InfuSystem Holdings' (INFU) CEO Eric Steen on Q2 2016 Results - Earnings Call Transcript

| About: InfuSystem Holdings, (INFU)

InfuSystem Holdings Inc. (NYSEMKT:INFU)

Q2 2016 Earnings Conference Call

August 10, 2016 11:00 AM ET

Executives

Eric Steen – President and Chief Executive Officer

Jan Skonieczny – Chife Operating Officer

Chris Downs – Interim Chief Financial Officer

Trent Smith – Chief Accounting Officer

Jon Foster – Outgoing Chief Financial Officer

Analysts

Andrew Walker – Brinkley Capital

Doug Weiss – DWS Investment

Richard Dearnley – Longport Partners

Operator

Good morning everyone, and welcome to the InfuSystem Holdings' Second Quarter 2016 Conference Call. This is your operator, Ellen. Let me first give you Mr. Christopher Downs, Interim Chief Financial Officer.

Chris Downs

Good morning. 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 Web sites. Additionally, a web replay will be available on the company's Web site for 30 days. Both the press release and Form 8-K, and the company's Form 10-K for the second quarter of 2016 were filed with the SEC 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 yearend report on Form 10-K for the year ended December 31, 2015 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 our Form 10-Q, including the most recent Form 10-Q.

Forward-looking statements reflect management's analysis only as of today. 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 adjusted EBITDA and adjusted net income, which are not considered measures of financial performance under 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.

With that, I would like to turn you over to Mr. Eric Steen, Chief Executive Officer.

Eric Steen

Good morning everyone, and thank you for joining the InfuSystem Holdings Inc. second quarter of 2016 earnings call. Joining me today are Jan Skonieczny, Chief Operating Officer; Chris Downs, Interim Chief Financial Officer, Trent Smith, Chief Accounting Officer; and Jon Foster, our outgoing Chief Financial Officer.

There are three things that I want to talk about today, an update on the CMS announcement regarding changes to ambulatory pump reimbursement, and our progress on adapting our business model to those changes, the completion of the rollout of our InfuExpress IT system, and progress on our growth initiatives to further grow and diversify our revenue streams. But first, let's go to the numbers. Now, our second quarter of 2016 results and their comparison to the second quarter of 2015. Total revenue was $19.1 million, up 11%. Net collected revenue was $18 million, up 12%. Rentals of infusion pumps to all sites of care grew at 10%. Gross profit was $12.1 million, up 2%; net income was $720,000, a decrease of 8% compared to the second quarter of the prior year.

Adjusted EBITDA was $4.35 million, an increase of 10%. Adjusted earnings per share was $0.04 per diluted share as compared to $0.05 per share in the second quarter of 2015. As we look at the 2016 year-to-date financial results through June, and their comparison to prior year, total revenue was $38.1 million, and net collected revenue was $35.3 million, both up 12%. Rental revenues were $34.4 million, also an increase of 12%. Our rentals of primarily oncology patient [technical difficulty] to third-party payer insurance was up 8%, and our direct rental business of infusion pumps for a variety of therapies and market segments, including hospitals, home infusion, and long-term care has grown 29% compared to the same six months of 2015. Direct product sales were $3.7 million, up 18%.

Gross profit was $25.4 million, up 6%. SG&A was $22.8 million, up 8%, G&A cost, which includes some variable cost of warehousing, billing, and collections were up $1.1 million, which was partially offset by reduced selling cost of $300,000. Net income was $1.2 million, up 230%. Earnings per share was $0.05 per share compared to $0.02 per share for the prior year. We've had some non-recurring charges this year that have impacted our profitability by $270,000. This includes severance for sales force management restructuring, and strategic alternatives. We now remain focused on the execution of our plan for the remainder of the year. Adjusted earnings before interest, taxes, depreciation, and amortization was $8.4 million, an increase of 8%. Adjusted earnings per share was $0.06 per share compared to $0.08 per share for the first six months in 2015.

InfuSystem had a sudden and significant change to the Medicare patient ambulatory pump reimbursement process that is used for 30 years. With the April 25, Medicare Learning Network Matter Advisory, FC 1069, the change is that CMS will not reimburse for ambulatory infusion pumps as durable medical equipment for infusions started at a treatment facility other than the patients' home. After clarifying the intent of this advisory and sharing our concerns with CMS, through our Washington, D.C-based counsel, we took the fast track to immediate compliance as to not put InfuSystem or our over 1,800 oncology practice sites in a overpayment position. We quickly rolled out a new pump service that offers many of the advantages of our existing offering now billing to the provider facility instead of CMS for Medicare patients.

