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Repro Med Systems, Inc. (NASDAQ:KRMD) Q1 2020 Earnings Conference Call May 5, 2020 9:00 AM ET

Company Participants

Devin Sullivan – SVP, Equity Group

Don Pettigrew – President & CEO

Karen Fisher – CFO

Conference Call Participants

Alex Nowak – Craig-Hallum Capital Group

Operator

Greetings and welcome to the KORU Medical Systems reports First Quarter 2020 Financial Results. [Operator Instructions].

I would now like to turn the conference over to your host, Devin Sullivan, Senior Vice President of Equity Group. Please proceed, sir.

Devin Sullivan

Thank you, Latanya, and good morning. Thank you all for joining us for KORU Medical Systems first-quarter 2020 financial results conference call. Our 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 today.

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 will 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 are posted on our website, you will find additional disclosure regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our strategic plan goals incorporate the trends that we’ve seen today and what we believe today to be appropriate assumptions.

Our results are inherently unpredictable and may be material – materially affected by many factors, including the introduction of competitive products, availability of insurance reimbursement, success of our research and development efforts, acceptance than 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, the impact of COVID-19 and other factors described in our filings with the SEC. Therefore, our actual results could differ materially from the goals set forth in our strategic plan. For the benefit of the – for the benefit of those of you listening to the replay, this call was held and recorded on Tuesday, May 5th, 2020, at approximately 9 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 KORU Medical Systems. Don, please go ahead.

Don Pettigrew

Thank you, Devin. Good morning, everyone, and thank you for joining us today. I hope all of you and your families are safe and well. I want to make you aware of the safe harbor statement on Slide 2 before I move on to Slide 3.

We’ll cover just a few topics this morning, leading with a discussion of COVID-19, followed by a review of our first-quarter financial performance and an overview of our strategy. We’ll then open things up for questions. I want to first draw your attention to Finnegan, who you can see on the left, especially in times like this, we are guided by our mission to improve the quality of life for people like Finnegan by providing products that allow him to manage his treatment regimen with a sense of independence and control. In a time when we were all being asked to social distance; the freedom 60 integrated infusion system is allowing Finnegan in thousands of other patients like him who are battling chronic medical conditions to treat their chronic medical conditions from the safety and comfort of their own home.

These are certainly challenging times. And despite the unprecedented impact of the virus on our daily lives, KORU Medical has both a privilege and responsibility to do everything in our power to ensure that our essential products continue to reach the patients we serve, while protecting the health and safety of our employees and their families. And I’m proud to say we’re doing just that. It takes a very complete team to manage through a crisis like this, and I’m very proud of our employees and their remarkable response during these challenging times.

KORU Medical currently qualifies as an essential business under New York state guidelines, and we remain operational. We are committed to the health and safety of our employees, suppliers and customers during these challenging times and have instituted safety protocols following federal, state and local guidelines. This includes increased frequency of cleaning and disinfecting, social distancing practices, requiring most nonproduction related team members to work remotely where possible, business travel restrictions, cancellation of certain events and limitations on visitor access to our facility. Since the virus hit in late March, we’ve been experiencing higher demand for our products, likely due to reactive purchasing associated with the uncertainty surrounding the impact of COVID-19.

We are currently continuing to manufacture and ship products on schedule and thus far have seen minimal impact to the production, inventory, supply chain or distribution of our product line. However, this is an evolving situation with economic uncertainty. We are closely monitoring and managing inventory levels in an effort to offset any potential slowdown in the supply chain and are also keeping a very close eye on logistics. I also want to note that KORU medical sells the majority of our products through distributors, which insulates us from having to depend on in person sales calls to drive revenue.

This is sometimes an overlooked aspect of our operating model, but one that we believe provides us with significant advantages at times like these. Moving to the next slide. It’s important to point out that most of the patients that use the freedom integrated infusion system are managing chronic conditions. In other words, this is not a discretionary item.

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We acknowledge that there are some patients who may have their diagnosis of PIDD and CIDP delayed simply because they cannot get into their doctor’s office. However, bear in mind that it can take more than 10 years in multiple physician visits to secure these diagnoses in the first place. So we do not currently view this as a long-term impediment to industry growth. With respect to plasma supply, we have not seen any significant issues with the supply of immunoglobulin for 2020, and prescriptions and fulfillment are progressing with minimal disruptions.

Our understanding is that plasma collection efforts are continuing despite the effects of COVID-19. Although it’s reasonable to assume that some disruption and collection may occur, we would also expect to see a ramp-up in collection activities as soon as federal, state and local guidelines permit. As added context, it’s important to note, any plasma that is collected today does not enter the drug supply for approximately seven to 12 months. The situation is fluid and the landscape with respect to the availability of plasma could change if the industry cannot harvest new supply in sufficient numbers.

