Milestone Scientific Inc.
Q3 2014 Earnings Call Transcript

Published: 17 Nov 2014

[Operator:]

Good day and welcome to the Milestone Scientific Incorporated Third Quarter 2014 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to David Waldman with Crescendo Communications. Please go ahead, sir.

[David Waldman:]

Good afternoon and thank you for joining Milestone Scientific’s third quarter 2014 financial results conference call. On the call with us today is Joseph D’Agostino, Chief Financial Officer and Chief Operating Officer. The company issued a press release this morning containing third quarter 2014 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 third quarter ended September 30, 2014. 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 December 31st report on Form-K for the year ended December 31, 2013 and September 30th report on Form 10-Q for the quarter ended September 30, 2014. The forward-looking statements made during this call are based upon management’s reasonable belief as of today’s date, November 17, 2014. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason. With that, we’ll now turn the call over to Joseph D’Agostino, Chief Financial Officer and Chief Operating Officer. Please go ahead, Joseph.

[Joseph D’Agostino:]

Thank you, David. And thanks everyone for joining us today. The total revenue for the third quarter of 2014 increased to $2.5 million, which included a 63% increase in international sales. This increase in international sales was partly offset by a decline in the domestic sales due to handpiece incentives in the first half of 2014 and lower distributor pricing on the STA instruments, which we believe will help drive long-term, recurring handpiece sales. We expect to resume domestic growth in the fourth quarter of 2014. Receipt of the CE Mark approval for our intra-articular and epidural instruments represents a significant step forward towards commercialization of our first medical instruments in Europe. Our subsidiary, Milestone Medical, is in the process of evaluating strategic partners to distribute both products in Europe. We are also making progress advancing our epidural and intra-articular instruments through the FDA regulatory process. And lastly, Milestone Medical is applying for a variety of brands in Europe, which would help us to expand both production as well as our R&D capabilities in Europe. We look forward to launching new medical applications for our computer-controlled injection technology in the coming years which I will discuss in more detail later in the call. Overall, we believe that we have developed an effective strategy to incubate, commercialize a wide array of instruments in partnerships, licensing arrangements while minimizing dilution to shareholders. At this point, I’d like to dive into the numbers in more detail and then provide a further discussion of our operations before we open the call for questions. Milestone’s overall revenue increased to $2.5 million for the third quarter of 2014 versus $2.4 million in the third quarter of 2013. Domestic instrument sales for the third quarter decreased by $72,000 or 28% versus the comparable period in 2013 due to lower distributor purchase prices for the STA instruments for a limited time period. The strategy is to facilitate the deployment of STA instruments at a faster pace, thus generating recurring handpiece revenue. Domestic handpiece sales decreased temporarily by approximately $400,000, 32% in third quarter of 2014 versus 2013, as a result of sales incentives in the first half of 2014 which I mentioned earlier. On the international front, instrument sales declined slightly by 2% or $5,000 in the third quarter of 2014 versus the same period in 2013. International handpiece sales (sic) [increased] by $565,000, or 83% due to added support we provided to our distributors. Gross profit for the third quarter of 2014 was $1.7 million or 67% of revenue as compared to the gross profit of $1.8 million or 72% of revenue for the third quarter of 2013. The decrease in gross margin reflected the lower pricing strategy on the instruments to drive handpiece sales. Selling, general and administrative expenses were $1.8 million for the third quarter as compared to $1.3 million in 2013. The increase in SG&A is due to our marketing, training, consulting and business development efforts to strengthen Milestone’s position in the marketplace. We also noted $126,000 increase in international commission fees for higher international sales. As a result of the rise in SG&A expenses, the loss from operations for the three months ended September 2014 was $162,000. And income from operations for the respective period in 2013 was $436,000. Net loss for the third quarter of 2014 was $358,000 or a minus $0.02 per share versus an income of $218,000 or $0.01 per share for the comparable period in 2013. The decrease in net income is primarily the result of an operating loss of $162,000, an increase in the loss of the Medical Joint Venture of $11,000 and the negative impact of the reversal of the bad debt reserve for uncollectable accounts in 2013. Now I’d like to turn our attention to liquidity and capital resources. At September 30, 2014, the company had cash and cash equivalents of $781,000 and treasury bills of $9.5 million. Our working capital was $13.7 million and increased by $11.3 million as compared to December 31, 2013. As a result of the capital raise of $10 million in 2014 offset by [loss of] nine month period. Our shareholders’ equity amounts to $15.3 million. As you can see, we have made major strides in strengthening our balance sheet. So to wrap it up, we received CE Regulatory Marks for the intra-articular and epidural instruments. As a result we are now focused on commercialization of our first medical instrument in Europe. We are also making progress towards advancing these medical instruments through the FDA regulatory process. Although, there is variety of factors outside our control, we currently expect the FDA approval on the intra-articular instrument in the first quarter of 2015 and FDA approval on the epidural instrument in the third quarter of 2015. We also look forward to expanding our computer-controlled injection technology into new markets. Most recently, we announced a formation of a dermatological joint venture with our exclusive distributor… [Technical Difficulty]. Hello? Let’s continue. We are looking forward to expanding our computer-controlled injection technology into new markets. Most recently, we announced the formation of a dermatological joint venture with our exclusive distributor across Asia, Milestone China to develop a botox drug delivery instrument. We also announced our plans to raise capital, apply for grant funding and list shares on another JV Milestone Ophthalmic, in Poland. With our dental division, we plan to launch global B2B and consumer awareness campaigns over the next few quarters as well as to establish relationship with dentists in order to better train them on the instruments, which have proven to be an effective strategy to increase handpiece utilization. Given the strength of our balance sheet, which includes over $10 million of cash, cash equivalents and treasury bills, we are now in a position to more aggressively market and sell our dental instruments and handpieces into United States and worldwide. We are also well positioned to accelerate the launch of new medical applications which could include colorectal surgery, podiatry, dermatology, orthopedics, nasal and sinus surgery and cosmetic surgery among others. At the same time, we remain focused on maintaining a lean overhead and leveraging our strategic partners to launch new medical applications while minimizing our own capital expenditures and avoiding unnecessary dilution to shareholders. We are encouraged by the outlook for the business and look forward to announcing additional developments as they unfold in the near future. I’d like to thank you for joining the call today. At this time, I would like to open the call up to questions. Operator?

