Operator:

Good morning, everyone and welcome to the InfuSystem Holdings Q1 2017 Conference Call. This is your operator, John. And let me give you first to Chris Downs, Interim Chief Financial Officer. Chris Downs: Good morning, everyone and thank you for joining the InfuSystem Holdings Inc. earnings call for the first quarter of 2017. Joining me today are Eric Steen, President and Chief Executive Officer; Jan Skonieczny, Chief Operating Officer; Mike McReynolds, Chief Information Officer; and Trent Smith, Chief Accounting Officer. First, some administrative matters. The company issued a press release yesterday after the close of the market. The release is available on most financial websites. Additionally, a web replay of this call will be available on the company’s website for 30 days. The press release and associated Form 8-K were filed with the SEC yesterday as well. Except for the historical information contained herein, the matters discussed on the conference call are forward-looking statements that involve risks and uncertainties. Such risks and uncertainties could cause actual results to differ materially from those predicted by such forward-looking statements. The words believe, expect, anticipate and estimate or other similar statements or expectations identify forward-looking statements. These risks and uncertainties include general economic conditions as well as other risks detailed from time to time in InfuSystem’s publicly filed documents with the Securities and Exchange Commission. Specifically, information about risks and uncertainties that could cause the company’s actual results and financial conditions to differ from those predicted by forward-looking statements are disclosed in the company’s year end report on Form 10-K for the year ended December 31, 2016 under the heading Risk Factors and elsewhere in the report and in other filings made by the company from time-to-time with the Securities and Exchange Commission, including subsequent quarterly reports on Form 10-Q. Forward-looking statements reflect management’s analysis only as of today. The company has no obligation to update forward-looking information contained in this conference call. While discussing the company’s performance, the company will refer to certain non-GAAP measures, such as adjusted EBITDA and adjusted net income, which are not considered measures of financial performance under the Generally Accepted Accounting Principles, or GAAP. A reconciliation of the differences between non-GAAP financial measures and those measures such as adjusted EBITDA and adjusted net income and the most comparable GAAP measures are contained in today’s press release. Now I would like to discuss the financial results for the quarter. For the first quarter of 2017, total net revenues were down 4% or approximately $0.6 million to $17.7 million versus the prior year period. Note that the prior year comparable period was prior to the SE1609 announcement by CMS and the associated pricing impact on our Medicare patients. Total product sales increased $0.7 million to $2.5 million, an increase of 39% compared to the prior year period. Total net rental revenues were down 8% versus prior year to $15.1 million. Gross profit was down 15% versus prior year to $10.6 million. Operating loss was $2 million. Net loss was $1.5 million or $0.07 per diluted share versus income of $41,000 or $0.00 in the prior year period. Adjusted EBITDA, a non-GAAP financial measure, was $1.4 million versus $3.3 million in the prior-year period. Adjusted EBITDA margin decreased from 18% to 8.1%. Adjusted diluted net loss per share, a non-GAAP financial measure, was $1.4 million or $0.06 per diluted share. As of March 31, 2017, an event of default occurred under the credit agreement due to a breach in the maximum leverage ratio covenant contained in Section 6.12(a). The required maximum leverage ratio for the credit agreement as of March 31 was 2.75x compared to an actual ratio of 2.96x. The company asked for and obtained a waiver of this covenant violation which has been filed in its entirety on Form 8-K as Exhibit 10.1 to the Securities and Exchange Commission on May 11, 2017. No fee was paid to the lender associated with this waiver. The company is currently in discussions with the lender to obtain a third amendment to the credit agreement to revise the required covenants in future periods. However, we can offer no assurances that any such amendment will be obtained. However, in management’s opinion, our partners at JPMorgan Chase remain supportive of the company and are working collaboratively towards an amendment that will allow the company to continue to respond to the dramatic shifts that have occurred in our market in the recent past. With that, I would like to turn the call over to Mr. Eric Steen, Chief Executive Officer. Eric Steen: Thank you, Chris. I would like to start by confirming that our first quarter 2017 came in below my expectations. I expected lower revenue from prior year due to the CMS 1609 reimbursement change, one, expected the increase cost of amortizing our suite of electronic connectivity software solutions, including our EMR integration, EXPRESS, InfuTrack, Pump Portal and BlockPain Dashboard. Unfortunately, in Q1, we had a small decline in our direct pay rental business, and we underperformed on cash collections in our changed reimbursement environment. In February, we leveraged our IT investment with EXPRESS system with the reorganization and reduction in force in our billings and collection area. We completed the quarterly close