Milestone Scientific Inc.
Q4 2016 Earnings Call Transcript

Published: 4 Apr 2017

[Operator:]

Good day and welcome to the Milestone Scientific Year-End 2016 Investor Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to David Waldman, please go ahead sir.

[David Waldman:]

Good afternoon and thank you for joining Milestone Scientific full-year 2016 financial results conference call. On the call with us today are Leonard Osser, CEO and Joseph D'Agostino, Chief Financial Officer and Chief Operating Officer. The company issued a press release this morning, Monday, April 3 containing full-year 2016 financial results which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. The company’s management will now provide prepared remarks, reviewing the financial and operational results for the full-year ended December 31, 2016. Before we get started, we would like to remind everyone that during this conference call we may make forward-looking statements regarding timing and financial impact of Milestone’s ability to implement its business plan, expected revenues, and future success. These statements involve a number of risks and uncertainties and are based upon assumptions involving judgments with respect to future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond Milestone’s control. Some of the important factors that could cause actual results to differ materially from those indicated by the forward-looking statements are general economic conditions, failure to achieve expected revenue growth, changes in our operating expenses, adverse patent rulings, FDA or legal developments, competitive pressures, changes in customer and market requirements and standards, and the risk factors detailed from time-to-time in Milestone’s periodic filings with the Securities and Exchange Commission, including without limitation, Milestone’s report on Form-K for the year ended December 31, 2016. The forward-looking statements made during this call are based upon management’s reasonable belief as of today’s date, April 3, 2017. Milestone undertakes no obligation to revise or publicly update any forward-looking statements for any reason. With that, we’ll now turn the call over to Leonard Osser, CEO. Please go ahead, Len.

[Leonard Osser:]

Good morning, thank you David and thanks to everyone who is joining us today, good afternoon rather. I’m pleased to report that revenue for the full year increased 10% to 10.5 million compared to 9.5 million last year. Our revenues would have been a bit higher, however, we deferred over $1 million in sales due to a delayed payment in the fourth quarter, which we expect to record in 2017. We attribute our continued growth to the success we have had in China where we are establishing a broad distribution network across the country to Milestone China, a joint venture distribution company between Milestone Scientific and a team of senior healthcare executives from China. We anticipate Milestone China will continue to help drive our dental instrument and handpiece sales in the months and years ahead. We also achieved our growth in 2016 despite the fact that we transitioned away from our former distributor in the United States and Canada to Henry Schein who is now our exclusive distributor in the US and Canada. Although this transition had a temporary impact on our domestic sales, we believe it sets the stage for long-term sustainable growth. Henry Schein is the world's largest provider of healthcare products and services to dentists in North America. Importantly, Henry Schein has completed the training of its exclusive product sales specialist on the Wand STA system, and we have begun to see the results of these initiatives. We also continued to expand our distribution partnerships globally and have made considerable progress in developing a global key opinion leader network. Importantly, our dental division continues to generate positive cash flow on a standalone basis, which has helped offset our cash needs for the medical side of the business, which we believe represents the greatest growth opportunity for our company. Turning to our medical instruments, 2016 was an important year as Milestone began the transition of our medical subsidiary from a product development company to our current focus on commercialization pending FDA marketing clearance. We have completed the clinical trials for our epidural instrument in the United States and have submitted our 510-K application for marketing clearance with the FDA. It is worth noting that we have incurred substantial course related to this trial in 2016. Although we could have conducted a smaller, less costly trial, we deliberately scaled up these studies to not only support our submission to the FDA, but also help us to build our key opinion leader network worldwide and support our worldwide marketing initiatives. The clinical trial for the epidural instrument reached an enrollment of 400 patients and consisted of two separate arms, pain management, and labor and delivery. Both arms were compared against the current medical standards of care. We believe we are on track to receive regulatory marketing clearance in the US for our epidural instrument in the first half of 2017. In advance of marketing clearance, we have initiated relationships with both distributors and key opinion leaders outside of the United States naturally predicting FDA clearance is guesswork and not scientific. As an example, we have continued our collaboration with key opinion leaders in Italy with the focus on expanding utilization of our instrument at key hospitals in Rome, Florence, Naples, and Pissarro, where the respective KOLs have been supportive and clearly recognized the advantages of our technology. Last month, we successfully began the clinical rollout of our epidural instrument in the MENA regions that’s Middle East and North Africa by initiating clinical evaluations at five hospitals in the United Arab Emirates and in Lebanon. In fact, a number of key opinion leaders in the Middle East, North Africa, and Italy have expressed further interest in broadening the scope into challenging their epidural procedures as well as extending its use into pediatric cases. These are both areas where it is very difficult to do epidurals; the results are not as clear as lumbar epidurals and quite a bit more problematic with considerable more morbidity, considerably higher morbidity and failure rates, and that's with the traditional use of the hypodermic syringe. The epidural instrument and disposable kit has been introduced to approximately 30 anesthesiologists from the United Arab Emirates at two product launch meetings during the Pan Arab Congress of Anesthesia. We also launched the epidural instrument and disposable kit in Lebanon with our distributor and received the required authorized representative license approval by the Saudi Food and Drug Authority in order to import and commercialize the epidural instrument in Saudi Arabia. We also signed additional distribution agreements in Egypt and Kuwait as part of our Middle East product launch strategy. We are now in the process of resubmitting our application to the FDA for our intra-articular instrument, and we are confident that the human factor study as well as the fact that our dental instrument has been used successfully in over 60 million injections to-date will help us to obtain approval. Given our clinical and regulatory progress, it was important to bring in additional resources to the senior management team as we enter the commercial phase of our growth on the medical side of the business. In 2016, we announced the appointments of James McAvinn as Senior Vice President of Sales and Marketing and Ausra Burniene as Senior Sales and Marketing Consultant, both of these executives bring extensive industry knowledge and relationships that should allow us to establish worldwide distribution networks for our medical instruments. I would add that they have been most impressive since joining the club. We have completed a pilot study of our CompuFlo instrument at Cornell University College of Veterinary Medicine. The control pilot study of ten animals confirmed that our instrument can identify a target with a high level of accuracy when performing a maxillary foramen block in a horse. At this point, I'd like to turn the call over to our Chief Financial Officer, Joseph D'Agostino to go over the numbers in detail. But I will be back at the conclusion of Joseph’s discussion, please go ahead Joseph.

