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InfuSystem Holdings (NYSEMKT:INFU)

Q2 2013 Earnings Call

August 13, 2013 9:00 am ET

Executives

Eric K. Steen - Chief Executive Officer, President and Director

Jonathan P. Foster - Chief Financial Officer and Principal Accounting Officer

Janet Skonieczny - Chief Operating Officer, Compliance Officer and Privacy Officer

Analysts

Joseph P. Munda - Sidoti & Company, LLC

Michael David Potter - Monarch Capital Group, LLC

David Cohen

Operator

Good morning, everyone, and welcome to the InfuSystem Holdings Second Quarter 2013 Conference Call. My name is John, and I'll be your operator for today's call.

On this call today is Mr. Eric Steen, Chief Executive Officer; Jonathan Foster, Chief Financial Officer; and Jan Skonieczny, Chief Operating Officer.

First of all, let me get some administrative matters out of the way.

The company issued a press release this morning. The release is available on most financial websites. Additionally, a web replay will be available on the company's website for 30 days.

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 the InfuSystem's publicly filed documents. The company has no obligation to update the 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 EBITDA, which is not considered a measure of financial performance under Generally Accepted Accounting Principles.

Now I'd like to turn the call over to Mr. Eric Steen, Chief Executive Officer.

Eric K. Steen

Good morning, everyone, and thank you for joining the InfuSystem Holdings' second quarter earnings call.

This is Eric Steen, Chief Executive Officer, and with me today are Jan Skonieczny, Chief Operating Officer; and Jon Foster, Chief Financial Officer.

I want to touch on 4 things in today's call: our second quarter performance, how we are leveraging technology to better serve our patients and provider customers and how we are growing organically and expanding into new market segments with products and services that have the potential to drive accelerated growth. I'd also want to comment on the take-private attempt. The second quarter was another quarter of profitability and significant progress, with revenue of $14.7 million, up 4% over the second quarter of 2012. In the second quarter, we also improved our connectivity with customers through the rollout of several new iPad features. We made progress on our connectivity plans and are already working with several key partners that will allow us to share data electronically with our provider partners. Mike McReynolds hit the ground running in his first quarter as Chief Information Officer, and made several key improvements on how we connect with our customers. Mike implemented iPad quick start that allows our customers to more quickly enter treatment dates and this, in turn, provides us with more timely information for billing. We are improving internal processes that will lower our cost of providing customer solutions. We have recently implemented internal process improvements that will lower our cost, including doing more work in our local branches, to be closer to our customers and streamline order processing. Jon Foster and I reached an agreement for him to continue as our CFO. Jon brings experience and stability to the finance team. I look forward to continuing our productive working relationship. Jon is leading his team in an extensive activity-based costing project to allow us to better understand each customer's profitability. We have expanded into new segments and products, like smart pumps in the long-term care market, and ambulatory pumps for post-surgical pain. We added several new payor contracts in the quarter, and we've added over 900 pumps to our oncology fleet in the first 6 months of 2013. Combined, the new pumps and new payor contracts help lead to a 5% increase in rental revenue compared to prior year. In the coming quarter, we will expand pump service and recertification capabilities with a new Houston pump service center and an expanded Los Angeles pump service center. CMS has just announced an expected 0.8% fee schedule increase for 2014. Jan Skonieczny will provide additional details during the Q&A.

It is management's opinion that competitive bidding may create opportunities for those companies that are efficient enough to capitalize on them. InfuSystem is the most cost-effective model to deliver infusion therapy at home as an extension of in-clinic infusion therapy. In the Affordable Care Act future, it will be important for organizations like CMS to support the most cost-effective delivery of medical care, and the patients' home will continue to grow as a place for treatment of multiple therapies and disease states.

Year-to-date, direct pump sales to providers and other brokers were down due to some opportunistic sales that occurred in the first half of 2012. Management projects that these same types of sales will be repeated in the second half of 2013 for a forecasted year-over-year increase of direct pump sales. Over this past quarter, I've had the pleasure of interacting with private equity and investment banking firms, and also with a special committee of the Board of Directors of InfuSystem Holdings as a result of Chairman Ryan Morris's interest in a take-private transaction. I want to thank those that were interested and invested in the process. The continued success of the InfuSystem model, combined with the uncertainty of a changing reimbursement landscape makes any valuation analysis difficult. The management team and the Board of Directors, led by Chairman Morris, are now looking forward to taking care of our patients and providing return for those shareholders who have entrusted their capital in our efforts to promote patient safety, patient recovery and convenience. The board is recommending changes to the option plan that are an improvement from a shareholder perspective. These changes include no reprice, no tax gross up and no options granted below current share price.

