Misonix, Inc.
Q1 2015 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Good afternoon and welcome to Misonix’s First Quarter Fiscal 2015 Conference Call. All participants will be in listen-mode. (Operator Instructions). Please note that this event is being recorded. I would now like to turn the conference over to Mr. Joseph Diaz. Please go ahead.

[Joseph Diaz:]

Thank you Zelda and thank all of you for joining us today to review the financial results of Misonix Incorporated for the first quarter of fiscal year 2015, which ended on September 30, 2014. As the conference call operator indicated my name is Joe Diaz. I’m with Lytham Partners. We are the Investor Relations consulting firm for Misonix. With us on the call representing the company today are Michael A. McManus, Jr., President and Chief Executive Officer; and 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 www.misonix.com. Before we begin with prepared remarks we submit for the record the following statement. Statements made by the management team of Misonix Incorporated during the course of this conference call that are not historical facts are considered 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. Investors are cautioned that forward-looking statements made during the course of this conference call are based on management's current expectations and involve risk and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligations to update forward-looking statements. Risk factors include, but are not limited to factors discussed in the company’s annual reports 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 Michael A. McManus, Jr., President and Chief Executive Officer of Misonix. Mike?

[Michael A. McManus:]

Thank you, Joe. Thank you for the introduction and I want to welcome all of you to the Misonix’s first quarter call. We are very pleased with the results released today for the first quarter as they demonstrate the continuing acceptance and growing use of our unique products for surgical innovation all around the world. Our overall sales increased 48%, including strong continued growth in all regions of the world. Our BoneScalpel consignments in United States increased 50% while overall BoneScalpel revenue, including disposables increased 92%. We are pleased to see that we are not only placing more units but surgeons are increasing their usage as well. All of our products are growing and we continue to see increases in awareness and acceptance. Support from key opinion leaders and major hospitals have led the breakthroughs in new reimbursement codes and higher reimbursement in a number of countries in the world. Our disciplined model for all of our sales and distribution partners, of more workshops led by prominent surgeons, both domestic and internationally increases our level of introduction and evaluation requests. Our binder on economic value, scientific evidence and key testimonials helps us speed the approval process and new apps and the Dropbox for detailed information all support accelerated sales. The continuing recognition of the safety factors with our BoneScalpel product, the resulting reduction in blood loss, less fragmentation of bone and in some cases a shorter overall procedure are all benefits that are now better understood and accepted by prominent surgeons around the world. Recently we have added the benefit from several surgeons that have talk to me that the BoneScalpel may add to an extension of their practice by saving their hands from strenuous devices like [loungers]. The acceptance and growing use of SonicOne continues in the O.R. environment as its benefit become clear from a cleaner debridement, less blood loss and faster closure. The effect of ultra sound on some bacteria and the additional benefit of growth factor uptake help to speed healing and disrupt biofilm, important factors in the overall healing of a wound. We have had surgeons working on the demonstration of the benefits of the SonicOne on burns. Early work is encouraging and you can expect to see some papers on this in the near future. The evaluation of the international opportunities for the SonicOne continues for both wound and burns and the addition of distributors in Germany, Turkey and Italy among others. Although the SonaStar market in United States is mainly a replacement market, our number of placement wins against our competitors continues to increase and our evaluation list has doubled. We recognize the need to continue to innovate and we have a robust team of marketing and R&D professionals to develop line extensions. In the SonaStar market we have developed a better aspirator with more vacuum capability combined with more sensitive tissue sensitivity. While developed for the Chinese market the product will soon be available in other countries together with a new laparoscopic pro. We are working with distinguish surgeons around the world on new improvements for the BoneScalpel and SonicOne to be announced shortly. We will also be addressing the needs of surgeons in the minimally invasive practices. With our continued growth we need to build the additional support in sales and marketing that I’ve you to you about before. We have added four new clinical trainers to work with doctors that are in their initial training and also go back to present users and make sure they are comfortable with using our products in more procedures. We have also added more distributors to cover new territories and introduce us to more high volume surgeons. We have added to our International sales team by including two new clinical training specialists. We are also recognizing the need for a strong infrastructure to support our growth. We are upgrading into our IT platform to provide better and faster reporting diagnostics to help us manage the growth and to provide world class customer support. All these continuing efforts are coming together well to build on our present success with a necessary depth of professional people and a disciplined approach to both sales and customer service. With that let me turn it over to Rich.

[Richard Zaremba:]

Thanks Mike. Revenue for the three months ended September 30, 2014 was $4.5 million, a 48% increase when compared to revenues of $3.1 million for the same period in fiscal 2014. Worldwide BoneScalpel revenues increased 64% to $2.2 million. Worldwide SonicOne revenues increased 28% to $601,000 and worldwide SonaStar revenues increased 34% to $1.5 million. The company reported net income for the three months ended September 30, 2014 of $383,000 or $0.05 earnings per diluted share, as compared to a net loss of $884,000 million or $0.12 loss per diluted share for the same period in fiscal 2014. That company’s cash position as of September 30, 2014 was $7.6 million. Day sales outstanding is 65 days, inventory turnover is 1.4 times and the company has no long term debt. The company's backlog of unfilled orders as of September 30, 2014 was 42,000. Most orders are shipped when received. Mike?