[Joseph D'Agostino:]

Thank you, Leonard. Revenue for the year ended December 31, 2016 was 10.5 million versus 9.5 million for the full-year of 2015. The increase in total revenue by approximately $1 million dollars or 10% was primarily related to the increase in instruments and handpiece sales to China. In the domestic market, total revenue decreased by approximately 408,000 in 2016 as Henry Schein continued to introduce our instrument to the market and sell down their current inventory. We believe that the new agreement with Henry Schein will be to increase domestic sales of the STA instruments and handpieces in 2017 and the coming years. On the international front, total revenue increased by approximately 1.4 million. International instrument sales increased by 1.2 million over 2015, due in large part to a shipment of STA instruments to China. Handpiece sales increased by approximately 220,000 compared to 2015. Gross profit for the year ended December 31, 2016 was 6.3 million or 60% of revenue versus 6.4 million or 68% of revenue for the year ended December 31, 2015. The decrease in gross profit percentage reflects the increased sales to China which have a lower gross margin as our Chinese distributor, Milestone China is developing and expanding the market in China. Operating loss for the full-year ended December 31, 2016 was 6.5 million versus an operating loss of 3.1 million for 2015. But the additional loss of 3.4 million is primarily the result of consolidation of Milestone Medical in 2016. On a pro-forma basis, the consolidation of Milestone Medical at December 31, 2015 would have resulted in a loss of approximately 5.5 million also equivalent to the consolidated loss in 2016. Net loss for the full-year ended December 31, 2016 was 5.9 million or a minus $0.22 per share versus a net loss of 5.5 million or a minus $0.26 per share in 2015. Now I would like to turn our attention to the liquidity and capital resources. At December 31, 2016, the company had cash and cash equivalents of 3.6 million. Our working capital was 7.7 million, a decrease of approximately 481,000 compared to December 31, 2015. The decrease in working capital was primarily due to loss from operations in 2016. However, we do believe that our cash on hand and revenues from the dental business will be sufficient to operate the going business for our at least the next 12 months. At this point, I'd like to turn the call back to Leonard.

[Leonard Osser:]

Thank you, Joseph. Given the progress we have made we recently increased our ownership stake in Milestone Medical, our epidural and intra-articular subsidiary to 95.75% in February this year and have contracts to exchange additional shares which will give us a 98% ownership of Milestone Medical. The market potential for both our epidural and intra-articular instruments are significant and we believe increasing our share of ownership will be beneficial for both Milestone Scientific and Milestone Medical shareholders. Having completed the clinical trials of our epidural instrument in the United States, we are now accelerating our efforts to enter into international distribution agreements in Europe, the Middle East, North Africa and now having received approvable in Australia as well. We look forward to announcing a number of these in the near future. In advance of marketing clearance, we are cultivating relationships with key opinion leaders who have been supportive and recognize the advantages of our technology. This is the essential next step in commercialization of the both products. We also continue to advance our platform technology across other indications such as cosmetic, ophthalmic and veterinarian instruments as well as pediatric applications. Finally, we completed a public offering in December with gross proceeds of $3 million which will allow us to accelerate the sales and marketing activities of our epidural instrument. We believe this capital raise will be sufficient to support the execution of our growth strategy for the foreseeable future. We continue to generate positive cash flow within our dental subsidiary and with the completion of our clinical trials for the epidural instrument, the burn rate of our medical subsidiary will be further reduced. So to wrap up, we remain encouraged by the outlook for the business and look forward to announcing additional developments as they unfold. I'd like to thank you for joining the call today. At this point, we would like to open the call up questions. Operator?