In summary, I'm pleased with our ongoing efforts to improve our customer connectivity that provide convenience, safety and efficiency for our patients and partner providers, with our improvement of internal processes that will lower our cost of providing customer solutions and our efforts to expand into new segments and products.

Jon, please take us through the numbers for the quarter.

Jonathan P. Foster

Thank you, Eric. Total revenues for the second quarter of 2013 were $14.7 million, up 4% compared to $14.1 million for the quarter ended June 30, 2012, primarily in rental revenues. Total revenues for the 6 months ended June 30, 2013, were $29.4 million, a 3% increase compared to $28.4 million for the same prior-year period. The increase in revenues was primarily related to a 5% increase in rental revenue compared to prior year periods. Sales revenue was down 5% from prior year for the second quarter, and down approximately 9% from prior year-to-date period. The increase in rental revenues was primarily related to the addition of larger customers, increased penetration into existing customer counts, the increase in the colorectal cancer and other cancer patients treated with the company's services and the continuation of the revision to claims processing guidelines by a major group of third-party payors.

Gross profit for the 3 months ended June 30, 2013 was $10.3 million, which was consistent with the same period in the prior year. It represented 70% of revenues in the current period compared to 73% in the prior year. Gross profit for the 6 months ended June 30, 2013, was $20.8 million, which was also consistent with the same period in the prior year. It represented 71% of revenues in the current period compared to 73% in the prior year. The decrease in gross margin as a percentage of revenue in 2013 reflects the decrease in average direct payor rental rates, a competitive response. For the quarter ended June 30, 2013, our selling and marketing expenses were $2.5 million, which was consistent with the second quarter of 2012. For the 6 months ended June 30, 2013, selling and marketing expenses were $4.9 million compared to $5.3 million, a 7% decrease compared to the same period in the prior year. The decrease in selling and marketing expenses was mainly attributed to lower travel, entertainment and compensation costs. Selling costs, year-to-date, represented 17% of revenues versus 18% in the prior year. During the 3 months ended June 30, 2013, our general and administrative expenses were $5 million compared to $6.1 million for the same prior-year period. General and administrative expenses have decreased from 44% to 34% of revenues for the second quarter of 2013, compared to the same period in the prior year. The decrease was primarily attributed to prior year cost of $2.4 million, pertaining to the additional legal, accounting and outside service fees as a result of the special meeting, changes in the compensation of the Board of Directors and severance costs associated with a settlement agreement, offset by previously recognized stock compensation expense of $1.3 million.

During the 6 months ended June 30, 2013, our general and administrative expenses were $10 million compared to $12.4 million for the same 6-month period in 2012. The decrease between these periods was primarily related to prior professional service and other costs for the Concerned Shareholder Group, which totaled approximately $2.3 million; severance payments for a former CEO amounted to $1 million; $0.6 million was recorded during the 3 months ended June 30, 2012 for retention payments to key employees; and $1.3 million of previously recognized stock compensation expense was reversed due to forfeiture. During the last 6 months, we experienced $0.5 million in onetime costs associated with the recently ended strategic alternatives and transition cost. So on a comparable basis, normal G&A costs were down from $9.8 million to $9.5 million for the 6 months ended June 30, 2013, compared to the prior-year period.

During the quarter ended June 30, 2013, our total Other expenses were $0.9 million compared to $1.2 million in the same prior-year period. During the 6-month period ended June 30, 2013 and 2012, it was $1.5 million compared to $1.8 million. The decrease during the 3- and 6-month periods was mainly attributed to increase in interest expense of $0.2 million and $0.5 million due to the cost of the new debt facility, offset by prior year loss and extinguishment of debt of $0.6 million during the second quarter of 2012. In addition, during the first quarter 2013, we received $0.3 million in cash proceeds when a mutual insurance company we maintained a policy with was acquired, and cash payments were dispersed to eligible members.

One of the questions we've been asked by investors in the past has been on pump utilization. In fact, in the last conference call, we promised to take a look at how to discuss this with shareholders. And we have. With the added information in our financials showing the composition of fixed assets, combined with the rental revenue on the face for [ph] income statement, I believe we have a good measurement to discuss with investors. Rental revenue per each dollar invested in medical equipment in service or, technically speaking, at fixed asset turnover ratio or as I'm going to call it, our rental revenue ratio. I know it's a mouthful, but I think you may find this helpful in understanding one of the ways we look at our rental business. This ratio takes our rental revenue both from third-party payor and direct payors on an annualized basis for the quarter, and is divided by the current historical cost for a rental fleet as seen in the notes on the financial statements or the 10-Q, resulting in a ratio reflecting the annual rental revenue dollars for every dollar invested in our rental fleet. This gets to the meat of our rental business, taking into account just not utilization but also pricing.

