Greetings and welcome to the KORU Medical Systems Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 host, Devin Sullivan, Senior Vice President of The Equity Group. Please go ahead.

Thank you, Brock. Good morning everyone and thank you for joining us today. The speakers for today's call are Don Pettigrew, President and Chief Executive Officer; and Karen Fisher, our Chief Financial Officer. 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 the associated press releases. We assume no obligation to update any forward-looking statements. The associated slide presentation will be posted to the Investor Relations' section of our website www.korumedical.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 this call management, we'll discuss certain non-GAAP financial measures in our press release and slide presentation, accompanying this webcast and our filings with the SEC, each of which is posted on our website. You will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our strategic plan, goals incorporate the trends 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 the introduction of competitive products, availability of 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, February 26, 2020 at approximately 9:00 A.M. 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'd now like to turn the call over to Don Pettigrew, President and CEO of the KORU Medical Systems. Don, please go ahead.

Thank you, Devin. Hope everybody's doing well today. Thanks for joining us as always. I'll ask that you please note the slides addressing forward-looking statements and the non GAAP measure we will refer to you on today's call. So, I'd like to begin on slide three. As you'll see, we begin with a brief overview of what was a eventful to say the least and exciting year for KORU Medical. In summary, we generated record financial results, ended the year in a strong financial position, refreshed our management team and Board, listed on the NASDAQ capital market, implemented an enterprise-wide rebranding initiative, and developed and our preparing to launch a new product. We also increased our shareholder engagement activities and receive two consecutive favorable judgments with respect to our ongoing litigation, which we believe we will defend on appeal. As you will also see on the slide, we had a very memorable day ringing the bell -- the closing bell of the NASDAQ on February 12th in New York City. We're very happy to be joined by members of our management team and Board members as well as associates, friends, and family. Let me transition to slide four. We reported a record full year 2019 with the highest-ever annual net sales, gross profit, and gross margin. We generated nearly $600,000 in net income, down from $900,000 last year, due primarily to litigation costs. Our adjusted EBITDA 2019 increased by nearly $2 million to record $5.6 million as compared to $3.6 million in 2018. I want to thank everyone at KORU Medical for their initiative, hard work, insights, and execution. As I've stated in the past, we have spent the last two years putting together a team that rivals any in our industry. Together, we reported a record 2019, and more…

Thanks Don. Good morning everyone. Beginning on slide 12, net sales rose 45.7% to $6.2 million in Q4 2019, up from $4.3 million in Q4 2018. This growth was due to continued expansion of our presence in the PIDD and CIDP markets, higher international sales, clinical trial activity, and to a lesser extent, price increases Gross profit in Q4 2019 rows to $3.9 million from $2.7 million in Q4 2018, due primarily to increased volume. Gross margin of 63.4% was stable compared to 63.5% in Q4, reflecting the integration of new hires during the quarter, partially offset by price increases. Total operating expenses for Q4 2019 rose 30.4% to $4.1 million, up from $3.2 million in Q4 2018. Of these SG&A expenses were $2.8 million as compared to $2.7 million in Q4 2018, slightly higher primarily due to higher consulting fees related to strategic initiatives and higher salary and related benefits, mostly offset by normal legal expenses, excluding litigation. SG&A expenses showed a substantial decline as a percentage of net sales to 44.9% of net sales in Q4 2019 as compared to 62.8% of net sales in Q4 2018. Research and development expenses increased to $0.3 million from $0.1 million in Q4 2018, reflecting expanded product development initiatives and increased headcount. Litigation costs increased to approximately $934,000 from $306,000 in Q4 2018, reflecting increased activity and the ongoing litigation with a competitor. While litigation continues, we have had several favorable rulings in the New York and Texas courts, dismissing those cases and have filed motions for court costs and attorney's fees of which one fee motion has been recommended to be granted by the Magistrate Judge in New York, and the fee motion in Texas has stayed pending appeal of the case. There can be no assurance that these costs…

Thanks Karen. So, again, I want to thank all of you for your participation. And I'd now like to open things up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question today is from Alex Nowak of Craig-Hallum Capital Group. Please go ahead.

Great. Good morning everyone and congrats on a great end to the year here. Last quarter there were some anomalies that elevated the growth here. I was just curious, was there anything that you need to call out here as more one-time or less recurring in Q4 that we shouldn't necessarily incorporate going forward?

So, in Q3, we commented on some anomalies that we did not see in Q4. So, we saw a largely normalized Q4 revenue line.

