Misonix, Inc.
Q4 2018 Earnings Call Transcript

Published:

  • Operator:
    Good day, and welcome to the Misonix Fourth Quarter Fiscal Year 2018 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call 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 Fourth Quarter Conference Call. We'll 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 contain forward-looking statements within the meaning of the safe harbor provision 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 beliefs, 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 statement relate to the future, they are subject to inherent uncertainties, risks, and other changes and circumstances. They are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward 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 on today’s call include among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and their risk described in today’s news announcement and the company’s filings for securities and exchange commission, including the company’s reports on Form 10-K and Form 10-Q. Any 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 the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as in the company's website. With that, I now like to turn the call over to Mr. Stavros Vizirgianakis, President and CEO of MISONIX. Please go ahead.
  • Stavros Vizirgianakis:
    Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our fiscal 2018 fourth quarter and full-year results. Joining me on the call today is Joe Dwyer, our Chief Financial Officer. Fiscal 2018 marked a transformational period for MISONIX, a period of great progress and success. Our fourth quarter and full-year results reflect the improvements and growth we’re achieving across the business and confirms the potential our products have to become the standard of care in the surgical markets we serve. So, while we are pleased with our achievements across fiscal 2018, we are keenly aware of the tremendous opportunity that lies ahead and are confident in our ability to leverage these opportunities to create added-value for our employees, partners, and shareholders. Taking a quick look at our results, the success of our strategies to expand our ultrasonic medical device platform combined with incremental license fees from our new Chinese partner led to a 34.5% rise in annual revenues or a record $36.7 million, which exceeded the high-end of our previously stated revenue guidance for fiscal 2018, which was 35 million to 36 million. Our product revenue grew by approximately 20% in fiscal 2018. The record top line growth helped drive a 41.1% increase in annual gross profit and allowed us to maintain a healthy gross margin of 70% from product revenue. Taking a look at our results from a revenue line item perspective, overall consumable sales increased 20.5% for full-year fiscal 2018, while equipment revenue grew by 17.7%. Looking at our results by region, domestic sales grew by 21.3%, and represented 61.1% of product revenue driven by 19.1% increase in consumables and a 42.4% increase in equipment sales. While international sales grew by 17.5%, and represented 38.9% of sales, driven by 24.5% increase in consumables revenue and a 10.4% increase in equipment revenue. BoneScalpel, our state-of-the ultrasonic bone cutting and sculpting system capable of making precise cuts with minimal impact continues to have strong adoption and newer products will allow us to further penetrate dynamic and growing market segments like minimally invasive spine surgery and additional opportunities such as maxillofacial surgery. The SonaStar system used predominantly in tumor surgery continues to gain ground in the international arena. Regarding SonicOne, we are thrilled with the results of the recently published randomized control trial, which demonstrated superior healing outcomes associated with the use of ultrasonic debridement for lower extremity wounds. The results showed marked improvement in healing rates and effectiveness of the SonicOne ultrasonic technology to positively and significantly impact patients’ lives. As we look to radically improve patient outcomes through medical technology innovation, we continue to strategically invest in R&D in order to support the development of our new ultrasonic surgical solutions and products, including our next generation Nexus platform. We are on track to unveil this innovative solution to the spinal community later this month at NES. We have received an overwhelmingly positive response from physicians who tested early prototypes and have incorporated their feedback to make further enhancements to the Nexus product line. We are confident that this integrated and easy to use system will benefit us from cross-selling opportunities, especially by further penetrating current customer accounts and expanding our addressable market to a broader range of procedures beyond those served by our current products. With regard to our sales and marketing efforts, as we continue to transition from an independent distributor model to a direct sales force. We’ve implemented a more strategic and focused approach to long-term growth, including the repositioning of our brands and the build out of our commercial sales team. With the recent additions in the U.S., our commercial sales team is now approximately four times larger than it was when we first embarked from the strategy two years ago. Our sales efforts are a lot more metric driven and continue to yield strong growth in consumables and equipment revenue. With regard to the U.S. sales force, we continue to expand and now have over 51 dedicated sales resources in the market. In addition to a more disciplined and results driven selling process, the most important contributor to our growth over the last two years is the complete refocusing of our corporate culture, product portfolio, and overall corporate identity around the concept of better matters. This idea now serves not only as a statement or a vision, but more importantly as a guiding principle of who we are, and who we want to continue to be. To become the standard of care in hospitals, operating rooms, and clinics around the world all of us at MISONIX work for sales, not just the people in the sales department. Everyone from marketing and R&D to services and customer support all of us are part of sales. And as many of you have already noticed the look and feel of our go-to-market strategy and overall branding is a lot more modern and high-tech, which is what our products deserve. On the international front, we continue to make marked 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 with the product they need to establish the SonaStar product line we expect them to begin manufacturing the SonaStar in the near future. And of great importance is the addition of some great people to our team. Just recently, we announced that Gwen Watanabe joined our Board of Directors. Gwen is a highly respected executive in the medical device sector who brings outstanding entrepreneurial skills to the MISONIX Board, as well as a proven long-term track record of success in mergers and acquisitions that will serve us well as we pursue the next phase of inorganic and organic growth for MISONIX. In summary, our results serve as further proof of the marked progress we're making in positioning MISONIX for profitable growth and our success in driving operational efficiencies, further improving our sales and go-to-market strategies, and strategic rebranding and repositioning of our products, expanding our product portfolio addressing new markets and becoming more customer centric and an R&D driven company. The significant improvement in our fiscal 2018 top and bottom line financial performance reflects the added value we're generating from our various growth investments. And the progress we're making to position MISONIX for ongoing sustainable growth and profitability. With a positive operating momentum across our business and a strong balance sheet, MISONIX has a solid foundation to continue pursuing a range of near and long-term growth opportunities that we are confident will deliver enhanced returns for our shareholders. Looking ahead, we’re aiming to grow product sales north of 20%, maintain gross margins of 70%, expand our direct sales channel, and also launch our Nexus product line in the coming months. 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?