Looking at the second quarter of 2013, we experienced a rental revenue ratio of $1.54. This compares to $1.54 in the previous quarter and $1.56 for all of 2012. This decrease from 2012 show signs of some competitive forces in our direct payor business. Another factor pushing the rental revenue ratio down 1% from the prior year is that we have increased our rental fleet by $1.3 million since December. So timing of additions is a factor. This pace of increase in our rental fleet is on par with 2012's full year increase of $2.5 million. All this sets a good foundation for our rental business going forward.

As of June 30, 2013, we had cash and cash equivalents of $0.1 million and $5.1 million of availability on the credit facility compared to $2.3 million and $4.7 million, respectively at the end of 2012 during the first 6 months of 2013. We paid down $2.5 million in total debt. Cash generated by operating activities for the 6 months ended June 30, 2013, was $2.2 million compared to $2.3 million for the 6 months ended June 30, 2012, generally unchanged. Although net income has significantly improved from a year ago, increases in accounts receivable offsetting any cash improvement at June 30, 2013, when compared to the prior year. Adjusted EBITDA for the second quarter of fiscal 2013 was $3.3 million compared with $3.6 million in the year-ago period. For the 6 months ended June 30, 2013, adjusted EBITDA was $7 million, which was consistent with the same prior-year period. We used adjusted EBITDA as a means to measure the company's operating performance. We have a full reconciliation of adjusted EBITDA and non-GAAP measure to net income or loss in our press release issued this morning. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization. Net working capital days improved 4 days for the 6 months ended June 30, 2013, compared to December 31, 2012. We experienced a decrease from 47 to 43 days, mainly due to better management of accounts payable. Without consigned inventory, which I'll discuss in a moment, we would have achieved 40 days. The detail is broken down as follows: we ended with accounts receivable days sales outstanding, or DSO, of 58 days compared to 52 days at December 31, 2012. This increase is due to timing of billings in June. Our days sales in inventory, or DSI, remained consistent at 8 days. Our days sales in medical equipment held for rental or sale increased from 16 to 19 days due to a mainly unique consignment arrangement of $0.5 million of pumps. We do not pay for these pumps until we sell them, I wish we had all of our inventory on this type of an arrangement. But such arrangements should aid in increasing pump sales. Day sales and accounts payable increased from 13 to 24 days due to tighter cash management to vendor terms. This figure does not include the liability consignment pumps. Eric?

Eric K. Steen

Thank you, Jon. In the third quarter, we expect organic growth to continue by capitalizing on our growing number of payor contracts and our growing pump fleet investment. We will continue to grow in our new segments and therapies. We will open a Houston pump center, saving $250,000 per year in air shipments of pumps.

Going forward, we will be using the cash we generate to buy pumps, invest in IT and to pay down debt. Year-to-date through June, we've paid down debt by $2.5 million. Second half of the year should be a similar amount, mainly dependent on the opportunities we see to expand the pump fleet and to grow market share of all infusion therapies. Now that the take-private is behind us, we will be taking a more proactive approach to Investor Relations, and I look forward to meeting and speaking with as many investors as possible.

And now we look forward to answering any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Joe Munda from Sidoti & Company.

Joseph P. Munda - Sidoti & Company, LLC

Real quick, in the release, you said rental revenue obviously up 5% due to penetration of existing customers and the addition of new customers. Can you give us a sense of how many new customers you've added in the quarter?

Jonathan P. Foster

Joe, the best measure is the number of pumps we put out in the field. Because when you talk customers, you could have 1 customer that's a 5-pump facility, you have 1 facility that is 150-pump facility. And as Eric mentioned, and as I've mentioned, we only buy pumps when we need them. So we've added $1.3 million of pumps, that's a good strong number that is consistent with the pace that we had in 2012. So we're very happy with the growth that we're seeing in the third-party payor and also, the direct payor rental business.

Joseph P. Munda - Sidoti & Company, LLC

That was year-over-year you added $1.3 million or sequentially, quarter-over-quarter?

Jonathan P. Foster

That's just since the year end of 2012.

Joseph P. Munda - Sidoti & Company, LLC

Since year end. And what's the size of pump fleet currently?

Jonathan P. Foster

We're around the 24,000 mark. I don't have that number exactly in front of me, but it's still -- I think it's over that now.

Janet Skonieczny

Yes, that's just --

Eric K. Steen

It's closer to 25,000. And that's just for the oncology fleet.

Janet Skonieczny

Right.

Eric K. Steen

Yes.