[Operator:]

[Operator Instructions] We will take our first question from Anthony Vendetti of Maxim Group. Your line is open.

[Anthony Vendetti:]

Thank you. Sure. Good afternoon, guys. I just wanted to talk a little bit about Henry Schein, a couple of questions around that. So is there a minimum purchase amount that they have either quarterly or for the year in order to maintain their exclusivity.

[Joseph D'Agostino:]

Yes. This is Joseph responding Anthony. The first two years of business with Henry Schein, there is not a minimum requirement. However, I've been very much pleased with the progress we’re making to date. Starting in year three, there is a minimum purchase requirement. It goes on for the remaining seven years.

[Anthony Vendetti:]

Okay. And part of the reason for the shortfall in the fourth quarter was with the fact that they didn't purchase any more or didn't purchase as much as they normally have, because they were selling down current inventory, is that correct?

[Joseph D'Agostino:]

Yeah. They were moving very quickly through their hand piece inventory and also for their instruments and they moved forward on a positive basis beginning in January again to replenish their inventory, but it's also a process of year end for a lot of companies to make sure they're in a good position.

[Anthony Vendetti:]

Okay. And then there was something in the 10-K that said Henry Schein has a right under certain circumstances to return your products for full credit against the purchase price. Is that -- that sounds like that might be normal legal lease of any contract, but I was just curious if they've ever done that other than working down the inventory, have they ever had to return or has there ever been a circumstance where they’ve returned the products?

[Joseph D'Agostino:]

No. As you know, we have worked with Henry Schein in the past and basically what they try to do is put everything in the advantage for themselves, however, they still have customers that want the instruments and the hand pieces, so even if we were to end their relationship with them, they would still go through the process of a smooth transition to another alternative distributor, but also satisfy their current customers along the way, so historically, we've never had that problem and I don't see that happening, because as Leonard introduced before, they’re the larger supplier of dental, medical, and veterinary supplies in the world and they have significant customer base that they really do not want to irritate.

[Anthony Vendetti:]

Sure. Understood. And then lastly on Henry Schein and then one question on the intra-articular. So right now, when you say no minimum purchase in the first two years, does that -- did that start in 2016 because that's when the exclusivity started or when do they have a minimum purchase, is it in 2019 or?

[Joseph D'Agostino:]

The contract started in June 2016. So we're talking about 2018. June.

[Anthony Vendetti:]

June. Okay. And then on the regulatory front on the intra-articular, I know you guys resubmitted the application. Has the FDA come back with any more questions or what's the timeline as best you can tell for right now?

[Leonard Osser:]

Well, we’re constantly resubmitting because they're constantly asking questions. The issue would seem to have been the major issue with our difficulties regarding the intra-articular was the human factor study, which as you know Anthony has nothing to do with the patient. It's the ease with which the practitioner can use the instruments. So we've considerably dumbed it down, lack of a better term to make it very, very easy. We thought that it was quite easy to use, but we’ve made it much easier to use and we've gone through really extensive work with outside consultants, and we'll be filing a 260 page response regarding that this month. So I believe that is the last issue of any significance with the FDA regarding that product.

[Anthony Vendetti:]

Okay. So this month, you'll file – well, it is a long response, but I guess it's good to be thorough in these situations, hoping it’s the last set of questions, if it's the last set of questions, then the FDA has up to 90 days to either come back with more questions, hopefully not obviously, but or make a decision within 90 days of submitting your response, correct?

[Leonard Osser:]

Yeah. Our experience this time around with the FDA, they've been very responsive. As a matter of fact, on the epidural side, the examiner, when she has a question regardless of the time allotted to her to come back, she's asked the question right away usually asking us get back to me tomorrow, which we've been able to do in every case. So I believe we're at the end of the process given the questions which we’re being asked at this point. But as you know, it's a guess in dealing with any government institution, but I believe that they are being quite fair and they're trying to expedite the approval for us.

[Operator:]

[Operator Instructions] We will take our next question from James Terwilliger with Paulson Investment Company. Your line is open.

[James Terwilliger:]

Yeah. Thank you. Just real quick, I joined a little bit late. On the gross margin side, it seemed like they were down a little bit by 800 basis points. Can you comment on that? Is it selling prices or it might be more international business with China or, any comments on the gross margins?