[Michael A. McManus:]

Thanks Rich. Operator, we'd be happy to take some questions if you have some now.

[Operator:]

Thank you. (Operator Instructions). The first question comes from Mr. Joe Munda with Sidoti. Please go ahead.

[Joseph Munda:]

Good afternoon, Rich and Mike. Can you hear me okay.

[Michael A. McManus:]

Yes. We can hear you fine. Joe how are you?

[Joseph Munda:]

Good. A couple of questions here, as far as I mean Europe is concerned did the typical summer slowdown that you see from a device company, did that impact you more or less than you had expected? I know you put up rate growth there, but were you expecting maybe more out of Europe?

[Michael A. McManus:]

Yeah, I think, I mean at some countries we are a little bit weaker than we expected.

[Joseph Munda:]

And you expect maybe due to the seasonality and you think that -- could that come back in the second quarter?

[Michael A. McManus:]

I do.

[Joseph Munda:]

Okay. As far as the big impact to the P&L here, the royalty income it seems to really control the bottom line. As far as what are you expectations, I guess going forward? I know it seems to move around here but I mean is this good level to model off of?

[Michael A. McManus:]

It’s only moved up from you know 600 to 700 to now a 1.1 million something like that and so, we have every reason to believe that this products hit the bases that this royalty is going to continue to grow. How fast I don’t know but the level that are out right now is probably good level to model off of.

[Joseph Munda:]

Okay. And then as far sale force concerned, you mentioned four new clinical trainers in the quarter is that number expected to go up you know we see sequentially here between the fourth quarter and the first quarter selling expenses have kicked-up a little bit. Is that something we are looking as the new norm?

[Michael A. McManus:]

I think the level where we are right now is going to be the norm for well because you know we feel very fortunate to be able to bring the four people on very quickly. So, with four additional trainers that’s one thing that we want to accomplish. We also brought some people on overseas. We may try to bring on another regional manager but other than that this is the -- these are the additional people that we put in the budget to be able to manage the growth to this year.

[Richard Zaremba:]

Just keep in mind Joe that these folks they were in the quarter from day one. So, it has been staged in a little bit. So the full impact will be probably Q2.

[Joseph Munda:]

Okay. And how big is the sales force currently?

[Michael A. McManus:]

Right now we have got on the surgical side including our Head of Sales in the field we have got nine people including new trainers. On the wound side we have four, two regional managers and two trainers basically.

[Joseph Munda:]

And are you looking to add, I guess further to surgical, as I mean as you are showing some strong growth here in the U.S. and you talked about the uptick from surgeons I mean is that number going to double?

[Michael A. McManus:]

No, because I said the trainers that we have brought on at the beginning of this fiscal year are here now.

[Joseph Munda:]

Okay.

[Michael A. McManus:]

They came on faster than I expected, which is great very highly qualified people. So they’re here and that’s the number for that we thought we would need to be able to handle the growth for this fiscal year. So I am very pleased they are on the board and we’re going to have their benefit throughout the year.

[Joseph Munda:]

Okay, very helpful. Rich as far CapEx is concerned can you give us a number for the quarter?

[Richard Zaremba:]

Capital expenditures, I think the number was probably around 300,000 most of that is again units that we have consigned out to the field for demo and for revenue purposes.

[Joseph Munda:]

Okay. I mean if we on an annualized basis I mean are we looking at 1.2 for the year or is it something that’s a moving target?

[Richard Zaremba:]

No, I don’t anticipate the -- from those units being that’s a fairly normal expenditure. As Mike had mentioned though we are expanding some of our IT capabilities. As that rolls out we may have some additional expenditure in software et cetera which as you know we capitalize.

[Joseph Munda:]

Okay. And then one last question and then I’ll hop back in the queue, very nice year, you had 65% margin in the quarter. Is this the baseline going forward? I mean you are seeing a strong build-up of recurring revenue? Is this a number that we expect you know could you get to high 60’s by the end of this fiscal year?

[Richard Zaremba:]

I don’t want to project that Joe. I mean there is a lot of variables in there. We are very satisfied with where we are. We will see what we do going forward but there is no reason to expect it doesn’t stay around here.

[Joseph Munda:]

Okay, that’s helpful. Thank you.

[Operator:]

(Operator Instructions). The next question comes from [Robert Smith]. Please go ahead.

[Unidentified Analyst:]

Hi, gentlemen.

[Michael A. McManus:]

Hi.

[Unidentified Analyst:]

Thanks for your effort. I really appreciate these results. I have been following you for quite some time and this seems like a very promising direction. You have transformed this business into. What would happen if you will attract a buyer here at this point? And you know these results are pointing to a lot of promise in the future and I am just wondering what would happen with a buyer and what your concerns are about that? Along with that I was wondering about the low number of shares that are there and at some point if their stock price gets higher, does it make easier to have more shares on the market and can we attract more interest with that at some point down the road and if you have ideas about that I would like to hear it.

