May 22, 2012
Operator
Welcome to the Q1 Earnings Call. My name is John, and I'll be your operator for today's call.
[Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr.
Jonathan Foster. Mr.
Foster, you may begin.
Jonathan Foster
Good morning, everyone, and welcome to InfuSystem Holdings First Quarter 2012 Conference Call. This is Jonathan Foster, Chief Financial Officer.
With me on the call today are Ryan Morris, Executive Chairman; and Dilip Singh, Chief Executive Officer. The company issued its Q1 2012 earnings press release yesterday evening.
It is posted on the company's website at www.infusystem.com. The release is also available on most financial websites.
Additionally, a web replay of this call will be available on the company's website for 30 days.
Jonathan Foster
Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those predicted by such 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.
The company has no obligation to update the forward-looking information contained in this conference call. While discussing our performance, we will refer to certain non-GAAP measures, such as EBITDA, which is not considered a measure of financial performance under Generally Accepted Accounting Principles.
Jonathan Foster
Now I'd like to turn the call over to our new Executive Chairman, Ryan Morris. Ryan?
Ryan Morris
Thank you, Jon, and good morning, everybody. On April 24, the concerned InfuSystem stockholders consisting of my fund, Meson Capital Partners, Boston Avenue Capital and Kleinheinz Capital Partners, working with the prior Board of Directors, reached a settlement that resulted in changing 5 of the 7 Board members, as well as the CEO.
Negotiating this significant change is truly a remarkable achievement for all parties involved in the process and it ultimately speaks to the calm and collected nature of the discussions, as well as everyone's desire to see InfuSystem succeed. A reconfigured Board has extensive experience in both healthcare and finance.
We have already begun to set the tone for future transparency and the importance of creating shareholder value at the top.
Ryan Morris
Our new Chief Executive Officer, Dilip Singh, enjoys a wealth of turnaround experience. The Board is confident that he will develop and implement the growth strategy and the operational initiatives to generate sustainable growth and profitability in the upcoming quarters.
Our new CFO, Jon Foster, who also has vast turnaround experience will play a key role in implementing several key policy initiatives. As Executive Chairman, I look forward to working with both the Board and the whole management team and being part of the renewed success of our company.
Ryan Morris
Though the Q1 results presented today predate our involvement with the company, I would just like to share a couple of items that highlight our philosophy of shareholder alignment and value creation. First, the newly appointed directors will receive 0 cash compensation.
Rather, they are to be compensated exclusively with options, which strike at $2.25, which was the price of the stock when we took office. Second, I, as Executive Chairman, firmly believe in this company.
Two weeks ago I acquired, through my fund, Meson Capital Partners, over 1 million shares, also at $2.25, from the former CEO of InfuSystem, who wished to make a clean break and undertake his new endeavors. I'll let our future results speak for themselves, but please know that our actions to date reflect the commitment and sincerity with which the new Board views the importance of shareholder alignment.
I'd now like to turn it over to our new CEO, Dilip Singh.
Dilip Singh
Thank you, Ryan. Good morning, everyone.
Before providing perspective on our future plans and actions, I first want to thank our InfuSystem family. What Ryan characterized as a remarkable transaction was nevertheless a stressful one for our employees.
Uncertainty will do that. Therefore, it makes me extremely proud that our employees and operational management generated important top line revenue growth in the midst of a broad and boldened management changes.
Dilip Singh
The first thing I learned in joining the company and meeting with our employees is that they take a great deal of pride in the service they deliver to our customers and their patients. And at the end of the day, that's what our business is about.
Our employees are the most important assets. Their loyalty, which I have seen in the last 4 weeks, is outstanding.
Moving forward, let me share with you our goals as we undertake our mission. We intend to address issues and opportunities in our business model, strategic, operational and financial whenever they need addressing.
Secondly, restore and build the company's credibility with investors, employees, business partners, customers and all our other stakeholders. And thirdly, create solid long-term value for a company we all deeply believe in.
Dilip Singh
I firmly agree with Ryan's statements regarding our dedication to shareholder alignment and creating value. I place a high priority on developing operating plans focused on improving performance in our core business areas and further fully integrating and realizing the operating synergies attendant to the company's acquisition of First Biomedical Inc., FBI.
Initially, we are focused on stabilizing the company and maximizing cash generation, thereby establishing a sound foundation to sustain the company over the long term.
Dilip Singh
You can also expect to see these cost saving initiatives in the near future, including some that are already in effect. These operational items are the first steps in implementing a broader strategy designed to achieve long-term sustainable growth and profitability.
