Misonix, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good afternoon and welcome to the Misonix’s Second Quarter Fiscal 2015 Financial Results Conference Call. All participants will be in listen-mode. (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.

[Joe Diaz:]

Thank you, operator and thank all of you for joining us today to review the financial results of Misonix Incorporated for the second quarter of fiscal year 2015, which ended on December 31, 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 Office; 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 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. These statements are based on management’s current expectations and are subject to uncertainty and changes and 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 but are not limited to general economic conditions, risk 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, risk involved in introducing and marketing new products, potential acquisitions, consumer and industry acceptance, litigation and/or court proceedings including the timing and monetary requirement to such activities, regulatory risk including approvals pending and/or contemplated five 10-K filings [ph], 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 obligations 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 Incorporated. Mike?

[Michael McManus:]

Thank you, Joe. And my thanks to all of you for participating on today’s call. As you probably know, we had our annual meeting of shareholders yesterday and so we have to thank all of you for your vote. We greatly appreciate your continuing interest in Misonix. As you saw today’s release, the second quarter and the first half of fiscal 2015 posted strong financial results. Total revenue was up 36% and 41% for the second quarter and the first half of the year respectively. We’re particularly pleased with the strong revenue increases and the unit growth across our BoneScalpel, SonicOne and SonaStar product lines in the United States. We primarily consigned our products in the United States in order to achieve a more rapid placement. In the second quarter of fiscal 2015 BoneScalpel revenue increased 50% to 5.2 million. SonaStar revenue increased 39% to 3.2 million. And SonicOne revenue increased 43% to 1.4 million. We just have to thank all the people here at Misonix for the wonderful job they do to accomplish those kinds of results, now consistently over four quarters. As the final results of the past four quarters indicate, we continue to make great progress in getting our products accepted as mission critical instruments for spinal surgery in an expanding number of medical institutions throughout the Unites States and the world. This is directly attributable to the success of our strategy in more effectively working with, among other things, value-added committees that many hospitals have instituted to assess the value proposition of new technologies that could be introduced into their respective institutions. And to our consignment model that allows surgical suits in hospitals the benefit from Misonix technology without having to make a large capital expenditure. Our success has to also be attributed to and is accelerated by the support of our surgeon users who provide us with introductions to their colleagues, to share their stories of how the BoneScalpel has benefited their practices. As hospitals agree to have our ultrasonic instruments placed in their surgical suits, they agree to purchase our single use consumable blades and tubing kits on an as-needed basis. This operating model is a win-win situation for both client hospitals and Misonix. We continue to own the base units and we depreciate them over a three-year period. However, the cost of placing the base units in the hospital suit is offset by consumable blade revenue in a relatively short period of time. We think that our consignment recurring revenue model which generates 59% of total second-quarter revenue compared to 46% for last year’s comparable quarter has shown to be a successful approach that is contributing significantly to our margin and to our overall growth. Here in the first half of fiscal 2015, we also continue to gain traction at international markets where we experienced sales growth across virtually all international regions. Internationally, while we sell our units and consumables directly to our distributors, revenue for the second quarter in the six month increased 35% and 40% respectively versus the first half of last year. We’ve made great progress in managing and upgrading where necessary our international distribution channels throughout fiscal 2014 and then to 2015. Our international distributors are doing a great job of achieving higher levels of acceptance by hospitals and surgeons around the world. And we continue to see individual countries, where, through our distributors’ efforts and with key opinion leaders, governments are granting us codes that allow us to get increased reimbursement on our blades. And we appreciate their work in doing that. And we appreciate the wonderful surgeons that are working with them. The safety profile of our BoneScalpel resulting in reduced blood loss, less bone fragmentation, and reduction in overall time required to complete a surgical procedure is gaining increased recognition around the world. Surgeons have indicated thus that the BoneScalpel allows them to successfully execute many procedures without the physical exertion that traditional orthopaedic surgical tools require. And in fact, a wonderful doctor up in Boston told me that he expected this would allow him this to extend his career for a number of additional years. These are important benefits that medical professionals can gain from the BoneScalpel. The same can be said of our SonaStar and SonicOne products in terms of their safety profiles. With the SonicOne, we’ve shown a better way to debride a wound, to preserve live tissue with less bleeding and a reduction in bacteria. This is particularly important in the case of diabetic foot and leg ulcers where the wound is not appropriately treated and healing does not take place. The ultimate result is inevitably the loss of a limb. This is a large and growing problem in many geographies around the world, unfortunately. The SonicOne also gives you the opportunity to treat infection and other problems in the bone, in deep wounds. The SonicOne is a leading-edge technology that can improve the ability to heal and improve quality of life. We’ve also established another real benefit of the SonicOne in the treatment of burns as highlighted in a recent paper from the Saint Barnabas Medical Center in Livingston, New Jersey. That study concluded that the SonicOne is safe and effective for use in tangential excision of third degree burn wounds. The study went on to say that the calculated blood loss using SonicOne OR is significantly less than published blood less using standard excision techniques. And that it represents a very important advancement in the treatment regimen. It also shows that the SonicOne can be effective in a shorter period of time because you don’t have to go back and cauterize so much of the bleeding. And so the overall procedure may also be shorter. The study results provide further clinical evidence to support the safety and effectiveness of the SonicOne ultrasonic technology in the treatment of burn wounds. It is gratifying to see more facilities electing to bring SonicOne into their operating rooms. The company also participated in the 42nd Annual Eastern Great Lakes Burn Study Group Meeting in Pittsburgh this past October. And at that meeting, we not only exhibited and offered surgeons hands-on training with the SonicOne ultrasonic surgical debridement system, and better, how this equipment can be used to address the challenges of burned tissue. Again this is a large market that Misonix technology can generate remarkable results. We’re making consistent progress and broadly introducing our products to surgeons around the world, and having those products assume their rightful place in the surgical suites in which they operate. During the quarter, we received royalty payments from Covidien totalling approximately $1 million and $2.2 million for the first half of the fiscal year. Our expectation is that we will continue to collect royalty payments through October of 2016, at which time, our patent expires. The patent is the basis for the royalty payments on the license. We are developing strategies to continue to find a way to offset this loss as we continue to aggressively grow our business. We’re also open to investing that royalty income in the acquisition licensing distribution of products or technologies with the potential for growth that can be accretive to our overall operations. All in all, we have to say we’re off to a very good start. Our sales, development engineering and support teams are executing at a very high level in achieving great market acceptance in all the markets in which we operate. As we move into the second half of the year, the company maintains a strong financial base with cash in excess of $8 million, no long-term debt and the ability to operate our business from internally generated cash flow. I have every reason to believe that we will continue to execute on our business plan at a high level for the foreseeable future. With that, let me turn the call over to Rich, our chief financial officer, for review of the numbers.