[Michael A. McManus:]

Thank you for your questions. There is actually a couple of them there. So obviously we can’t control what other people do. All I can control is the fact that I believe and I believe our Board believes that we can grow this company better ourselves other than [external players] and add considerable value. So if anybody does talk to me we are not looking to be sold. At the same time, the shareholders own the company and I guess the single largest shareholder so, you have my feelings on it. The other question that you asked was with regard to whether we can continue to grow like this. Is that the second question you asked?

[Unidentified Analyst:]

Well I was wondering about the number of shares, than [inaudible] shares.

[Michael A. McManus:]

Yeah, I have got it, sure, sure. So, liquidity cuts both way. The liquidity has served us from time-to-time because if somebody does a research report on us they want to sell it to people who are typically capable of buying 250,000 shares. So people have said that’s limiting. On the other hand if we have a limited number of shares and you have a lot of people that want to own them, the stock may go up faster. Some people think that’s a positive. The important thing to us during the entire time that Rich and I have been here we have never diluted our shareholders one, and that’s important to us. We have a lot of people that are interested in having us put more shares out on the market for the purposes of raising more capital but with $7.5 million in cash unless I had a very substantial accretive purpose for going out and trying to raise additional capital I would not want to dilute the shareholders by doing that because you just don’t earn anything on the cash. So with regard to the number of shares we have we look at it all the time. If for some reason in the future there is value to shareholders in having more shares outstanding we’d certainly consider it. Right now and for the last many years it seems that we have done pretty well with where we are. There is still at least 313 D shareholders of this company. So it shows you that people that are patient are able to pick-up enough stock if they want to. So it’s sort of win-win for everybody in my view.

[Unidentified Analyst:]

Thank you. I appreciate that and I really do appreciate your effort. I think you guys have done a great job,

[Richard Zaremba:]

Thank you.

[Michael A. McManus:]

Thank you so much

[Operator:]

(Operator Instructions). The next question comes from Michael Kaufman with MK Investment. Please go ahead.

[Michael Kaufman:]

Hi, Mike and Rich.

[Michael A. McManus:]

Hi.

[Michael Kaufman:]

You are making very good progress, proud of you guys. I noticed when I was looking for the Investor presentation it hasn’t been updated since May 2014 and maybe now that we have more momentum and can focus just on the going forward on the new products and kill some of the old products way back it could be a much more interesting presentation in terms of how that thing is really tracking/

[Michael A. McManus:]

I think you will be pleased Mike to see one pop-up on your screen in the next couple of days or so.

[Michael Kaufman:]

Okay. The only other thing is can you share with any of us any new applications or new products or line extensions that could fill out kind of the mosaic of how these generic tools can get to many more procedures?

[Michael A. McManus:]

Well, as I said in my remarks Mike the innovation aspect of the business that we’re in is extremely important and I made reference to a line extension if you will with regard to our SonaStar, which I think creates the best aspirator in the world which provides an opportunity for a higher vacuumed capability but also a greater tissue sensitivity and that’s a product that we created especially for the Chinese market to begin with, but there is a lot of demand for it now in other countries around the world and we are going to be looking to give new customers an opportunity to have the benefit of that line extension and with that we will be -- I mentioned also laparoscopic probe that would be available probably at the end of December. We are looking at similar line extensions for our BoneScalpel and for the SonicOne and we are also looking at a number of potential applications in minimum -- minimally invasive surgery as well to give doctors an opportunity to use some of these products to a less invasive incision report.

[Michael Kaufman:]

That’s very interesting. Keep up with that work.

[Michael A. McManus:]

Thank you so much.

[Richard Zaremba:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would you like to turn the conference back over to Mr. Michael McManus for any closing remarks? Please go ahead.

[Michael A. McManus:]

Thank you very much, operator and thank all of you for being on the phone call. We appreciate it very much. We are very open to your questions. Call anytime if you have questions. I hope you get a sense of the enthusiasm that we have around what we are doing here at Misonix, the success that we are realizing but we are also recognize the importance of being focused and making sure that we pay attention to growing the business and making sure that surgeons understand and are well trained on our products, so that they will use them in more procedures driving more disposable revenue and talking with their friends about the product and giving us referrals. All of those things are the leverage that we need to grow this business faster. We are still growing it fast but off a small base. We want to have a larger market share not only in the United States but around the world in all of our products. We have got very unique technology, some of the benefits of ultrasound are things that you will be reading about in the next several months as we develop more of the scientific background and support for the benefits of ultrasound, in terms of tissue and in terms of bone. And all of these coming together now with the great acceptance by major surgeons around the world are helping us to continue to grow your company. Your voice is very important to us. We thank you for your support and we wish all a good evening. Thank you.

[Operator:]

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