Finally, although it’s tough to look out too far ahead of our current situation, I believe that COVID-19 has opened eyes to the great benefits and perhaps necessity of home healthcare. In some sense, we have all been afforded a glimpse into the lives of a patient managing with PIDD, who live in fear of contracting an illness that could have a severe impact on their health. Our operating thesis is based on the great benefits we see with self-administered infusion therapy for patients with PIDD and CIDP. Given the events of the past couple of months, we expect that the conversations surrounding the benefits of at home infusion and subcu therapy will continue to grow.

We are aware of specialty pharmacies and home infusion providers actively shifting IVIg patients to subcu IG. Moving to the next slide. Our first-quarter results were driven by strong demand for our portfolio of infusion products, continued commercial execution and the dedication and resilience of our employees. As we sit here today, the fundamentals of our business remain strong.

However, there remains economic uncertainty due to COVID-19. We reported significant increases in net sales, gross profit, net income and adjusted EBITDA. Higher net sales benefited from the continued penetration into our primary end markets, along with increased clinical trial sales. Gross profit was up with a slight tick down in gross margin attributable to a $100,000 noncash charge related to the discontinuation of our Rescue VAC product line.

This is a legacy product and its contributions to our overall results were not material. Normalizing for this impact, our gross margin would have been 62% in Q1 2020. We see significant potential to expand gross margin via increased scale and manufacturing-related efficiencies. To that end, we engaged the help of a consulting firm to help us explore how we can manufacture products in a more efficient manner.

The process and this review is one component of an overall set of initiatives designed to advance us toward our financial goals included as part of our strategic plan. We operated profitably on a GAAP basis with a net income of $449,000, a more than $500,000 turnaround from the first quarter of 2019, and adjusted EBITDA improved by $400,000 to 1.3 million. On to the next slide, we are managing the business toward our strategic goals of a $50 million run rate by year-end 2022, improving our operating efficiencies to drive us toward our 70% plus gross margin goal by the year-end 2022 and generating 20% plus organic revenue growth for each year. We continue to focus on penetrating our primary end markets, both domestically and overseas, increasing our clinical trial revenue and solidifying and improving our contractual positions with our key customers, specialty pharmacies and home infusion providers.

Operationally, in 2019, we received 510k clearance from the FDA for our high flow Super 26 subcutaneous safety needle set. This limited launch was originally scheduled to occur in the first quarter. However, it was delayed due to COVID-19. We now expect to launch this new needle set later this year. We do not expect a material financial impact from this new product in 2020. However, it may be very helpful in allowing us to expand our product offering to those patients and providers that prefer faster infusions. We continue to focus on providing product support to pharmaceutical companies like CSL Behring, which manufactures Hizentra and Grifols, the makers of Xembify, which launched in late 2019. Growing sales of HIZENTRA continue to benefit the sales of our products, and we expect that new products such as Xembify, will produce positive incremental growth for KORU Medical.

Grifols is a market leader in the IVIg market, and we feel their focus on their subcu formulation validates the more widely preferred and prescribed modality of subcu infusion versus IV infusion. Our freedom system is currently involved in multiple clinical trials associated with the potential expansion of IG and development of subcutaneous therapies for other disease states. This includes a recently completed Phase III trial in the area of hematology that met its primary efficacy endpoint with a contemplated but as yet defined drug launch. We plan to continue to actively pursue these opportunities, although there may be some delays in clinical trial activity as a result of COVID-19.

On to the next slide, world events have made it imperative that we focus much of our energy on the near term. Regardless, we are keeping an eye toward the future and believe that we are well positioned to navigate current market conditions. We have a unique technology in our mechanical freedom integrated infusion system that has provided us with first mover advantages. We have significant market share, strong at strong pharmaceutical industry relationships and are supporting the migration toward at home care.

Most importantly, we are confident that our products improve compliance, enhance outcomes and deliver tangible quality of life benefits to the patients who use them. While we continue to leverage these themes, we see several avenues for long-term and sustainable growth. This includes the growing use of IG therapy, expanded use of existing therapies, increasing participation in clinical trials for new drugs beyond our current space and international expansion. I will now turn things over to Karen for a review of our first-quarter results. Karen?

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Karen Fisher

Thanks, Don. Good morning, everyone. Beginning on Slide 9, net sales rose 27% to 6.3 million in the first quarter from 5 million in last year’s Q1, with growth across our infusion product lines. We believe this growth was primarily driven by an increased utilization of our products by PIDD patients and ongoing expansion of HIZENTRA into CIDP.