Joseph P. Munda - Sidoti & Company, LLC

Okay. Jon, you made some interesting comments on the rental revenue ratio. Can you -- you went through it pretty quick. Can you, I guess, walk me through that one more time? Maybe show me how you --

Jonathan P. Foster

Exactly, I think we've had a lot of questions from you and -- in our discussions and also, from other investors, on utilization. And utilization, from one company to the next, depending on how they define it, can vary. And then also, if we ever wanted to change our utilization percentage for operational purposes, then, we'd have to be explaining it to the investor community on a technical basis. So we were trying to find something that's very much out in the open. And it's also one of the things that we'd look at internally, and that is simply, from a pure accounting point of view, it's a fixed asset turnover ratio. You're taking your rental revenue, divided by your cost of your fixed assets. And if you go back, looking at our 10-Q, the changes we made last year about breaking out our fixed assets into medical equipment in service, meaning that, that is medical equipment that is -- it's been rented. Whether that is out in the -- at a customers' office or facility or hospital; or it's been rented before, but it's back in our, what we call, our administrative fleet. So that includes the cost of equipment that is sitting unutilized. So if you do that and you take your rental revenue an annualized basis, divide it by the cost, not the net depreciated value, not the net book value, but the full historical cost, you're seeing that we experience rental revenues of $1.54 for every dollar that we invest in medical equipment in service, of every pump that we put in into our rental fleet. And I think that's also have given you data on the third-party payor and direct payor combined.

Joseph P. Munda - Sidoti & Company, LLC

So it's almost like an ARPU, basically, like an average revenue per pump?

Jonathan P. Foster

Exactly. Exactly.

Joseph P. Munda - Sidoti & Company, LLC

Okay...

Jonathan P. Foster

Joe, let me just -- the question you asked about number of new customers, and it gets hard. But I will say this, there's at least 40 new locations that we have pumps into producing revenue for us now. And that's on both sides of the business. Not just -- the 5% is both our own patients, where we've got more pumps out there taking care of our oncology patients, but then, we've also been growing with some of our large provider customers like National HomeCare accounts and we're providing pumps to multiple of their locations. So I think that's sometimes why we measure the number of pumps. But I do want to let you know we've got a lot more InfuSystem pumps in a lot more facilities than we did.

Jonathan P. Foster

Joe, you asked one of the questions on, specifically, on the pumps. The total number of pumps by both third-party payor and direct payor of 45,000. And roughly, as I mentioned, about 24, 25 of that is on the third-party payor side.

Joseph P. Munda - Sidoti & Company, LLC

Eric, you talked about the cash that -- the generation of free cash flow here. You talked about cash to buy pumps, as well as pay down debt. Can you give us some sort of breakdown as maybe 2/3 of that is going to go to buy pumps and a 1/3 to debt? How should we look at that going forward?

Eric K. Steen

It really depends on the opportunity. If we find an opportunity to buy pumps at a good price and place them in locations where we know we’re going to get utilization of them, we'll do that first. And whatever's left over after that, we will look at putting that toward the debt.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And then, you guys talked about the reimbursement, actually, are going to be up in '14, I know you had projected it to be down based on prior CMS rulings. Why the sudden change?

Eric K. Steen

Well, let's have Jan talk about that. Go ahead, Jan.

Janet Skonieczny

Just to clarify a little bit, competitive bidding in Round 1 Recompete is still slated to take effect January 1, 2014 . However, that will affect only 9 MSAs. And so this 0.8% increase that Eric mentioned will pertain to the other areas that are not subject to competitive bidding. So in effect, it's going to help offset some of the decrease in reimbursement from the other 9 MSAs.

Joseph P. Munda - Sidoti & Company, LLC

Okay. Okay, that's helpful. And then, I think, Jon, you spoke about CapEx, and you're going to see a similar level of CapEx in the second half. Is that correct?

Jonathan P. Foster

Well, as Eric mentioned, I hope with $1.54 coming back every year on rental, every dollar you invest in the medical equipment in service. The great problem to have is, in this business, when Jan and her group comes looking for pumps. And that's a great investment. Right now we're on pace for last year's CapEx, utilization is good, as you can see about the $1.54. With the timing that, as I mentioned, it's always an issue. A lot of those pumps got sent out later in the quarter. So I expect to see some improvement in that number in the third quarter. But it all depends if we put out, what pumps and timing lies next quarter. But we're on pace for the same amount of CapEx that we did last year in pumps.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And then, my last question and I'll hop back in the queue. Eric and Jon, do you guys think that the going private situation may be impacted operations in any way? And what is the status? I know in the proxy, Ryan Morris is up for reelection as Chairman. Do you think any of that weighed into any of the -- or impacted results in the quarter?

Eric K. Steen

No, I don't think so. One thing I'll say, it was new for me, it was my first quarter. And I think because the team had been through a lot of strategic alternatives over the whole past year, a lot of that work had been done. I would say, for me, I learned from the process, and I think sometimes looking at the types of questions that people in the private equity world ask, I've learned a lot from them. And I don't think the rest of the team had spent much time on it. So I would say it didn't impact any of the operations results, other than just the different fees we had to pay for attorneys, et cetera.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And how much were those fees in the quarter, I mean, all-in for the transaction?

