Greetings, and welcome to KORU Medical Systems Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Greg Chodaczek of Gilmartin Group. Please go ahead, sir.

Thank you, Ryan, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the second quarter ended June 30, 2022. A copy of the press release is available on the company's website. During this call, we will make certain forward-looking statements regarding our business plans and other matters. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to many risks and uncertainties, including those mentioned in the associated press release and our most recent filings with the SEC. We assume no obligation to update any forward-looking statements. We 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 discuss certain non-GAAP financial measures in our press release and accompanying investor presentation and our filings with the SEC, each of which are posted on our website. You will find additional disclosure regarding these non-GAAP measures, including reconciliations of these matters with comparable GAAP measures, in our press release and accompanying investor presentation and those filings. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 3, 2022, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to topics discussed. And please reference the company's most recent press release and filings with the SEC. Joining us on the call today is Linda Tharby, President and CEO of KORU Medical Systems; and Tom Adams, KORU Medical's Interim Chief Financial Officer. Linda, please go ahead.

Thank you, Greg. Good afternoon, everyone, and thank you for joining us today. To start, I want to emphasize the hard work and dedication of the entire KORU Medical team in delivering another strong quarter. Their efforts are instrumental in delivering on our mission to improve the quality of life for patients self-administering infusion therapy in the home. During today's call, we will use slides to support our commentary. I will begin with the business update of the second quarter. I will then turn the call over to Tom to discuss the quarterly financials before ending with updates to our 2022 guidance. After concluding our prepared remarks, Tom and I will then be happy to open the call up for Q&A. Before diving into our quarterly results, a few comments on our progress and vision as a leading drug delivery provider. The company holds a leading share position in the growing large volume subcu drug therapy market with over 25,000 patients on our FREEDOM Infusion system. Our current market for subcu home infusion primarily serves patients suffering from the chronic conditions of PIDD and CIDP, a market with substantial opportunity, with less than 20% of patients on subcu therapy. Currently, we have 12 commercialized drug indications on the KORU Medical FREEDOM Infusion System, having doubled our number with 6 new label expansions in the past year. As the overall market for subcu drugs in development continues to expand, we continue to build our new drug pipeline with several new clinical trials and development agreements over the last 12 months that are increasing our total addressable market potential to over $1 billion. Now turning to our results for the quarter. We are very pleased with our results this quarter on several fronts. Q2 '22 marked our third consecutive quarter of double-digit…

Thank you, Linda, and good afternoon, everyone. I'm excited to report our third consecutive quarter of double-digit net sales growth, ending the second quarter with net sales of $6.5 million, an 18.4% increase from $5.5 million for the same period last year. Novel therapies sales were approximately $600,000 for the quarter, an increase of $528,000 over prior year or a 747% increase. The growth in novel therapies included the completion of a milestone for our previously announced agreement for a large pharmaceutical customer. Also contributing to novel therapies growth were clinical trial revenues related to our pipeline expansion. Our domestic KORU business grew by 8.7% or approximately $400,000. The business was impacted by supply chain issues and labor shortages, which created back orders of approximately $300,000 that are not included in the reported net sales number. The increase in domestic KORU demand, inclusive of back orders, was attributed to volume growth driven by SCIg market growth, label expansions, including prefills, and a nominal increase in average selling prices for our products. International KORU was up 10.7% year-over-year due to growth in several European markets driven by key tender wins. The following slide shows a bridge of our gross margin and related impacts that we saw in the quarter. Starting with Q2 2021 and walking through the margin bridge from left to right, our total gross margin for the core business was 56.2% and was lower than prior year by 192 basis points due to amortization of manufacturing variances from the supply issues we experienced in Q1 2022, partially offset by a nominal increase in average selling prices. Continuing with this bridge, our gross margin, inclusive of our novel therapies engineering services revenue, was 54.9% driven by the impact of service revenue mix. Finally, our total reported gross margin for the…

