis which we think will have a positive uplift on the subQ trends.

Okay, got it. And then last quarter, I think it was last quarter, you mentioned having three partners and immunoglobulin and five outside of IG, you know, any update to those numbers? And if you could just provide some more details around your partners outside of IG, what sort of drug classes are these in? And what are your expectations for approval from these non-IG partners over the next 12 to 24 months.

So I understand and appreciate the curiosity. So we are very focused on the business in our backyard with sub-QIG. There are other areas that we're looking at and part of our pharma initiative is to really build out those relationships. There is a level of confidentiality with some of the clinical trials that we respect and one of our positions is to be Switzerland, if you will, in terms of supporting these companies with a delivery system that we think applies to a lot of different applications. So as there are developments, you can look forward to hearing about some of those going forward. But at this point, I'm not sharing any of the details on those specifics.

No understood there understood. Another question just maybe on kind of the rebuilding of the company, since you've come on board, you know, you've added some personnel last couple months here to fill the gaps, you know, particularly within those former relationships. What other ads are necessary at the VP level and just remind us how big is the sales team today and the current plans for expansion there?

So I'm really pleased to report that we've rounded out our executive sales team at this point. So it was previously communicated that in order to execute on our strategy, we needed to have this team in place. I couldn't be more excited about the quality and caliber of people that we've added and I'm even more excited about adding people that really know the current space that we're in, as well as other spaces within medical that we could potentially expand into. In terms of the commercialization team we have an evolving sales team that will be led by Craig Ross, who I mentioned in this call, where their efforts will shift heavily from kind of support at the branch level to influencing at a higher level. One of the great things about our selling organization is right now we have roughly six people supporting sales but one of the great things about this business is that adding more salespeople doesn't mean increased revenue. What does that mean increased revenue is adding the right sales people at an executive level that are influencing at a larger level, including home infusion, sales reps, pharma companies, patient advocates, etcetera. So we see those call points as an extension of our selling organization without a need to ramp up headcount on the sales team. But hope that answers your question, Alex.

It does. It does. Got it. And then just last question for me, you know, it's been mentioned in the past here, but what are the current plans for up-listing to either the NYC, the NASDAQ and what is the current timing here for an up-listing?

So good question. Not surprised that came up. We are actively pursuing an up-listing at this time to a national exchange, and we'll look forward to keeping you apprised of our progress hopefully sooner than later.

[Operator Instructions]. Our next question comes from the line of [indiscernible]. Please proceed with your question.

I've one real quick question for you. I don't know if you can answer or not. I think one of the things you're pursuing as a company eventually is to diversify your product line. I was wondering if you could maybe comment on that. And how that may play out over time?

Yes, so I get that question asked frequently. And I think one of the things that I like to guide people towards is one thing is the strategic plan to build out to become a $50 million organization by year in 2022, but our focus is there is a large opportunity in the space that we're currently playing in. And I'd like to highlight the opportunity of patients being diagnosed, the increased supply of IG, but also I'd like to highlight the activity from these pharma companies to expand their indications for these current drugs. So I see a lot of upside based on those things that have us in-line with our strategic goals.

[Operator Instructions]. Thank you. It appears we have no further questions at this time. So I'd like to turn the floor back over to Don Pettigrew for any additional or concluding comments.

Thank you, Jesse. So I want to sincerely thank all of you for attending today's call and your continued interest in RMS Medical. We think we have a very good tailwind to continue to advance towards our stated operational and financial goals. We are focused on improving the quality of life for patients around the world and delivering value to our shareholders. Finally, just want to let you know Dan will be attending the Canaccord Conference tomorrow in Boston hosting one on one meetings, and RMS Medical will also be presenting at the Doherty Conference on September 5 in Minneapolis and we will be appearing and various other events throughout the fall. So I hope everybody has a wonderful day and I appreciate your interest.

Ladies and gentlemen, this concludes today's teleconference. Again we thank you for your participation and you may disconnect your lines at this time.