Jonathan P. Foster

We were $0.5 million for strategic alternatives and transition cost, some of that's blurred between the board and legal fees of all the things that were occurring at the same time. And we'll have some follow-on legal fees in the third quarter.

Joseph P. Munda - Sidoti & Company, LLC

Not of the similar $500,000.

Jonathan P. Foster

No, I wouldn't consider $500,000, but it will be a material amount.

Operator

Our next question is from Michael Potter from Monarch Capital.

Michael David Potter - Monarch Capital Group, LLC

Quick question, in the release, you put in here, "expect to generate revenue growth from new therapies and services," and we've heard a lot about that over the years, if you will. I was wondering if you could, perhaps, give us some specifics of what we should we looking for going forward, and how we entered into these markets currently?

Eric K. Steen

Yes, thanks, Michael. The 2 specific examples I've said in my remarks that were new for us in this last quarter was smart pumps in the long-term care market. And so smart IV pumps are IV pumps that have a drug library of all the preset drugs and doses that you can use. So it's a real success story for us to be able to work with the pump manufacturer partner and their drug library, and to help the long-term care facility create the drug library that prevents overdoses for their patients. And we did the whole drug library work and implemented it. And it's the first time InfuSystem has done that. And I see, with the aging population, I see steady growth in our long-term care facilities. And I think InfuSystem, being able to offer asset management programs, is really what this was. It wasn't the sale of pumps, but it's providing that asset to these long-term care customers, to provide safe infusion delivery and also, help with the drug library that goes with that. The other example I mentioned was ambulatory pumps in post-surgical pain. And this was for patients that have orthopedic surgery, receiving peripheral nerve blocks. Peripheral nerve blocks is a growing trend in anesthesia. And then, the patients actually went home with a continuous peripheral nerve block at home. This eliminates oral narcotics coming into our communities, and because the patient's receiving an anesthetic like bupivacaine via IV. And so we've been tracking our patient pain scores. And in the close to 200 patients that we've done a continuous peripheral nerve block at home, the pain scores are 9.5 out of 10, which are just fantastic. So I see continual growth in both of those segments as specific examples.

Michael David Potter - Monarch Capital Group, LLC

And can you give us any sort of numbers associated with it? What was our CapEx spend in these smart pumps or in these nerve pumps, and what kind of revenue was generated during the quarter from these 2 initiatives?

Eric K. Steen

Well, the CapEx is very small on the ambulatory pumps for peripheral nerve block because we're acquiring them in the used market and then, reconditioning them. So it's, I'm going to say, it's less than $500 per pump. So the revenue is pretty small with a couple of hundred patients. So it's not enough to -- I don't know -- remember exactly what the number is, but 200 patients doesn't give us $100,000 in revenue. But I'll continue to report on that as that grows. I would say the -- well, I'm talking off the top of my head here for the long-term care opportunity, but under $250,000 in CapEx, that will give us 50% greater than that in asset management program in the first fully implemented year.

Michael David Potter - Monarch Capital Group, LLC

Okay, so -- and did we spend that $250,000 yet on the drug delivery pumps or the smart pumps, I'm sorry?

Eric K. Steen

Yes, they came out of our fleet. Yes, they came out of our fleet. We have them -- those are pumps that have been purchased for sale that we used into -- those pumps were in our inventory last quarter and now they're implemented in the customer-generating revenue.

Michael David Potter - Monarch Capital Group, LLC

Okay, and so the $250,000 in value is going to generate about $375,000 in year 1.

Eric K. Steen

Right.

Michael David Potter - Monarch Capital Group, LLC

Okay. So we shouldn't expect a whole lot of effect from these 2 initiatives, near-term effect on our P&L, it sounds like?

Eric K. Steen

No, yes. Yes, from our base business that's headed toward over $60 million this year in revenue, pretty small incremental, a lot of opportunity long-term, but it's going to take a lot of work putting feet on the street to go and drive share here because our current sales efforts are primarily in the oncology space. And so that's going to be a limiting factor here as we build our organization to better access the surgical and long-term care markets.

Michael David Potter - Monarch Capital Group, LLC

Okay. All right. Great. I'm looking forward to hearing more as these 2 new initiatives evolve. Another question, with regards to -- just a follow-up to Joe's prior question with regards to the go-private, I guess, initiative, that the company spent, you said, $0.5 million in professional fees to support that go-private initiative? Am I -- is that correct?

Jonathan P. Foster

That's correct.

Michael David Potter - Monarch Capital Group, LLC

Okay, can you break down those fees because I was under the impression that we were utilizing Houlihan as our advisor and that they were already paid last year.