[Leonard Osser:]

Yeah. As you know, we own -- Milestone Scientific owns 40% of Milestone China and the executive team is pushing very hard in China to own over a 10% market share of injections given in the dental arena, in the clinical environment in China, which is very, very substantial, so their objective is to make their money through the disposables, not the instruments. So we have been helpful with them by having the lowest margins with any distributor that we deal with. That’s why you see the margins lower. However, when you look at the efforts of our dental team throughout the rest of the world, you see that that actually has moved up considerably. We sold 672 instruments in ’15 and 767 in the rest of world, which is up 14%. Also, hand pieces have moved up considerably. The margin on the STA instrument in rest of world has gone from 64% to 67%. We're quite optimistic in that the STA instruments of 1398 and 1651 [ph] average pricing is up 18%. What's happening there is sense Gian Domenico Trombetta invested his team's $12 million and has become the CEO of the dental division, his model has been first bring in the top KOLs throughout the world, which is well into that process and he's been quite successful utilizing that to upgrade the distributors that we're dealing with. So in spite of giving away instruments to key opinion leaders, because we don't pay them, but we do give them instruments, they do clinical studies for free. He's been able to bring on far better distributors and up the margins. So we're beginning to see the result of that. We expect that to be significantly greater with both better margins and better volume this year than we've seen, but the process that he's initiated is clearly working and we're following that process well as we introduced the epidural instrument. In other words, bring in the top KOLs in the region, use them to train both in their universities, all the anesthesiologists, then they also have training sessions, they lecture, they do their own clinicals and that way, you move towards other KOLs in other regions, but that's the model that we're following. So we expect increased margins and increased volume this year. In the rest of world, we do not expect to increase margins in China, but the sales should remain about the same, approximately the same with STA instruments, but we believe as they put much more attention into putting out the instruments and the training that we will see greater sales in ’17 of the disposables and considerably greater sales of both the instruments and the disposables in ’18 and’19.

[James Terwilliger:]

Thanks, Leon. That was an excellent assessment of the strategy and that helped me a lot. I've got one other question on the distributor in China and the ownership and I hope this isn't a dumb question. But when I look at the income statement, we have a loss on earnings from the joint venture in China, not a significant loss, but nonetheless a loss and you own 40%. So two quick questions. Does the distributor sell other products besides your products and when do you think and I know it's hard for you to speak for that distributor but when would you think that that loss would disappear from the income statement?

[Leonard Osser:]

I think that the loss will certainly turn around next year, maybe in the fourth quarter. See, their objective is to flood the market with the STA instruments and do extensive training of the dentists and the clinics charge for the procedure, which is the most important thing. When they have no cost, but they have a profit each time they use our instrument, the motivation is very, very high to use our instrument. So that's in fact what they're doing. They're moving into clinics. They charge for the instrument, but when the -- there is a sinking fund by a financial institution in China and each time the clinic or hospital purchases a box of hand pieces, a certain amount of money for that goes into the fund. When they reach 500 boxes of the disposables either in one year of three years, whatever that is, they then get the money back that they paid for the instrument. So the instrument then becomes free. This is his model. So we anticipate as he moves ahead with this model, the same amount of sales of disposable -- I'm sorry, of instruments this year, but a considerable increase in disposable, but we believe if the strategy moves as anticipated that the amount of STA instruments next year and the following year will move up dramatically.

[James Terwilliger:]

Interesting. Okay. And just lastly, does the distributor sell other medical products or are they?

[Leonard Osser:]

Yeah. I'm sorry. They do, but on a very, very minor basis. They're putting virtually all their effort into the STA instrument.

[James Terwilliger:]

Okay. But good. That's something that could be a tailwind for you as well going forward just over time, pulling in more -- some other attractive products besides your attractive product line. Lastly, just very quickly and again I apologize if I missed this, the deferral of $1 million in sales, could you -- since I probably missed it, could you just expand on that? Again I apologize.

[Leonard Osser:]

China purchased, it’s of the end of the year, instruments. They paid us 1.35 million, which was for one container of disposables and 1000 instruments. They get special pricing. They're right at the end of a funding, which should happen this month and from that funding, they will pay for the other 1000 instruments. So we will probably -- we’ll most probably see another $1 million in revenues in this quarter because we did not book that in the last quarter.

[James Terwilliger:]

Okay. Well, good. So that was more of a just a push based on the funding issue and off to a good start in 2017 with that and hopefully some additional regulatory approvals. I'll jump back in queue and thanks for taking my questions. Sorry, I was a little bit late. Thanks, Leon.

[Leonard Osser:]

Not at all. Thank you very much, James.

[Operator:]

[Operator Instructions] And there are no further questions at this time.

[Leonard Osser:]

Thank you all very much and we believe that there will be developments this quarter, which we will be announcing. Thanks again. All the best.

[Operator:]

That concludes today’s conference. Thank you for your participation. You may now disconnect.