with 25% less staff, although severance mostly offset that labor savings. We expect the reduction of salaries to be over $1 million per year starting in the second quarter. We have also taken the following corrective actions to show our core. We’ve increased our focus on cash collections by incenting our sales force to assist in contracting and collections from our clinic customers with the new direct billing model. We have shifted resources to insurance claims denial analysis and contract compliance for our commercial insurance payers. And we are outsourcing collection efforts for aged receivables for both insurance carriers and patients. While our financial performance in the first quarter was clearly a disappointment, a number of things went well that we believe will help with our results in the future. In mid-Q1, we implemented redesigned third-party payer workflows, made possible by our new IT system and connectivity with our growing customer base. The improved efficiencies of the redesigned workflows show in our completing the largest quarterly billing close in company history with 25% less billing and collection staff. Our billings per FTE increased 38% from the first quarter of 2016 to Q1 of 2017. We also reduced pending tickets by 20% as compared to the end of the previous quarter. We know from our revenue cycle management that most of the billing from the recently completed record billing close will hit cash in May and June. Total insurance gross billings increased 12% from Q1 of 2016 to Q1 of 2017. This increase is a combination of market share gain and improving billing capture made possible by our investment in state-of-the-art IT technology. We saw strong revenue growth in our newer business areas, with our non-narcotic pain management service up 25% in revenue over prior year. Additionally, we saw a 40% increase in pain management patients versus prior year, which bodes well for our pain management revenue collections in the quarters ahead. Our direct sales of disposable products was up 45% over prior year as we continue to not only rent infusion pumps, but also sell infusion pumps along with the consumable IV tubing sets that go with them. The good news about pain management and disposable sales is that there is very little churn in those markets. When we win new business, we keep it. This hasn’t been the case in our oncology outpatient infusion segment as the market is still trying to adjust following SE1609. In Q1, we welcomed 35 new facility customers. But unfortunately, we lost 12 of our current customers. Our likely share gain with new customers means restarting the insurance revenue cycle and delayed revenues as we work to process signatures and forms at 12 new facilities just to replace the ones we lost. Our G&A costs were down $300,000 from prior year despite $186,000 in severance and labor costs related to issues arising from our restatement. CapEx was well controlled at $96,000 for some maintenance pump replacements. There was an additional IT CapEx of $121,000. We will continue at this level throughout 2017. Selling costs were up over prior year, which is disappointing. This is an area where necessary corrections have been implemented to better connect our commission plans to our collective revenues. There are a lot of reasons that have made it complicated to collect cash after moving our nearly 1,800 customers to a direct billing program, including executing the appropriate documents with purchasing, legal and compliance departments with some of our nation’s largest and most prestigious health systems. Significant progress has been made, but there are still 279 facilities that haven’t completed their necessary internal processes to cut us a check. We continue to anticipate those that have not yet paid will. We will continue to focus on closing our existing fleet in those facilities that meet our requirements that allow us to operate and be compliant with our sales force incented by not only new accounts but collected revenues, improved efficiency and utilization. Going forward, we will continue to leverage our IT investment for greatest efficiency with our new workflows as our leaner billings and collection team focuses on cash collection. We will further limit selling costs and CapEx to generate cash to pay down debt and strengthen our balance sheet to take advantages of the opportunities ahead in the growing and changing infusion marketplace. At this time, I would like to invite any questions. Operator: [Operator Instructions] And our first question is from Douglas Weiss from DSW Investment. Douglas Weiss: Hi, guys. Good morning. Eric Steen: Good morning Doug. Douglas Weiss: So I guess, as you pointed out, a pretty good revenue quarter given all the changes. On the costs, there were a couple of things I just hoped you could give a little color on. On the service and supply side, your – that line item was a little higher than it’s been historically. Could you give a little detail on what’s in there and if that’s sort of a onetime kind of thing or if that’s going to be higher going forward? Eric Steen: Yes. That’s a good question, Doug. It’s an interesting thing that allows me to talk a bit about the marketplace. So big change in our model as customers, our facilities, big hospitals allow us to partner with them to take care of their patients historically haven’t had any charges because it was 100% insurance with Medicares reimbursing for ambulatory pumps. Now with the cost of those treatments now falling on the providers, whether it’s a doctor’s office or a university