Jonathan P. Foster

That is correct, but there are still expenses that go along with that, travel cost. Now that did include roughly about $150,000 of transition cost, as I mentioned, with the board, we just -- and on our schedule, just lumped it together and probably, round figures $350,000. Much of that figure relates to the private -- travel cost during that time period were quite high because you're buying full priced tickets versus the full week tickets that we normally buy. There are professional fees. There are attorneys involved, and attorneys are not cheap.

Michael David Potter - Monarch Capital Group, LLC

No, but they shouldn't be -- we shouldn't get $350,000 of legal fees from this either, especially, for a transaction that didn't occur. And this is only really at the investigative stage.

Eric K. Steen

Michael, the costs are what they are.

Michael David Potter - Monarch Capital Group, LLC

Okay. So this was a pretty big distraction, then, for the company and certainly, a pretty big expense to the shareholders.

Jonathan P. Foster

Speaking a moment on the distraction, I would say, from the operational side and from the sales force side, not at all, it was 0%. As you work up the ladder, it really doesn't hit until it gets to Jan's level. And then, being brought into some conference calls. Where the meat of the load is carried is on the accounting side, on the finance side, getting involved in the transactions and the numbers and all the discussions. As I'm sure you well know how those -- how deals like this are discussed. So from -- operationally in the sales force, minimal.

Eric K. Steen

Yes, I think there is more work, I think, from the special committee of the board. I think I remember a lot of after-hours and nighttime phone calls as that group looked at things. And then, because of the sort of unusual nature of the relationship, I think that's why legal help was called in because there are, I guess, a number of cases in the news today where these types of things didn't happen the way they should. And so I think great care was taken to ensure that everything was done by the book. And so I think it was really more -- it took some of my time and Jon's time, but not from the -- the day-to-day people getting it done, I don't feel was distracted by this at all.

Michael David Potter - Monarch Capital Group, LLC

Okay. All right. Listen, I'm sure you can understand where we're -- some of the shareholders are coming from. I've been a very long-term shareholder in this company, unfortunately for me, and it seems as if we have the distraction of the prior management team and Board of Directors. We go through this transition period over the past year, where there's a lot of upheaval and hopefully, for the good. And then, we get hit with this kind of situation, where our Chairman is trying to really get a bargain basement price for the company, we incur some additional cost of $0.5 million and then, it doesn't go through, which is fine, which is what should have occurred. But he gets to resume his role as Chairman with compensation at the same time. And shareholders were left, kind of, sitting here and scratching our heads and saying, "Okay, what's next?" And I guess, that's my question here. You mentioned about you wanting to go out there and start communicating with the Street. The company doesn't really seem to have an Investor Relations program. Can you tell us, in the near-term, what the schedule looks like for getting out in the road and meeting with investors and cultivating, perhaps, new investors to our company?

Eric K. Steen

Yes, it's -- Michael, I certainly understand your perspective. For me, I started my very first earnings call as the new CEO, saying a take-private had been announced. And so now in my first quarter, that's what I've been learning. Now that that's behind me, and Jon and I want to get out and meet investors. I don't have a schedule, but we do plan to be setting up meetings and meeting with people now going forward. I think that the take-private, I think it was an interesting idea. InfuSystem is a small company for the public markets, and I think there's 2 things you can do, you can look at taking it private, that was investigated. But valuation, as I said before, is difficult. And then, the second thing you can do with a small company is go grow it. And that's what I was hired to do and that's what I intend to do. And this is new to me, but I want to get out there and let people know what we're going to be doing. And I think some of the things we've already done this last quarter, growing revenue, investing in pumps, paying down debt, taking market share, getting into new areas, I think despite the transactions, you can see the company is still quite operating successfully.

Operator

And our next question is from David Cohen from Minerva Advisors.

David Cohen

A couple of questions for you. I guess, the first one might be for Jan. You talked about the competitive bidding in 9 MSAs starting January 1, 2014. Could you give us a sense for what percentage of revenues were generated in those 9 MSAs either in 2012 or in the first half of 2013?

Janet Skonieczny

Sure. The 9 MSAs, really, will affect about 1% of our third-party payor revenue.

David Cohen

Okay, all right. And then, I guess for Jon. You talked about second half debt paydown being similar to the first half with the proviso obviously, that if you get some great opportunities in the pump market, you might pay down less debt in favor of adding to the inventories. Can you, though, if I look at the first-half debt paydown, you referred to it as $2.5 million, but I looked at it on a net basis and cash balance went down by $2.2 million in the first half. So from my viewpoint, there was minimal net debt paydown in the first half. Can you talk a little about how you view second half debt paydown, looked at that way?

