Misonix, Inc.
Q3 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good day and welcome to the Misonix, Inc Third Quarter Fiscal Year 2017 Financial Results Conference Call. All participants will be in listen-only-mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

[Joe Diaz:]

Thank you, Nicole, and thanks all of you for joining us to review the financial results of Misonix, Incorporated for the third quarter of fiscal year 2017, which ended on March 31, 2017. As the conference call operator indicated, my name is Joe Diaz, I'm with Lytham Partners and we are the Investor Relations consulting firm for Misonix. With us on the call representing the Company are Mr. Stavros Vizirgianakis, President and Chief Executive Officer, and Mr. Joe Dwyer, Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full-text copy of the release or the referenced 10-K and 10-Qs, you can access them from the company's website at www.misonix.com or numerous other financial websites. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Misonix Incorporated during the course of this conference call that are not historical facts are considered forward-looking statements, subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a 'Safe Harbor' for such forward-looking statements. The words, believe, expect, anticipate, estimate, will and other statements of expectation identify these forward-looking statements. Investors are cautioned that forward-looking statements made during this conference call are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligation to update forward-looking statements. Risk Factors include, but are not limited to factors discussed in the company's Annual Report on Form 10-K subsequent Quarterly Reports on Form 10-Q and current reports on Form 8-K. With that said, let me turn the call over to Stavros Vizirgianakis, President and Chief Executive Officer of Misonix. Stavros?

[Stavros Vizirgianakis:]

Good afternoon. I would like to thank all of you for taking time to participate on today's call. All of us at the company greatly appreciate your continued interest. The third quarter of fiscal 2017 generated solid operational and financial results. Revenue of $7.2 million, 32% increase from the comparable quarter last year represents the highest quarterly revenue for Misonix since the transition into a dedicated medical device company eight years ago. As I indicated in our previous quarterly call, the strategic focus for our business going forward will be to grow consumable sales, thereby driving recurring revenue. The U.S. business will be our primary focus going forward. Our goal is to grow consumable revenue to over 80% of total sales so that we can have a predictable and profitable revenue stream domestically as well as internationally. Towards that end, we are redeploying our resources to more effectively develop the U.S. market. We will have more direct contact with our end user customers and can rapidly respond to their needs. We have expanded the number of clinical sales specialists in our domestic sales and marketing group by seven professionals and the results to-date have been an excellent as evidenced by a 39% increase in domestic consumable sales, and a 31% increase in total U.S. sales in the third quarter. During the quarter we worked very closely with our new distributor in the People's Republic of China. We delivered our initially equipment stocking order and we conducted comprehensive training with their technical and sales personnel. We believe that China represents a significant opportunity for our product as the PRC increasingly values advanced medical technology and its population continues to advance from a socio-economic perspective. There are growing numbers of state of the art hospitals with equivalent operating room facilities that can benefit from the Misonix suite of ultrasonic medical instruments. Working with our distributor we look forward to developing this opportunity. On a more macro level international consumable sales for the third quarter of fiscal 2017 increased approximately 7% versus the comparable quarter last year, and for the nine months international consumable sales increased approximately 11% versus the comparable nine months of fiscal 2016. Again, as I said in last quarter's call, we are interested in working with partners that like us are dedicated to building sustainable consumables revenue streams. We're looking for distributors that will take the time and make the necessary investments in their respective markets to build awareness of the Misonix's product line and the advantages they bring to the surgical suite in terms of efficiencies and improved patient outcomes. Although this requires a somewhat longer sales process initially and doesn't provide the immediate gratification of a one-time capital equipment sale in the intermediate to long-term the benefits of the recurring revenue model will certainly make it worth a extra effort upfront. We're in the process of evaluating all of the 48 markets in which we operate internationally with the express intention of narrowing that group to those we believe can support a sustainable recurring revenue model and single use of consumable products. Subsequent to the end of the quarter, we have been preparing for the launch of our SonicOne product line internationally, at the European Wound Association Meeting taking place this week in Amsterdam. Our SonicOne system is proven to deliver outstanding results in accelerating the wound healing process leading to improved patient outcomes and cost savings to the healthcare system. We're excited with the opportunities ahead. We recently launched our new SharpVac product extension in the SonicOne product line at the Diabetic Foot Conference in Houston on March 23. SharpVac is The World's First Ultrasonic Curette with Aspiration, and the initial customer response from surgeons at the conference was overwhelmingly positive. We firmly believe that the SharpVac can be important tool in healing wounds more effectively while avoiding the traumatizing impact of amputating limbs. We are dedicated to improving quality of life to those afflicted with the damaging effects of diabetic wounds. Let me also say that we are working on a number of interesting clinical studies in the wound segment that we believe will lead to improved treatment protocols and better patient outcomes in the not too distant future. We hope to share some of these findings with you in the coming months. With that, let me turn the call over to Joe Dwyer, our Chief Financial Officer, for a review of the financial results of the just completed quarter. After Joe's remarks, we will open the call for your questions. Joe?