hospital, they are looking at our service offering differently. And as you might imagine since no one had budgeted for this, they are looking for a low cost alternative. So what this has done to us is take some of these less expensive pumps that were maybe older, less costly models, allow them to be utilized for squeezed oncology providers where there’s been a lot of reimbursement cuts, looking at anything they can do to keep cost down. And so sometimes, you know a lot about our business, we can find these older model pumps for $25 apiece in the market because they are not – have not been as popular. So we acquired a number of older pumps and put the service cost into them to make them patient-ready and compliant and to go out and serve the market share where we are the dominant player in the outpatient oncology infusion patients. And so it’s a short-term hit to the P&L for sure, and there’s a number of things like that. But when I – I guess, what I am looking more to the long term, it makes sense to me to acquire lower-cost pumps now, take a P&L hit with the service investment and then enjoy that share for years to come. Douglas Weiss: Yes, makes sense. And then, on – you have taken some steps to address the slower collection in the direct pay. Are you giving a sense of the time in – over which period you will begin to see how effective those are proven? Eric Steen: No. We see slow improvement on it. And I think it’s – we need to do a better job with cash collections. And I think with a small company, you turn on a dime and do all these direct contracts which we hadn’t done before. So not only are there customers probably looking for any excuse to delay their payments, I would look in the mirror and say our contracting requirements have been stretched with the sudden need to contract with all of these health systems, especially the larger health systems that have a lot of different departments we need to interface with. So we need to do a better job. And I think we have been so focused on getting the new IT out so we can completely redesign this business. We have just gotten started. And I think one of the things I have talked about in the past is when I got here, the business completely run on fax machines. We had a large selling organization out there hustling and picking up paperwork and a lot of double order entry internally. Now we have really looked at our internal processes and I think I see additional opportunities and selling costs as we can now leverage this IT investment which we have done the development. We have – for a small company, developed all these things. Now we have begun the amortization and you can really see in the numbers that those are the tools that are going to allow us to be able to compete more efficiently in the future in changed reimbursement, because it’s no surprise that the reimbursement change cap, it may be more suddenly or more dramatically – or timing. But we knew reimbursement changes were coming, and that’s why we developed systems that would require less people and allow us to provide a very efficient offering by being connected electronically with a large customer base. Douglas Weiss: And you always have a sequential – the first quarter is always the highest for bad debt anyway. So is what’s happening here, it’s just the normal seasonal tick up plus this additional reserve for direct pay, is that the way to think about it? Eric Steen: No, I would say a couple of things. We have got $1 million now in bad debt that we have accrued for these accounts that still haven’t paid us since the time of the change. And I think that was 257 in the quarter. So there’s $1 million now of bad debt that I would do everything we can with our team to reverse that and drive it down. And then I would also say, with all of the changes and doing a RIF and a reorg, again, sometimes in a small company, when you push on one side of the balloon, it pops out on the other. And I think some of our collections effort hurt. And what I have learned is, when we look at our NR 3 rate, which is our big multiplier on our gross billings number, it’s the – it’s a more difficult reimbursement environment, and insurance companies do whatever they can to deny even if you have a contract with them. So we need to now shift our – now that we have got our IT systems out, we can have live online information. You can now better manage our whole revenue cycle management process. So we have got changes ahead. We are working to do things more efficiently. But now that we have got the framework built, now we are going to be able to have the information to focus on our three buckets that we can collect from. Now we have got three big buckets. We have got our commercial insurance carriers. We have got our clinic customers, our direct business. But also, as healthcare changes, patients and look at co-pays and what’s happened to commercial insurance plans where most people are in, it’s higher patient deductible and co-pay. So, interestingly, I worked at our Medicaid contracting and our managed Medicaid contracting is pretty good. It’s some of our commercial plans with higher patients and we are going to get some professional help on collecting from insurance companies and patients, some of the aged receivables. So our team can focus on what you’ve got them set up to do best, which is gross billings going through our new IT system. Douglas Weiss: Alright, okay. And then, you mentioned a higher level of billings going out in May and June. So would that be reflected in the second quarter revenue? Is that... Eric