Misonix, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Feb 2013

[Operator:]

Good afternoon and welcome to the Misonix Inc. Second Quarter of Fiscal Year 2013 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Joe Diaz of Lytham Partners. Please go ahead, Sir.

[Joe Diaz:]

Thank you, and thanks all of you for joining us today to review the financial results of Misonix Inc. for the second quarter fiscal year 2013 which ended on December 31, 2012. As the conference call operator indicated, my name is Joe Diaz, I'm with Lytham Partners. We're the Investor Relations consulting firm for Misonix. With us on the call representing the company today are Mr. Michael A. McManus Jr., President and Chief Executive Officer; and Mr. Richard Zaremba, Senior Vice President and 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, you can retrieve it from the company's website at 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 to be 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 similar statements of expectation identify forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the statements made. These factors include general economic conditions, risks associated with international sales and currency fluctuations, uncertainties as a result of research and development, acceptable results from clinical studies including publication of results and patient procedure data with varying levels of statistical relevancy, risks involved in introducing and marketing new products, potential acquisitions, consumer and industry acceptance, litigation and/or court proceedings, including the timing and monetary requirements of such activities, regulatory risks, including approvals pending and/or contemplated by 10-K filings, the ability to achieve and maintain profitability and other 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. The company disclaims any obligation to update forward-looking statements. With that, let me turn the call over to Michael A. McManus Jr., President and Chief Executive Officer of Misonix Inc. Mike?

[Michael A. McManus:]