[Operator:]

Thank you. [Operator Instructions]. We do have a question from [Maria Coffman with Lyndon]

[Joseph D’Agostino:]

Yes Maria.

[Unidentified Analyst:]

Yes. Congratulations on receipt of approval in Europe.

[Joseph D’Agostino:]

Thank you.

[Unidentified Analyst:]

And can you just please comment on discussion with distributors and maybe the next step forward of data approval?

[Joseph D’Agostino:]

Okay. Can I put you on speaker right now on the phone? And I think the confusion or at least the communication problem is there. So, hold on one second. Hello, can you hear me?

[Unidentified Analyst:]

Yes, I can hear you.

[Joseph D’Agostino:]

Okay. So, I apologize for the interruption and the globalness in the communication. Can you repeat your question?

[Unidentified Analyst:]

Yes, certainly. Can you just comment on discussions with distributors in Europe and the next step for FDA approval?

[Joseph D’Agostino:]

Sure. We’re moving forward in Europe on the medical instrument. I think that’s what you’re referring to…

[Unidentified Analyst:]

Yes.

[Joseph D’Agostino:]

Both the epidural and intra-articular. We’ve had several meetings and we -- as recently as last week. And we’re moving forward on trying to pick the correct, the most appropriate, the most opportunistic distributor in each of the territories in Europe. So, that’s moving forward and we hope that in the first quarter, we’ll be able to announce some of those distributors in various countries. On the FDA side, as I mentioned in the prepared remarks, we’re moving forward on the FDA approvals and each step is a short step, but a monumental step on moving forward. And we believe, as mentioned in the presentation that we have positive steps, positive communications from the FDA although they could change, because we can’t control totally that process. But we’re looking forward for the intra-articular instrument to be approved in the first quarter of 2015 and for the epidural by the third quarter of 2015, both of which are incrementally important for our business, but at the same time we’re looking forward for our first real deal in Europe which is significant for us and especially since we now have the CE approval.

[Unidentified Analyst:]

Okay.

[Joseph D’Agostino:]

Thank you very much, Maria.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions]. We have a question from [Ed Agitian], Private Investor.

[Unidentified Analyst:]

Yes, hi Joe. I saw in the 10-Q and trying to find again as we’re speaking, but something to the effect that that very long term advance that you had made to your contract manufacturer for instruments is very close to winding itself down and -- or at least with respect to the instruments. And just trying to understand anything that you could color that you can give beyond that, because it seems like to wind that down you’d be building up inventory quite significantly. Is this related to the stocking of China or is there anything behind this that you could help me understand a little bit better?