Jonathan P. Foster

Sure, David. From a standpoint of -- the second half of the year, generally, is much more cash-rich than the first half. We don't have the end of the year expenses that come over, audit fees and such. And plus also, as we get into the second half of the year, because the patients have gone through their co-pays, you're getting more of your -- or higher percentage of your revenue being made by the commercial payors. And so it is much more cash-rich. We do expect significant cash generation in the second half of the year. We will pay down the debt as much as we can. We do have early payment, a surcharge of 5%, it turns to 3% in November. But we also have the mandatory free cash flow calculation that will take effect in the first quarter of next year. We do have cash. Those payments do not have a premium put to them.

David Cohen

Okay. So on a net basis, you expect the debt paydown in the second half to be higher than in the first half?

Jonathan P. Foster

Yes. But again, when you're earning the $1.54 of revenue on each $1 invested, I'll gladly forgo some debt paydown and go for an increase in rental business.

David Cohen

I understand. It's just that the debt is not particularly cheap at this point.

Jonathan P. Foster

I would agree with that.

Operator

Our next question is from Jeremy Gould[ph] from Alicia Asset Management.

Unknown Analyst

Going after the debt a bit further. Can you guys speak to what level of debt you'd be comfortable with? And if there are any options down the road to refinance some of it since it is so expensive right now?

Jonathan P. Foster

We have -- first of all, let me state that with Wells Fargo and PennantPark, we have a great relationship. We have a great relationship with both of these lenders. They're very responsive to our needs and the transaction, even though, it is close to 10%, it is expensive, it is a good debt arrangement and a good debt agreement that allows us to operate our business with -- making good decisions. Of course, being good stewards, we're always looking for ways to lessen the cost of our debt. But realistically, the only way that we're going to come upon those opportunities is to perform, to continue to pay down debt, to generate cash, generate EBITDA, generate net income. And I think we've laid a basis for that once we get away from the noise of 2012 and the first half of 2013. I look forward to reporting some clean financial numbers and -- resulting in that. Realistically, I wouldn't see any chance to enter any new types of negotiations or anything to pay down debt until we have a few quarters of good, strong performance. So I wouldn't see that until sometime in 2014.

Unknown Analyst

And as you keep paying down those, is there a level at which you'd be comfortable to look at other opportunities for the cash flow?

Jonathan P. Foster

Most definitely. I mean, as we reduce our leverage, we'll be able to -- we'll be able to definitely -- I mean, as you get below the 2x EBITDA level, more doors will open up.

Unknown Analyst

Okay. And then, my next question was about the competitiveness of InfuSystem. I was wondering why there isn't any large competitor, or other company that is able to replicate the efficiency of InfuSystem. As we've heard, as far as you guys know, I think you said that there isn't any other competitor with a 24/7 nursing service. And I was wondering why it is so much easier for InfuSystem to cultivate third-party payor contracts, and why the regional players aren't able to get these contracts?

Eric K. Steen

I mean, there's a number of competitors in the marketplace. I'm not sure about that no one having the 24/7 nursing line. That's the first time I've heard that. Maybe it was said on a prior call. It sure is a differentiator and not everybody has it. I would just -- I would say that InfuSystem has an interesting niche, where it's not like our other good home infusion company customers, but it's more of a continuation of services, of infusion therapy that starts in a facility. And I think that's the niche that InfuSystem is capitalized on. There's a number of competitors. And I would say one of the things -- customer service is one way we seem to get customers back. They like the customer service that InfuSystem provides. And I think we've recently won some business from some of our direct competitors, and the word that came back is taking care of the customer. So I'm not sure why others haven't gotten as big. But having the large number of payor contracts and the large fleet of pumps that we have, there's certainly an opportunity for us to continue to capitalize that in the marketplace.

Janet Skonieczny

I would also add, Jeremy, I think that one of -- our strength comes from the fact that we started this business over 25 years ago, and it allowed us to build up a rather large pump fleet and gave us kind of a leg-up on everyone else with respect to payor contracting. And we continue to grow that network of payors on a daily basis. So I think those things, all combined, have led to our strength.

Unknown Analyst

And does your market share -- does your existing history with the third payor party contracts, do you think that's one of the reasons why the regional players -- why they are unable to cultivate them? So why they -- have these direct customer relationships or maybe they are more expensive?

Janet Skonieczny

I do think it's probably a barrier to entry for some of them just because as we get squeezed more and more on the reimbursement side and different payors changed their reporting structure, those contracts become extremely important, where, years ago, there were more traditional type-plans and you didn't have as much managed care and in and out of network benefits to deal with.

Unknown Analyst

Okay. And then, I have one more question. You mentioned that general and administrative expenses decreased, but they're still dwarfing any other expenses. And it seems that if a sale had happened, the depression inclusion of the change of control statutes might have -- it made it seem that the general and administrative cost -- the general and administrative expenses really didn't decrease that much. And I was wondering if you guys can speak to your -- what do you think you can do further with general and administrative? And the inclusion with the potential sale of the timely change of control?