Thanks, Joe. And my thanks to all of you for participating on today's call to review the financial results of the first half of fiscal 2013. As always, we appreciate your time, and we appreciate your continued interest in Misonix, your company. We had a solid second quarter in the first half of the fiscal year. For the quarter, BoneScalpel revenue was up 33% compared to last year's second quarter. SonicOne revenues increased 70% versus the second quarter last year, with SonaStar is a 20% sales decline versus Q2 last year. However, if you do exclude the declining revenue of our end-of-life legacy products, the AutoSonix and the LySonix, our flagship product sales, our continuing product line was up 12% for the quarter. For the first half of fiscal 2013, BoneScalpel sales were up 99%, SonicOne sales increased 82% and SonaStar revenue was comparable to last year's first half. Again, excluding the anticipated declining legacy product sales, BoneScalpel, SonicOne and SonaStar revenue increased 46% for the 6 months. We think this is a very respectable growth rate, and we're pleased with that result. For the 6 months, royalty revenue increased 128% to $832,000. Gross profit margin for the 6 months was 56.9%, down from 59.6% in the comparable period last year. Operating expenses increased 16% for the first half of the fiscal year as we incurred higher selling expenses due, by among other things, adding headcount to improve customer service and support, paying out the commissions and an unfavorable mix of high and lower profit products delivered during the first half of the year. We're particularly pleased with the 31% increase in international revenue for the first half of the year. An important part of our growth strategy, as you know, is to continue to add to our sales team more experienced, highly focused, independent representatives; basically, a hybrid sales force. These are professionals that are very experienced in the field of practice we are in, and importantly, they have a very good personal relationship with doctors that they have been providing quality products to for over -- for many years. In fact, in many cases, the relationships between the rep and the doctor have been an important part of the successful growth of the doctor's practice. Typically, they like and trust one another. During our second fiscal quarter, we increased the number of these independent reps in spine neuro sales from 19 independent reps at the end of September, to 42 as of December 31. During the same period of time, we increased the number of independent reps in the wound care market from 5 to 15. We're excited about the value-added effect that these professionals and their direct contacts can have on our sales. These people have as great an ability as anybody we have seen to be able to get in to see a doctor because of this relationship and because of the doctor's confidence in the independent reps focusing on quality products that will add value to the doctor's practice. Our BoneScalpel continues to gain acceptance and recognition from doctors using the product in a variety of procedures. We continue to gather evidence of the BoneScalpel's benefits as a soft tissue sparing device that results in safer procedures. The impact of less blood loss in procedures not only improves visibility, but it also reduces the use of bone wax and perhaps, most important, in longer complex procedures, reduces the possible need for a blood transfusion. Many doctors have commented on the fact that there is less bone fragmentation, which allows for cleaner cuts and less time in reconstruction. We are starting to see a presence of what are referred to as Value Assessment Committees, this has been building up over time, but accelerating, we think as part of ObamaCare. We see them in hospitals. They're charged with reviewing new products. So if they see a product that has not been part of a purchase order before, that product may go to a Value Assessment Committee. Although these take time, the analysis is welcome as we expect someday that there will be greater reimbursement for technology that provides benefit to each of the patient, the doctor and the hospital. In fact, there is reference to this in the literature as the ObamaCare rules and regulations are finally written. To this end, we have provided a binder of information for all prospective customers of our BoneScalpel and other products. The BoneScalpel document clearly lays out how the new technology works and the benefits of a safer procedure, less dura tears, less bleeding, less use of bone wax and sealant, a cleaner cut and overall, we believe, a faster and safer procedure. The document also tells new customers the names of hospitals where the BoneScalpel is in use and provides testimonials, and even specific contact numbers for questions and referrals, not only from us, but from doctor users and this is exactly what's happening. With a number of recent sales, the value-added committee or the hospital has reached out to doctors that they know use the BoneScalpel for referrals, and in those cases, we've gotten clearance earlier and we've gotten the sale. So the system that we've talked about in the past of the importance of providing the right information in an easily understandable form, together with referrals from colleagues that really understand the product is an important part of what we're trying to do to penetrate this market. We're very pleased by the recent examples of recognition and acceptance of the BoneScalpel as an important new technology, when in the November 16, 2012 addition of Becker's Orthopedic and Spine Review, Dr. Isador Lieberman of Texas Back Institute was asked, what technology have you been most impressed with over the past year? His response was, "The ultrasonic BoneScalpel by Misonix. It is a game changer." He then went on and talked about the importance of less blood and an overall faster, safer procedure. We recognize the importance of the clinical experience with the BoneScalpel and the publication of results. To this end, 4 abstracts have been submitted on the clinical benefit of the BoneScalpel over the past 6 months. With regard to our SonicOne, the continued explosive growth of diabetes through the world foreshadows another real health threat that -- particularly that relates to the treatment of diabetic ulcers. These are very serious conditions, which if not effectively treated, in most cases, I can assure you, result in the loss of a limb. SonicOne is beginning to be recognized as a preferred method of treating these wounds in the operating environment. The soft tissue discriminating nature of the ultrasound allows for the debridement of a wound, while preserving as much of the viable live tissue as possible. The quality of this live tissue bed is a critical factor in the healing of the wound. Practitioners also understand the antibacterial effect of ultrasound and its positive effect on protein and growth factors in the cells as important advances over the present standard of care. In this area, the addition of size-like Brooke Army Hospital Medical Center in Houston, Texas and West Virginia University Medical Center expand the use of our SonicOne and increase clinical development. Throughout our user base, 3 new abstracts were submitted in the second quarter with regard to the benefits of SonicOne wound-healing capability. You will find that we are also doing clinicals that we will be publishing in the near future. I hope that will distinguish between the BoneScalpel and the Versajet -- I mean, the SonicOne and the Versajet. The Versajet being about, we believe, a $17 million product in the wound care category that competes with the SonicOne. We believe the SonicOne has the kinds of benefit that I mentioned and practitioners are realizing that, and we hope to have something out in the near future to make that clear. We continue to work with the leading teaching institutions like Johns Hopkins and Texas Back Institute, the University of Pennsylvania and other medical schools in training the next generation of spine and maxillofacial surgeons with the Misonix BoneScalpel as part of their surgical practice. Our goal is to have this upcoming generation using Misonix products as their instruments of choice, having been exposed to our products throughout their medical residencies and fellowships. We continue to reach out to the investment community to introduce Misonix and its game-changing technology. We have been in New York City, San Francisco and Minneapolis over the past several months. We will continue to do that on a regular basis. We think it's important. We enjoy telling the story and the reception has been terrific. With that, let me turn the call over to Rick Zaremba, our Chief Financial Officer, for a review of the numbers. And at the completion of Rich's remarks, we will open for your questions. Rich?

[Richard Zaremba:]

Thanks, Mike. Revenues for the 3 months ended December 31, 2012 were $3.5 million, a 2% decrease when compared with revenues of $3.6 million for the same period in fiscal 2012. BoneScalpel revenues increased 33% to $1.6 million. SonicOne revenues increased 70% to $528,000. And SonaStar revenues decreased 20% to $1.1 million. As Mike had mentioned, BoneScalpel, SonicOne and SonaStar product revenues increased 12% for the 3 months ended December 31, 2012, compared to the comparable period in fiscal 2012. The company reported a loss for the 3 months ended December 31, 2012 of $654,000, or a $0.09 loss per share, including income of $3,000 from discontinued operations. This compares to an increase of $1.0 million or $0.15 earnings per share, including income of $792,000 from discontinued operations for the 3 months ended December 31, 2011. Revenue for the 6 months ended December 31, 2012, were $8 million, a 19% increase when compared with revenues of $6.8 million for the same period in fiscal 2012. The BoneScalpel increased 99% to $3.7 million, SonicOne revenue increased 82% to $1.0 million and SonaStar revenue remained the same at $2.6 million as compared with the 6 months ended December 31, 2011. BoneScalpel, SonicOne and SonaStar revenues increased 46% for the 6 months ended December 31, 2012, compared to the same period in fiscal 2012. The company reported a net loss for the 6 months ended December 31, 2012 of $609,000 or $0.09 loss per share, including $10,000 income from discontinued operations, compared to income of $136,000 or $0.02 earnings per share, which included $712,000 of income from discontinued operations as of December 31, 2011. The company's cash position as of December 31, 2012 was $6.9 million. Days sales outstanding is 53 days. Inventory turnover is 1.6x and the company has no long-term debt. The company's backlog of unfilled orders as of December 31, 2012 was $837,000. I'd like to turn it back to Mike.