Steen: Thanks, Doug, for giving me the opportunity to clarify. What I was talking about was cash. So the way the – our system still works, a lot of the gross billings that we process come in towards the end of the quarter. And it’s somewhat of a legacy of having a lot of people rounding up paperwork at the end of the quarter and faxing in the insurance information – the way the world used to work for this 30-year company. So there’s still sort of a trend of a lot of billings at the quarter. And so what I was saying with all those record billings that came in at the end of the quarter, they got multiplied by our NR 3 for our revenue. But cash collection from that is going to hit in May and June. So now we’ve got an opportunity to really focus in improving our cash collection. As we do a better job with cash, now that we’ve got this big project that’s taken so much of our resources done, we can focus on our cash collection. That’s going to help our NR 3 rate going forward. Douglas Weiss: Right. What about on the revenue line? Do you have a sense of how that was going to progress through the year or? Eric Steen: I assume our pain business, which is tiny, has seen tremendous growth. Our infusion products division is seeing growth in some of our sales of pumps and sets. So we’ll see growth in that. And then on big business, the third-party payer business, as I look at what we have done with pending and what we have done with share gain, I know the gross billings will be there. One of the things that’s sometimes hard to project is the number to use for all of our past revenue collection efforts in our NR 3, but I expect continued growth with all those factors in place. But it’s a dynamic market and things are certainly subject to change. I see a lot of changes in the market, many of them I think that will help us long term, but there is certainly short-term issues. This share exchange in the market is very expensive. Putting your pumps and supplies in one account, picking it up and yet you always seem to end a pump short at the end of it, then you’ve got to spend some maintenance CapEx on that and some of your supplies get left behind. And then you’ve got to re-sign all the doctors and miss a couple of treatments. At some point, I got to make some tough decisions about who our customers are going to be, who’s going to contract with us, who’s going to sort of play by the rules and have that be my customer base and maybe let some small amount of the share for the people that don’t think they need to pay or submit treatments information, we’ll let that share go. Douglas Weiss: Yes. And then, you – it sounds like there is – you have – I take it the $1 million cut comes out of G&A on the billing side. But it sounds like there is some opportunity to reduce cost on the selling and marketing line. Can you talk about how big that opportunity might be or is it just going to be more lined to sales or talk about... Eric Steen: Yes. Overall, there is certainly some areas now that we can reduce and we have already done some things. Our selling costs were a bit overstated for the first quarter. That’s going to turn around, but I don’t want to give a number on that at this time, Doug. Douglas Weiss: Okay. Well, thank you. That’s really helpful. Eric Steen: Okay. Appreciate the questions. Thank you. Operator: Our next question is from Andrew Walker from Rangeley Capital. Andrew Walker: Hey, guys. Thanks for taking the questions. I just wanted to follow-up a little bit on the accounts receivables. So you started talking about with Doug, but the press release mentioned you expect to collect substantially all accounts receivable. Can you give us a sense for how big the accounts receivable like kind of written off accounts receivable opportunity is? Eric Steen: In the – I think for the press release, the thing that I think I was specifically talking about from the accounts that hadn’t paid, that’s $1 million. When I look at that, there is $1 million of bad debt accrued that I believe we are going to get most of that back. And it’s going to take time, because it’s – each one of these facilities has their own story. And there may be a contract that I sent out from our offices yesterday that we think is going to get signed, but maybe the compliance department is going to come back with another question on it. But we are going to continue on those efforts. So now when I look at it from the first month that we went to direct billing, we’ve had 80% of those invoices collected. So there is still these 259 facilities that haven’t paid. If you look at the list of them, they are some of the most brand name health systems in America that I have done business with before, that I know were going to pay these invoices and each – going forward, we’re going to plan to reverse that accrual as we continue to collect from those. Another part of our AR, we also have – when you look at our bad debt, another part of bad debt is our patient receivables. And that’s one trend that we notice is more responsibility on patients. And that’s why we are focusing additional efforts on patient collections and again, the outsourcing, selected age receivables to bring that money into the company. Andrew Walker: Okay, great. And so I am kind of hearing that you have – to-date, like we are kind of 1.5 months past the quarter. You still haven’t collected any of those uncollected accounts receivables? Eric Steen: No, we have some collected some since the end of quarter, yes. Yes, absolutely. It’s – we have collected definitely. Everyday, I have a dashboard