Simply put, we want to be the supplier of choice in the markets we serve. Our goal is to enhance customer service solutions that make it easier for various partners, channels and customers to rent, lease or buy new and reconditioned funds with just-in-time inventory, which is essential for the marketplace.
Dilip Singh
There clearly are a number of other significant onetime and re-occurring opportunities for organic growth as well, as we enter the other vertical market disciplines and in time, expand our footprint globally. We look forward to sharing some of these opportunities with you in the very near future.
Dilip Singh
Jon Foster will discuss Q1 results in great detail momentarily. Suffice to say, we are pleased to report meaningful revenue growth.
Q1 revenue was $14.3 million, up 11%, or the same percent last year. EBITDA exceeded $1.6 million.
This is a good start to the year, but we hope to do even better in the future.
Dilip Singh
In conclusion, I'm encouraged by our employees' enthusiasm and our top line revenue growth in the first quarter of 2012. As we move forward in 2012 and execute on our operation plans and cost saving initiatives, I'm excited about the company can grow the top line revenue while improving EBITDA and, ultimately, the bottom line.
Dilip Singh
With that, I'll turn the call over to Mr. Jonathan Foster, who will discuss our financial results in more detail and after which, we'll open the call to your questions.
Jonathan?
Jonathan Foster
Thank you, Dilip. Good morning, everyone.
For the first quarter of fiscal 2012, as Dilip just mentioned, revenues were up $1.4 million, or 11%, from the first quarter of 2011 to $14.3 million. This is due to 3 factors.
First of all, we're taking business at new, larger customer facilities with high patient counts. Secondly, revenues generated from continued penetration into our existing customer facilities.
And lastly, the resolution of the oncology drug shortage, which makes our pump delivery system available to more individuals in need.
Jonathan Foster
Moving on to gross profit. This was $10.4 million for the first quarter of fiscal 2012, up 15% from $9.1 million in the prior year period.
The increase in revenues was the main factor for the $1.4 million increase in gross profit between the periods. Gross margin was 73% versus last year's 70%, up slightly.
Two factors contributed to the increase in gross margin. First of all, we've improved vendor contracts, which contributed to the improved margins, and secondly, we had a slight decrease in our depreciation.
Jonathan Foster
Turning to SG&A. This was $10.9 million for the first quarter of 2012, or up 24%, from $8.8 million in the prior fiscal period.
As a percent of revenues, SG&A was 76% for the latest quarter compared to 62% in fiscal 2011. 2011 numbers excluded non-cash intangible asset impairment charges.
The major factor contributing to the increase of $2.1 million in SG&A was that we had professional fees and other expenses of $1.5 million related to the activities for the settlement agreement entered into with the concerned stockholder group, as described in the 8-K we filed on April 26.
Jonathan Foster
Finishing over the income statement, we reported other loss of approximately $600,000, consistent with the $0.5 million loss a year ago, the slight difference being due to higher interest expense.
Jonathan Foster
Our income tax for the quarter was a benefit of $197,000 compared to a benefit of just $146,000 from the prior period. All of this led to a net loss of $915,000, which is equal to $0.04 per diluted share, versus last year's first quarter net loss of $171,000, equal to $0.01 per diluted share.
Jonathan Foster
EBITDA for the first quarter of fiscal 2012 was $1.6 million compared to $2.4 million a year ago. Excluding the onetime fees I just mentioned, EBITDA would have been $3.1 million.
We use EBITDA as a means to measure the company's operating performance. We have a full reconciliation of EBITDA, a non-GAAP measure, to net income in our press release issued yesterday evening.
The company defines EBITDA as earnings before interest, taxes, depreciation and amortization, and is, as you know, an internationally used indicator for a company's operating performance.
Now let's move on to our financial condition. At the end of the quarter, we had a cash balance of 0 as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability on our revolving credit facility of $2.4 million. Subsequent to the period ended March 31, 2012, we've also entered into the Fifth Amendment to our credit agreement, which focuses on the following key areas
the changes in the composition of our Board of Directors as a result of our recent changes does not constitute a change of control under the credit argument; secondly, we changed the maturity date to July 1, 2013; it also permits exclusion of certain expenses pertaining to the recent settlement with the concerned stockholder group; addition of a minimum liquidity covenant of $1.5 million at the end of each day and $2 million at the end of each month; and lastly, a monthly ticking fee of 1% of our outstanding term loan and on our revolving credit facility beginning August 2012.