This sudden change necessitated that the team focus immediately on communicating with and educating our oncology customers on the service options that would allow us to provide continuity of care for their Medicare patients. The majority of our customers had no idea about this CMS change. Unfortunately we had to be on the leading edge of communicating this news, which our customers took as very unpleasant, especially in light of other reimbursement changes that have had a negative impact on their practices. The good news is the vast majority of our customers appreciate our proactive compliance stance, and how rapidly we put together a program that meets their needs. And they will continue with the InfuSystem service with no interruption of treatment for their Medicare patients.

It is important to remember that this change in the established CMS practice is for everyone. So not only can InfuSystem not bill DME pumps for ambulatory infusion started in a clinic, neither can our DME competitor and home infusion companies. Many home infusion companies don't want to be in this segment because there's no money in it for them with their bundled drug and pump model. As the most commonly used drug, 5FU, has a very low reimbursement amount. This policy change has given some home infusion companies a reason to exit the segment, and recommend InfuSystem as an alternative as they depart. Some of our customers are evaluating other options, but we are now having new conversations with some of the most prestigious cancer centers in the country regarding our services because of the CMS changes.

Additionally, we will now be in a vendor contract position with our existing customers, which should facilitate our efforts to direct sell additional products and services, like [indiscernible] pumps, biomedical service, and consumables, like IV administration sets in closed system transfer devices. Now that we are on solid footing from a CMS compliance perspective we are continuing our lobbying efforts, joined by our customers and others impacted by the sudden departure from past CMS practice, requesting that CMS grant an extension through January 1, 2017 for implementing these new changes.

This additional time will allow providers and clinics to modify their internal billing systems, and to make the necessary adjustments to ensure that the new billing directives are properly implement. It will also allow time for CMS to modify the cost for the chemotherapy administration codes to ensure appropriate reimbursement for physicians using ambulatory pumps, and for the AB Max to provide uniform guidance to physicians, which is not the case today, resulting in confusion for both providers and suppliers. For our commercial payers, we continue to have success. So far this year we have 38 new payer contracts and three contract renewals where we negotiated higher rates. Private commercial payers and state Medicaid plans continue to embrace the cost savings benefit of the most affordable side of infusion care patients on, while unfortunately our federal government is not permitting for senior citizens.

We are nearing the completion of the successful roll out of our Infu EXPRESS System to all sites that were using our old iPad solution. This will allow us to retire our old servers on August 15. This means we not only reduced our cost of running two systems during the roll out, but more importantly we will no longer be converting iPad orders into PDFs that our faxed and manually entered twice in the both our billing and our operating systems.

We now have the 1,375 sites up on EXPRSS and over 114 sites on our complete electronic medical records integration, for a total of 75% of our oncology clinics now on our Electronic Connectivity solutions. We have some accounts that are still on paper as they never converted to our old iPad system. Now that the iPad conversion is behind us and once the dust settles from the CMS transition our sales force will return to those paper accounts and bring them with us into the 21st century.

Our electronic connectivity initiative continues to make our service offering more popular. Our core oncology business has grown by over 116 new accounts this year. Over 2,500 ambulatory pumps have been deployed into our oncology accounts year to date. Last year at this time the number was 1,900 and 700 of those were from the Ciscura asset acquisition. We have over double number of market place wins. In 2014, we were net flat to June on pump deployments due to some account losses before we had our new electronic connectivity offerings.

In 2013 it was only 900 pumps deployed in the first six months. We are growing faster than we ever have and gobbling of share in the oncology segment. As those who follow the company know there is a delayed gratification combined pumps at InfuSystem. The depreciation clock start ticking the moment we shift the pump to the customer that pump supply hit our expense line as soon as we shift them as well. However, the revenue collection is delayed as we gathered the necessary information to submit a claim to insurance.

For example, in our year-to-date results we have booked close to $600,000 in pump depreciation and supply cost for new accounts that we are yet to collect revenue. Once we collect revenue which can be between three to six months from the shift date we have a one year's payback on our capital investment.

As I have previously discussed the one dynamic of the computer system roll out that we anticipated in plan for is that our new system requires that we captured a new electronic signature for every existing patient and physician. An example might be a physician, who have used the InfuSystem service for years now need their signatures to be documented in our new system.

We are capturing the signatures of busy oncologists from 1,800 practice sites can be a challenge. In our first quarter earnings call, I reported that we had $800 increase of what we call pending our insurance claims that are waiting or pending for additional information like positional electronic signature. In Q2 our pending increased from prior year have had some improvement, but it is still $639,000 over prior year. If we would have built all of this additional pending our revenue increase over prior year would be over 14%.

This was expected to happen facility by facility as the roll out occurred. I expect the pending dollars to be down to a normal level by the end of Q3 after we cut off on our electronic signatures. What I did not anticipate and plan for was CMS reimbursement change in the midst of the computer system roll out. The change that took significant day to day business time away from our oncology sales force as they prioritize educating our customers, so we could move them to our new direct bill business model for their Medicare patients.