  • Joe Dwyer:
    Thanks, Stavros. And good afternoon everyone. I’ll begin by reviewing our financial results in greater detail. Revenue increased 9.5% in the fourth quarter to $8.6 million, marking our best quarter ever for product revenue and our third consecutive quarter of record product revenue. Domestic sales for Q4 increased by 12.2%, and international sales rose by 5.9% compared with last year’s fourth quarter. On a full-year basis, revenue rose 34.5% or $9.4 million to 36.7 million for fiscal 2018. The growth was principally due to the strong demand we experienced both domestically, as well as internationally. In addition, we recorded $4 million of license revenue related to our previously announced partnership with one of our partners for the exclusive manufacturing and distribution rights for SonaStar across China. As we highlighted on prior calls, the China agreement calls for total payments of at least $11 million, consisting of upfront fees and stocking orders of 5 million. And royalty payments from the sale of SonaStar products across China of at least $2 million per calendar year in 2019, 2020, and 2021. Taking a closer look at the top line, product revenue increased 19.8% or $5.4 million to $32.7 million in fiscal 2018, driven by a 21.3% increase in U.S. product revenue and 17.5% increase in international product revenue. Consumables revenue are high-margin recurring revenue stream that brings added predictability to our results, increased in the U.S. by 19.1% or $2.8 million for the year, principally in the back of strong BoneScalpel sales, while international consumables grew by 24.5%. Our gross profit margin was a healthy 70% for fiscal 2018, compared with 69.9% last year. Including the impact of license revenue in fiscal 2018, which was 100% gross profit margin, the GP margin for fiscal 2018 was 73.3%. Selling expenses increased by $2.1 million or 15.1% to $16.4 million in fiscal 2018, reflecting increased salaries and related costs of approximately $1.4 million for our expanded direct sales force and to a lesser degree on a higher commission expenses and increased marketing investments. G&A expenses decreased $500,000 for the year to $9.1 million in fiscal 2018, principally from lower professional fees. This decrease in expenses was partially offset by an increase in non-cash compensation expense of $1.4 million. R&D expenses increased by $2.6 million or 139% to $4.4 million in fiscal 2018, reflecting the investments we're making and bringing the Nexus product to market. Looking at taxes, we recorded an income tax expense of $5.4 million for the year, compared with a tax benefit of $1 million in fiscal 2017. The 2018 results included a one-time charge of $1.8 million to revalue our deferred tax assets, to give effect to the reduction in the federal corporate tax rate to 21%, resulting from the tax legislation enacted in December 2017. Income tax expense also includes a $4.1 million charge to record a full valuation allowance against the company's remaining deferred tax assets. It's important to note that this is a non-cash charge, which does not reflect the actual performance of our businesses and does not impact our ongoing business operations. We still believe that we'll be able to utilize our deferred tax assets in future years and we will reverse this reserve when sufficient profitable years of operations have been realized. This led to a net loss of $7.6 million for fiscal 2018 or $0.85 per share. Taking a look at EBITDA, the fourth quarter adjusted EBITDA was a loss of $200,000 and the full-year was positive $4.2 million, a significant improvement over the full-year fiscal 2017 EBITDA loss of $500,000. We define the adjusted EBITDA as earnings before interest, depreciation, amortization, taxes, non-cash comp expense and R&D expenses for the Nexus project. We excluded the Nexus-related expenses as they are not typically part of the company's R&D run rate. The Nexus development costs for fiscal 2018 were $2.3 million. Now, moving on to cash flow and the balance sheet. Working capital at June 30, 2018 was $17.3 million and cash used in operations was $600,000, mainly due to a $2.1 million use of cash for working capital, offset by our net loss and non-cash expenses. We ended fiscal 2018 with $11 million in cash and no debt. In closing, we are pleased with our performance in fiscal 2018 and with the progress we are making to meet our 2019 and future goals. We remain encouraged about our progress and opportunities ahead of us to further leverage our existing product base, engage with healthcare providers, and enter new markets. We continue to focus on actively managing our capital structure, driving sales, improving productivity, and increasing efficiencies. We are confident that the direction we’re heading and will enable us to meet our goal of enhancing long-term shareholder value as we move through fiscal 2019 and beyond. With over 62,000 surgical procedures performed with Misonix consumables last year, we're more than confident than ever in our ability to reach our goal of 100,000 annual procedures in the years to come. Stavros?