[Michael A. McManus:]

Thanks for that review, Rich. All in all, we've had a solid first half of fiscal 2013. We had double-digit revenue growth domestically, excluding legacy products and internationally. Our products are penetrating the market, thanks to the focused effort of our in-house sales force and expansive international distribution network that we've developed in the past couple of years. The financial base of your company continues to get stronger. We've got $6.9 million in cash; cash, as Rich said, and equivalent, and no long-term debt. We're able to effectively run our business from operating cash flow, and we can do it more effectively now that all of our personnel and operating assets are focused on our core surgical instrument business. We continue to build on that progress that we've achieved by aggressively managing costs, making our products even more effective, less expensive to manufacture and enhancing operating margin in the years to come. We remain committed to placing more instruments in surgical sites throughout the world, continuing to expand our growing distribution channel and to become consistently profitable over time. We believe there are great opportunities ahead. With that, let's open up the call, operator, if you would, for your questions. And please instruct the audience on how to queue up.

[Operator:]

[Operator Instructions] The first question will come from Joe Munda of Sidoti.

[Joseph P. Munda:]

First off, Mike, the royalty income, what led to that giant increase in this quarter?

[Michael A. McManus:]

Well, Joe, good to have you on the call first. The increase is essentially due to a new product that Covidien has that seems to be growing faster than the older AutoSonix model of the past. So they've had greater sales, and we get 5% royalty.

[Joseph P. Munda:]

5%, I'm sorry, and what is that product growing at? What's the current growth rate on that product?

[Michael A. McManus:]

We don't know. We just -- we get 5% of their international sales using our technology.

[Joseph P. Munda:]

Can you disclose the product or is that not something that you guys can do?

[Michael A. McManus:]

Look, I think it's still called the AutoSonix. It's just a different model. It's wireless, I believe.

[Joseph P. Munda:]

Okay. And I guess, touching on AutoSonix, you guys went on to say the other revenue, which includes legacy products, AutoSonix and Lysonix decreased 59%. I mean, roughly, was -- did you guys record around $250,000 this quarter from those sales? I'm backing into that number.

[Michael A. McManus:]

Well, Rich will look at the…

[Richard Zaremba:]

Well, for the 6 months, it's $684,000, but that -- the total other includes things like service revenues and other things like that. So the legacy products are certainly very, very small. As you remember, we had the AutoSonix that we were manufacturing and we are no longer manufacturing.

[Joseph P. Munda:]

Okay. I'm guessing that -- is Aesculap involved in any way in that or is this a totally separate issue?

[Michael A. McManus:]

No. It's totally separate. Just to be clear, the AutoSonix, we've been working with Covidien, originally U.S. Surgical for years. And as we've said, they've taken more of that back. They took the probes to an outside vendor, as they had a right to do and they've been pushing to lower costs. So that product has been deteriorating over time. The Lysonix is a product that we transferred or did a distribution agreement with Mentor as part of the settlement of a lawsuit 10 years ago -- 13 years ago, and Mentor was bought by J&J, it's just a pimple for them. So there's not an awful lot of focus within J&J on liposuction. But they do have the technology. Both of those products are products where we could add value for the distributor, Covidien and J&J, if they wanted to pay attention to them, but right now, they appear to be just too small to matter and we're not getting the attention from the people on the distributor side. And they don't have to meet minimums, either one of them.

[Joseph P. Munda:]

Okay. My other question is regarding SonaStar. SonaStar revenues were down 20%, and I was just wondering if you guys could give us some color on that?