This timing wasn't fortunate and it did impact our short term results with claims that whacked beyond the filing limit of the insurance companies. The difficulties faced by our oncology sales force of trying to finish in servicing and training their customers on the new Express System or simultaneously incrementing contracts and purchase orders for infusion pumps that were previously reimbursed by Medicare and the additional responsibilities of reducing the pending billing has had a negative impact on our gross profit of $208,000.

I expect this issue to have a smaller impact in the third quarter in the out of our numbers by the fourth quarter. We continue expand our new revenue streams. Our pain management service continues to grow in both outpatient surgery centers and in acute care patient hospitals. We are currently on an annual run rate of over $1 million and plan to be on $2 million run rate with the positive net income contribution by yearend.

Another revenue diversification initiative has been the direct selling of disposable infusion products. These recurring order consumable products like IV administration sets and close system transfer devices across the $2 million year to date, up 37% compared to prior year. We've recently signed distribution agreements with manufacturers of different disposable infusion products, and look to continue to broaden our offering. Additionally, we have entered into new agreements to recruit purchasing organizations as a necessary component of our expanded supplier offering.

Now I'd like to ask Trent Smith, our Chief Accounting Officer to take us through some of the numbers in more detail.

Trent Smith

Thank you, Eric. I've been with the InfuSystem now for almost five years. Then at time we've made many improvements and changes to our business whether it be staffing appropriately, improving our financial results, implementing our IT connectivity projects, or in this most recent case changing our business model for Medicare billing. I can honestly say the first six months of 2016 have been some of the most challenging and rewarding times for the company to be able to changed our business model so quickly.

Basically in less than three months and be at the forefront of the significant change in our industry is a testament of the great team work and ability we have here at InfuSystem. With that you probably had a chance to review our financial numbers and recent earnings release and 10-Q filings made this morning on several investment sites and with the SEC. So I'd really like to focus on just a few areas.

Revenues both to the quarter and six months ended June 30, 2016 exceeded prior year periods by double digits. This is good news considering the significant changes Eric discussed already the CMS and our EXPRESS roll out during 2016.

Gross profits for the quarter and for six months of 2016 are above prior year periods, this, in spite of approximately $1 million in additional costs during the six months period of 2016 due to depreciation and supply cost as aforementioned record pump deployments. As we've discussed previously in our earnings call the time lag between the actual spends of opening new account and recognizing the corresponding revenues is meaningful when we are deploying as many new pumps as we have in the first six months of the 2016.

I believe Chris will go into little more detail in his area. Bad debt, year-to-date they are unfavorable to prior year by half a parentage point. This is mainly due to what occurred in Q1. The some changes are bringing a major payer out of network to in network and personnel changes in our direct rental business. In the second quarter, they were actually better year-over-year by a 4 percentage point. This is due to the commercial contract we're settling down and the addition of new personnel focus on collection in the direct rental business.

Amortization this is up for both three and six months of 2016 compared to 2015. As we noted in previous calls, we have made significant investments in IT projects over last several years including earmarking activity, our EXPRESS platform, and other IT related projects. Some of these have reached completion and are now starting to be amortized, resulting in an increase in amortization year-over-year.

General and administrative or G&A costs are up for both the three and six months period compared to 2015. However, when you look at these costs as a percentage of revenue they are actually lower at 34% versus 35% in 2015 for both the three and six months' periods. This is good news.

We have a good portion of our G&A is variable to revenue. In addition, we have nearly $1 million in IT related expenses, which are not part of our capitalize projects. These costs should begin the slow down as we hit our peak in IT spending and the newly implemented programs like EXPRESS and EMR should begin to drive cost savings as our business continues to grow. So going forward we should see higher non-cash amortization expense, but lower cash capitalizing investment.

Net income is down slightly versus the same two months period in 2015. But earnings per diluted share remain consistent at $0.03 per share, while also net income by nearly $1 million compared to same six months prior year period with earnings per share increasing from $0.02 per share to $0.05 per share.

In closing, I just want to emphasize again we have a lot occurred in the second quarter of 2016, both CMS changed and our EXPRESS roll out. All things considered I thought it was a pretty good quarter. Eric?

Eric Steen

Thank you, Trent. Chris Downs, our Interim CFO will now provide additional color on balance sheet, liquidity and our record pump deployments.

Chris Downs

Thanks, Eric. I first wanted to reiterate what Eric said earlier about our pump deployments in the oncology market year to date. Thus far this year we have deployed 2,500 pumps in the oncology space. Now we frequently use the term deployment, so I wanted to clarify what we are saying when we use the term. In our language the deployment is an increasing number of pumps that have been send to our customer facility to be used for billable treatment. We always report of the net number meaning that our 2,500 pumps is net of any loss accounts [indiscernible] return to us for future use elsewhere.