Thank you, Tom. Turning to our expectations for fiscal 2022. As a reminder, our outlook is rooted in several key drivers: SCIg market growth rate in the high single digits; plasma supply, clinical trial activity and expansion on the novel therapies pipeline; inflationary impacts, including labor and supply price increases; supply chain and labor shortage impacts; timely receipt of equipment financing and credit; and planned inventory reductions by year-end 2022. For full year '22, we are raising our revenue guidance to $27 million to $27.5 million, previously $26.5 million to $27 million, based primarily on the strength of our novel therapies pipeline. We are guiding to a 55% to 60% gross margin to exit the year, updated from a 60% exit rate. Q2 '22 supply chain disruption impacts have resulted in unfavorable manufacturing variances in the first half of the year, which are expected to improve. Additionally, we now expect the transfer to our outsourced manufacturer to be completed in Q1 of 2023. We anticipate steady gross margin improvement beginning in Q3 and for the remainder of 2022. We reiterate our operating expense range in support of our strategic plan. We anticipate expenses to be in line sequentially for Q3. And finally, we expect our cash position to reflect the year-end balance of a minimum of $16 million. We anticipate improvement from first half year burn rate where we had significant onetime investing activities for our headquarter relocation and experienced lower gross margins. In addition to higher sales and improved gross margin per our forecast, we expect cash to come in from our filed ERC preapproved equipment financing and tenant reimbursements. In closing, we are making significant progress in advancing our strategic priorities. We have met our third quarter double-digit growth, are making continued progress within the novel therapies pipeline and new deal advancements and our core domestic business is outpacing a rebounding U.S. SCIg market. We have a plan to remedy the supply chain challenges we have faced, and we continue to build a stronger KORU foundation. We are seeing evidence of our results in our strong quarterly results. We are excited by our progress to date in executing against our strategic plan and look forward to continuing to build our position as a leading drug delivery player. Thank you again to the KORU team. And I will now turn the call over for Q&A.

[Operator Instructions]. Our first question comes from the line of Connor Stevenson from Craig-Hallum Capital.

This is Connor on for Alex this afternoon. I guess, first off, could you just speak to kind of how volumes trended out of June and into July? And are we continuing to see a recovery in new patient starts?

Yes. Connor, thanks for the question. We are seeing, as we reported, about a 7% growth, 6.9% overall, in the quarter for new patient starts, and we continue to see the recovery with growth from month to month.

And then I guess just on the cost side, obviously, first half had an investment in the new headquarters. Thinking about second half, what kind of investments should we expect to see you make just kind of in the second half, just kind of some puts and takes there?

Yes. Thanks, Connor. I'll let Tom handle that.

So Connor, the investments that we have in the second half of the year is the completion of the manufacturing transfer. So we do have some additional equipment and some items of that capital equipment of that nature, but it will be less significant than the first half.

Our next question is from the line of Kyle Rose from Canaccord.

This is Gibran on for Kyle. Congrats on a strong quarter. I guess maybe just to start on gross margins, appreciate there were some unfavorable headwinds in the Q2 and appreciate the quarterly sort of margin walk you provided. Maybe just to dig in a little bit more, what gives you confidence in a stronger second half on the gross margin side? And maybe if we could just walk through some of those operational efficiencies that you're looking to realize.

Thanks, Gibran. So I'm going to let Tom walk you through it. And I think what's most important to recall here is that we started with the 54.9%. So the explanation in accounting treatment is really important, and then we'll talk you through some of the efficiencies that we've already realized and what we will see in the quarter three.

Yes, Gibran, thanks for the question. So we anticipate the issue that we had in the second quarter of labor shortages to be remediated as we continue to hire and restaff our production lines. This will generate further productivity and output, which will help improve our margins here in the third quarter. We also anticipate better performance from a supplier perspective, from the raw materials perspective, on the shipments we have received. Linda?

Yes. In addition, I would say, we had some equipment downtime, which has since been remedied in the quarter. And as Tom talked about, we have staffed the production appropriately now, added a third shift. So with all of this, we anticipate getting back up to our full production efficiencies during the third quarter.

Understood. That's helpful. And then maybe just on the innovation side and product pipeline side. Any sort of color you can give on the next-generation system you're developing? I think previously, you had mentioned it will improve upon convenience and have some enhanced connectivity. Just wondering how you're thinking about the innovation pipeline now with Brian having been in the CTO seat for a few months now?