[Michael A. McManus:]

That is -- the SonaStar is an older product to begin with. A lot of its growth had been in international markets. We introduced the product into some new international markets over the last 6 months, I'd say, where distributors have been buying basically demo units and they have an obligation to do that. And now, they're starting to distribute them in the marketplace. So we have to wait and see how that growth develops as we bring new distributors on. The other thing that's happening is that we know historically, and unfortunately, that in international markets, there is some reuse of disposables. So that you don't get the same kind of a ramp up as you would in domestic markets. That's not true in all countries. In Korea, for instance, you can't reuse products, and some places in South America, you can't. But in a lot of other lesser developed countries particularly, you can reuse the product or you do reuse the product. And since we're all over the world, there is some incidents of that, that we're realizing.

[Joseph P. Munda:]

Okay. I'm just trying to get a sense here because you made those points, but then you're increasing the rep count both on the spine and wound sides, so really you're focused, I guess, on BoneScalpel and SonicOne, at this point, right? Is that…

[Michael A. McManus:]

Well, remember that when we talk about international markets, we're not talking about the distributors that you mentioned. The distributors and the growth of the distributors, really, independent reps that I mentioned are in the domestic market. So we are increasing distributors in both the -- we've got 2 sales forces, one is for spine and neuro, they sell the BoneScalpel and the SonaStar, and we talked about the increase in the number of those independent reps. And we've also increased the number of independent reps in the wound care market for the SonicOne. All of those are domestic distributors. There is no reusing of disposables in the United States.

[Joseph P. Munda:]

Okay. So, Mike and Rich, I guess, I mean, a core product with these 3 products, I mean, is 12% growth quarter-over-quarter something sustainable for you guys, because I'm just wondering, because I'm trying to really take this thing apart?

[Michael A. McManus:]

Well, I think -- is 12% sustainable? Yes. I think we ought to be growing better than that. The -- for a number of reasons, our -- this quarter was a little bit slower than I would have liked, although we had good growth. 12% is not something to object to, but I want to see greater growth than that. I mean, the reason that we're expanding our distributors is because we think if we can touch more doctors, we're going to get more business. And so it is a function of the number of people that you have out there with good relationships with these doctors that are introducing them to something that can make a difference in their practice. So I would hope our growth would be greater than 12%. One of the things that slowed, to some extent, our growth in this quarter is the fact that we have been building up our independent rep network and that takes time. You bring on somebody that -- even somebody that's been in the business for a long time that has a fairly substantial independent rep business, even at a $10 million, $15 million level, you still have to take the time to train those people on how to use a product that has never existed before. And so it takes several months to get these people to be able to add value. But if you look at the growth that we're putting in and we're being very careful in all of the growth, we're taking some out that have not been performing and putting the best people we can find in. But if you go from the end of June, with 9 to 19 at the end of September, those are people that were trained during that period of time or came on some time during that period of time. It probably takes 3 months before they can actually start selling. So there's a window of time where even though you're adding people, you're not getting benefit of the total number of feet on the street until they're fully trained. So…

[Joseph P. Munda:]

No, I understand what you're saying, Mike, and to that point, you guys exhibited over 20% growth in the September quarter alone. That's why I'm -- you're saying you added those people and I understand that. So you're really expecting the results from the additions to be yielded into the third quarter, you're saying, correct?

[Michael A. McManus:]

Yes.

[Operator:]

Our next question will come from Orin Hirschman of AIGH Investment Partners.

[Orin Hirschman:]

Just kind of following up on the last question and I apologize if I missed anything at the beginning of the call that really focused on it. Just in terms of comparing this quarter to the prior quarter, as opposed to looking at the full first half as a whole, clearly, there was an increase, and let's say for example, in actual disposables which I would guess correlates to procedures as well. But it wasn't nearly as large as it has been in prior quarter-to-quarter over the last few quarters in BoneScalpel disposable sales. I wonder if you could shed some color on that. And also just in terms of the placements on BoneScalpel, did anything have to do with the repositioning on the distributor side? What accounts for that kind of that lost momentum just quarter-on-quarter? Or was last quarter a quirk, just it was just so incredibly strong?

[Michael A. McManus:]

