Milestone Scientific Inc.
Q4 2017 Earnings Call Transcript

Published: 3 Apr 2018

[Operator:]

Good day. And welcome to the Milestone Scientific Inc. Year End 2017 Investor Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Natalya Rudman, Investor Relations for Crescendo Communications. Please go ahead.

[Natalya Rudman:]

Thank you. Good afternoon. And thank you everybody for joining Milestone Scientific’s full year 2017 business update conference call. On the call with us today are Leslie Bernhard, Chairman of the Board and Joseph D'Agostino, Chief Financial Officer and Chief Operating Officer. Unfortunately, Leonard Osser is overseas on business and was unable to join the call but is happy to consult, available as always after he returns. The Company issued a press release this morning containing full year 2017 financial results, which is also posted on the Company’s Web site. 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, 2017. 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 on 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 10-K for the year ended December 31, 2017. The forward-looking statements made during this call are based upon management’s reasonable belief as of today’s date, April 03, 2018. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason. With that out of the way, we will now turn the call over to Leslie Bernhard. Please go ahead, Leslie.

[Leslie Bernhard:]

Thank you, Natalya. And thanks to everyone for joining us today. We achieved a number of major milestones in 2017. Most notably we received marketing clearance from the U.S. FDA for the CompuFlo Epidural system. But before I discuss the Epidural instrument and the medical side of the business, let me first provide an update on the dentals division. I am pleased to report we achieved 46.9% increase in sales for the fourth quarter of 2017 due in large part to increase dental handpiece sales in the U.S. In the U.S., we're pleased with how our partnership with Henry Schein has progressed and in particular, we're excited to have the one as a featured product being marketed by the exclusive product sales team at Henry Schein. Looking ahead, we anticipate some continued lumpiness in the business quarter-to-quarter due to the timing of domestic and international promotions, as well as the timing of orders from China. But overall, we anticipate our dental division will continue to generate steady growth and maintain solid margins. Overall, our dental division continues to generate positive cash flow on a standalone basis, which has helped offset some of the cost related to launching our medical instruments. Turning now to the medical side of the business. We’ve begun to accelerate our commercial efforts to around CompuFlo Epidural system, which was granted marketing clearance by the U.S. Food and Drug Administration in 2017. Thus far, we've been successful in gaining marketing clearance and creating awareness among KOLs, both in Europe and the U.S. In fact, the CompuFlo Epidural system has now been successfully utilized in over 600 epidural procedures worldwide, including both labor and delivery, as well as pain management with no complications reported to-date. This is a significant accomplishment when you factor the considerable risk factors associated with a traditional epidural procedure. With both clinical and post-approval data strongly supporting the benefits of our instruments, we've recently hired Sharon Smith as Executive Vice President of Global Sales & Marketing to see ahead our global commercial efforts and to bring focus on the U.S. launch plan. Sharon brings an extensive medical device background, a successful track record commercializing new products, as well as deep industry relationships, especially within the anesthesia and imaging market. To accelerate the U.S. launch plan, Sharon recently hired a veteran, VP of U.S. Sales, to continue development of KOLs and partnerships with U.S. distributors. We are now commencing the next phase of our strategy, which involves building out our distribution channels. We are in discussions with a number of distributors around the world and look forward to having the results of our clinical trials published in leading industry journals later this year, which will help drive market adoption. Last week, we announced that Health Canada has issued a medical device license for the CompuFlo Epidural. This is another important step in our global rollout strategy. Heading into 2018, we look forward to beginning the launch process of our Intra-Articular Instrument. We will be providing additional details in the near future. In addition, we recently announced plans to launch our new Cosmetic Instrument for the delivery of botulinum toxin, such as Botox and Dysport. There is a large and growing global market for botulinum toxin injections with over 8.4 million injections annually in the United States alone. The new cosmetic injection instrument is designed to inject accurate doses with the precision of a stylus pen and uses the same comfort speed technology that has made our dental injections painless. Yesterday, we announced that the CompuFlo Epidural system received independent industry trade coverage in an article entitled, Pressure Sensing Technology for Epidural. In the March issue of OBG Management, a publication in the OB/GYN specialty arena addressing patient care and practice management. This coverage further illustrates the interest we’re starting to generate within the industry, including the key trade publications. In conclusion, we are seeing growth in our dental division, which we expect to continue in 2018. As I mentioned earlier, our dental division is generating positive cash flow on a standalone basis and we anticipate improved profitability as we continue to grow our top line. At the same time, we’ve maintained a solid balance sheet, clean capital structure, which we believe will help drive shareholder value as we execute on our strategy in 2018. At this point, I would like to turn the call over to our CFO, 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 if you would, Joseph.

