Misonix, Inc.
Q4 2016 Earnings Call Transcript

Published: 15 Mar 2017

[Operator:]

Good afternoon, and welcome to the Misonix Inc First Half of Fiscal Year 2017 Financial Results Conference Call. All participants will be in a 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, sir.

[Joe Diaz:]

Thank you for joining us to review the financial results of Misonix, Inc. for Year-End 2016, which ended on June 30, 2016 and the first half of fiscal year 2017, which ended on December 31, 2016. As the conference call operator indicated, my name is Joe Diaz; I am with Lytham Partners. We are the investor relations consulting firm for Misonix. With us on the call representing the Company are Stavros Vizirgianakis, President and Chief Executive Officer, and 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 financial websites. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Misonix Inc. 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, let me turn the call over to Stavros Vizirgianakis, President and Chief Executive Officer of Misonix. Stavros.

[Stavros Vizirgianakis:]

Good Morning. I would like to thank all of you participating on today’s call. For all of you existing shareholders, it has been a long time since you’ve heard directly from the Company in a conference call format. This is my first opportunity to talk with you as the chief executive officer of the Company, and I look forward to sharing with you my vision for moving the Company forward in the coming years. The Board asked me to take the job and I appreciate the confidence that the Board has invested in me. I believe there are great opportunities ahead for Misonix and I look forward to developing those opportunities and driving enhanced shareholder value. I am a strong believer in aligning my interests with those of our shareholders and in that regard made a significant personal investment in the Company. I would not have taken the job, let alone make the investment, if I didn’t think we could grow this business and become a leader in the industry. As you are aware there have been many changes at the Company since the last call. We were not able to file our Form 10-K for the fiscal year ended June 30, 2016 by its due date, as well as our Forms 10-Q for the first and second quarters of our fiscal year 2017; essentially the first half of fiscal year 2017, which ended on December 31, 2016. In the intervening time, with the assistance of outside counsel, we conducted a voluntary investigation into the business practices of the independent Chinese entity that previously distributed our products in China and the Company’s knowledge of those business practices, which may have implications under the Foreign Corrupt Practices Act, as well as internal control issues identified during the investigation. On September 27, 2016 and September 28, 2016, Misonix voluntarily contacted the Securities and Exchange Commission and the U.S. Department of Justice, to advise both agencies of these potential issues. We have provided and will continue to provide documents and other information to the SEC and the DOJ, and are cooperating fully with these agencies in their investigations of these matters. Although our internal investigation is now complete, additional issues could arise which may expand the scope or severity of the potential violations. We could also receive additional requests from the DOJ or SEC, which may require further investigation. We will continue to cooperate fully with these agencies. In the course of our internal investigation, we encountered no evidence to indicate that our previously reported financial statements were incorrect. We have proactively implemented changes, controls and procedures which we believe will remediate the internal control issues identified during our investigation. You can find additional detail on these matters in our recently filed Form 10-K document for the fiscal year ended June 30, 2016 and our recently filed 10-Qs for the first two fiscal quarters. With the filing of the Forms 10-Q for the first and second quarters of fiscal 2017 – the period ending December 31, 2016 - we have regained full regulatory compliance with the SEC and Nasdaq, and we look ahead with great enthusiasm. Our goal is to become the leading therapeutic ultrasonic medical device company in the world. We have changed our approach to the business and are now more focused on consumables utilization and want to grow consumable revenue to over 80% of total sales revenue so that we have a predictable and profitable revenue stream domestically as well as OUS. In order to achieve our short- and long-term goals we have a number of initiatives under way. Our US business is our primary focus and now represents in excess of 65% of our total global revenue. Domestically we have greater control over our distributors and we can also engage directly with our customers on a face to face basis through our field managers and clinical support specialists which we continue to add so that we have greater coverage across the United States. By continuing to consign equipment and drive consumable sales we believe that we will create