Yes. So first, maybe let me talk about prefills, which is a significant area of focus for us. You see the market expanding, KORU taking advantage of that overall position with our label indication. So prefills is our first area of focus of our innovation efforts. Second, and I'd like to talk about this in terms of the 3 Cs, right, so comfort, convenience, connected. So on the convenience side, we're really working a lot on our consumables and making that the most comfortable experience for our patients. On the convenience side, we're really looking at reducing the overall number of steps required for the platform and then making it a smaller platform overall that can be utilized universally across a range of 10 ml all the way up to 50 mls plus for that platform. Anticipate that from us. You'll hear more at the end of the fiscal year as Brian gets his feet under him. We're really working now with our pharma partners to really define what that system looks like, and we'll have more to say towards the end of the year. But comfort, convenience, connected are the 3 key themes.

Our next question comes from the line of Jason Bednar from Piper Sandler.

Congrats on the revenue performance here. Linda, if I could actually start there. Could you help us with the sustainability of this really nice revenue growth you've been putting up? It seems like it actually would have been even better if not for the back orders you mentioned. But the comps do start to get a little bit more challenging here over the coming quarters. So as you're updating the revenue guide, maybe help us with how you're thinking about the inputs around maybe a sustained acceleration in the growth rate and what you're assuming as far as the trajectory of end market growth and share gains for KORU as well as contributions maybe from novel therapies.

Sure. So thanks, Jason. So three primary areas that we look at to really drive that performance and what gave us the confidence to improve our revenue outlook and raise the overall guidance. So first is novel therapies. So you saw us come out in the latter half of last year and by the end of quarter 1, we announced 7 new agreements overall in the past 6 to 9 months. So those agreements now are starting to produce revenue for us. They are progressing products through clinical trials. Some of them resulting in new innovations to our current FREEDOM system. So all of those in conjunction, as we look at that pipeline of what we've already signed, is what we see. And then with the expansion of deals that I just announced this quarter, we see additional deals in our pipeline and then as we see new opportunities coming in. So that would be the first. You're starting to really see that novel therapies pipeline kick in. Second is a U.S. business that we've been out there saying to market we're looking at about 8% growth overall in the year. It's been nice to see that 7% growth for the first 2 quarters and us outperforming that market a little bit more than what we anticipated. And that's primarily due to prefills, which are doing much better than our internal expectations. And when we have the only pump associated with prefills, as they do better, we do better. So that would be second. And third is, we've begun to put some additional efforts into our international business. So although it's earlier days in that whole effort for international, we're starting to see some initial paybacks there as well. So it's nice, and hopefully, you picked this up in the call, that we now have several different areas where we can look to for growth for the company, and we're starting to see each one of those contribute in different ways and with opportunities to outperform our expectations.

That's really helpful. And then Tom and Linda, I really appreciate the gross margin bridge. Maybe if I can just follow up on a prior question. I just want to better understand the gross margin guidance reset. And also as we think ahead to 2023, I mean, do the issues here in 2022 that are pulling that gross margin a little bit here in this year and then the push out of the outsourcing, I guess, does all of that adjust how you're thinking about 2023 gross margin potential? And again, not looking for guidance, but if you're sitting here today relative to where you might have been 3 months ago, has your intermediate to long-term gross margin view for the business changed?

Yes. So fundamentally, no, our outlook to get to a 60% gross margin has not changed. And I think the most important part for everyone to understand on our gross margin in the second quarter was the acceleration of the variances, which was really an accounting treatment where typically those variances would have gone into the quarter 3. And they were all accelerated. So we took 2 quarters of variances. So that 54.9% number is really important for us to remember and look at. And then it was impacted in the quarter by a supply chain shortage we had with 1 of our vendors, which prevented us from really getting the full production out that we intended to. So those are things that we now have a handle on, working very closely with supplier where we anticipate getting out of all of that. And that brings us back to that mid-50% range. Bringing us then in the 55% to 60% range is just really the increased efficiencies we're seeing in quarter 3 and quarter 4 as we get to full production levels. And then getting to 60% is completing the transition to our outsource manufacturer. That move is near completion and we anticipate happening. We just pushed it out by a few months, so we can really focus on ensuring that we get this back order cleared and get back to where we need to be. So no change at all in our guidance overall on gross margin, just a little bit of a pushout, and we still see a clear headway for us to get to that 60% range when we get the transition to Command complete.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the call back to Ms. Linda Tharby, CEO, for closing remarks.

So in closing, I just want to say thanks again to the KORU team, to all of our customers and patients, for their incredible support for another great quarter. Thank you so much.

Thank you. The conference of KORU Medical Systems has now concluded. Thank you for your participation. You may now disconnect your lines.