  • Stavros Vizirgianakis:
    Thank you. We'll now move on to our Q&A session.
  • Operator:
    Thank you. [Operator Instructions] And our first question will come from Kyle Rose with Canaccord.
  • Kyle Rose:
    Great. Thank you taking the questions, can you hear me alright?
  • Stavros Vizirgianakis:
    Yes, can hear you fine. How are you doing Kyle?
  • Kyle Rose:
    I’m well. I wanted to start a little bit on the OUS side. I mean OUS came in from a mix perspective a bit different than what we expected. So, I guess, maybe if you could just help us understand what drove – what looks like the relative strength in OUS consumables, particularly in the Q4?
  • Stavros Vizirgianakis:
    I think what we're seeing in the OUS business is that in select markets we have introduced a rental program for placing of capital equipment. So, what we're seeing is a possible shortfall on capital equipment sales, where we are offering an aggressive placement system with distributors in certain key markets can rent capital equipment from us to place in the market to drive consumable sales. So, we've seen that and that's certainly helped in key markets, drive the consumable sales. But I think Q4 was particularly good quarter, but we've had a good year on the international side with consumables. I think the focus and the message to all distributors has been, we really want you to focus your efforts on growing the consumable business rather than the previous focus, which was just on capital equipment. You'll also notice in Q4 that the capital equipment number was a little bit down, although, we still had double-digit growth for the year. And that was really, if we look at the comparable in the same fourth quarter, a year ago, we had some significant orders from China. So, those were initial stocking orders. And I think as the business gets to a steady state, you'll see more predictable revenue coming out of markets like China, but with capital equipment, it's always going to be a bit choppy. The way we're optimistic is that, overall the consumable business is particularly strong and where it's lagged on the international front, we've seen good signs in the last year.
  • Kyle Rose:
    Thank you. I appreciate that. And when we think about moving to the rental model internationally, I guess, what we're trying to understand is, should we think about the consumables in this quarter has been, how we should think about utilization moving forward? Or was there some sort of stock in the quarter? Just trying to – I appreciate that it was up year-over-year, but I mean, I think that's the strongest quarter in OUS consumables that I've seen historically. So, I'm just trying to understand, we should think about that as a run rate?
  • Stavros Vizirgianakis:
    I wouldn't think of that as a run rate. I think historically in the international business, the fourth quarter is usually our strongest quarter for international, you do find that people do stock in a bit in anticipation of the holidays in particular, in markets like Europe, where essentially August thereof. So, I wouldn't take it as the run rate, I would just model in line with our guidance, a growth rate north of 20% on disposables.
  • Kyle Rose:
    Okay. I appreciate that. And then, obviously you know China has come back into the picture, you mentioned the year-over-year comp on the equipment from the initial stocking order last year. Can you tease out what China looked like in the Q4 of this year?
  • Stavros Vizirgianakis:
    Joe, do you have a breakdown of it?
  • Joe Dwyer:
    I don't have a breakdown in Q4.
  • Stavros Vizirgianakis:
    Yeah, Q4 – Kyle, I don't have the exact numbers for you, but there was good SonaStar revenue. So, it's really a tale of two distributors at the moment. The SonaStar partner is performing particularly well. So, we saw good pull through still on SonaStar revenue in Q4. BoneScalpel was a little bit disappointing. So, we're obviously putting a lot of pressure on that distributor to perform. So, it was really SonaStar performed well. BoneScalpel was probably below our expectations in terms of what we wanted the distributor to do. But, exact numbers, unfortunately I don't have for you, for China specifically for Q4, but it was skewed towards SonaStar.
  • Kyle Rose:
    Okay. And then on the sales rep expansion, I appreciate the overall sales force headcount, but if you could just give us where you ended the year from quota carrying reps? And then, how we should think about modeling sales rep expansion in 2019?