[Richard Zaremba:]

Thanks, Mike. Revenue for the three months ended December 31st, 2014 was $5.6 million, a 35% increase when compared to revenues of $4.1 million for the same period in fiscal 2014. BoneScalpel revenues increased 41% to 3 million, SonicOne revenues increased 57% to 840,000, and SonaStar revenues increased 43% to 1.7 million. If we look quarter of a quarter, BoneScalpel revenue increased 35% to 3 million, SonicOne revenues increased 39% to 840,000 and SonaStar revenues increased 11% to 1.7 million for the second fiscal quarter 2015 as compared to the first fiscal quarter of 2015. The company reported net income for the three months ended December 31st, 2014 of 901,000 or $0.11 earnings per diluted share as compared to earnings of 459,000 or $0.06 earnings per diluted share for the same period in fiscal 2014. Revenue for the six months ended December 31st, 2014 were 10.1 million, a 41% increase when compared to 7.2 million for the same period of fiscal 2014. The company reported net income of 1.3 million or $0.16 earnings per diluted share for the six months ended December 31st, 2014 compared to a net loss of 425,000 or $0.06 loss per diluted share for the same period into fiscal 2014. As Mike had mentioned, the company’s cash position as of December 31st, 2014 was 8.3 million. Days sales outstanding is 65 days, inventory turnover is 1.6 times, and the company has no long-term debt. The company’s backlog of unfilled orders as of December 31st, 2014 was 430,000. Most orders are shipped when received. Mike.