[Joseph D'Agostino:]

Thank you, Leslie. Total revenues for the three months ended December 31, 2017 and ‘16 were approximately $2.2 million and $1.5 million respectively. Total revenue increased by approximately $700,000 or 46.9%, which principally was due to increased handpiece sales in the United States and in Europe. Gross profit for the quarter ended December 31, 2017 was [$1.2 million] or 55% of revenue versus $1.1 million or 67% of revenue for the quarter ended December 31, 2016. Decline in gross profit percentage which was a result of handpiece sales to China, which has a lower gross margin and a reserve for inventory on a medical instrument due to a delay in commercialization of that device. The net loss for the three months ended December 31, 2017 was $1.8 million or $0.06 per share versus a net loss of $1.7 million or $0.06 per share in the prior year. The total revenue for the full year ended December 31, 2017 and ‘16 were approximately $11.3 million and $10.5 million respectively. Total revenue increased by approximately $800,000 or 8%, which was principally related to increased domestic handpiece sales of approximately $2 million in 2017 compared to 2016. International sales in 2017 decreased by approximately $1.2 million over the same period in 2016 due to a reduction in shipment to Milestone China. Gross profit for the year ended December 31, 2017 was $6.9 million or 62% of revenue versus $6.3 million or 56% of revenue for the year ended December 31, 2016. Net loss for the year ended December 31, 2017 was $5.1 million or $0.16 per share versus a net loss of $5.9 million or $0.22 per share in the prior year. I would now like to turn our attention to liquidity and capital resources. As of December 31, 2017, the Company had cash and cash equivalents of $2.6 million, total current assets of approximately $12 million and working capital of $5.4 million. We believe that our cash on hand, accounts receivable and revenues from the dental business, will be sufficient to operate the ongoing business for the next 12 months. At this point, I’d like to turn the call back Leslie.

[Leslie Bernhard:]

Thanks, Joseph. So as you can see, we’ve made significant progress today that we are targeting several very sizeable and potentially lucrative markets for our instruments as we look to aggressively expand our platform technology into new indications. Stay tuned for exciting announcements on major initiatives in the weeks and months ahead. I want to thank you all for joining the call today. And at this point, we would like to open the call for questions.

[Operator:]

Thank you [Operator Instructions]. And our first question today comes from Anthony Vendetti with Maxim Group.

[Anthony Vendetti:]

I was just wondering, Leslie or Joe, if you could talk about how the sales of the CompuFlo Epidural Instrument are going and how Sharon’s hire could help that process? And then also just an update on the Intra-Articular device, the timeline for that?

[Joseph D'Agostino:]

Our Epidural business is moving forward. And as you mentioned, Anthony, the inclusion of Sharon Smith in February as our Executive VP will add substantial positive results for us going forward. Sharon has a substantial background in the medical devices, as Leslie mentioned before. She was previously with Rivanna Medical, LLC where she was a Vice President of Sales and Marketing. And before that, she was working with Gamma Medical, a company that is also develops and manufactures high resolution digital molecular breast imaging systems. So I believe that with her and we spend some time together also myself with her that her leadership will be substantial in helping us drive not only the U.S. business but she’s also been working aggressively since she joined us in Europe, working with some of our KOLs and some of possible sites. As Leslie also mentioned in her introduction, we’ve hired an additional sales VP who will be working directly for Sharon. He’s been on the ground approximately three weeks at this point and he joined us, his name is Eric Gilbert, and he joined us previously from a company called [Osian], which was a company that supported orthopedics and neutral instruments. So I think with two of these people, Sharon in the lead and Eric on the U.S. side that will give us a substantial amount of coverage in the U.S. Both of these people have experience with medical devices. And I think that boots on the ground for the first time truly on an operating basis for this company is a substantial improvement. And now, I'll address the issue, the second issue you had, which is the IA. The IA, we are in a position now to begin providing our application for 510(k). We estimate that we'll be able to complete that process by the end of Q2. In this process as you know in the past, we've had an issue with the FDA back in December, resending our application saying that we didn't meet all the standards, principally because of some detailed background information that we do not include. We had a conversation and a follow up with the FDA through a, it’s call a Q-Sub submission. And we've gone over the questions and have now been in the process of preparing our response to include those questions and responses to those questions. So we should be a smoother application process. Not that I can guarantee that we’ll be done in 90 days, but I think we have the information that was a difficult situation for the FDA in approval before. And I believe that we have the conclusion to those questions that will be formulated in our plan in our new application for 510(k) for the IA Instrument.