Net sales for Q1 2020 also reflected increased clinical trials sales compared to Q1 2019. Gross profit in Q1 2020 rose 24% to 3.8 million from 3.1 million in Q1 2019, primarily due to increased sales volume. As Don mentioned, the decline in gross margin reflected a noncash $100,000 obsolescence reserve related to the discontinuation of Rescue VAC, as well as an increase in overtime, partially offset by some price increases that we implemented last year. Total operating expenses for Q1 2020 were stable at 3.2 million when compared to Q1 2019.

Selling, general and administrative expenses were 2.8 million or 44% of net sales compared to 2.5 million or 50% of net sales in Q1 2019. I litigation costs declined to under $100,000 in the 2020 first quarter from $500,000 in the same period last year, reflecting a decrease in ongoing legal activity with our competitor. While litigation continues, we have had several favorable rulings in the New York and Texas courts. In April, the Federal Circuit Court affirmed an earlier decision by the United States District Court for the Eastern District of Texas that granted KORU Medical’s motion for summary judgment of non-infringement against Emed.

Research and development expenses increased to approximately $300,000 from $100,000 in last year’s first quarter, reflecting increased salary and related benefits due to higher headcount as we increase our development initiatives. Net income for the first quarter was $449,000 or $0.01 per share, a $535,000 improvement from a net loss of $85,000 in last year’s first quarter. A Q1 2020 adjusted EBITDA rose 38% to 1.3 million from adjusted EBITDA of $900,000 in Q1 2019. For the first quarter of 2020, adjusted EBITDA included charges related to the discontinuation of Rescue VAC product line and the expenses related to our manufacturing expense initiatives.

On Slide 10, moving to our balance sheet. We ended the quarter with 7.4 million of cash, a $1.6 million increase from December 31st, 2019. Substantially, all of this increase was due to our March 2020 drawdown of 1.5 million on the company’s line of credit, the full amount available at that time. On April 14th, 2020, we signed a new 3.5 million revolving line of credit agreement with our lenders that extended the above referenced 1.5 million line of credit, and we subsequently drew down on the full amount available.

These actions were undertaken out of concerns about the potential impact of COVID-19. On April 20th, 2020, the company entered into an agreement with its lender pursuant to the Paycheck protection program under the coronavirus a relief and Economic security Act, providing for a loan in the principal amount of approximately 1.5 million. The loan was funded on April 27th, 2020. Additionally, on April 27th, 2020, the company entered into an agreement with a division of its lender to provide up to 2.5 million in financing for equipment purchases from third-party vendors. Referring to the cash flow. We had a $700,000 increase in inventory in the quarter to keep pace with sales growth. We continue to maintain a clean capital structure. We ended the quarter with 39.7 million basic shares outstanding and diluted share count of 44.2 million.

I also want to point out that we have not experienced any significant slowdown in customer payments to date. In this environment, our strong financial position and conservative balance sheet is allowing us to maintain good liquidity and financial flexibility, and our capital allocation priorities remain largely uninterrupted. These are uncertain times, however, and the potential impact – economic impact of COVID-19 remains to be seen. Here on Slide 11, you can see the reconciliation of net income to adjusted EBITDA, along with the metrics that comprise this calculation.

I will now turn things back to Don.

Don Pettigrew

Sorry about that. So thank you, Karen. I want to close by thanking the brave men and women who are on the front lines keeping us safe, and this includes our team, especially our production staff at KORU Medical. We send our best wishes that you and your families are safe and healthy. Thank you again for your continuing interest in coal room medical, and we can now open the call for questions.

Question-and-Answer Session

Operator

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

Alex Nowak

Don, do you believe the moment of patients from IV to subcu that you mentioned is just a one quarter benefit due to COVID? Or is COVID really amplifying a bigger secular trend unfolding here and this benefit of switching to subcu is going to have a much longer tail than potentially we even think right now. And you mentioned that – you mentioned that the pharmacies are pushing more subcutaneous drugs. But are the drug companies doing the same? Are they pushing more of their subcu portfolio during the COVID pandemic?

Don Pettigrew

Yes. Alex, thanks for the question. So first and foremost, the movement of IV patients to subcu is real. It’s very active, and I believe it’s very sustainable. When you talk about a bigger secular trend, no doubt. We’ve been seeing movement from IVIg to subcu all along. I think when you actually look at it from a patient perspective and analyze the benefits of subcu versus IV, the solution, I think, it’s pretty easy to come to that the subcu is better for most patients. And I absolutely see a longer term impact.