Okay, that's great. And then just on gross margin, though it did come in a little bit from last quarter, just anything specific to call out there?

So, gross margins largely were driven by increasing sales with the potential to impact them going forward more with some of the things I mentioned about operational efficiencies and cost reduction initiatives, but that was the main driver.

Okay. And then I know the launch here is early with Xembify exemplified, but are you seeing a similar attach rate here with the Freedom 60 pump and your infusion sets compared to something like Hizentra?

Sorry, Alex, similar what rates?

Similar attachment rate?

Yeah, so what we've seen so far is a bit of a slow launch by Xembify, but a lot of excitement about the added supply that's coming to market. As I've mentioned in previously, we see the allotment or allocation of SUBQ-IG drugs not even meeting half of the demand. So, we're starting to see the uptick. What we have seen is they've been very selective in who they've taken this to, but we are feeling very good about this increasing supply. I think it's a little bit of a slow ramp with just building physician and patient awareness, but we're incredibly excited about the amount of supply that will be added as a result is Xembify and even CUTAQUIG.

Okay. And then could you expand on that Phase III hematology drug that you mentioned? Were you actively supporting their clinical trials? If you can provide that? And then when should we expect to learn more about that product?

So, I mentioned in the space of hematology, there is a successful Phase III trial that met its clinical efficacy endpoint. And we are hopeful that more definition will come out on the planned drug launch. But you could probably expect for me to give them a more detailed update for the next quarterly call. And to answer the first part of your question, yes, we were involved in as part of our pharma initiatives and working very closely with them and their clinical trials.

That's great to hear. And then just last question from me. You've been growing above this 20% growth for the last several quarters now. If you really take out some of the one-time pieces from last quarter, it's basically over 30%. The longer term targets that you've outlined here from the past year, but also on this earnings call and going forward, having said it about 20% per year. So, I'm curious at what point do you think you'll look to raise those longer term targets? Is the goal here really to keep 20% growth as the baseline, but ultimately beat that?

The goal is always to beat that, right? So, I think through some of this execution with strategic plan and some of the market dynamics have allowed us to overachieve that goal. But we're not providing guidance on revenue growth going forward with the exception of what's outlined quite clearly in the strategic plan of 20%-plus, and there's a reason why there's a plus after the 20% in there.

Nope, understood here loud and clear. Thank you. Appreciate and congrats on a good year.

Yes, thank you Alex.

Your next question is from Andrew DeSilva of B. Riley FBR. Please go ahead.

Hey, good morning. Congrats on the progress last year. Got a couple quick questions. If you could, could you discuss exactly what actually gets Freedom implemented as a preferred infusion system? Is it going through the actual partnering process with your biopharma product suppliers? Or is it more relevant to become integrated within the distribution channels that they work with, specifically, like specialty pharmacies or care providers? Kind of curious to see where your sales and marketing initiatives and dynamics break out into?

Okay. Good question, Andrew. So, the answer is really twofold. So, what you'll see is us being a first mover into this space and the familiarity from the patients, physicians, and specialty pharmacies is a really huge advantage for us. So, one of the things I mentioned earlier in the call was how sticky our revenue model is with the disposable component. Once patients are familiar or caregivers are familiar with our product, there's not a -- there's rarely a reason to change what they're using. So, that's what's kind of got us on the map. Going forward, what you're onto is a huge component of our strategic plan. And that's within these pharma initiatives. So, when I mentioned clinical trials, our goal is to work closely with these drug developers to use our product during clinical trials. So, when a drug does launch, like I mentioned, with the hematology example, that we are the preferred and recommended drug delivery system. I hope that answers your question.

No, no, that was great color. Thank you very much. And then as far as the ID shortages go, is that still highly relevant today or does some of those manufacturing issues kind of being resolved in real-time? And then as it relates to that, I always thought of the shortages being kind of a driving force to have the market moved towards SUBQ. But you mentioned increase collections and manufacturing as being a catalyst also for the market going towards that. So, I was just curious if you could help reconcile the differences there?