No. Well, thanks for the question. I think it's attributable to a number of things. Yes, we are going through a period of trying to get this to be as strong a sales -- hybrid sales force as possible. And we have made some changes in people. You'll remember at the very beginning, they're putting together this sales force, we took advantage of the fact that Stryker had bought a neuro aspirator business from Synergetics. And so the Synergetics sales force was available. Well, the Synergetics sales force, while a very good sales force, was really more neuro-related than orthopedic-related. And we really wanted to see if they could sell the BoneScalpel. Some could and some couldn't. But the key to us is getting people that have the ability to sell into the spine market and the maxillofacial market and the neuro market with a level of expertise that is exceptional. And the good thing that we've been finding is that as we've been making these changes, a couple of things have been happening. One is you meet some doctors that will tell you who their preferred distributor is, and so you pick up a good distributor. We also have had some distributors call us because they make their reputation by delivering best new quality products to their preferred doctors. So those are distributors that we didn't identify ourselves that turned out to be very good distributors. And when we find them, we put them into our system. We also have brought on about 6 months ago, a new sales director who comes out of Biomet, where he has the ability to identify some better spine distributors than we'd been able to identify in the past perhaps. So it's an evolving process where we're getting closer and closer now with 40 to the people that we think we really want based upon their history and their relationship with doctors. So there will be some aberrations over time as we change distributors in and out. But the answer to Joe's question, with regard to the 12% growth, is that everything that we see in the field, with regard to the acceptance of this product, when using the right distributor and when using the referrals, the kind of referrals we're getting from colleague users that are very pleased with the results that they're getting with the BoneScalpel, allows us to feel comfortable that we're going to see some good growth going forward. Will it be up and down little bit from time to time for a variety of reasons? Sure. I mean, there's no excuse, but in the second quarter, and this is not, I don't think, really a big part of the difference, but we did have Sandy, and the plant here was shut down for a period of time. And the number of operating business days, because of the way the calendar worked, was less than it was in the year -- the last year same quarter. So there's a lot of things over time that do it. But the important thing is that we're getting the right people and we think it's going to cause good growth.

[Orin Hirschman:]

Then I guess, just a follow-up on that, just you did have your salespeople from last quarter this quarter and they obviously executed really well last quarter, as opposed to this quarter. Are there any other factors that we should just be focused on as to why maybe this quarter is an aberration or last quarter was just an overly incredible [indiscernible] quarter?

[Michael A. McManus:]

The other thing, like a lot of things, is it depends upon what you're looking at. So if you're looking at units, it's one thing; if you're looking at dollars, it's another thing, because remember, we have a number of different economic models as to how we sell. So in a quarter in which we're placing more units than selling units, you'll see a difference in total revenues because you're selling a unit perhaps for $35,000 as compared to placing a unit or renting a unit, in which case, the price is either nothing or something like $7,500. Follow me?

[Orin Hirschman:]

I do follow you. It's just that the one number of placements though, that's, I guess, the number I'm more focused on. But if I can shift you for a minute, because you've gone over that a little bit, if I can shift you just to the number of disposables for BoneScalpel. Is there any indication, I mean, you had such incredible rising numbers and this kind of moderated this past quarter, does that mean the existing docs are not using it as much, or does it mean that some of what was sold was together with units where they're doing them on these type of leasing plans with, little money down to no money down, and that helped the number of disposables last quarter? I'm not -- I'm still not clear on that.

[Michael A. McManus:]

Well, the disposable growth will depend on a number of things. Among other things, it depends upon how many new users you have within any period. A new user starts with a lower number of uses per month. We have seen the number of average uses per month go from 5 to 10 overall. The number of uses per month is not only based upon how long you've been using it, but how you build yourself into a practice where you're using it in different kinds of procedures. We typically start people with something called a laminectomy. And what happens is doctors, as they begin to be comfortable with it, use it in procedures up and down the spine, not including people who use it in maxillofacial surgery. So we have found that people, once you start using it, you do use it more often as you become comfortable with it. Now it depends upon how many procedures you as a doctor have in that particular category over any particular month. But the other thing is that the -- we find that the thing that slows some of this up is also not just our sales force's ability to get out there and introduce the doctors to the BoneScalpel, but this entire process of starting with the doctor with typically a cadaver procedure, bio lab, if you will, and then getting into his schedule for 3 to 5 procedures. Now that depends upon how long that takes with individual doctors, and that will again, vary over time. It then depends upon whether that hospital has us go through a value-added committee. That will change over time. So I think as we get more accustomed to this entire process and how long it takes to get from the introduction of a doctor to the commitment for a purchase, and as we get better at dealing with these value-added committees, that you're going to see more consistency with more independent reps on the street selling the product. But this is a longer sales cycle product, there's no question about it. And some of the things that we're seeing, over time, like these value-added committees, will make it a longer sales cycle. So among other things, sales that we had in the first quarter, we may not have had as many value-added committees involved. And now we're seeing more. So those sales will move over into the third quarter. But everything we see suggests the answer to Joe's question is, we feel comfortable with the 12% growth rate without any doubt.

[Operator:]

Our next question will come from Jason Revland of Blueprint Capital.

[Jason Revland:]

Most of my questions have been covered. But the gross margin number of 53%, can we get a little more color on the product mix and what kind of drove that? And do you expect that to kind of bounce back to more closely to the 60% range you've kind of targeted longer term?