significant shareholder value over time and also establish our products as standard of care in specific applications that will enhance clinical outcomes and help lower the overall cost of healthcare. In our domestic wound business we have recently launched an additional product, the Sharp Vac, to complement our existing product line. We have also for the first time in the company's history added 7 new clinical support specialists in order to speed up the adoption of our technology in the OR across the United States. All 7 professionals have recently completed training on our products and sales processes and we will be monitoring and supporting their activities closely in the coming months before adding additional resources in the near future. In terms of our international business we are currently reviewing our activities country by country as we do business in over 48 countries. We are no longer interested in working with partners that are solely focused on selling equipment and not working towards building a sustainable consumables revenue stream through investing in the required initiatives in the local market that build awareness and usage of our products on a daily basis. We need like-minded partners so that we can experience the same kind of predictable consumables growth that we are experiencing in the USA through a very disciplined and focused approach to the various market segments that we operate in. We will also be less inclined to support activities in markets where there is a blatant disregard for adhering to single use practice in terms of consumables. We are also evaluating certain international markets for our wound product range and we are hopeful that we will launch the Sonic One wound range into select markets within the coming months as there is potentially a huge market globally for treatment of chronic wounds and burn patients using our technology. We are schedule to do a soft launch at the upcoming European Wound Management Association Meeting in Amsterdam in early May. In terms of one of most import international markets you will have noticed that we recently appointed Weigao Orthopedic as our exclusive distributor for the BoneScalpel product range in the Chinese market. We are confident that we now have a partner in China that is highly regarded in the spine and orthopedic arena with a broad distribution network and the necessary skills to help establish BoneScalpel as the “go-to” product for spinal surgery. They have committed to ongoing surgeon education and significant investment in the training of their sales force and we are expecting to get started in the coming months with commercial activities. Another major change initiative that we are busy with relates to our equipment or hardware. Up to now we have had two separate pieces of equipment for BoneScalpel and Sonic One OR. Going forward, we have decided to have one new Misonix branded console unit which will be able to run all the BoneScalpel as well as Sonic One OR consumables. This should benefit the sales team significantly as they can spend more time selling consumables for specific applications in both spine and wound without having to go through a lengthy equipment approval process in most major US hospitals. We believe that a universal platform advances the interests of all involved, the surgeons, the hospital and more patients who will receive better outcomes with our technology. Our last current major initiative revolves around new product development. Our emphasis on product development is to develop new consumable titanium blades, probes and tips to enable better outcomes in specific surgical procedures. Working with the input of our Key Opinion Leaders and surgeons that we train on our instruments at conferences, cadaver labs and other events, new titanium consumable products will be designed to bring enabling technology to specific spine, neuro and wound procedures. The goal is to execute those procedures more effectively and in a more timely fashion. Our mission is to have our products become the “standard of care” for those specific procedures. Historically, it is taken us approximately 18 months for our R&D process to bring a new product to market, and we are hoping to significantly accelerate that process in the coming months. Our vision is to accelerate the introduction of new surgical blades, probes and tips. As I’ve described, we are taking aggressive steps to ramp-up our business in the coming years. We believe that all the elements are in place for Misonix to take its place among the leading instruments providers in surgical suites around the world. Our products have proven to reduce bleeding, spare soft tissue, provide the surgical team a greater field of vision during the procedure, impart a level of microbial protection, and produce improved patient outcomes. We are excited with the opportunities ahead. With that, let me turn the call over to Joe Dwyer, our chief financial officer, for a review of the financial results of full year fiscal 2016 and the first two quarters of fiscal 2017. After Joe’s remarks, we will open the call for your questions. Joe.

[Joe Dwyer:]