that’s setup. And one of the – when I am in the office, one of the first things I do is look at that number to get those clinics to pay and it goes up a tiny amount everyday, so – it’s progress, but it’s slow. Andrew Walker: Great. And then just following up on some things you said at – on the last call. So last quarter, you said you guided to about $7 million to $8 million of free cash flow. Are you kind of standing by that? Eric Steen: Yes, I am standing by it. There were a number of costs that hit in first quarter, so it was a bit ugly but we are going to get progressively better each quarter. We are going to generate cash, we are going to collect cash, we are going to keep costs down and we are going to pay down our debt and strengthen our balance to – so I think that $7 million to $8 million still is my target. Andrew Walker: So $7 million to $8 million of free cash flow is still the guidance. And you said EBITDA improved sequentially throughout the year. Do you think you can still do that as well? Eric Steen: Yes. Andrew Walker: Okay. And then, the press release said this is a preliminary balance sheet. I haven’t seen that on your press releases before. Can you tell me why this it’s a preliminary balance sheet? Eric Steen: And I’m going to ask Chris to address that. Chris Downs: Because of the covenant violation and the situation that we’re in related to with having received a waiver but not the full amendment that we are working on currently with the bank, the decision was made to just do the selected bank balance sheet items. However, we are planning to file the 10-Q shortly, which will obviously have the full statements. Andrew Walker: Okay, okay. No, that was my question. So I guess, it – because you haven’t done the full amendment, you can’t decide if you can put the debt as short term or long-term debt? Am I kind of thinking about that correctly? Chris Downs: That was one of the major questions that we have been wrestling with. And the decision was made to not entirely avoid the issue but simplify the question. Andrew Walker: And then so on the amendment, like it leverages a little under 3x right now. It seems like it will probably tick up a little bit this year but maybe offset by free cash flow. What’s the bank kind of asking for in the amendment? Is it an increase in interest rates? Or you are already paying down debt at a pretty fast rate, so I don’t see how you could pay that down any faster. Chris Downs: Yes. I would hesitate to speculate on what the final result could look like at this point. We are in discussions and progress seems to be made. The lender remains very supportive. They believe in the company. They believe we are on the right track and our focus now is 100% on paying down the debt to do that and to achieve free cash flow that you asked about. We are controlling the capital investment and then trying to strengthen the income statement as well. So all of that and the increased focus on cash collections, as Eric has mentioned, all contribute to improving that EBITDA number as well as reducing our debt as we go forward. Andrew Walker: Okay, great. And then, kind of less – so you guys – clearly, there’s an issue with collecting accounts receivable. I know you have made a big investment into IT. But with a big – with issues of collecting accounts receivable, I’m kind of having trouble matching that up with – “Hey, we just cut our billing and collection staff by – well, was it 25% or 33%.” So can you walk me through why you are comfortable with that? Eric Steen: That’s a great comment. Gives me an opportunity to talk again about our previous workflow where every document that we got from our customer base had pieces of paper: insurance information, physician signature, patient signature. And even though the company had some iPads, even things that were entered into iPads that turned into a PDF and order entry into 2 different systems, our billing system and then our system that did the pump. So we had a tremendous amount of manual order entry. So really, and now we have got more order entry happening with the customers. And with our big accounts, even EMR interfaces where the information comes from their electronic medical record, automatically in with no order entry. So now what we have got is a new billing team and collections team that are looking for issues in the flow of data and kind of looking for problem areas rather than just a mad scramble to order entry every piece of information and do without it. So we have got a different – we have got different roles and responsibilities, which is going to flag things for us. And we have already seen some things come in where we have got a denial, but we have got a contract in place and/or someone’s paying at the same rate. So now having less of an order entry workforce and a workforce proactively looking at the stream of information, we are going to do better on things like denial management and denial analysis and say, how can this payer that we have a contract with this paying us at this wrong rate and do a better job there. So it’s a smaller team. It’s sort of like a – I would say, before, it was a larger team with a lot of manual order entry. And now it’s a smaller team of people using state-of-the-art IT to manage the flow from these customers and look to better manage what we are billing and what we are collecting on. Andrew Walker: And just last one because we don’t hear from you too much. On the free cash flow number we are talking about, $7 million to $8 million of free cash flow, like obviously, I think people