[Richard Zaremba:]

Well, there's actually 2 events that happened there. The first event, which is, as we spoke about, our international sales; our margins on international sales are lower than they are domestically because we sell directly to stocking distributors as opposed to the independent reps we have in the United States. So as the international mix was higher than it was in the first quarter, that certainly would drive down a little bit of margin. The second thing and probably the most important is if you look at we have a relationship with PuriCore that, based upon our lawsuit with them, we have a take or pay. We have that $188,000 that we had to basically record in our second quarter. And if you take that out, compared to last year, it was virtually 0. That's approximately 5.3 percentage points, which is right around where we would hope to be. So because of the low volume, it wasn't able to be absorbed as fully as maybe it was in Q1. But those were the 2 events that drove the margins and again...

[Jason Revland:]

Yes, PuriCore sounds like it was sort of a big driver of that margin decrease quarter-over-quarter. Is that PuriCore something that we could model or is that really just a big question mark quarter-to-quarter?

[Richard Zaremba:]

No, I think that, that continues. We have a contract, a commitment to do $2 million over a period of time. We're down just about 1/2 and that's going to hit us for the next 1.5 years.

[Jason Revland:]

Okay. And my last question, you had mentioned that in certain international markets, there's a reuse of disposable products. Is that commonplace with the BoneScalpel consumables? Have you witnessed that yet?

[Michael A. McManus:]

It's -- dependent upon the market, it's something that has existed for a period of time and everybody knows that it happens. It's just the way they operate. And so it has the potential of being done for almost any disposable. The difference, I think, is that the BoneScalpel blades are things that are more fragile and you probably have people that -- or spine surgeons are less typically reusing disposables than people in other kinds of practice. So we have not seen as much, I would say, in the BoneScalpel as we've seen in the SonaStar.

[Operator:]

[Operator Instructions] The next question will come from Michael Kaufman of MK Investments.

[Michael D. Kaufman:]

One conceptual question I have. I remember last quarter, you had the report that I thought was great. And in the BoneScalpel overview of that report, it said that consumables, the ASP for consumables on the BoneScalpel is roughly $400 a piece?

[Michael A. McManus:]

Right.

[Michael D. Kaufman:]

Or $500 if it's on consignment, but this quarter, it said that you had 9,000 consumables for the BoneScalpel. So if I would multiply $400 x 9,000, I'd get $3.6 million alone, and BoneScalpel revenue was only $1.6 million. What am I missing?

[Michael A. McManus:]

You're missing the fact that a lot of those sales were international, where we're selling to -- that we're not selling to a hospital, we're selling to the distributor and the price of the distributor is not $400 a blade.

[Michael D. Kaufman:]

So what do we charge the distributor?

[Richard Zaremba:]

Well, the price to an international distributor is about $200 a blade.

[Michael D. Kaufman:]

Okay. So even if it was only $200 a blade for all 9,000, and we sold nothing in the U.S., that would be $1.8 million alone if we didn't sell any of the 33 units. So what am I missing?

[Michael A. McManus:]

It's not -- all disposables aren't blades.

[Michael D. Kaufman:]

So there are some disposables -- so there's not a package that says we're going to get $400 per procedure or something?

[Michael A. McManus:]

Look, a disposable is a blade and tubing, among other things. So it depends upon what the mix of tubing and blades is. But all disposables are not $400 blades.

[Michael D. Kaufman:]

No, I was surprised the number is so low. It's below $200 per consumable.

[Michael A. McManus:]

Well, I think -- what was the percentage of BoneScalpel sales that were international, 60% or something?

[Richard Zaremba:]

60%, yes.

[Michael A. McManus:]

60%. So 60% of the sales were at the lower BoneScalpel price to international distributors and some portion of the disposables were tubing.

[Michael D. Kaufman:]

So just if somebody gets just tubing, what do they pay for the disposable?

[Michael A. McManus:]

Something like $50.

[Michael D. Kaufman:]

Okay. That's what I was trying to understand. So the write-up from the November review could be confusing because it depends on -- this implies that you get either $400 or $500 per consumable, but that's only if it's blade and not tubing.

[Michael A. McManus:]

It's really more $400 per blade and a disposable package with tubing is about $450.

[Michael D. Kaufman:]

I see. Okay. But you add them both together?

[Michael A. McManus:]

Yes.

[Michael D. Kaufman:]

So you have a huge mix difference there. I guess, at some point, when you're big enough, it would be helpful to know the blades versus just the plastic tubes.

[Michael A. McManus:]

Sure, absolutely.

[Michael D. Kaufman:]

All right. Well, that was the only thing I was confused about. Other than that, I guess you continue to make progress and the idea is to grow the top line quick enough so you absorb all these extra costs and we start making money again.

