Misonix, Inc.
Q2 2018 Earnings Call Transcript

Published: 7 Feb 2018

[Operator:]

Good day, everyone and welcome to the Misonix Second Quarter Fiscal Year 2018 Earnings Conference Call. Today call is being recorded. At this time I would like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

[Norberto Aja:]

Thank you, operator and good afternoon everyone. Thank you for joining the Misonix fiscal 2018 second quarter conference call. We will get started in just a minute with management's presentation and comments, but before doing so let me take a minute to read the safe harbor disclosure. Today's call and webcast contains forward-looking statements with the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include among others, statements we make regarding guidance relating to our financial results. Forward looking statements are neither historical facts nor assurance of future performance. Instead they are based only on our current believes, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances. They are difficult to predict and many of which are outside of our control. Our actual results and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward looking statements today include among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions, and the risk described in today's news announcement in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K, and Form 10-Q. Andy forward-looking statement made by us in today's conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise. Today's call and webcast will also include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to most directly comparable financial measures calculated in percentage and accordance with GAAP can be found in today's press release, as well as in the company's Web site. With that, I would now like to turn the call over to CEO, Mr. Stavros Vizirgianakis, President and CEO of Misonix. Please go ahead, Stavros.

[Stavros Vizirgianakis:]

Thank you, Norberto, and good afternoon, everyone. Thank you for joining us in the call today to review our fiscal 2018 second quarter results and our continued progress on several key initiatives during the period which support our goals for growth. Joining me on the call today is Joe Dwyer, our Chief Financial Officer. As outlined in today's release, Misonix delivered another period of strong top line results, including record quarterly revenue growth of 38% for the second quarter of fiscal 2018 compared to the prior year period with gross margins in excess of 70%. The quarterly revenue increase was driven by robust growth across both consumables and equipment sales and in our U.S. business as well as across our international markets. Year-to-date, overall revenue growth of 28% compared to the first half of fiscal 2017 is in line with our expectations for continued double digit top line growth and highlights the positive impact of various initiatives are having on sales performance. Given that we have a better feel at this point for our future performance, we are providing revenue guidance for the full year fiscal 2018. We now expect to report revenue for fiscal 2018 to exceed $31 million. Overall, our second quarter results once again highlight the marked progress we are making in positioning Misonix for profitable growth as we focus on driving additional operating efficiencies, further improving our sales and go to market strategies through the expansion of our sales team and strategic rebranding and repositioning of our products, expanding our product portfolio, addressing new markets and becoming a more customer-centric and R&D driven company. The value proposition of our product is very strong as evidenced in the growing appeal amongst healthcare providers. This is further reinforced by the recent studies conducted by Dr. [Wade Jameson] [ph] of the Center for Neurosciences, Orthopedics and Spine, demonstrating how our BoneScalpel product line was able to achieve average cost savings of over $1000 in bone grafting material alone. Allowing doctors to provide better patients outcomes while at the same time reducing cost in the overall system. Looking at the U.S. market. We continue to see healthy trends in the market which represents approximately 40% of the global medical device market. Although challenges remain related to insurance coverage and reimbursement, healthcare providers as well as patients are putting greater emphasis on utilizing devices that offer clear advantages. Including effectiveness of results, ease of use and attractive economics, to help health practitioners achieve the desired outcomes related to time, cost savings and outcomes for their patients. On the international front we continued to make market progress including with our Chinese manufacturing partner, under which we license certain manufacturing and distribution rights to the SonaStar product line. While we are currently supplying them with the product that need to establish the SonaStar product line, we expect them to begin manufacturing the SonaStar in the near future. The growth across our consumables and equipment sales as well in the domestic and international fronts, reflect the success of the strategic changes we have made and the various initiatives we have undertaken to improve our go to market process, including the repositioning of our brands and the build out of our commercial sales team which now represents approximately 43 people with the recent additions in the U.S. On the back of these results and the operating momentum we continued to achieve, we feel confident that our investments in research and development will yield attractive returns. R&D is a vital part of our business, particularly for a medical device company like Misonix. As such, we will continue to focus our resources in investing in the design and development of various product range extensions and our next generation of products, which is expected to be launched later this year and available in fiscal 2019. We expect that these new additions and products will further fuel that growth and yield healthy returns on our investment. In addition to the success we are delivering as a result of the strategic changes and execution and our optimism regarding the value to be derived from our R&D efforts, we have made some valuable additions to the management team compared to last year at this time. Our CFO, Joe Dwyer has been a valuable addition to the team with strong contributions in guiding the company through the critical stage of change and helping manage the day to day operations of our growing company while playing a key role in pursuing our inorganic growth initiatives. Looking ahead, we continue to believe the business has significant opportunities to create substantial shareholder value and remain confident in our ability to drive further utilization towards our goal of achieving 100,000 surgical procedures annually by fiscal 2020. The medical device industry continues to see growing demand for better solutions and we have positioned Misonix to be the beneficiary of this environment and the many exciting opportunities before us. Our team is more enthusiastic than ever about our future. Our near term and long-term growth and profitability prospects and our growing capability to address the needs and trends impacting the patients and healthcare providers. With that, I would like to now turn the call over to our CFO, Joe Dwyer to review our financial results and future outlook. Joe?