This is a slightly different number from another pumps purchase due to timing as well as some maintenance CapEx purchases to replace retired pumps. This net deployment number is the most useful metric for us to measure the underlying business activity potential. So, net deployments are very good thing, so long as we are deploying them where they are truly needed, and almost exclusively we are deploying them to new customer wins, with the remaining small amounts going to the same customers who are experiencing growth in our patient volumes.

The other things to mention is that we will strive for only purchased pumps when we have identified the new customer and the start day for the facility, in order to avoid having large quantities of pump sitting unused on our shelves. Now having explained what we mean by pump deployments let's review the history one more time in for getting context.

During the first six months of 2010 through 2013 we had net deployments of about 700 in the first half of 2010, 8211 through 1512 and 913. During 2014, we were basically flat as we lost the large account and had new account wins that offset. In 2015 it was 1,900 pumps of which about 700 were acquired from Ciscura, so about 1,200 we win from the market. We thought that was fantastic year. But this year we deployed over 2,500 pumps. We had twice as many pumps placed in business wins this year as our prior record.

As Eric previously mentioned once the pump is deployed to new customer facility especially with the larger pumps, it takes up to six months before we begin recognizing revenue. Due to the time lag of in-sourcing the accounts the ramp up of beginning to put new patient on the pumps and the time to complete collect and do all the paperwork. As we have more win into larger and larger facilities this time lag is increased from about three months at an average small facility to the current six months estimate as majority of our new deployments are large cancer hospitals.

With the large deployments in the quarter this will begin to impact revenue in the fourth quarter, but these pumps will be fully productive efforts first of the year. I can only imagine that some of you might be thinking that we keep saying the revenue is coming, the revenue is coming and it's true we do. And we will continue to say as long as we are placing lots of pumps. If placement slow down significantly we will continue to grow on the revenue line for six months afterwards with minimal investment in the fleet, but after that revenue would be stagnant unless we had opportunities to resume investing in the fleet.

Purchasing and deploying pumps for new customers requires a lot of capital and we fund our purchases either the cash from the balance sheet or capital leases and we are now investigating option for renting pumps to reduce that. The record pump deployment on the oncology side of the business and combined with very strong growth in the direct rental business has required a lot of capital to be deployed and accounts for portion to be increased in that levels.

The other big factor in the increase in the debt levels this quarter is our account receivable. Our cash collections are dependent on billing the treatment paper work we've received from our customer facilities. Ensuring you are getting this paperwork in a timing manner has historically consumed a very large portion of the time for our oncology sales force. This year, however, we have planned to roll out EXPRESS backlog during the first quarter through second quarter. So we expect the paperwork has slowed down during this roll out.

As just as we are getting passed over that we were here with the medical billing changes, following this announcement our sales force happy to roll out and have the conversation with all of their accounts about moving to a direct sale model. So the focus was once again out of necessity to shift it away from getting the paperwork. Now only the billed treatments are in AR. But it was the timing of the billing in the quarter it resulted in increase in AR.

We had a greater percentage of quarter's oncology billings coming during the last month of the quarter this year than ever before. The result is there is virtually no chance to collect on more this quarter's billing by quarter end than usual. This is why AR increased. Additionally, there are treatments for which we don't yet have all the paperwork necessary to bill the payer. These treatment that we know about that aren't yet able to bill is what we call pending. Pending is not an AR or a treatment that will be billed in the future. Thus AR intending was significantly increased due to these two events; one planned and one unplanned and both have a negative impact on cash collections, which is necessitated some borrowing on a revolving credit facility.

And now we recognized our growth has negatively impacted our liquidity position, and we are currently exploring our options for restoring liquidity to our stated target level of $10 million to $12 million.

Eric Steen

Thank you, Chris. In conclusion, InfuSystem has properly adapted to changes in the reimbursement of ambulatory pumps. This sudden reimbursement change coming in the midst of a computer roll out has had a negative impact on our short term results.

However, when I consider the efforts in the quarter that completed the EXPRESS system rollout, added a record number of new customers in ambulatory pump placements on oncology, completed the seamless integration of another asset acquisition, grew our direct-to-provider rental business by 29% and continue the uptake on our pain management services, all while moving nearly 1,800 oncology practice sites to a new billing mechanism for Medicare patients. I am satisfied with the results and proud that the teams responded so rapidly and professionally, given the situation. We continue with our guidance of high single-digit revenue growth for 2016.

I would now like to open up the phone lines and address any questions that you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Andrew Walker with Brinkley Capital.

Andrew Walker

Hi guys thanks for taking the question and congrats on a pretty nice quarter and first of all uncertainty.

Eric Steen

Thank you.

Andrew Walker

Let's see. So just quickly, on the accounts receivable increase, so based on your commentary, should we assume that it's going to come down in Q3 and has it already started to come down?