Now let's move on to our financial condition. At the end of the quarter, we had a cash balance of 0 as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability on our revolving credit facility of $2.4 million. Subsequent to the period ended March 31, 2012, we've also entered into the Fifth Amendment to our credit agreement, which focuses on the following key areas
Now we do intend to refinance our debt prior to maturity in order for us to maintain sufficient funds for our operations and alleviate the burden of these additional fees. In addition, we believe the combination of our normal cash and revolving credit facility is sufficient to fund our current operations or working capital needs for the next 12 months.
Now let's move on to our financial condition. At the end of the quarter, we had a cash balance of 0 as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability on our revolving credit facility of $2.4 million. Subsequent to the period ended March 31, 2012, we've also entered into the Fifth Amendment to our credit agreement, which focuses on the following key areas
We ended the quarter with accounts receivable days sales outstanding, DSO, of 53 days, which increased over this time last year due to the increase in revenue that we talked about earlier coming late in the quarter. Our days sales in inventory increased to 25 days due to our particularly used pump purchases.
Our allowance for doubtful accounts was up slightly at $2 million but improved as a percent of revenues from 14.8% to 14.1%. Overall, networking capital sit at $1.7 million, or 12% of revenues, versus $1.3 million, or 10% of revenues a year ago.
Now let's move on to our financial condition. At the end of the quarter, we had a cash balance of 0 as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability on our revolving credit facility of $2.4 million. Subsequent to the period ended March 31, 2012, we've also entered into the Fifth Amendment to our credit agreement, which focuses on the following key areas
Net cash provided by operations for the quarter was less than $100,000, down $2 million from the prior year period due to increased costs as described earlier for SG&A. Cash used in investing activities for the quarter was $1.3 million compared to $2.4 million in the prior period.
The decrease is primarily due to a decrease in capital expenditures, which included a small asset acquisition in the first quarter of 2011. Cash provided by financial activities for the quarter was approximately $400,000 compared to $1.5 million used in the prior year.
The increase is primarily related to withdrawals in the revolving credit facility of $2.5 million. All this leads to a decrease of about $800,000 in our cash balance.
Now let's move on to our financial condition. At the end of the quarter, we had a cash balance of 0 as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability on our revolving credit facility of $2.4 million. Subsequent to the period ended March 31, 2012, we've also entered into the Fifth Amendment to our credit agreement, which focuses on the following key areas
In summary, as Dilip stated earlier, the latest quarter continued our growth in revenues and excluding the onetime charges that we've mentioned, EBITDA as well. With that, let me turn the call back over to Dilip for a few brief moments.
Dilip Singh
Thank you, Jon. Let me conclude by reminding and, once again, sharing with you, all the 3 key objectives we have set for myself and my management team and the employees of InfuSystem.
We intend to address issues and opportunities in our business model, restore and build the company's credibility and create solid long -time sustainable growth and profitability. With that, we now welcome questions from all of you and once again, thanks for joining us on this call.
Operator
[Operator Instructions] Our first question comes from Dennis Van Zelfden from Brazos Research.
Dennis Van Zelfden
Before he left, Sean hired an investment banker to explore ways to increase shareholder value, which included, I think, a potential sale of the company. Can you update us on that status?
Dilip Singh
Yes, this is Dilip Singh. I will be more than happy to update you on that.
We are continuing with Houlihan Lokey to consider the strategic alternatives and present that to us. As we go ahead and review their findings, we'll be more than happy to make the announcement in terms of the next steps, but I can tell you that there are no definite conclusions which have been drawn at this time.
Dennis Van Zelfden
Okay. But in your speech, you had talked about a lot of avenues for growth and so on and so forth.
Does that mean, though, that you would not sell the company if someone offered you a reasonable price?
Dilip Singh
So again, Dennis, the Board and the management team is focused on maximizing the shareholder value. Houlihan Lokey continues to advise us in the strategic alternatives with respect to this.
And as I said before, no definite conclusions have been drawn at this time to the extent that any changes in the company's strategic posture or in Houlihan Lokey's role, we'll be more than happy to make the announcement and update you. But at this time, we are considering all the strategic alternatives available and are being discussed with Houlihan Lokey.
Dennis Van Zelfden
Okay, fair enough. In the press release you talked about you have already implemented some cost cuts.
Can you tell us about any potential annual savings from that?
Dilip Singh
Here is what we are doing. We are focusing on optimizing the current operations and looking for opportunities in the cost savings area.
We are hands-on and already met with our management team and I define those initiatives at this point in time. The areas which we're looking is to seek opportunities to create synergies and integrating activities where possible, but the details of the cost savings and growth opportunities we'll be more than happy to share with you in the near future, most probably at the end of the second quarter or some of them maybe towards the end of the third quarter.