[Joseph Dwyer:]

Thank you, Stavros. Good afternoon, everyone. Let me begin by reviewing our financial results in greater detail. As Stavros noted, the second quarter of fiscal 2018 revenue grew by 38% to $8.3 million, which is the best revenue quarter in the company's history. Top line results were driven by healthy growth across both consumables as well as equipment revenue. Consumables product revenue or recurring revenue grew by 26% to $6.2 million, reflecting their focus and redeploying our assets to drive recurring revenue. Consumables now represents 74% of total revenue in line with our expectations and the focus we have devoted to developing this important revenue stream. Overall, equipment revenue nearly doubled growing by 93% to $2.2 million, driven by 185% growth domestically and 63% internationally. Domestic revenue increased 31% to $5.4 million, while international revenue grew 53% to $2.9 million. This led to a gross margin of 70% in line with our expectations. We are very pleased to see that robust growth not only across our product revenue lines but also across both our domestic and international markets, reflecting the strong appeal and relevance of our product offerings on a global basis. Operating expenses were $7.3 million for the second quarter, a 25% increase from the second quarter of last year. The increase was primarily driven by a 20% increase in selling expenses, principally related to the continued build out of our sales organizations and variable commissions on higher revenue, 14% increase in G&A expenses related to increase expense in the non-cash compensation expense area during the second quarter of fiscal 2018, and $600,000 increase in R&D with the development of our next generation products. This led to a loss from operations of $1.3 million compared to a loss from operations for the second quarter of fiscal 2017 of $1.6 million. Due to the expiration in August 2017 of our royalty contract with Medtronic minimally invasive therapies related to our ultrasonic product line, other income decreased by $900,000 in the second quarter of fiscal 2018. In addition, recently enacted tax legislation reduces the U.S. statutory tax rate from 35% to 21% effective January 1, 2018, which required as to revalue our deferred tax assets to reflect the lower rate. As a result, we recorded a $1.8 million tax expense during the quarter reflecting this revaluation. Additionally, we evaluated our remaining deferred tax assets as of December 31, 2017, to determine their realizability in accordance with GAAP. While revenue growth has been impressive, we are required to measure our last three years of cumulative pretax income determine if those results are positive or negative. As June 30, 2017, we were in a cumulative three-year profit position. As of December 31, 2017, we are projecting that as of the end of this fiscal year, we will be in a cumulative three-year loss position. In part resulting from the continued investments we are making in building a direct sales force and building our next generation Nexus platform. This is in addition to the $2.8 million of non-recurring professional fees in fiscal '17 and '18, relating to our internal investigation of the FCPA matter. Given these new data points, we were required to fully reserve the remaining deferred tax assets on our books and we recorded a $4 million charge at December 31, 2017. In total, we recorded a $5.8 million non-cash tax charge for the reevaluation of our deferred tax assets and the valuation allowance during the second quarter. It's important to note that this is a non-cash charge which does not reflect the actual performance of our business and does not impact our ongoing business operations. We still believe that we will be able to utilize our deferred tax assets in future years and we will reverse this reserve when sufficient profitable years have been realized. This led to a net loss of $6.9 million or $0.76 per share for the second quarter of fiscal 2018 compared to a net loss of $600,000 or $0.07 per share in the prior year period. Our loss per share of $0.76 for the quarter included $0.64 for the tax impacts. Excluding this onetime tax expense, the net loss would have been $1.1 million for the quarter. Regarding our new Chinese distribution partner, we expect to receive an additional $1.7 million of cash during the second half of fiscal 2018 related to the technologies that we have licensed. The $5 million of cash we expect to receive in fiscal '18 from this new contract will more than offset the impact of the $3.8 million in lost royalty from fiscal 2017. We are happy to report that we generated positive adjusted EBITDA of $400,000 for the second quarter. While we have not reported EBITDA or adjusted EBITDA in the past, we believe that this is an important measure to show our cash earnings run rate given that our income statement contains quite a few non-cash items. We define adjusted EBITDA is earnings before interest, depreciation, amortization, taxes, non-cash compensation expense, and R&D expenses from our Nexus next generation project. We have excluded Nexus because this is an expense which is not typically a part of the company's R&D run rate. As Stavros mentioned, we have also elected to provide revenue guidance and now expect full year fiscal 2018 revenue to exceed $31 million. Moving on to the balance sheet, we ended the second quarter of fiscal 2018 with $12.1 million in cash and no debt. Our improving balance sheet allowed us to generate $500,000 of cash from operations during the first half of this fiscal year. And working capital increased to $18.3 million at December 31, a healthy working capital ratio of 6.2x. In closing we remain highly encouraged about the progress achieved to date but even more so about the opportunities ahead of us to further leverage our existing product base, engage with healthcare providers and enter new markets. We are energized by the progress we continue to make in improving the company's operations and financial performance and expect positive operating momentum to continue into the second half of fiscal 2018. With that, I will turn it over to the operator for questions.