Eric Steen

I would expect to see it come down, offset by the fact that we do have a lot of new pump deployments in first quarter that are going to continue to get implemented and we put on patients and that paper is going to be coming through. And that is going to increase the billings and the revenue.

Andrew Walker

Okay. So I guess it might be elevated for one more quarter in Q3 and then coming down starting in Q4?

Jon Foster

That's a reasonable estimate.

Andrew Walker

Okay and then the pending you mentioned that's not in the accounts receivable, where can you see that on the balance sheet?

Jon Foster

It's not on the balance sheet, because it has not been built.

Eric Steen

So what you see for pending, you see it in the P&L, you see expenses in our P&L without revenue. That's where we see it.

Andrew Walker

Okay, got you. And just in terms of increasing liquidity, is this just increasing the revolver or would you redo your term lines?

Jon Foster

As I said, we're exploring our options and we have a great relationship with Chase, our current bank, and they remained very supportive with the company and management, but as I said, we're exploring options.

Andrew Walker

Okay. Just as a shareholder, with the shares at this level, I think, the one thing that would scare me is doing any type of equity offering or anything, so are you just encourage, don't dilute shareholders at these levels?

Jon Foster

There's certainly no dilution of shareholders expected.

Andrew Walker

Okay. That's really reassuring. Turning to the CMS payments, obviously, I think, you guys have handled it really well. And you mentioned it a little bit on your -- in your commentary, but a lot of times, I know where Medicare leads kind of commercial plans follow, but just to confirm, you're not seeing commercial plans looking to follow what Medicare has done here?

Eric Steen

We have 46 new payer contracts signed this year and only 1 lost CMS. CMS was already the industry laggard for home infusion. And I can get on my [indiscernible] box and start talking about how senior citizens have to go to a nursing home to get something as simple as pulling the electrolyte imbalance with a bag of saline, a procedure so simple, they do it on the bench at halftime of a football game. So at this point, CMS has been a laggard and they seem to be going in the other direction and we continue to add private commercial payer contracts.

Andrew Walker

That's really good to hear. And then just looking at kind of net collected revenue is up double digits here today, and the commentary had a lot of acceleration as all the pumps that you deployed kind of start recognizing revenue in the back half of the year. So can you help me reconcile all of that with maintaining guidance for high single-digit growth?

Eric Steen

From the guidance, I want to be conservative for guidance. The brief tenure as a public company CEO and I've never had to revise the guidance. And one of the things in our numbers that sometimes make it difficult is our core business is all recurring. Rental business and now we are selling more disposables, but we also sell pumps. As people who sell capital equipment know, every once in a while, you hit the big home run, and everybody says what have you done today. So because we do have in our numbers from last year, some big capital equipment sales that we have, had this year, we're certainly going to be in the hunt for more capital equipment sales, but that's another thing when we look at year-over-year, some of the big capital equipment sales that we have in the second half of last year, we just don't know what capital sales we're going to have in the second half of 2016.

Andrew Walker

Great, really great color. The last one for me and then I'll jump back in the queue. I think, all the acquisitions you've done to date have been kind of home runs. Are you still on the prowl there or seeing anything there or right now, are you just more focused on getting the Medicare issues just taken care of?

Eric Steen

We're always looking at things. And I think we're always looking at things that are going to increase shareholder value. I will say the current situation has occupied all of our time to focus on the job at hand. However, there are, opportunities out there in the marketplace and we'll continue to investigate them. As I have said publicly before, I'm more of an organic growth guy, because sometimes for me, it's easier to start a business yourself like our pain management service then go out and acquire somebody and have to find synergies and clash of culture and IT system. So I would say I'd like to do things myself first, but we have had two nice asset acquisitions that we found accretive and just fit right in, and if there's more things that will work as smoothly as those have, we will investigate and take a good hard look at them.

Andrew Walker

Great, well hey thanks for taking the questions. I think you guys did a fantastic job and [indiscernible] all the headwinds and looking for to continued to see some great numbers from you.

Eric Steen

Thank you.

Operator

The next question is from Doug Weiss with DWS Investment.

Doug Weiss

Hi, good morning.

Eric Steen

Hi, Doug.

Doug Weiss

I just want to say congrats to John and best of luck on your future endeavors.

Jon Foster

Thanks, Doug. I appreciate it.

Doug Weiss

I guess I wanted to just clarify a little under gross margin. Eric, you mentioned in your remarks about $250,000 of unbilled insurance that I think, is in that service and supply line, is that accurate?

Eric Steen

Yes. We had costs that we recognized and when a claim goes beyond finalizing limit, we are not going to get that money, but we have the -- we have all the expenses associated with the treatment, but unfortunately, we missed the revenue.

Doug Weiss

And how much was that?

Eric Steen

But we've got a bridge with all these [indiscernible] about 300,000 there.