Thanks Stavros. For the first half of fiscal 17, sales increased by 8.1% over the first 6 months of fiscal 16 to $12.2 million. In addition, we reported last month that our fiscal 16 sales for the full year grew to $23.1 million, or 4% higher than fiscal 15. The key to our sales growth has been stronger domestic sales, which increased by 28% in the first half of fiscal 2017, which were partially offset by a 16% decline in our international business. We saw the same trends in fiscal 16, where domestic revenue grew by 21%, and international revenue declined by 12%. Domestic sales made up 65% of total sales in the first half of fiscal 17, up from 55% in the prior period. Our gross margin percent grew to 69.4% in the first half of fiscal 17, from 67.1% in the first half of fiscal 16. By comparison, gross margin was also 67.1% for the full year of fiscal 16. The healthy increase in margin has resulted from a higher mix of consumables sales compared with hardware. Consumables sales grew 29% in the first half of fiscal 17. Operating expenses were $11.5 million for the first half of fiscal 17, up $1.6 million from the prior year. About $900,000 of the increase related to higher sales and marketing expenses. As Stavros mentioned, the Company is in the process taking aggressive steps to ramp-up our business, which includes investments in sales and marketing. General and administrative expenses were $540,000 higher in the first half of fiscal 17 principally relating to the cost of professional fees for the company’s internal investigation. In the first half of fiscal 17, investigative related costs were almost $1.4 million, and are $1.9 million in total since we began that process in the fourth quarter of fiscal 16. G&A expenses were also reduced in fiscal 17 by a reduction in non-cash compensation expense of $600,000 from the termination of unvested stock options which were forfeited by our former CEO. Our pre-tax loss for the first half of fiscal 17 was $1.2 million compared with a $352,000 pre-tax loss in the first half of fiscal 16. This pre-tax loss was driven by the $1.4 million cost for the investigation during the period. As of the end of February, we have $11.9 million in cash and no debt. Our balance sheet is strong, and we believe we are well positioned and funded to execute on the growth strategy Stavros has articulated. 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.

[Operator:]

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Michael Kaufman of MK Investments. Please go ahead.

[Michael Kaufman:]

One question, I had is. Are you going to provide some longer term expense to revenue model because you're in a transient state now kind of building things out and would be helpful to understand whether you see the business going? And when I went on the website and look for corporate presentation it says, there aren't any, so you’re going to update the corporate presentation, so we have a feel for kind of what the net additions have been in various products and be able to take a look at how this SharpVac is going to be moving out and growing overtime? And I guess the last thing would in terms of the addressable market for the current products. How big do you see that and what new product areas are you looking at to grow the base into your 1.5 billion potential that you talk about it?

[Stavros Vizirgianakis:]

Thank you, Michael. Thank you very much for your questions. I’ll start addressing the corporate presentation. As you're in a state of change at moment, we are updating the corporate presentation. So, I’m hoping that by the time we have the next conference call. We will have an updated corporate presentation where we will basically update the metric and then also the way that we look at the various markets. So, overall, we have always said the addressable market is $1.5 billion, but what we're hoping to do is to segment the market into the specific areas that our product served. So, I think in the coming weeks, we’ll certainly have that data ready. In terms of a little bit more clarity on the finance side. Joe, would you like to answer that question.

[Joe Dwyer:]

Yes, we have a long-term vision. We are in the process of building out a longer term plan. We don’t intend to provide guidance for the Street, but taken our next call, we could probably provide direction is to where we expect to be longer range or maybe some expense ratio as we discussed.

[Operator:]

[Operator Instructions] And the next question will come from Steve Krueger of Foresight Investing. Please go ahead.

[Steve Krueger:]

Could you give us a little guidance on the royalty stream? My understanding was, that was supposed to end sometime around now. What’s the outlook there?

[Stavros Vizirgianakis:]

Thanks Steve for your question. In terms of the revenue stream relating to royalty that was due to end in September, but when we review the contracts more closely, the agreement base that it was a 20-year royalty agreement. Are 20 years old at the expiration of the loss patient? So the loss patent expires in August of this year relating to that particular Medtronic it was ex-U.S. surgical agreement. So, essentially August of this year is when the royalty revenue stream will come to an end.

[Operator:]

[Operator Instructions] And I'm showing no additional questions at this time. We'll conclude the question-and-answer session. I would like to turn the conference back over to Stavros Vizirgianakis for any closing remarks.

[Stavros Vizirgianakis:]

Good, thank you very much. I would like to thank all of you participating on today’s call. We’ll look forward to talking with you again at the conclusion of the current quarter, which will be in the next couple of weeks. So, thank you very much everybody and have a great day.

[Operator:]

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may no disconnect your lines.