[Operator:]

[Operator Instructions] And we will take our first question of the day from Michael Kaufman with MK Investments. Please go ahead.

[Michael Kaufman:]

Great quarter. Keep up the good rate. And the question I have, R&D, do you have the quarterly run rate still around of $500,000 a quarter exclusive of these extras charges for the new products.

[Joseph Dwyer:]

Still we are in that run rate. We have had about, in each of the first and the second quarter, first quarter we had $500,000 for that product. Second quarter was $600,000 in expense. And the R&D run rate is, as reported last [indiscernible].

[Michael Kaufman:]

And you had said the new product would be like $2 million to get it out the door or something at one of those meetings.

[Joseph Dwyer:]

Somewhere in that range.

[Michael Kaufman:]

Okay. The other things, the G&A, what is the steady state run rate of the G&A versus the $2.38 million you are showing in this quarter.

[Joseph Dwyer:]

I think we are getting right now pretty close to run rate G&A. Remember we have got quite a bit of non-cash compensation expense in there but we have had a little higher professional fees during the second quarter but we are close to run rate now.

[Michael Kaufman:]

And all of the -- the investigative work, do you think is behind you right now?

[Joseph Dwyer:]

Predominantly the investigative work is done. The matter is not closed yet so we await closure and if there is further work to be done, we will deal with it at that time.

[Michael Kaufman:]

And you showed royalty income of the $71,000, but with the Chinese contract are you treating that as different than royalty until such time as they manufacture? How are you handling it?

[Joseph Dwyer:]

Part of the Chinese contract is equipment revenue, I guess until they are manufacturing their units. But the rest and the bulk of the money we will receive from the contract will end up as essentially a royalty, so it will be included in other income and not in revenue.

[Michael Kaufman:]

Okay. So that will start to pick up again?

[Joseph Dwyer:]

It will.

[Michael Kaufman:]

You know right now it's only $71,000, it used to be $0.5 million a quarter -- I mean a million a quarter.

[Joseph Dwyer:]

That revenue and the China contract from a royalty perspective has not started yet.

[Michael Kaufman:]

And the deferred income tax, you still have a loss but you are saying under the regs you can't recognize any of it yet because of your loss over the three year period. So that just sits in limbo until you stop being profitable.

[Joseph Dwyer:]

It does. Than that operating losses don’t go away, they are still there. The way we record those for GAAP will depend on our future operations and profitability and how we measure that in accordance with the regulations.

[Michael Kaufman:]

And the last question. Sorry to be so wordy, but how is the SonicVac doing in the wound care area. I mean what progress you are actually making there?

[Stavros Vizirgianakis:]

I think good progress, Michael. In the market place, if we have to look at the probe sales in the wound business, it's the growth with the SonicVac and [indiscernible] product line is approaching close to 20%. So I think we are very enthusiastic, obviously of a small base, but we are starting to see good traction in the market with those products.

[Operator:]

[Operator Instructions] And it appears there are no other questions so I would like to turn it back to Stavros Vizirgianakis for any additional or closing remarks.

[Stavros Vizirgianakis:]

Thank you. I would like to take this opportunity to thank talented and dedicated Misonix team, our customers, partners and shareholders. It is because of our dedicated employees direct to the loyal customers and shareholders, who continue to support and drive our success, that a few weeks ago Misonix celebrated its 25th year of listing on the NASDAQ Exchange and 59 years since its founding with a ceremony ringing of the NASDAQ closing bell. In summary, we are pleased with our second quarter fiscal 2018 results and the progress we have made during the first half of fiscal 2018 and expect for the second half of our fiscal year to be stronger than our first half. We are excited about the opportunities that lie ahead as we continue to make significant progress on our strategic initiatives to position Misonix as a standard of care in operating rooms and hospital outpatient departments both across the U.S. and worldwide. With a performance based culture, a new focus on driving sales of consumable and recurring revenue products and the ongoing expansion into new markets, I am confident Misonix has a bright future ahead. As always, thank you for joining us this afternoon and for the confidence you entrust in us. We sincerely appreciate it. We look forward to speaking to you again when we report our fiscal 2018 third quarter results. Good bye.

[Operator:]

And thank you very much. That does conclude our conference today, I would like to thank everyone for your participation and have a great day.