Doug Weiss

Okay. Comparing the first part of the second quarter, and revenues are similar, but services supply went up $1.3 million. So that would I think explain $300,000 of that $1.3 million. Could you just talk to where the other $1 million is -- how that breaks out?

Eric Steen

So we've had, as I look at our bridge here, we had a $639,000 -- I'm working from prior year, $639,000 increase in pending, we had $300,000 of [technical difficulty]. We had depreciation in supply crafts for new accounts of $600,000, where we ship that to new accounts. And then those are the major movers.

Doug Weiss

And the pending is where you talked about not getting the billing by quarter-end, but that will still…

Eric Steen

There's two things, Doug, I want to make clear on that. That pending, we still have a chance for it. It's $639,000 over prior year that sits there waiting for an electronic signature. So I hope, as we're speaking, one of our reps has tracked down Dr. Someone, and he or she has signed our electronic signature pad releasing all the patients that these busy doctors have. And it's kind of a 80/20, where some of the busiest doctors have the most patients, and those are the ones hardest to tackle for a signature. And they don't prioritize the InfuSystem rep; they prioritize saving peoples' lives with oncology treatment. So we're working on that pending and we'll get it down. Now beyond filing limits, or no paperwork, which was a -- we had a bad quarter on that. And we had a bad quarter because when you're in the midst of training people on the computer system, and then you have to tell them that they're going to pay for pumps they previously got for free, the doctor or anybody else isn't interested in signing anything.

So I wouldn't call it a goat rodeo but it will certainly suffice until the goat rodeo comes to town. And it was not business as normal at InfuSystem that quarter. So pending is still out there. We can still try to bring it in beyond filing limit, and no paperwork. Unfortunately that's lost money for us this quarter.

Doug Weiss

Right. Is that still -- I mean, you're describing something of an operational issue in terms of doctors not signing forms. Is that something that you think you've completely tackled or is that something that still needs to be improved?

Eric Steen

It still needs to be improved. That once the physician signs in our new system they're in there. And so the -- one of the things is we had a lot of physician signatures in our old system, but now everything is new, and we're having them sign into our new system. And then once we have the physician's sign, there're in there. And then when we see their treatments that they've improved, we've got their signature. So we're working it our way down, but again, at the first quarter we had $800,000 in pending, we had sort of more accounts that hadn't been completed with InfuSystem Express, our new IT system. And now second quarter we've got it down, down to $639,000 over prior year. But there's still $639,000 more sitting in pending, waiting for things like a physician's signature because we can release those claims and send them on to the insurance providers.

And I guess the other thing I will comment is, now with the CMS changes, and I'm operating as if CMS is not going to change their mind, and this is forever now. If it does change, we can immediately go back to the old way, but I'm operating like the CMS changes forever. So now an interesting thing for us is all those Medicare patients, they're on a direct bill. There is no pending. There is no six-month lag time. You ship a pump, you ship a supply, the patient goes on that pump and supply, and you bill them just like we do for our direct pay rental business. And so I think that will, having almost 30% of our third-party payer business now go on a direct basis, that will increase our pending as well, but not immediately because we still got all these treatments that we've done previously that we're still hustling signature, and doing things to get that out of our number. So there's a number of moving parts on this.

Doug Weiss

So just to make sure I understand, you just need the physicians' signature once. After that you can, as you submit new bills for that physician, you can reuse that signature. But the problem you ran into is when you went from your old system to your new system you had to get everyone to provide a new signature. Is that accurate? And you're still in the process of doing that?

Jan Skonieczny

Doug, this is Jan. I just want to -- let me clarify a little bit here. First of all, it's important to note that every patient, every new patient that goes on one of our pumps [indiscernible] for some length of time, because it's a process to obtain all of the documentation. And in times of heavy growth we see a spike in our pending because all of those patients going out of pump are brand new. So that's part of the issue. Then the other piece is what Eric has mentioned with respect to the new system, it's just a different way of collecting physicians' signatures. And we need a physicians' signature for every new order for every new patient. And then when that order expires, if the patient is still on a pump, then we have to collect the physician's signature again.

Doug Weiss

And that's different from the way it used to be or it's…

Jan Skonieczny

No. It's the same way it used to be, it's just the new system creates a new workflow and a new process for physicians in the clinic. So therefore there's some stumbling on that end in getting things collected in a timely fashion. And plus, don't forget, we just talked about we supplied a record number of pumps, meaning that many more new patients going on our pumps, as well as the Ciscura acquisition and [indiscernible] acquisition, or asset purchase where both patients are all brand new to [indiscernible].

Doug Weiss

Right, right.

Jan Skonieczny

So there's a lot of moving parts here.