Yeah. So, if you're a pharma manufacturer, I think you see a few things. You see what's being preferred and requested by physicians and patients. And it's really obvious that that preference has leaned heavily in favor of SUBQ. With that said and the backdrop is in IVIG drug that was the first mover. So, again, I kind of talked about that stickiness of the business. That's where the supply has been. And you're talking seven to 12 months to develop IG from the collection -- through the collection process. So, at the end of the day, it's a big allocation question for these pharma manufacturers. How much of the supply are they going to allocate for IV and how much are they going to convert to SUBQ? And I think with the recent additions of Xembify and CUTAQUIG, I'll use Xembify as an example. Grifols is the largest market shareholder of IVIG drug. And they've come out with a SUBQ formulation. So, there's a couple messages there, but the main message is it's really validating the movement and demand in the SUBQ market and it's also showing their ability to -- if they choose to, to cannibalize their own business and move internally from their IV product to their SUBQ product. So, I think those are really strong tailwinds for KORU.

Okay. So, fair maybe to think about the backdrop, as you know, the markets continuing to grow, even though manufacturing is increasing, there's still going to remain to be supply constraints just due to the lengthy process after collections. And couple that with patient preference, they're seeing a move towards SUBQ?

I'd say that's an accurate summary there. There's one other piece in there and that is I mentioned earlier that the U.S. is the largest exporter of IG. So, we are talking mostly about the U.S. opportunity where it's incredibly supply constrained. But another contributor to that is a lot of this IG being exported. So, it creates other opportunities for us, but -- and for them, but it doesn't satisfy the current demand in the U.S. market.

Okay. And just a last question for me. You had a five SUBQs listed. And I was just looking to the FDA website, they had more SUBQs listed, I'm not sure if they've all launched, but have you heard anything about GAMMAGARD or GAMUNEX, for example, be going to SUBQ? Or have they hit the market in any sort of capacity that could be relevant for you?

Yes, so you're talking about the IV formulations and typically it's the difference between IV and SUBQ is the concentration. So, a typical difference in concentration would be 20% for SUBQ and 10% for IV. But we are aware of the five SUBQ formulations and we're expecting some of the other formulas or formulations that are currently IV. We expect those companies and I speculate that these companies are certainly looking at trying to get into the SUBQ formulation space.

Okay, great. Yeah, maybe they haven't launched yet. The FDA actually has them listed as both SUBQ and IV formulations, but I'm assuming it's probably really early. So, but great. Either way, good backdrop. Thank you very much for the time and good luck going forward in 2020.

Thank you. Appreciate the questions.

[Operator Instructions] Our next question is from Marsh [Indiscernible] Don of GeoInvesting. Please go ahead.

Hi, Don. I have a question -- specifically two questions really the same thing. Last quarter you talked about McKesson, buying your largest distributor and just want to know if you could comment on how that relationship is progressing and anything going on in McKesson that could really excite you about that? And also, maybe you can discuss your overall just the distributor kind of partnership kind of strategy going forward -- other partner issues kind of targeting that could really help the company, and maybe even go internationally?

Yeah, so thanks for the question Marsh. So, McKesson, they dominate the home infusion Specialty Pharmacy distribution space. I feel that we have a very good relationship with them. We meet with them quite regularly and collaborate exceptionally well with them. And they are the preferred distributor in the home infusion Specialty Pharmacy space. So, there's a handful of other distributors in the space. But they at the end of the day, we let our customers decide what distributor best meets their needs. And as the dust is settled, McKesson who's obviously the largest, it's been the preferred distributor. With that said, we work openly with all the distributors that are supplying into this market, not necessarily just to get new distributors and fill pipelines, we really let the customer decide what's best for them. And if they prefer a certain distributor for whatever reason that might be, we will work with that distributor in the spirit of best customer experience. As far as the second part of the question our distribution strategy going forward, it really is to have a very solid working relationship with all these distributors. We do see the potential for other distributors to enter the market, which we think is probably a net positive for the customers that have additional choices. And as we look outside the U.S., depending on the country that we're talking about, it's very dependent on having a solid distribution network. So, we'll have unlike the consolidation, you'll see in the U.S., you'll see a reliance on a handful of key distributors in the European market space.

Thanks Don.

Yes, thank you.

There are no further questions. At this time, I'd like to turn the floor back over to Don Pettigrew for closing comments.

Thank you, Brock. So, I really appreciate everyone's continued interest in KORU Medical. We're incredibly excited about the prospects for 2020 as we continue to build on a solid foundation that was significantly strengthened in 2019. We have a number of upcoming and events scheduled including the BTIG Med-Tech Life Science and Diagnostics Tool Conference in March, as well as the Craig-Hallum institutional Investor Conference in May and we hope to see some use these events. Otherwise, I really appreciate the attention and interest in KORU Medical and wish everybody a wonderful day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.