[Michael McManus:]

Thanks, Rich. And, operator, we’d be happy to take some questions if they have some.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Joe Mundo of Sidoti and Company.

[Joe Mundo:]

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

[Richard Zaremba:]

Yes, we can. How are you?

[Joe Mundo:]

I’m good. Real quick here, a few questions. As far as BoneScalpel revenue is concerned, a nice bump here in the quarter, I’m just wondering, can you give us some color as far as new customers are existing? You talked a little bit about how surgeons are talking to their buddies and saying maybe you should use this. I’m trying to get a sense of where the growth is coming from, new customers? Or is it customers have won and they’re adding more units to their facility?

[Richard Zaremba:]

It’s all of that, Joe. We’re very pleased to - we get a significant number of referrals. We get referrals from doctor-teachers referring us to students that they taught last year or the year before but now are out around the countries. They’re practicing themselves and a doctor will let them know that he didn’t know about the BoneScalpel when he was teaching them but now he does and he wants to share the information with them. We also are pleased to see the number of doctors on a system increasing, because that then drives a second system in the hospital. So the answer is all of the above.

[Joe Mundo:]

Okay. As far as international sales growth, seeing very strong demand particularly in Europe where it was up 200% [ph] according to the cue. Any concerns there as far as currency, headwinds, any pushback you’re seeing as far as pricing is concerned?

[Richard Zaremba:]

Well, you know, we get paid in dollars but it did seem that one of the biggest growths in the past six months in Europe came out of the - I guess the highest volume was - came out of Russia, strangely enough. So if there’s one place we could think there might be trouble and an indication of headwinds, that would certainly be one of them, but that was not the case. The second was probably Turkey. And so some of the growth is coming from places where you wouldn’t expect to see it as much, although set steady growth continues from what we think of as the more developed countries. And we’re starting to see more success in some countries that approve a code for a greater reimbursement. And as different doctors look around the world and see some of their friends using the BoneScalpel, it’s amazing how many people know one another, it’s a small community. There’s no question though, Joe, that particularly in places like Latin America where there’s been a tremendous devaluation in their currency, they’re looking for discounts. And my first question is, when the dollar declines are you going to let me increase my prices? I think that what we need to sell on is the basis of a better quality piece of equipment that deserves a premium price that comes from the United States. And so far doctors seem to understand the value there, but we are starting to see pushback from certain parts of the world.

[Joe Mundo:]

Okay. That’s helpful. As far as gross margins are concerned, Rich, I mean up sequentially down year-over-year. Can you give us a little bit of color as far as what the mix was and what drove it sequentially but didn’t quite jump over last year’s result?

[Richard Zaremba:]

Well, of course you know, as you mentioned, the product mix has a large part to do with it domestic margins certainly are higher than our internal margins. So that all plays into it. I mean, it’s just purely product mix.

[Joe Mundo:]

Okay. Mike, just a few more. Regarding the press release on Aesculap, the decision to buy them out. And in the cue, you put in there as far as maintaining a level of key revenue, can you give us some sense of how much revenue Aesculap was doing by selling the BoneScalpel? And are you going to see a significant uptick in 2016 when that agreement is expired?