[Operator:]

And next will be [Richard Durando], a Private Investor.

[Unidentified Analyst:]

What response are you getting from the commission as far as their desire to maybe have this product in hand versus their purchasing managers who maybe are reticent to buy a product, or how they feel about the liability being first on the block users? Do you have color into this…

[Joseph D'Agostino:]

I seem to be much more in the ground forces on the dental side. And where are you located, you said California?

[Unidentified Analyst:]

I'm in California. We've talked before at San Francisco meeting about. I mean, I am user since '97-'98, it's a great product elegant tool. I assume that this Epidural product is a very good tool. What just seems like -- the tool is so nice for me to use, I just can’t imagine the clinician not wanting to dive in and purchase these things in the tens of thousands across the world. And I'm just wondering what’s the hold-up. Can you give us some color on what the hold-up is and people purchasing these units?

[Joseph D'Agostino:]

In response to that question, Richard, it's just like any other new product that's creating a gap between what they have learned in the dental or medical school to what is available today. And there needs to be a catalyst to move then on to the new instrument. So what we're doing first in the dental side as you’re probably aware, we’re working with Henry Schein and Henry Schein is putting together quite a few promotions with us. But in addition to that, we have created additional programs where we get one-on-one with doctors in about 30 different sessions throughout the United States each year, specifically hands-on portions also. And I think you’re going to see the same thing to some extent in the medial sector. There are clinicians that are out there, academics love it, they love the new instruments and they are easy to accept it. Clinicians that have been using a loss of resistance syringe in the epidural process have a difficult time in changing. And I don’t think it’s because they are afraid of technology, but I think also it’s a point that they have learned it and they’ve been using it for a number of years. So we’re hoping that through the KOLs and through some additional training, including going to some of the medical schools and getting the medical schools up on board so the people that are at run at the schools will also see the information, see the new instrument for the epidural and be able to accept this new instrument on an easier basis and on a periodic basis quicker than we had on the progression with the dental instrument. However, I think that it takes a little bit of time with relatively new in the medical field and people do not know us in medical as they do it in dental.

[Operator:]

And our next question will come from [Roger Vincent with No.1 Corporation].

[Unidentified Analyst:]

My questions have been pretty much answered, it had to do with the Intra-Articular devices and while we don’t know anything about it, how is this that this takes long when the Epidural has already been approved and the FDA is familiar with the device and how it works. Why is this other thing taking so long?

[Joseph D'Agostino:]

Part of the question was believe it or not Roger, they were asking us to provide clinical data on the viscosity of the different drugs that could be used in the IA instrument. As you know, we’re a device company not a pharmaceutical company. So we had to, as part of that Q-Sub, go back to all of the pharma companies, get that information on viscosity and then to do the testing on the different viscosities through our instrument to determine if we had the same results with different types of medicament. So it’s just one more of hurdles that took us time to be able to do that, because as you probably know the pharma companies don’t easily able to or want to provide all that information to someone that’s not in their fold. So I think we’ve accomplished that and I think that we are moving forward on the 510(k) and we will be using our own in-house people who have worked on the Q-Sub. So I am convinced that we will have it complete and filed by the end of Q2.

[Operator:]

[Operator Instructions] Next will be James Terwilliger with Paulson Investment Company.

[James Terwilliger:]

Well I think the quarter looks pretty good. So congratulations on the revenue growth rate. I have got some questions that I think have been asked but I’m going to ask again maybe in a different way. So you have a platform technology with the dental business and we’ve got revenue growth there. We have a second indication for the epidural market and we’re on the verge of -- we have approval, we’re on the verge of different degrees of a controlled launch. In the IA market, we’re going to be going for 510(k). I can see the logic on the FDA in terms of the make-up of the agent and that’s not your problem, but I can see them asking that question. Would your 510(k) indication be then for a particular type or class of drugs or once they ask the question, how do we answer that?

[Joseph D'Agostino:]

So what we have done is by going through and doing the different testing, we were able to show that we can get significantly the same amount of medicament definite and the measurements being essentially the same, difference being the absorption rate of the medicament, which is really again not our forte, but we’re able to put that piece together. And I think that from at least the response that we have so far from the FDA, it seems that our responses to their question. So I think that we are in good position now to be able to provide that documentation and that detail again based on information supplied by the pharma companies and utilizing that data. So I believe that we are in a better position now obviously than we were before but also that we had data from the pharma companies that help support our conclusion.