[Michael A. McManus:]

Well, that's right. We don't -- we shouldn't have a lot of extra costs, but growing the top line and keeping margin up to where it was is our goal. There's no question about it.

[Operator:]

Our next question will come from Robert Simms of Snake River Capital.

[Robert A. Simms:]

For those of us that have been following the company for more than the last 6 months, and for those that have been following you for more than that, maybe several years, we know what your record has been in building companies. The question simply is now that you've gained the -- the company has gained the notoriety of game change, which is accompanying shareholder interests, price increase and along with that, I'm sure both domestically and internationally there's been a huge influx of deal-making interest, both speaking of the $7 million that you have, which can be levered quite a bit. I would guess you could probably double your revenues in a heartbeat with all the prospective products that you're probably seeing that are accompanying this. But with 2 products, the game-change products, BoneScalpels and SonicOne, what -- the trick question is what is the valuation scheme that these dealmakers are undoubtedly throwing at you is that both on the -- in seeking your $7 million interest, but also probably seeking the whole company. Assuming there's $1 million probably cost of being a public company in there somewhere and which is $0.15 a share anyhow, what are the benchmarks for valuation? Is the standard OPE per Bcf, price revenues, plus cash? What are the dimensions of the real valuation in the hearts and the minds of potential sellers to you and potential buyers of the whole company? I know that's a good question and you probably won't answer it, but maybe you can get a -- give us some conception of what you're -- what a game changing, small, microcap company might be worth?

[Michael A. McManus:]

Okay, so that's a multipart difficult question that I could write a book on probably, but let me see if I can give you a short answer. So we're not consistently making money right now, so it can't be a multiple of earnings. And we're talking in a general sense here because we -- this company is not for sale and we are not in discussions with anybody with regard to buying or selling anything. But we do, from time to time, look at companies that have ultrasound technology and when we look at them, if they're smaller companies and they don't have earnings, typically, the 2 things that are the driving factors of value are revenue and growth rate and margin. And so the growth potential of this business, I think, to anybody that would look at it that's in the business is considerable because this is technology that allows in the case of the BoneScalpel surgeons to be able to do a procedure where even though the way they practice now they believe is safe, they know it's not really safe. They understand the risk of a spinning saw blade. So the ability to teach surgeons how to do a safer procedure is, as you said, a game changer. And people that have experienced this know that. The fact that there's a bloodless field and, in fact, the fact that for the older people who typically are having complex spine procedures that may take 5 hours, there isn't the need to have a blood transfusion is, doctors tell us, a huge difference for the patient, for the doctor and for the hospital. So the combination of things like that, plus the better cut and the fact that the reconstruction is cleaner, you don't have to use bone cement and the whole procedure overall then becomes safer and faster is a considerable value when you just think about the words and associate it with spine surgery. And you also look at what a tray besides a spine surgeon looks like. Most spine surgeons we talk to understand when they look at that tray, they keep looking at it 2 or 3 times because they're bewildered by the fact that there's nothing on there really that is new over the last 20 years. So new, safer, better, faster technology matters. The thing that people are watching us do is what we were talking about before, and that's blocking and tackling. How do we get to the doctors with the best people representing us that have the kind of relationships that will cause doctors to call them back, give them access and let us move the process along faster. There's no question that the sales cycle here is a longer sales cycle, from start to finish. It depends upon doctor schedules. It depends upon these value-added committees and a whole variety of things. But if you look at a company that has game-changing technology, you look at the growth in its revenues and you look at a multiple to sales has to be what you do. What's that multiple to sales? Well, for a real dynamic company, it's 6% or 7% maybe, or 6x or 7x revenues. And that's what people have been paying in the market, for companies that have transformational technology in life sciences and in medical devices, if those companies can be found. There are not very many of them around. We are very unique in that respect in terms of having unique technology in both wound care and spine, which are huge, very fast-growing, worldwide markets, where the demographics of the aging of the population suggest to you that they're going to continue for a long time. So that's the best I can do to answer your question. I hope it helps.

[Operator:]

Our next question is a follow-up from Joe Munda of Sidoti.

[Joseph P. Munda:]

Real quick, two things; Rich, you mentioned the backlog of $837,000, Can you give us an idea of what is comprised in that backlog, what products and mix?

[Richard Zaremba:]

Well, they're orders. What do you mean by mix, you mean like products?

[Joseph P. Munda:]

Yes.

[Richard Zaremba:]

I have not -- I don't have that handily right now.