[Michael McManus:]

Well, no, because we don’t release the Aesculap revenue or the revenue to us from Aesculap, but suffice it to say that the transfer of price from us to Aesculap was lower than it is to almost anybody else that we deal with because the transfer price was set a number of years ago. So, just by taking back these accounts and selling at the price that Aesculap was selling into the hospitals for, our margin increased and that’s important. The second thing is that Aesculap is primarily a neuro company, they sell them neurosurgical suite more than into the orthopedic suite. And so in a number of these very large accounts we have the opportunity to realize incremental sales from now going down the hall or across the street to visit the guys or the orthopedic surgeons that weren’t being served in the past. And so we think both of those things are going to give us an increase in margin and an increase in volume.

[Joe Mundo:]

Okay.

[Richard Zaremba:]

The other thing too on that, Joe, is that as you probably know we terminated their agreement two years ago and it expires this December and they were not able to sell capital equipment based on that agreement. Now we have an opportunity to potentially consign more units into those hospitals, hopefully getting more interest in those units. And then, Mike had said, when we sell the disposables we get a higher margin.

[Joe Mundo:]

Yeah, I’m just trying to quantify what exactly the opportunity is.

[Richard Zaremba:]

Well, I think the only way to look at it is that for the agreement that we did, it was limited to a number of their very largest accounts. And so whatever the size of those accounts were, they were very big hospitals where we are now going to at least have the business that they had at a higher margin and an opportunity for incremental unit sales and disposable sales out of that in a second part of the hospital they weren’t serving. I know that doesn’t help you come up with a specific number but it does suggest that the hospitals are big and the opportunity is big.

[Joe Mundo:]

Okay, okay. And then I guess my final question, as far as the royalty is concerned, Mike, I know Covidien came out with a couple of new models of the SoniciSion, it’s based off of the IP with Covidien, any chance because of that occurring that the royalty income stream actually picks up with the release of three new models using that IP?

[Michael McManus:]

No, Joe, because it’s not the equipment that they make, it’s the patent. And even if they use the patent in more pieces of equipment or new products, when the patent expires the royalty terminates.

[Joe Mundo:]

Okay. So, it’s not based on the amount of product sold on their end?

[Michael McManus:]

It is. But only with products that are using our patent. And if our patent expires they don’t owe us anything.

[Joe Mundo:]

No, I understand that, but they’re coming out with three new models of SoniciSion using your patent.

[Michael McManus:]

Right. So, between now and October 16, if you’re suggesting, the royalty may go up because they’re going better with the first product they came out with, which was a cordless product and they may have some additional products around that. But when the patent expires they won’t owe us anything because the royalty is based on the patent.

[Joe Mundo:]

I understand that, that’s what I’m saying from now until the expiration.

[Michael McManus:]

Yes, it could be better.

[Joe Mundo:]

Okay, okay. Thank you.

[Michael McManus:]

Yes.

[Operator:]

[Operator Instructions] Our next question will come from Steve Krueger of Foresight Investing.

[Steve Krueger:]

Hi, guys.

[Unidentified Company Representative:]

Hello, Steve.

[Steve Krueger:]

The question about the number of BoneScalpel units sold or consigned in the second quarter, if I understand the numbers correctly, total units consigned in the U.S. were 18, total units worldwide sold a consignment of 63, which would mean 45 units were sold or consigned internationally. Do I have those numbers right, Mike?

[Michael McManus Jr.:]

There could be a couple of units that were sold domestically, but basically [indiscernible] yes.

[Steve Krueger:]

Okay. Now, most typically what I see time and time again when you’re looking at U.S. versus rest of the world in medical devices total U.S. unit sales tend to be about double what the total international sales are. And right now, you guys have a flip-flop relationship to that. Can you shed any light on you know, on that phenomenon and whether or not it’s reasonable to expect that baseline international sales and be increasing acceptance you’re getting in the US that the sales or consignment from the US are going to accelerate more, we’ll see a more typical ratio at some point in not too distant future?