Doug Weiss

No, I understand. I guess but what the question is for me is I mean you're sort of footing the bill for a physician who doesn't sign his forms. And you're providing him with the pump. I mean is there is a certain -- I would think you had some leverage in this situation where you say, we need you to sign this or we're not going to keep providing you with a pump. I mean, how is that negotiation -- am I right on that or is that -

Eric Steen

You're right. I mean, we do have some leverage. And it's changed for us and changed for them. And we want to be a customer service. You know, you go to Nordstrom [ph] and you -- something happened with your [indiscernible] and they're very nice or being accommodating, and you come back there all the time. There are other choices in the marketplace. And so we have leverage, but we want our customers to come away from their interactions with us knowing that they've been treated very nicely.

Doug Weiss

Okay, I see this is a busy time and complicated time for everyone. So is the way to think about it that this is sort of something that by the end of this year probably is a non-issue or is it going to take longer than that?

Jan Skonieczny

Pending is an ongoing issue for the company, it isn't just physicians' signature that cause documents to pend. We have to have to collect patient signature, we have to collect insurance information, we have to verify, we have to get authorizations. There's many steps that go into generating a claim. So as we continue to grow, I expect pending to continue to at least stay at a higher level. It's a good problem to have, in all honesty, because that's revenue that we're working on. And we will realize it at some point in time.

Eric Steen

But as a percentage of total billings, one of the things that we have today is people do manual order entry into two systems of facts. And if they make one fact sum keypunch error and get the birth date off by one digit or the insurance number off by one digit, then that's going to pend, and we've got to go get the correct information. So there are plans -- the plan for our new electronic connectivity solutions is to get this information not being manually keyed. And we hope that some of these things will help us reduce pending us reduce pending as a percentage of all of our billings.

Doug Weiss

All right, okay. So I mean maybe -- I don't know if you can help me on this, but how do you expect gross margin to slow over the next couple of quarters? I mean, you're down a lot this quarter, will it start to bounce back to the historical levels or do you have any sense of…

Eric Steen

Yes, everything about our gross margin for this quarter, none of it was due to pricing. And just to be clear, all these CMS changes didn't go into effect in the quarter, so all of our pricing was the same for this quarter. So the short-term impact to gross profit had nothing to do with pricing. It was primarily a result of these paperwork issues, which was a new computer rollout, which we expected. The problem was tremendously compounded by inserting these new contract discussions through CMS into the middle of it. And one of the things we have planned is that our new Express system is going to help us be more efficient to help us drive cost out of the system. And so there is a big change as we go to our direct billing margin. And I would have to say that the goal is to keep margins where they are, but we've got to recognize that we've got a different billing model at different rates in a different cost structure. And we can provide further color on that as we get more information on it.

Doug Weiss

So in other words, your goal is to keep margins where they were last quarter, but then you have to make some adjustments for changes in the business structure. Is that…

Eric Steen

Yes, there are going to be changes in the business structure. We're changing our pricing for 30% of our third-party payer, and we're also changing our cost structure for those patients as well. And then another thing, it's still businesses, but as we sell consumable products in our direct sales, those margins are not the same as our 70% third-party payer margins. Although it's not big enough to impact the business, but it's a way for us to [technical difficulty] higher revenue streams right in the sweet spot of where we have customer relationships, and where we have products and services to funnel into those customer relationships.

Doug Weiss

Okay, all right. Well, thanks for the answers, and talk to you next quarter.

Eric Steen

Okay, thank you, Doug.

Operator

The next question is from Joshua Horowitz [ph] with [indiscernible] Global.

Unidentified Analyst

Hi, thank you for taking my question. Personally, they've all been answered by previous callers mainly focused on what you're going to do to increase liquidity, and the idea of a potential share issuance, which we agree with the previous caller would not be a great idea at these levels. But in any event, congrats on a very strong quarter amidst all the changes that are happening in the business.

Eric Steen

Thank you.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions] The next question is from Richard Dearnley with Longport Partners.

Richard Dearnley

Good morning. I'm relatively new to your company. The way the pending discussions, you need a new signature from both the clients and the doctor at the end of pump contract, is that correct? Even if it just renews?

Eric Steen

Every patient must sign an assignment of benefit. And for every patient treatment we must have a physician written order as well, and our -- so our new system, we may have had a patient that signed the assignment of benefit on our old iPad system, and now we are having him on our new system. And I would say, even more complicated was patients are in a chair. They've got time to sign things. I think it's tracking down the physicians who sometimes aren't at the treatment facilities very often to get them to sign things. So that's what that discussion was about.

Richard Dearnley

Right.

Eric Steen

But as Jan says, every treatment pends. Every time someone sits in a chair and gets on a infuse system pump, until we send that claim to the insurance company with both the patient's assignment of benefit, the physician-written order, all of the insurance information, patient demographics, treatment, we need all those things before we send a claim to the insurance company. And all those treatments that are waiting completion of all the information we need we call pending.

Richard Dearnley

Right. And how long is your normal pump contract?