[Michael A. McManus:]

But the other thing about this, Joe, I -- just because I wanted everybody to understand this, is when you look at the backlog, one of the things that used to drive our backlog was the fact that we had distributors who were having to put in forecasts and then orders on a quarterly basis. So without any of those, now that Aesculap has been terminated, all of our backlog is made up of orders that we tend to get out within the month, as a matter of fact, within a week. So we would not expect to see a huge backlog buildup over time on a month-to-month basis.

[Joseph P. Munda:]

Okay. And then my other question, Mike, I was wondering if you could give us some color on China and any progress there?

[Michael A. McManus:]

Well, the answer is there's a lot of hope and expectation. But I can't tell you when we would get the final approval. We've been through a number of approvals and they've gone well. The regulators came back to confirm a couple of questions a few months ago. We hear from the people on the ground any day now. I think I mentioned to you the last time that we were at a show in Shanghai, where they were -- our distributor in China was able to show both the BoneScalpel and the SonaStar. And the reception to those products was terrific, something like 150 doctors waiting to be able to get the BoneScalpel. So all I can tell you is that we expect it soon. What does that mean? I just -- I'm not sure. I suspect it's several months out. But there's no reason why it couldn't happen any day either. Because as far as I know, we've done everything we can to provide them with all the information that they need.

[Joseph P. Munda:]

Okay. I'm sorry, and then I just had one for Rich. You guys used the term placed or sold; is there any you could give us a little bit more color on the breakdown of placed versus sold?

[Richard Zaremba:]

Well, we look at the both of them, but predominantly, most of the units are sold what we have in the chart for BoneScalpel as of right now.

[Joseph P. Munda:]

Okay. But like a percentage-wise, is it 75% or is it…

[Richard Zaremba:]

85%.

[Operator:]

And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Michael McManus for his closing remarks. Please go ahead, sir.

[Michael A. McManus:]

Thank you, operator, and thank all of you for participating. Good questions. We need to continue to provide you with as much clarity as we can. As we move forward here, it's important, I think, to remember that we are starting to build a hybrid sales force off of a very low base. And so there will be some rotation in and out as we try to get the best people. One questioner asked about the placement of units where they may not be used, and I wanted to assure you, that is not something that is happening and that is something that we are extremely careful about. We're not interested in placing units just to be able to place a unit. We have -- anybody that gets a unit has to have been through our training process. They have to commit to take x number of blades over a period of time and we will watch that. And if somebody is trained and for some reason or other, decides that they're not going to follow through with their training and isn't using the BoneScalpel, we'll go back and retrain them. There's not going to be cases where these products are placed someplace and put on the shelf. First of all, we have -- since we own them, we have the ability to take them back. But we monitor them very closely. And part of what we're doing here is making sure that we not only introduce doctors to how you can use a BoneScalpel particularly and how it can help your practice, but we're also interested in helping you learn how to grow with it into other procedures. That's how we get to the point where there are more and more uses of the BoneScalpel, driving more and more disposables of off one system. And we also want to go back, after there's been a system, because in most cases, once a system this placed, some other doctors sees the doctor using the BoneScalpel wants to know what it is, and they want to start using it too. So we spend a lot of time in the hospitals around these doctors, seeing how they're doing, helping them understand how to use this new game-changing technology. So I just don't want anybody to misunderstand the potential or possibility of a box being someplace that isn't being used. That should not happen. And one of the reasons why it shouldn't happen is if you have the best kinds of independent reps, because they're selling other products and because they're selling them to high-volume doctors, their people are in the hospital every day. So every day we have visibility as to what's going on. And we have to pay attention to that and make sure that people are, in fact, using our products more and more in difficult procedures up and down the spine. A quick example is a doctor, Nick Qandah, down in Roanoake that started with a basic laminectomy, and this year, he'll do 600 procedures. He's not -- he's got other doctors working with him that are setting it up for him to come in and actually use the BoneScalpel in very complex spinal deformities. But there's a guy who started with a laminectomy as he got more comfortable with the safety and the ability of the BoneScalpel to cut the way it does, he started playing with it and trying it in different things, because he knew it was safe. He was comfortable using it more often because he knew it was safe. As he did that, he became more proficient in doing different kinds of procedures up and down the spine. That's the kind of thing that we have to make sure these doctors and their associates and colleagues in the same hospital are doing. And that's why the training and getting the right reps is the recipe that we have to follow to success. So please understand that. Understand that we're working very hard on all of this. It's a terrific opportunity. It doesn't come along very often that you have something like our BoneScalpel in a huge category like spine. So we're going to pay careful attention to it, I can assure you. Again, my thanks to all of you for participating on the call and we look forward to talking with you again at the conclusion of the current quarter. Have a great evening. Watch out for the snow if you're in the Northeast. And if you have any other questions, give us a call directly. Thank you so much. Goodnight.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.