  • Stavros Vizirgianakis:
    Okay. We look at the basic structure. Now, we've got five regions within the U.S. So, basically five regional sales managers. We have a VP of Sales and then you've got 45 sales people in place. We are hoping to expand by another 20 sales people. So, roughly 5 per quarter throughout the fiscal year. And we are also wanting to expand the regions from 5 regions to 7 regions, because we are seeing in some regions, where sales managers have got eight or nine people to look after. You know, they're getting a little bit stretched. So, it makes sense to create an additional two regions. So, going forward, I would basically model an additional 20 salespeople, so, it will take us somewhere in the region of 65 salespeople and probably seven sales managers, if all goes to plan.
  • Kyle Rose:
    Great. And last question and then I'll let some others jump in. You made the comment about pursuing a range of near and long-term opportunities to deliver growth. I think it's pretty clear, and clearly, the Chinese agreements as well as Nexus and the OUS and the U.S. investments are near-term opportunities. What do you view as medium to long-term growth opportunities? Maybe outside of what exists in the organic business currently?
  • Stavros Vizirgianakis:
    Look, we obviously have an increased focus on the neurosurgery segment of the market. We think with Nexus, it gives us a unique opportunity to pursue the neurosurgery business and be more competitive in that space. Because if we look at it up to now, we've really had success in the neurosurgery business for the SonaStar product line outside the U.S. We believe that with Nexus that is the game leveler, so that gives us a chance to be more active in the neuro business. And I think we would look for bolt-on opportunities around the neuro segment, medium to long-term as well. We think that becomes a more critical part of our overall business.
  • Kyle Rose:
    Great. Thank you, very much for taking the questions.
  • Stavros Vizirgianakis:
    It’s a pleasure. Thank you for your participation.
  • Operator:
    [Operator Instructions] The next question comes from Michael Kaufman with MK Investments.
  • Michael Kaufman:
    Hi Stavros. Very good progress on moving forward. I had two questions. One, some color on the SonicVac sales, where you're starting to see more efficacy in terms of wound healing, that maybe can be translated into actual financial metrics. And the other one is the R&D year-over-year grew by $2.6 million, which actually is more than the total loss from continuing operations of $2.4 million. The question is, with the introduction of the new product, what is going to be the steady state level for R&D? And will we see an interesting pickup in contribution margin opportunity there?
  • Stavros Vizirgianakis:
    Thank you, Michael. I'll answer the first portion of your question, related to the wound care products, specifically. I think what we look at – when we look at our business right now, we really look at three key areas of the business, obviously the BoneScalpel, the SonicOne, which is around the wound, and then the SonaStar business. I think what was particularly relevant for us in the fourth quarter, is that we saw for the first-time product growth on disposables in excess of 20%. So, we haven't had that before on the wound business, so what we are hoping to do is really create that second engine of growth with the wound care products going forward. So, we certainly are getting the right clinical information out there. If we look at the randomized control trials that was recently completed at Ottawa hospital. I think this was really the first time we've had Level 1 evidence, which actually prove that you have superior wound healing. There was a greater number of wounds that closed, we had a reduction in the wound area as well. And overall better wound appearance. So, I think with data like that being published and coming out, that's certainly going to support a more widespread adoption in areas like the wound care products. And as I said, for the first time, we saw growth north of 20%. So, that's really encouraging. So, if we can, ignite that second growth engine in the business along with BoneScalpel that's certainly going to be positive for the business. I'll turn over to Joe for the second part of your question.
  • Joe Dwyer:
    Michael, on R&D expenses, as we mentioned, we've been spending money on our Nexus product, principally in fiscal 2018 and some into fiscal 2019, but will probably get back to a normalized run rate, probably in that – maybe 8% of revenue somewhere in that range, as the product moves towards completion. So that we will see a reduction in that overall cost.
  • Michael Kaufman:
    Thank you very much.
  • Operator:
    And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.
  • Stavros Vizirgianakis:
    Thank you. I want to close by thanking the outstanding team at MISONIX for all the terrific work that they're doing, to build the new MISONIX and capitalize on our abundant opportunities. I'd also like to thank our loyal customers, great partners and supportive shareholders. If you're planning to be at the North American Spine Society Conference that's NASS, later this month, please contact our IR firm, JCIR, you can reach them on 212-825-8500 and chat with Norberto or Jennifer and we’d be happy to meet you when we’re in LA, both Joe and myself will be attending. We also look forward to reporting on the additional progress we're achieving in the business when we announce our fiscal 2019 first quarter results later this fall. Thank you, very much, and good afternoon.
  • Operator:
    Well, thank you. That does conclude today's conference. We do thank you for your participation today.