Jan Skonieczny

In terms of the order, is that what you're asking?

Richard Dearnley

Yes, well how long does that patient have it before someone has to resign?

Jan Skonieczny

Well, that's up to the physician. The physician makes the call on how long…

Richard Dearnley

And, well, on average how long is that?

Jan Skonieczny

I would say somewhere between six months and a year, but it varies patient to patient. But yes, it's a case of them -- if the doctor chooses to continue a patient on treatment then we would have to obtain a renewal order, and the doctor would sign it.

Richard Dearnley

Okay. And then what -- you gave the first quarter and the second quarter pending, and you're expecting it to be normal in the third quarter. What's normal?

Eric Steen

[Technical difficulty]

Jan Skonieczny

It's really a percentage of gross billings, really, that you're looking at, because as I said, patient [indiscernible]. So our issue right now is timing, getting the number of new patients that we have going on service, keeping that percentage within the normal range of the cycle.

Richard Dearnley

And looking back over history, what was that percentage range that's normal?

Eric Steen

[Indiscernible]

Richard Dearnley

Excuse me?

Jon Foster

I don't think that we have it, but we can find that information as far as how it's been historically.

Richard Dearnley

Okay.

Jon Foster

Chris, do you know?

Chris Downs

I mean, we haven't publicly stated what our total pending is. What we've referenced in this call and first quarter as well, was the increase from year end, which at first quarter was about $800,000 over year-end. And then we lowered that $800,000 down to about $630,000 currently at the end of the second quarter.

Eric Steen

Yes, so as pending -- as your business grows pending grows, all --

Richard Dearnley

Yes, I understand that. And I guess when a doctor signs a new client up do you get his signature at that time? In other words, no pump if the doctor doesn't sign for a new signup?

Jan Skonieczny

Well, that is how the process works. But sometimes a patient comes to the clinic, and the doctor is not right there in the clinic. And they -- some physicians sign in advance. If we don't get a signature in advance, then we have to have the physician call to give us a heads-up that they're going to be using the pump. But the pumps are already located in the clinic. So it's kind of a consignment-type scenario where they take the pump off the shelf. So we don't exactly have that leverage where we can say, no, I'm not shipping the pump till I get the order. And many provide us with a verbal order prior to submitting the written order. But we need to written order in our file to put into claims.

Richard Dearnley

Right. And then could you describe what you're -- you referenced your direct product sales were up -- were $3.7 million in the year-to-date, and up 18%. And then direct was up 29%. What else is there that is direct or could you just describe direct?

Eric Steen

Yes.

Richard Dearnley

You know, I'm new to you all so…

Eric Steen

Sure, sure, you know, you might, one thing I would suggest because this is a -- it's a great question. And it's, I'll describe it for you but I would also say we file investor presentations with the FCC and if you want to look at our most recent investor presentation one of the interesting slides its up front talks about our four revenue streams. And about four revenue streams three are what we call direct where in the direct we are a supplier. I would say direct is we're a supplier to other providers. And then in the other stream where we call our third party payer it's the insurance companies that are paying the bills. And so in both of our oncology business and in our pain service we submit claims to insurance companies and we get the big private insurers and used to be CMS for oncology but now our oncology business looks like our pain business for pain we've never been reimbursed for CMS.

So if patients have private insurance we can send claims but if they don't we build the provider direct and so in oncology it's a physician owned practice. It could be a large hospital network. We build the provider for the service. So in our direct business we rent pumps, both ambulatory pumps, pull mounted pumps, enteral pumps, patient controlled analgesic pumps, syringe pumps. We rent pumps to a variety of different providers. These could be hospitals, home infusion companies, long-term care companies, and we're renting them a pump and they're paying us and then they're billing the insurance company.

We also sell products to those providers. We sell pumps and we sell consumable, disposable supplies that are used in infusion treatments to oncology clinics and hospitals and home cares. And then our fourth revenue stream which is also direct is we provide biomedical services. We repair pumps. We provide preventative maintenance for pumps. Sometimes I tell people if we were in the car business we we'd be Hertz, we'd be Mr. Good wrench. We'd also be Car Max because we buy and sell used equipment. So when we think of our direct business work we're renting, we're repairing, we're selling and then in our third party business which is really only for oncology and for pain for post orthopedic surgery non-narcotic pain pump program. In that case we're billing the insurance company for private commercial insurance or state medicated plans for the insurance reimbursement.

Richard Dearnley

Thanks, okay. Thank you very much, good explanation.

Eric Steen

Thank you for your interest.

Operator

We have no further questions at this time. I will turn the call back to Eric Steen for closing remarks.

Eric Steen

This concludes the call, and in closing I want to take a moment to thank Jon Foster our outgoing CFO for his contributions to the organization and to wish him well in his new opportunity. Goodbye everybody and we'll talk to you next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!