[Richard Zaremba:]

Yes, I think we will and I think your observation is a good one. But it requires us to look back in history because about three years ago, Aesculap had the exclusive rights to distribute the BoneScalpel in the United States. And as a result, the growth of the BoneScalpel in the United States was limited to Aesculap’s to sell it. On the other hand, we had the opportunity during that period of time to start our business outside the United States and only after we terminated the relationship with Aesculap, except for the major accounts, did we have the ability ourselves to start generating a BoneScalpel business in the United States. So in a sense, we’re about a year behind, or a little bit more than a year behind, domestically from our efforts in the international markets. And so over time, yes, I would think that you would expect to see something more traditional as you suggest.

[Steve Krueger:]

Okay, thank you.

[Richard Zaremba:]

Just to add to that Steve, I think you know, we consign units in the United States, so we get no revenue where we sell units outside the United States, to distributors, granted a set of distributor price. But it’s a sale, plus we sell disposables, in the US, we’re just selling the disposables.

[Steve Krueger:]

Right, I understand that, Rich. I was focused on the number of units being either sold of consigned and wondering if we might expect reasonably, to see pretty significant acceleration in the number of units being consigned here in the US.

[Richard Zaremba:]

Yes, so Steve, just to be clear, the answer is yes, we should. Our highest priority, as we’ve told shareholders in the past, is to increase the units in the United States. Our market share is pretty low. And so there’s wonderful opportunity for additional growth. We have to do that, we have to continue to grow market share in hospitals with high volumes, in the United States. That’s our highest priority. And so overtime, despite the advantage we had the year early, to build an international business, the United States business will be faster growing and bigger.

[Steve Krueger:]

Okay. Thanks very much.

[Richard Zaremba:]

Yes.

[Operator:]

Again, if you would like to ask a question, please press star then one. And our next question comes from Michael Kaufman of MK Investments.

[Michael Kaufman:]

Hi Mike and Rich, great quarter. It looks like you’re really tracking and I think on the curve. A few questions I have; one, would be Aesculap being terminated and very little time left anyway since, I guess they would want to keep their customers happy, I presume you paid a de minimis amount of considerations picking up the extra few months or whatever it was, be interested in.

[Richard Zaremba:]

Yes, I would say that we qualify as de minimis.

[Michael Kaufman:]

Okay.

[Richard Zaremba:]

The important thing here to both us and them wasn’t as much the time as it was the transition. They are going to continue to sell a lot of their products to these accounts.

[Michael Kaufman:]

Right, they want to keep them happy.

[Richard Zaremba:]

They wanted to make sure they were going to be happy. And they understood too that they didn’t have the opportunity to sell capital equipment, just disposables. In some of these places, there really needed to be the replacement of some machines, the upgrading of some machines. So it was in their interest as well, to try to get that done faster. So yes, it was a good deal for everybody and certainly de minimis.

[Michael Kaufman:]

Great job. The other question I had is, I noticed in kind of the footnotes, that it looked like the Treasuries stock increased by 47,000 shares.

[Richard Zaremba:]

That’s correct.

[Michael Kaufman:]

Or about $535,000. Was that a buyback? It was like an 11-29 if I do the math.

[Richard Zaremba:]

It’s just option, cash to stock [ph] exercises are where you give back stock to be able to purchase additional options, exercise options.

[Michael Kaufman:]

Okay. So in effect, we were diluted less than we would have been had we not done that and we had the cash to do it.

[Richard Zaremba:]

That’s correct.

[Michael Kaufman:]

The other question I had is your expense to revenue ratio of R&D, came down and it’s down to 5.8%. And if we’re going to increase our patent portfolio so we can maybe get another Covidien or get some of the ousted [ph] payers royalties, or come up with new breakthrough products, it sounds like we might have to commit a little more than 6% to R&D as far as that went down.

