Milestone Scientific Inc. (MLSS) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Milestone Scientific Incorporated Third Quarter 2018 Investor Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to you, David Waldman, Investor Relations. Please go ahead, sir.

Good morning. And thank you for joining Milestone Scientific's third quarter 2018 financial results conference call. On the call with us today are Leonard Osser, Interim Chief Executive Officer; and Joseph D’Agostino, Chief Financial Officer and Chief Operating Officer. The company issued a press release last week, Thursday, November 15, containing third quarter 2018 financial results, which is also posted on the company’s website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1021. The company’s management will now provide prepared remarks, reviewing the financial and operational results for the third quarter ended September 30, 2018. Before we get started, we would like to remind everyone that during this conference call we may make forward-looking statements regarding timing and financial impact of Milestone’s ability to implement its business plans, expected revenues and future success. These statements involve a number of risks and uncertainties and are based on assumptions involving judgments with respect to future economic, competitive and market conditions and future business decisions. All of which are difficult or impossible to predict accurately and many of which are beyond Milestone’s control. Some of the important factors that could cause actual results to differ materially from those indicated by the forward-looking statements are general economic conditions, failure to achieve expected revenue growth, changes in our operating expenses, adverse patent rulings, FDA or legal developments, competitive pressures, changes in customer and market requirements and standards, and the risk factors detailed from time-to-time in Milestone’s periodic filings with the Securities and Exchange Commission, including without limitation Milestone’s report on Form 10-K for the year ended December 31, 2017, and Milestone’s report on Form 10-Q for the third quarter ended September 30, 2018. These forward-looking statements made during this call are based upon management’s reasonable beliefs as of today’s date, November 21, 2018. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason. With that, we’ll now turn the call over to Leonard Osser, Chief Executive Officer. Please go ahead, Leonard.

Good morning, and thank you, David, and thanks to everyone joining us on the call today. Starting first with the commercialization of the CompuFlo Epidural system, we continue to sign independent distributors that cover markets in the United States. Most recently, we signed a distribution agreement with Clinical Technology, a leading specialty distributor of medical products in the mid-western region of the United States. They had several instruments on loan with top anesthesiologists and have received positive feedback from both providers and patients. We believe CTI will be a valuable asset to Milestone as we educate medical professionals on the benefits of objective, quantifiable and real time confirmation of assessing the epidural space and strive to build a new standard of care with the CompuFlo Epidural System. Last week, we announced that a new clinical study was published in the International Journal of Obstetric Anesthesia that found the CompuFlo Epidural system to be successful in objectively identifying the epidural space, even in difficult patients. Accurate epidural space identification can build physician and resident confidence, while reducing the number of attempts per capita placement and accidental dural functions that can be costly to the hospital and patients -- painful to the patients. The study authors from the Citta di Roma Hospital and Careggi Hospital in Italy included "we have validated the CompuFlo device as a means of adequately identifying the ligamentum flavum and the epidural space. And our preliminary findings suggest that it could assist the physician in training while performing epidural insertion". This has been validated in a number of different university hospitals and by a number of luminaries throughout the world over the past couple of years actually. This study further validates that the CompuFlo Epidural system is able to safely and effectively identify the epidural space giving providers a proven alternative to loss of resistance for range keeping in mind that the competitive technology came about in the 1860s. In the beginning of November, we announced that we received a notice of allowance for a key patent from the U.S. Patent and Trademark Office. The patent covers the method and apparatus for performing a peripheral nerve block. Peripheral nerve blocks are form of regional anesthesia that have significantly increased and used for the treatment of trauma and surgical procedures as well as for post-operative and non-surgical anesthesia. The patient will further -- the patent will further expand our intellectual property portfolio into peripheral nerve block procedures. Our computer control systems with proprietary dynamic pressure sensing technology are designed to make all types of injections for science, efficient and virtually painless. Leveraging this patent to develop an instrument that is optimized specifically for peripheral nerve block in the future will allow medical professionals to precisely control the numerous critical parameters of performing a PNB procedure. Turning now to our dental business, we experienced weakness within our dental division in the third quarter of 2018, due in part to a restocking order from Henry Schein, our exclusive distributor in the U.S. That was delayed to the fourth quarter. The timing of orders -- due to the timing of orders, but overall, we anticipate or dental division will resume growth in 2019. At this point, I’d like to turn the call over to our Chief Financial Officer, Joseph D’Agostino to go over the financials in detail. But I will be back at the conclusion of Joseph’s discussion. Please go ahead, Joseph. Joseph D’Agostino: Thank you, Leonard. Revenue for the 3 months ended September 30, 2018 was $1.6 million versus $2.8 million for the third quarter of 2018. Dental sales decreased by approximately $1.2 million during the 3-months ended September 2018 compared to 2017. The decrease in revenue was primarily due to a decrease of approximately $848,000 related to a delay in the quarterly restocking orders for handpieces and devices from Henry Schein. The third quarter restocking order was received and shipped in October 2018 and the amount of $773,000. International dental revenue, excluding China's, decreased approximately $326,000 for the 3-months ended September 30, 2018 compared to the same period in 2017. Gross profit for the third quarter was a loss of $120,000 versus a profit of approximately $1.8 million or 63% of revenue for the third quarter of 2017. Gross profit for the 3-months ended September 30, 2018 included a reserve of approximately $273,000 for certain dental handpieces and a charge of $790,000 for the deferred cost of handpieces and devices sold to Milestone China. Operating loss for the 3-months ended September 30, 2018 and '17 were approximately $4.5 million versus $1.4 million for the third quarter of 2017. Operating loss for the third quarter of 2018 included a $1.5 million write-down of a long-lived asset. Net loss for the third quarter of 2018 was $4.4 million or $0.12 per share versus a net loss of $1.4 million or $0.04 per share for the comparable period in 2017. Revenue for the 9-months ended September 30, 2018 was $5.8 million versus $9.1 million for the third quarter of 2017. Domestic dental revenue decreased by $1.5 million during the 9-months ended September 30, 2018 as compared to the same period in 2017 due in part to a delay in the quarterly restocking order of handpieces and devices from Henry Schein and deferred focus on working through their inventory purchase in the fourth quarter of 2017 earlier in the year. However, sell-through of handpieces continues on par to the same period in 2017. International dental revenue, excluding China, decreased approximately $350,000 for the 9-months ended September 30 compared to the same period in 2017. China revenue decreased for the 9-months ended September 30, 2018 by approximately $1.4 million compared to 2017 as Milestone Scientific recognized $300,000 in revenue, previously deferred to the payment was received by Milestone Scientific. Milestone China is making modifications in the business strategy to better serve the Chinese dental market. Gross profit for the nine months ended 2018 was $2.5 million or 43% of revenue versus $5.7 million or 63% of revenue for the first 9-months of 2017. Operating loss for the 9-months ended September 30, 2018 and '17 was approximately $8 million and $3.5 million respectively, an increase of approximately $4.5 million. This increase is primarily attributable to a reduction in sales and gross profit dollars as well as several reserves for dental and medical inventory and charges of approximately $1.4 million during the nine months period additionally. As noted previously, the reserve impairment of a long-lived asset of approximately $1.5 million. Net loss for the nine months of 2018 was $7.6 million or $0.22 per share, a net loss of approximately $3.4 million or $0.10 per share for a comparable period in 2017. Now, I’d like to turn your attention to liquidity and capital resources. As of September 30, 2018, the company had cash and cash equivalents of approximately $400,000, current assets of approximately $7 million and working capital of approximately $500,000. At this point, I’d like to turn the call back to Leonard.