Dennis Van Zelfden
Okay. Last question.
You also mentioned in the press release that there may be some more tag-ins of proxy-related expenses in the second quarter. Do you know about how much that would be?
Dilip Singh
Jon?
Jonathan Foster
Well, yes. Roughly, I think as we mentioned in the Q that there's going to be roughly $2.4 million in expenses that we currently estimate.
That relates to expenses, legal expenses, professional fees and severance costs. And we'll update that number in the second quarter.
Dennis Van Zelfden
That's the amount in the second quarter or is that the total amount over the 2 quarters?
Jonathan Foster
No, that would be the second amount in the second quarter.
Operator
Our next question comes from Michael Potter from Monarch Capital Group.
Michael David Potter
I had a couple of questions and I just want to continue with the prior caller's last question. We had $1.5 million in, kind of, proxy-fight-related cost for Q1, is that correct?
Jonathan Foster
That's correct.
Michael David Potter
All right. So all in, we're going to talk -- we're going to be in about $4 million?
Jonathan Foster
Well, that's our current estimate, $1 million of that deals with the former CEO's severance agreement. These are expensive undertakings on both sides of the fence and right now we're going through the invoice and talking to our professional fees and we're doing our best to negotiate those downward in the best interest of the shareholders.
Michael David Potter
Seems like an awfully, awfully high number for a company of this size.
Jonathan Foster
Speaking as a CFO, yes, I would definitely like to see the number lower, but from the standpoint of going through all the invoices and dealing with all the professionals that we're involved, it was a very complex process.
Michael David Potter
Okay. We have an interim CEO currently.
Can you bring us up to date or tell us what the plan is for a search for a permanent CEO?
Ryan Morris
Michael, this is Ryan Morris, I'll go into that. So Dilip agreed at first to be on for 6 months and this is the current commitment that we have right now, but it's not like we have a fear that Dilip is going to bail on us after 6 months or anything like that.
So really, we're going to evaluate things as time goes by. Certainly at the moment, I would say Dilip is exactly what this company needs in terms of bringing in some operational discipline at the top.
And so this is the perfect solution right now, but, certainly, as we determine what the best course for the company is over the next 4 or 5 months, that's something that we're going to be considering. But there's no search going on at the moment, but we'll update you whenever we get to that point.
Michael David Potter
Okay. You mentioned here with regards to having a just-in-time inventory plan.
Do we have an inventory issue with our current line of products?
Dilip Singh
Michael, this is Dilip. No, but the market's demand are increasing in terms of reducing the inventories on their shelves and we want to make sure that we can optimize our inventory management systems, the process and procedures and provide proper training to our personnel here that we should be seen as a leader that when the market needs any kind of pump, then we become the logical choice for our customers in terms of providing them the depth and the breadth of the inventory of these pumps from off-the-shelf availability for InfuSystem.
Michael David Potter
What is our current turnaround, assuming the customer does not have the appropriate pump on their shelf?
Dilip Singh
We can turnaround the pumps in 24 hours, literally.
Michael David Potter
Okay. So, I mean, realistically, is it realistic for us to reduce that shipment process to less than 24 hours?
Dilip Singh
Not really. But also the inventory process really starts, Michael, from the time we actually put the purchase order for our goods and put them on our shelves and then move them from our shelves to on a consignment basis and the third-party payer model to the shelves of our customers and getting them back here and cleaning them and recalibrating them and bringing them out again.
If you look at it, it's a pretty complex inventory process, which we are trying to optimize.
Michael David Potter
You mentioned in multiple times your kind of three-pronged approach of what you're looking to achieve in the near term here, and you mentioned credibility multiple times which is terrific. Obviously, a great deal of work needs to go into that.
What credibility or what's your plans for gaining credibility with the shareholders, who obviously, like yourselves, have had to endure this what's going on with this company for several years. Dilip, do you plan to get out there on the road and meet with the shareholders anytime soon?
Dilip Singh
Well, Michael, again, thanks for asking that question. I think credibility comes in threefolds.
One is full transparency and fairness in terms of informing and communicating with the shareholders and stakeholders, which are the employees of the company and customers and partners. Secondly, no surprises and give the news as it is, as sometimes it's good news, but sometimes it could be a challenging news.
And third is coming to know the shareholders and informing them of -- yes, answer is yes to your question that I would definitely like to meet the shareholders and the stakeholders. I have met all the stakeholders here which are my employees, next is to go after and meet the customers and partners and then concurrently I'm not putting the shareholders, whose asset this company is, in the last in the queue, but definitely meet with them also.