would be pretty happy with that after the Q1 results. Is that an EBITDA minus CapEx number? Are you guys including – I saw in Q1, you sold, was it $1.5 million of medical support? Are you guys going to use medical equipment to get to that free cash flow number? Eric Steen: Well, there will be some. And so we sell medical equipment two ways. We sell new devices we get from manufacturers. We buy used devices and resell that. So we certainly will be doing that. We are – I would say one thing that also generates is – I will say, we are reconfiguring our fleet. And so as opportunities come up in different areas, we might be getting more of one model of pump that is more popular for a certain segment of our customers and minimizing maybe another area that the pump is more competitive. So we have done some change in upgrading of our fleet. And we have more smart pumps than ever before. So a lot of infusion pumps now have drug libraries on and a safety feature. So we are certainly seeing the change in some of the pumps that people use. So there will be some buying and selling of the fleet to make sure we put the right model pump in the right place to satisfy our customers’ needs. Andrew Walker: Alright. Thanks for taking the call there. Eric Steen: Thank you. Operator: Our next question is from Walter Schenker from MAZ Partners. Walter Schenker: Hi, could you just provide a little more color on what’s going on competitively to cause people to turn over suppliers? You indicated you lost 12 accounts and you – I forget the number, you picked up more than that. It’s not just disruptive to you, it’s also, I would think, somewhat disruptive to people on the other side to have to change suppliers. Are people changing because they are unhappy with the equipment, because people are cutting price? I am just trying to understand why, in the service business, you are turning over – not enormous, but at a consistent meaningful rate. Eric Steen: Great question. I think what happened is that, in April, when CMS announced they weren’t going to pay for these pumps, it certainly surprised us and we went on and told the customers that. So a lot of them, their budgets are done. Where’s the money coming from? I often think about the fact that compared to the price of the drugs, this is just a tiny, miniscule percent of people’s budget. But these oncology practices have been hit with reimbursement reductions. And they are looking for ways to save money. And then this cost got shifted to them, people looked at different ways to save money. We have seen home infusion companies who are good customers on our infusion products division side and we rent pumps to, they often take care of patients coming out of oncology clinics. But because they got hit for reimbursement on not only the pump but also the drug, with the 21st Century Cures Act, we have seen some infusion – home infusion companies leave the market and allow share gain for us. So I mentioned 35 new facilities. We had a 12% over prior in billings, some of that is us filling that need. We have also had customers that are – don’t like the fact that we now must charge them for Medicare patients. That’s what we need to do. And if they are going to bill for the Medicare patients, they need to pay for the pump. And some of them are looking at the – what the lowest cost they can do, and some decide to buy a used pump or rent a pump. We have a direct competitor and there’s also some small B&E type companies that occasionally come in and see an opportunity and offer the same type of service that we have had. I – sometimes it looks, from my seat, kind of penny-wise and kind of foolish to have to in service your nursing staff and changes in processes, all to save – a lot of times, we are talking about a few thousand dollars, just a pricing difference, it seems ridiculous to me. But I certainly feel their pain in a changed reimbursement and that you have got to do whatever you can to lower their cost. But that’s what’s happening. And people are looking at more interest in low cost technology and that’s why we had some old pumps on our shelves that are now out in the world after going through our ISO certified quality department to be brought up to patient with ready specifications that are now generating revenue that weren’t before. So, there is opportunity in the reduced reimbursement world, just like there is issues with having – being difficult to collect. It’s difficult for everybody. So I think at some point here, as budgeting cycle goes, I think people will find a vendor that we’re comfortable with. We have people leave and come back. I think one thing they forget about is our 24-hour nursing service and the service culture that InfuSystem provides and taking care of our problems. And occasionally, someone who tried to save a few thousand dollars doing something gets a complaint and we are right back in again, going through the process of starting up as a new account and entering that revenue cycle management again. So there are definitely decisions to make about the churn in the market. And in today’s environment, I need to pick the places where we know are going to be good partners. And bigger is not necessarily better. In this environment, it’s finding the right partners who will work with you. So it’s a win-win for both organizations. Walter Schenker: Okay, thank you. Eric Steen: Thank you. Operator: [Operator Instructions] And I have no further questions at this time. Eric Steen: Okay. Thanks, everybody. Appreciate the questions and look forward to talking next quarter.