[James Terwilliger:]

It’s an interesting path to go down one that we just have to manage, it’s not -- I think that the FDA’s question is interesting, I think you guys are doing the right thing in the response and it is what it is that’s business. On the cosmetic side, is that a different 510(k) or does that fall under the IA or how do I think about that?

[Joseph D'Agostino:]

It will be a separate 510(k). We are moving ourselves down through that process too. And yes, different 510(k), the platform is very similar. However, we’re talking about a different indication to that instrument. And as you’re probably aware, it’s never simple dealing with the government, especially for medical devices each one is a separate 510(k).

[James Terwilliger:]

But it is very interesting and we’ll talk offline, it’s interesting you got delivery mechanism. I did some work on drug coated stent, so where you put a polymer on the stent and you release a agent that opens up a whole lot of questions from the FDA, not that it changes safety or anything like that, I don’t think that’s the case here. But it is a drug delivery technology. When we look at this technology and we look at where we are at Epidural switching gears a little bit, I’ll take the 510(k) questions maybe offline. What -- can you expand anything in terms of the visibility of when we’re going to see something with the distributors for the Epidural? I think everyone on the call are very bullish on the Epidural product, and what it can be in the future. I think the data is fantastic. Should we be thinking of more of a second half of 2018 maybe distributor announcement and what, without talking about a particular distributor, what would you like to see in that distribution agreement beside an outright acquisition. But what would you like to see, stocking inventory, large sales force and multiple distributors, one large distributor like Henry Schein. How should we think about what we're looking for on the Epidural distribution?

[Leslie Bernhard:]

Let me share a particular gating item, which is the publication of the clinical study. And we expect certainly that that will -- every indication we have is that that will clearly be before the end of the year, and probably sooner than that, but we're being conservative. In terms of the distribution strategy and I wish Sharon were on the phone with us, our VP, because she could probably share this chapter in first with you. But really it's and we discussed this in our last conference call. It's a combination it's small regional but it's not shooting your-self in the foot but we have an opportunity with a large distributor that we have an expected distribution agreement that we can't move forward. And when you're first beginning, it's a strategy that employs an approach to each and every one of these. The last part of your question is -- Joseph, maybe you could comment on the nature of terms within the distribution agreements that we'd like to see.

[Joseph D'Agostino:]

James, what we're looking forward is a distributor that will be a stocking distributor, the distributor and I say distributor. Our path right now is to try and find regional versus a global distributor only because as you probably know, a lot of these Cosco’s and a lot of the pain management centers buy through a local distributor or one that has already been approved by the consortium of hospitals with their registration and their rating of the instrument before it goes into the hospital for review and finally for purchasing. So our goal is to find regional or at least three [indiscernible] of country, a distributor who can provide us with the access to that group for the purchasing group and buying group. At the same time, provide the personnel that qualified our training to present the instrument and to assist the hospital and the users through a training program on how to acquire the instrument within their specific organizations for medical locations. Now they have a lot of these distributors physically do that because they have their technicians or their sales people actually in the operating room in some cases. So I believe that with that type of distributors, and there are many of those out there, that we can find that sweet spot for us and help us to move along on a faster basis. Henry Schein is a great company to work with. They're not the right company to be able to work on training and applying those instruments as it is in the medical center. It’s just not the right place for us at this point. So I believe that's the best answer regional, people with strength in that region with strength with the buying groups and the approval groups and specific relationships with the hospital themselves, so that they buy into our instrument and they're able to sale in the instrument with the quality and the assurance that we stand behind instrument that works.

[James Terwilliger:]

Now, I want to thank you for taking those questions. I know that was a lot. I didn’t mean to come cross that way and then I think some of those were difficult, and I think you provided the best answers in visibility you could. At the end of the day, your platform technology that one could argue right now, you’re trading about 3 times revenue just for the dental business. You could say that’s fair even though I could say that that should be at 3 to 5 times revenue multiple. I think what’s exciting for investors is the Epidural business, which I think has tremendous growth, the IA and the cosmetic. So just keep it up, work with the FDA and the distributors. Some things are out of your control but overtime I think we’ll be successful. Thank you and I will jump back in queue.

[Operator:]

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

[Leslie Bernhard:]

Thank you all very much for joining the call today and we look forward to talking to you again -- well actually not very far off from now. Thank you again.

[Operator:]

Well, thank you. That does conclude today’s conference call. We do thank you for your participation today.