But transparency, total transparency, fairness, on-time availability of information, open channel for providing the information and letting them know the good or the bad news.
Operator
Our next question comes from Joe Munda from Sidoti & Company.
Joseph Munda
Just real quick, on the last call they talked about the drug shortages affecting overall revenues. You guys still experiencing that?
Jonathan Foster
From a standpoint of our customer base, no, we're not seeing that.
Joseph Munda
Okay. And then just to follow up on the last caller, you guys expect another $2.5 million, you said, in legal expense in the second quarter.
Jonathan Foster
That also includes $1 million of severance to the former CEO.
Joseph Munda
Okay. Is it going to end in the second quarter or do you expect further charges to continue throughout the year?
Jonathan Foster
From a standpoint of -- that should be the meat of it. I don't really expect much bleeding into the third quarter.
Joseph Munda
Okay. And my last question is in terms of the gross margin, is this a sustainable level going forward or is this a one-off scenario?
Jonathan Foster
I think it's sustainable. Now in all of the health care business, there is continuing pressures from a standpoint of bidding and negotiating insurance contract.
There's always pressure from that standpoint. That gets back to what Dilip mentioned earlier, where we've got to look internally to optimize on cost savings and inventory turnover.
So it's a continuous game.
Operator
[Operator Instructions] Our next question comes from Boris Peaker from Oppenheimer.
Boris Peaker
I just wanted to know what percentage of your pump use is for primary human colorectal cancer? Seems like that would be, probably, the majority but I just wanted to know if you know the number.
Jonathan Foster
Yes, well, I would say we're north of 75% of that number. For competitive reasons,I don't want to give the exact number, but we're north of 75%.
Boris Peaker
And do you discuss new kind of treatment paradigms with the physicians regularly? I'm just curious to know what their thoughts is of Xeloda in the near term when it becomes a generic drug.
Ryan Morris
So Boris, this is Ryan. I mean this is certainly a question that I looked at a lot before making the investment here.
I mean, you don't want your reason to exist just to disappear. Xeloda has actually been in the market for, I think, about 10 years now and it has -- it had relatively stable market share.
I think they've actually been shifting their marketing dollars more towards breast cancer treatment now and that's where it's been growing. My understanding on when it becomes generic, and that was a concern of mine too, was that I thought with experience over 10 years, it should become a generic relatively soon.
My understanding is that they've actually been doing some tweaks to the drug or adding other ingredients over its lifetime and as such, extending its patent life. And so I don't believe it actually becomes generic for quite a long time, although I could be mistaken on that.
But I believe that's the case. It doesn't seem to be the trend.
Boris Peaker
I'm just curious to know, maybe we can take it off line because it is going to be generic within a year if I don't remember the date myself, so I'd just be curious to know, at least, the research that you've done in colorectal cancer for Xeloda. Bbut speaking beyond colorectal cancer, are there other indications or uses for your pumps that you see in the near future to expand the market outside of colorectal cancer?
Dilip Singh
Boris, this is Dilip. We are considering other vertical markets and building a strategy around it and hopefully by the end of the second quarter when we get into that call, we'll be able to discuss more about the areas, which we are entering because at this stage, we cannot tell you more because of competitive reasons.
But yes, we are definitely considering the use of the pumps in other vertical health care markets.
Operator
Our next question comes from Dennis Van Zelfden from Brazos Research.
Dennis Van Zelfden
Just one follow-up question here. Does Meson or anyone else there contemplate purchasing stock from any of the other former directors or officers like you did with Sean?
Ryan Morris
This is Ryan. So as part of our settlement agreement, where we changed 5 of the 7 Board members, there was this standstill at 5%.
So I purchased the maximum number of shares that I could purchase under the standpoint. It was 4.99% or something like that, and so I currently am tapped out from that point of view.
Other members of the group certainly could, if they choose to, which would be Boston Avenue and Kleinheinz, but I'm not allowed to enter the settlement agreement.
Operator
[Operator Instructions] We have no further questions at this time. Do you have any final remarks?
Dilip Singh
Yes. This is Dilip.
On behalf of Ryan and Jon here and my team, we thank you for joining the call. I'd like to extend an invitation to all the shareholders, either on this call and who are not here, to join us for our annual meeting of stockholders, which will be held on Friday, May 25, 2012, at 31700 Research Park Drive, Madison Heights, and that meeting is commencing at 10:00 a.m.
So please, this will be good opportunity to meet some of you and have further discussions on the kind of important questions which -- and very good questions, which you all raised during the call. Once again, thank you all and look forward to seeing you individually.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.