[Joe Dwyer:]

Thanks, Stavros. We had a very solid third quarter ending March 31. Consumable sales were up both domestically and internationally. We made great progress with our new distributor in China to begin developing a significant opportunity in the coming years and we had a very favorable product mix in the third quarter which was weighted in higher margin consumables products. For our third quarter, sales increased by 32% over the third quarter of last year to $7.2 million, an increase of $1.8 million. Our mix of domestic to international sales was 56% domestic to 44% International about the same as the third quarter of last year. We achieved a 31% growth in domestic revenue fueled by 39% increase in domestic consumables sales. Internationally, we increased sales by 33% principally resulting from the initial shipments of BoneScalpel product to our new Chinese distributor. Aggregating domestic and international consumable sales for the quarter, consumable sales represented 74% of sales in Q3 and 76% of sales year-to-date. While we expect ebbs and flows throughout the course of an operating year, we're confident that an 80% recurring revenue run rate as a percentage of total sales is an achievable annual goal going forward. This will provide a solid base of predictable revenue from which we can grow the business in the coming years. The favorable product mix increased gross margin from the third quarter to 70.6% compared with 65.7% in last year's third quarter. We're pleased with margin performance for the quarter and year-to-date. Operating expenses were $6.5 million for the third quarter, up $1.2 million from the third quarter last year. About $270,000 of the increase related to higher sales and marketing expenses. As Stavros mentioned, the company is in the process of taking aggressive steps to ramp up our business which includes investments in sales and marketing. General and administrative expenses were $1.1 million higher for the third quarter than last year. About $700,000 of the increase related to the cost of professional fees for the company's internal investigation along with increased non-cash stock compensation expenses. Our net loss for the third quarter was $146,000 compared to a net loss of $679,000 in last year's third quarter. On a year-to-date basis for the first three quarters, sales were $19.4 million, up 16% from last year. The gross profit margin was 69.9%, up from 66.6% last year. Operating expenses were $18.1 million, up $2.8 million from last year, with $2 million of that increase coming from the cost of our internal investigation. Finally, our net loss for the nine month period was $1.3 million compared with a loss of $724,000 for last year. Without the investigative costs, we would have reported profitable operations on a year-to-date basis. The financial condition of the company remains strong. We head into the fourth quarter of the fiscal year with a solid cash position of approximately $12 million and no debt. We look forward to a strong finish in our fourth quarter and expect to enter fiscal 2018 with good momentum. Stavros?

[Stavros Vizirgianakis:]

Thank you, Joe for that review. Let's now open the call for your questions. Operator, provide instructions for our listeners to queue up please.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Michael Kaufman of MK Investments. Please go ahead.

[Michael Kaufman:]

Hi Stavros, it sounds like a great quarter. You did a magnificent job in growing the business, the question I have is when does the administration expense reach a more steady state level and what are you forecasting that level to be without the special internal investigation charges? And the other question would be when do you see us providing some corporate presentation that's still absent but a lot of good things to say, so I think a presentation will be appropriate. And I guess other than that it looks pretty good as we move forward. Thank you.

[Stavros Vizirgianakis:]

Thank you, Michael. Thank you very much for your participation and for your question. The first part of the question I'm going to let Joe address regarding the administration. In terms of the updated corporate presentation, this is a work in progress at the moment at the company, what we're doing is we're actually upgrading the matrix. As you know in the past we looked at the business from a different point of view, we were more concerned about box placements; new focus has really been all about utilization and procedures. So what we're hoping to do is that by the end of the year to update the presentation to extrapolate to you some of the new metrics that we're putting into place. One of the big things that we're looking at in terms of procedure is usage of Misonix's products. So you will start seeing in the presentation that will follow there will be specific mention of target procedures and volumes of procedures that we're actually targeting. So this year, for instance, we're targeting 50,000 procedures to get the Misonix's disposables used in those procedures. So when we put out the new updated presentation, you'll see what the goals are for the New Year but some of the metrics are going to change fairly significantly that's why there has been a little bit of a delay. On the admin side, I will defer to Joe.