[Richard Zaremba:]

Well, I agree with you. And I can assure you that - I mean, I think in a typical quarter we probably have four, five patent applications that we make around our products. So that certainly isn’t slowing down. The part of the reason for the slowdown I think is the fact that what we’re really focusing on is basically what you might call a line extensions, new blades and probes and things like that around the products that we have where we already have the box, the generator. And so the expense of doing that is mainly the cause of the people as I said before in all of our product categories even though we’re doing extremely well in terms of growth and great market acceptance. Our market share is so low that in my belief we have to focus on gaining market share by adding value to the products that we have right now. We’re a small company we only have so many people. And I don’t want to lose focus on trying to gain market share in the spine, the wound [ph] and the neurosurgery market. And we’ve got some great engineers and R&D folks. And they’ll be very excited about your question and hearing that I think that we ought to be investing more. The question is when you look at our priority list of products that we’re working on we’ve got four or five right now that are hot that we’re going to be adding to each of our products lines. We can’t do more than that. So - and finding people that have the expertise that our people have in our unique technology is not easy, it takes a lot of training. So right now we’re focused on trying to gain market share. But I can assure you we have already identified a number of things that we can do to add value going forward.

[Michael Kaufman:]

Well, maybe - and this could be applications engineers where they could accelerate some of these line extensions that work with customers to come up with things that would be even more valuable to them. So maybe it’s not --

[Richard Zaremba:]

Well, that’s where the - that’s where the projects come from to begin with, Mike. We’re not sitting in the backroom here with the door closed trying to figure out what we ought to be doing. This is all based upon applications, specialists and customer doctor input. That’s where the new product development comes from. So if we want to be in minimally invasive surgery, if we want to have a different blade that a doctor needs. That’s where the ideas come from. It’s all based upon market need. It’s not developed internally by us without a thought to the market. The other possibility is to perhaps to outsource some of the development where - and we might be able to do some of that. But the answer to your question is, your observation of the percentage is right, it’s low. It will be higher, it should be higher. We have to invest in our technology in the future of our company and I can assure you we will.

[Michael Kaufman:]

Okay. Just a last point. With Covidien they’ve been a major source of zero cost to good sold revenue and profit. With all of your line extensions and other things there’s nothing you could to extend the patent to cause them to want use one of your patent enhancements that would kick start [ph] some additional royalties with them?

[Richard Zaremba:]

Well, we’ve had conversations about the possibility of trying to do some additional things. In the first case a number of the patents we co-hold with them. So we can’t extend them just by ourselves. And other ones they of course litigate with everybody because I think they’re smarter than everybody. And to some extent they don’t want to use our technology and have to pay us a royalty. So the answer to your question is, as much as we might have tried I don’t think that’s going to be a real possibility.

[Michael Kaufman:]

Is their products soft tissue rather than bone?

[Richard Zaremba:]

Their product is a product that competes with the harmonic scalpel and soft tissue. It’s the Autosonix.

[Michael Kaufman:]

Are we prevented from getting into soft tissue if once their royalty thing is totally severed?

[Richard Zaremba:]

Anybody in the world can go into the same - once the patents are expired anybody can use them.

[Michael Kaufman:]

Well, I guess what I’m saying is that right now, you wouldn’t want to do anything that would frustrate somebody who’s giving you a lot of money, but in the future I guess conceivably we could a think about a soft tissue product obviously they’re getting a lot of revenue from their product.

[Richard Zaremba:]

Yes. And you know we are in neurosurgery, we are in general surgery outside the United States. And believe me I won’t be trying to avoid upsetting big competitors by taking market share.

[Michael Kaufman:]

Okay. Onward and upwards. It sounds like you’re doing a wonderful job, the whole team.

[Richard Zaremba:]

Thank you, Mike [ph].

[Operator:]

This will conclude our question-and-answer session. I would like to turn the conference back over to Michael McManus for any closing remarks.

[Michael McManus:]

Thank you very much operator. And thanks to all you of you participating on today’s call. We really do appreciate it. We appreciate you’re taking the time; you ask great questions, you challenge us. Call anytime if you have questions that you haven’t thought of during our calls. We’re always happy to talk to you. We look forward to talking to you on the next call. And we look forward to continuing to grow your company. Have a good day. Take care of yourself. Be good. Bye.

[Operator:]

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