Jonathan P. Foster

Well, from the standpoint of just G&A cost, at the last part of that section, I was trying to pare out all of last year's onetime costs and all of our current onetime costs. That's where you'll basically, if you pare out the debits and credits from last year. The run rate of G&A for the 6 months ended was 9.8 compared to 9.5 for this year. Hence, that's what I was trying to do there. Now G&A, is just not accounting and executive, it's also our billing department, as well as some of our operations that was kind of in a gray area that should have belonged up in -- part of -- as a deduct from gross profit or down in G&A. And we had a lot of internal discussions whether we should reclassify that or not. But it does include our operations. If you go back over the last couple of years, we have beefed up our finance and IT staffs. Finances, due to material weaknesses in our accountings internal control and accounting structure a couple of years ago and we've fixed those. But that took adding some heads. As Eric mentioned, that does -- our IT costs aren't allocated except for some direct iPad costs were up in G&A, I mean, up in gross profit. The meat of our IT costs are also down in G&A and not allocated across the board, as some companies do. So within our G&A line item is a lot of operating cost.

Operator

[Operator Instructions] And our next question is from Anthony Japoor, a private investor.

Unknown Attendee

I was looking at the documents, I know this is not about revenues for the quarter, but I was looking at the documents from the annual meeting and I was wondering what the rationale was for the Executive Chairman to be receiving quite the amount of compensation as the other Board of Directors?

Eric K. Steen

From a standpoint of compensation for the board, that is set by the Compensation Committee. Ryan Morris is not just a Chairman, he is an Executive Chairman, so he does play a role in some of the operational and management discussions. And so that is all set by the Compensation Committee and their view of his value to the company.

Unknown Attendee

I mean, I know he has had some concerns about the fact that the management team was taking too much in compensation and not delivering value to the shareholders and somehow, it just seems unseemly for him to be getting that kind of compensation.

Eric K. Steen

Well, I understand your concern. But I think from the standpoint -- it's unfair to compare him to the prior CEO, and how the difference in the compensation and the stock, and what transpired in the past versus his current cash compensation. But I hear your concerns and we'll definitely pass it along to the Comp Committee.

Operator

We have a question from Gabby Dilksburg [ph], a private investor.

Unknown Attendee

My question is regarding the privatization. So the process, from shareholder's perspective, is that it seems to have ended really abruptly. And I'm still trying to wrap my head around what went wrong. So my first question is does it simply just comes down to the price indication, from Ryan Morris's letter, of $1.85 to $2 a share?

Eric K. Steen

Yes, I think the letter pretty much stand on their own and state what happened. From his standpoint, there was a range of value discussed as an offer. The Special Committee came back and said they were willing to enter into discussions, but they viewed that their indication of value, their thoughts of value were beyond the range that was mentioned. And Ryan Morris and his investors were not interested in going forward on that basis.

Unknown Shareholder

Right. So if the Special Committee found that the range was too low to even bring the 2 parties to the negotiating table, I just have to wonder why the Chairman would have even begun the process on the obvious distraction to begin with?

Jonathan P. Foster

Well, I mean, I think first of all, the Special Committee was willing to go forward in discussions. But it was Ryan and his investors that decided to not move forward in any more negotiations. But from a standpoint of the process, our board, our Special Committee was very intent on running a clean process and not having any backroom negotiations. So they quickly formed the Special Committee. Ryan quickly stepped down and separated himself from that decision-making process, and we definitely had 2 sides: a Special Committee representing the shareholders; and Ryan Morris, representing himself and his fellow investors. So I think from a standpoint of what is normally seen between a private equity group and the discussions with a company, the public saw a little bit more than normally is shared simply because of the positions of the parties involved.

Unknown Attendee

Right, but also, when -- if you're going to compare it to other private equity transactions, the step of getting an indication of intent from a private equity group is extremely early on in the process. So just as a shareholder, I think it's incredibly wasteful that you spent, what was it? $350,000 on legal fees just to get to that point. And at the end of the day, you're spending shareholders money on something that is so early on in the sales process that it's a little shocking. And again, I'm not looking for any comment, I guess on that, as much as just understand, Obviously, that you heard disappointment on this call about that process. And it does bring to question what is going on in that boardroom?

Jonathan P. Foster

I hear your comments, and I'll pass them on.

Operator

And I have no further questions at this time.

Eric K. Steen

Well, I appreciate the good questions. And when I think about what's going to be going on in the boardroom is moving forward, and to capitalizing on the strengths we have to continue our success in the marketplace. And I appreciate everybody's attendance on the call today. Look forward to talking to you next quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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