[Joseph D’Agostino:]

I think there is two items that are in there. One item is the FDA instruments, now I think that’s you’re referring to. As you know, we purchased those parts in advance over a longer period of time to create a fixing of our cost of sales for those parts. At this point, we are moving down the line because some of those parts we have purchased a while ago need to be put into a finished unit, tested and make sure they’re working so that we don’t void any of our agreements and/or any of the opportunities for replacements for parts under warranty. So, those instruments are being put together. We look at our production and also our distribution over the next two years in the dental side and we believe that we’ll be utilizing most of those instruments in that period of time. This year to-date, we have as mentioned in our prepared remarks, we have reduced the price of our instruments to accelerate the sale of handpieces and that has become beneficial for us in moving more instruments through. At the same time you noted, which is important to us is the China business. And we have already started to move some of those instruments into our affiliate, which is Milestone China who is now going to be our number one distributor, exclusive distributor in Asia and China. So that market is moving forward and we hope to utilize most of these instruments within the next 18 month period.

[Unidentified Analyst:]

Okay. That’s great, that’s great. It’s good to see that finally winded itself down there. And then from here forward, do you just going to go on as needed basis or do you think you will enter into another substantial advance once this thing winds down?

[Joseph D’Agostino:]

Yes. Our typical approach both for all our instruments is to advance for the raw materials necessary, not the labor, to prepare the instruments and that will be in the medical and the dental side with our capitalization, the $10 million we received in May of 2014. That gives us an opportunity to increase our marketing efforts, which have here [indiscernible] been sketchy in the U.S. as you know. And more direct overseas and that’s why we’re seeing the bubbling of our international business. But the quick answer is that, yes, we will look at doing at purchasing additional parts for a longer time production; three years, four year production period so that we can walk in the prices and make sure that we have the instruments capable and available for sale. Now remember, since we are also the manufacturer, we have an opportunity to redirect the manufacturing to go from international to domestic to Chinese. So, depending on which of those markets are moving forward faster, we will just divert the production; with very little cost and produce the other instruments. So, the short answer is, yes, we intend to continue doing that. Yes, we will with the best effort that we have project out what we think we need over next two to three year period and purchase those parts, which will represent a fixing of our costs for the instruments that also give us the immediate availability to fulfill orders as they come in and that’s both in medical and in the dental side. Thank you for your question.

[Unidentified Analyst:]

Thank you. Just a couple of more if I may. Given the fact that you have all the cash that you have now, is there any thought to discontinuing the practice that made a lot of sense in the past of issuing stock to consultants and all those sorts of things, paying them in cash versus using stock at this point?

[Joseph D’Agostino:]

Yes, we’ve discussed that, it’s a very good point too, because now with our cash position, we do not want to dilute the shareholders any further in that side and we talked about that recently and we are moving forward on a positioning where outsiders will not receive stock, but perhaps continue with, as you know, our commitments and contracts with our CEO and some other officers in the company. But the major point for outsiders that will come to an end.

[Unidentified Analyst:]

Excellent. And then last question. MM, the Milestone Medical, if my estimations are correct, they are probably not too far away from needing more money. If and when that period that time should come, can you tell me anything about what your thinking is again given your cash position now? Are you considering in lieu of having them go out to the market to try to raise more money at least with respect to your 45% interest that you would fund that yourselves with your own cash?

[Joseph D’Agostino:]

That’s a very good question. Let me just give you an update, because there was a recent press release where Milestone Scientific actually purchased some additional shares from one of the founding shareholders. So, we now own 49.8% of the company, that’s the first point. So, we’ve increased our shareholders’ position. We believe that there is value there and we are moving forward aggressively on that. We’ve also released, put out a press release not too distant past where Milestone Medical is in fact preparing a prospectus for two reasons; one to raise $6 million to $7 million, right now we’re on the new connect exchange on the Warsaw Exchange and we plan to move up to the full Warsaw Stock Exchange that will be done sometime in the second quarter of 2015. The prospectus is in with the post SEC and we’re waiting for approval to move that forward. So the answer is, as Leonard has directed, which make sense, we’re trying not to burden Milestone Scientific with any cash requirements for these joint ventures. So, the joint venture will be financed through the $6 million to $7 million that we raise. And if you look at the stock, the way it’s trading right now, it’s doing very well. So, we believe we’ll be able to sell those shares and sell out that offering in the second quarter, by the second quarter of 2015 and not cause cash drain on Milestone Scientific.

[Unidentified Analyst:]

Okay, very good. Thank you very much, Joe.

[Joseph D’Agostino:]

My pleasure, Ed.

[Operator:]

[Operator Instructions]. And there are no more questions in queue.

[Joseph D’Agostino:]

Okay everybody. I’d like to give a closing comment and to thank the shareholders of the company. They’ve stuck with us through thick and thin and the future looks encouraging for us both on the dental side, as well as our joint ventures in some or more exclusive transactions in the future. So, thank you very much for being here with us and signing off now. Thank you very much. Bye, bye.

[Operator:]

This concludes today’s conference. And thank you for your participation.