I think COVID-19 has put a big spotlight on what I think is best for patients, most of the time and also what is good for healthcare economics. So as a result, you’ve heard me talk about the stickiness of the business that once patients are on a certain therapy, I see this having a long-term and sustainable impact. In regards to your second question on the drug companies, I do hear and see about their movement to really supply product based on consumer demand, which is influenced heavily by physicians and patients. And with the same secular shift that you see from IVIg to subcu IG, we think that is very validated by companies like CSL Behring in their sales of HIZENTRA.

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But we also think, as I mentioned earlier in this presentation, Grifols coming out with a subcu formulation when they have the market – they have a strong market share position with their IV product, we think really validates a few things. One, the shift to subcu that they can control, but also, we feel that they have the ability or the ability to influence movement from IV to subcu. So both those questions, both are good questions, Alex.

Alex Nowak

Okay. That’s great. Understood. And April is the month that’s going to see the biggest impact here from COVID. Can you maybe talk to what you saw during the month of April, how you’re feeling about Q2 generally, it sounds like the business is resilient here and maybe some tailwind in Q2 due to the shifting in subcu. Is that the correct way to read your commentary, Don?

Don Pettigrew

Yes. As I mentioned, we’ve seen increased demand that we attribute to COVID-19. And as you – as we just talked about with the movement of IV over to subcu being sustainable, we certainly anticipate that. But in terms of trends spilling into the second quarter, we’ve definitely seen an increased demand that has spilled into this quarter. But as you’ve seen from past calls and the history of our business, we have a fairly predictable business based on patient population, and we feel that even though maybe there’s some lumpiness that could be created from something like this, the business is largely normalized with a, in my opinion, a very strong tailwind of new patients moving from IV to subcu.

Alex Nowak

Okay. Got it. And how is the launch of Xembify going in the market so far? And how is their early launch of Xembify tracking the initial launch trajectory of HIZENTRA?

Don Pettigrew

You know, that’s a great question. If you go back to when HIZENTRA launched, it was very – it was a slow, slow role, if you will, where they’re introducing a new drug and a new modality for delivering that drug with subcu therapy. So we feel they’ve done a really nice job of paving the road for setting the tone for the benefits of subcu. But Grifols is – we feel that the launch has been relatively slow, but it’s starting to pick up some momentum.

We’re super excited by the increase of supply of subcu formulations. But we feel a lot of the slow role has been tied to contract – Grifols contracting with specialty pharmacies and allocating accordingly. So we expect that to continue to pick up more momentum going forward. And frankly, I see them being part of the solution for this conversion of IV to subcu patients by having more supply in the market.

Alex Nowak

Okay, got it. That’s helpful. And then the hematology announcement was a bit of a surprise to the upside last quarter. Should we be expecting any other announcements or data releases from any of the other pharma companies that you’re working with throughout 2020?

Don Pettigrew

So what I typically do is as there’s information available, I share that. So in the last earnings call, we talked about a successful hematology trial that met its clinical efficacy endpoint. We don’t know all the details in terms of commercialization. But in a case like that one, we anticipate commercialization sometime in the next 12 months. And as there’s updates on other current – other current trials and the success of them, I will report those accordingly.

Alex Nowak

Okay. That sounds good. And then just last question for me. Just looking at gross margins sequentially. They again came under pressure in the quarter. I get there’s a onetime piece with Rescue VAC, but even backing that out, what is driving the declines in the gross margin over the last couple of quarters? And when should that pressure start to moderate?

Don Pettigrew

So as I mentioned earlier, one of the things that we’ve just announced is that we’ve invested in a consultant to improve our manufacturing efficiency. So trying to meet up – stay operational with COVID-19 and increased demand. We’ve been putting a lot of pressure on our production line and actually added a second line. So that had a contribution in terms of employees and efficiency that doesn’t necessarily match the first-line efficiency right away. But going forward, I’ll report more on what those efficiencies look like, but we’re heavily focused on cost of goods reduction, and I’ll report on those accordingly.

Alex Nowak

Okay, understood that we are in the great results.

Don Pettigrew

Thank you, Alex.

Operator

[Operator Instructions]. There are no further questions in queue at this time. I would like to turn the call back over to Mr. Pettigrew for closing comments.

Don Pettigrew

Thank you very much, Latanya. So thank you all for your time and interest in KORU Medical. I hope you’ve been able to convey our passion about our business and the opportunities that lie ahead. We’re committed to doing everything in our power to ensure that our products reach the patients that need the most.

With respect to COVID-19, we are certainly aware of the challenges and acknowledge that the situation is rapidly evolving. Still, the underlying demand for our products remains very strong, and we are confident in our long-term fundamentals. If you have additional questions, feel free to contact Karen or myself or Devin Sullivan at the Equity Group, our investor relations firm. Thank you all again, and I hope you all have a wonderful day.