[Joe Dwyer:]

Hi, Michael. Regarding G&A expenses, the fees from the investigation year-to-date or I guess inception to-date have been about $2.1 million and $700,000 of that was in the third quarter. We think going forward for the fourth quarter expenses should be quite a bit less than the third. We don't know how much but it should be significantly less and then going into fiscal 2018, we think that there will be much less than what we've already incurred, they think our belief is that the heavy lifting was done right now, you never know but we think that most of it is behind us. So steady state, I think our belief is 2018, fiscal 2018.

[Michael Kaufman:]

I guess the question is what level do you think you'll approach in terms of your G&A expense in 2018 on a quarterly run rate basis?

[Joe Dwyer:]

We're not going to give guidance on that right now but we're still going through, working on our budget and haven't provided guidance. But I think it could be probably more, more similar to what we had in the past. So just think down $2 million from what we are now.

[Michael Kaufman:]

And I guess last question is on the SonicOne the vacuum product which sounds like an interesting product. Do you have any idea what the market opportunity is for that product worldwide?

[Stavros Vizirgianakis:]

Right now it's still preliminary data; we believe that the market in the surgical department for surgical procedures department in operating room represents an opportunity in excess of $100 million. This was made up of existing market from a similar technology using a water jet that has been established in the marketplace as well as our ability to develop a new market segment for pure play ultrasonic requirement. So again we will probably have that in the updated presentation but short answer I'd say in excess of $100 million.

[Michael Kaufman:]

Thank you very much and keep up the good work.

[Stavros Vizirgianakis:]

Thank you, Michael.

[Operator:]

[Operator Instructions].

[Joe Diaz:]

While we are getting additional questioners into the queue, Stavros I think this might be an opportune time to give the audience a sense of the progress that you've made since becoming CEO in December. Can you give us an overview of some of the things that you have done and/or changed in that time period?

[Stavros Vizirgianakis:]

Well actually a lot has changed, obviously I've come on board as the CEO, we bought an Interim CFO, we have also appointed and created a new position for a Chief Compliance Officer within the organization. In terms of the board, the committee reorganization has been significant. We have a new audit committee chairman as well as Governance Committee Chairman. We have upgraded the ethics policy and also the Whistle Blowers Hotline. We have also had numerous other upgrades to policies and procedures. So we really are expecting big benefits and we're confident that we have the internal controls in place now for the level of the business that we are going forward. We've also significantly ramped up the sales efforts we have added on additional heads on the sales side and we will continue to add additional resources to the sales and marketing team as well. Also I think a major milestone in the company has been sorting out Chinese distribution and really identifying and partnering with the right entity that is the same corporate alignment as Misonix. So I believe that is beginning of a very long-term and successful partnership potentially.

[Joe Diaz:]

With regards to the international business, the company has traditionally been involved with a large group of nations out there. You mentioned that you're looking to possibly reduce the number of countries that you operate in. Can you give us an idea of what your thought process is on that?

[Stavros Vizirgianakis:]

Yes right now we're doing business in roughly 48 countries and we're trying to support activities in all of these countries. What we're striving to do is to have 12 to 15 key markets where we will dedicate the majority of our resources on the international front to support and grow those markets and we will have a diminished level of support to the remaining countries. So we will still continue to do business in the 48 countries but we will also significantly less support to the markets outside of the key identified markets.

[Joe Diaz:]

Turning back domestically BoneScalpel revenues here in the U.S. how is that shaping up obviously you added some additional clinical sales specialists, is it your intention to perhaps add more people in the coming quarters?

[Stavros Vizirgianakis:]

Absolutely. I think we've seen huge success with BoneScalpel if you look at the growth for the quarter, our growth in BoneScalpel was actually in excess of 40%, so very encouraging signs and we will continue to add resources. I think we proved to ourselves that additional resources in the field do result in additional sales for the company. So that's a good investment.

[Joe Diaz:]

On the previous call, you talked about transitioning your installed base of ultrasonic generators into more of a universal platform that would run most of your product lines. Can you give us an update on how that's coming along, is that new universal platform out there and what will it support?

[Stavros Vizirgianakis:]

Well basically that's going to be a step surprise, Steve. The first step was to essentially combine the BoneScalpel on the SonicOne OR platform into one new platform basically the Misonix console unit, so we’re in the process of transitioning these units into a unified platform which will run BoneScalpel accessories as well as wound. The universal platform is little bit further out but step one is well underway.

[Joe Diaz:]

Okay. With that let me turn the call back over to the operator for reprompt.

[Operator:]

[Operator Instructions]. And we have no phone questions at this time.

[Joe Diaz:]

Let's turn the call back over to Stavros for closing remarks.

[Stavros Vizirgianakis:]

I would like to thank all of you for participating on today’s call. We look forward to talking to you all again at the conclusion of the current quarter. Have a great day and thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.