Thank you, Joseph. Within our medical division, we’re adding new distributors, and have received very favorable feedback in the market from luminaries and key opinion leaders, physicians, and most importantly, hospital networks. We expect to start seeing sales ramping up in our medical division next year as the initiatives we have put in place begin to take hold. So to wrap it up, we are encouraged by the outlook for the business and look forward to announcing additional developments as they unfold. I’d like to thank you for joining the call today. At this point, we would like to open the call up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Keith Goodman with Maxim Group.

Hey Len, a couple quick questions for you. One is on the timing of the dental orders. If they got pushed off into Q4, do you expect a second order in Q4? Or do you think that that entire sequence of orders just keeps getting pumped out? Joseph D’Agostino: Yes, this is Joseph D’Agostino responding to Keith. The answer for that is we anticipate to receive an order in the fourth quarter. As you know, we do have minimum starting in 2018, and part of those minimums would be the delivery of an order in 2018 fourth quarter.

So the order from Q3 got pumped to Q4. But you expect the order from that -- should have been in Q4 being pumped pushed to Q1 of next year. What do you think the second order comes in 2018?

We anticipate -- we have received an order already, which we just spoke off for $773,000. That order was received unfortunately. If we received about 10 days later then -- so we didn’t make it into the third quarter, but it already made into the fourth quarter. We do anticipate more orders in this quarter in addition to that with this quarter. Does that answer the question?

Yes, it does. Thank you. And on the previous call you said that your model is not to replicate distribution that you'd be looking for licensing with joint ventures are now right sale of different technologies as it pertains to the different areas of medical. Can you give any update on that?

Yes, you're absolutely right, Keith. And thank you for bringing that up. We are putting all of our energy into our epidural instrument. The dental business is something that we have unfortunately started over the last number of years. We put very little money into it. We have taken money out of it to support our efforts with the epidural instrument. As you may be aware we have hired, about nine months ago, a senior sales marketing executive for worldwide distribution of the product. We have hired another executive for the United States. We have hired a marketing person in that area. And we are bringing on [indiscernible] trainers to train these sales people and doctors as we move forward. So that has been, for our company, very costly. And it’s a big -- it's part of our use of whatever money we have been earning from the dental division. It is our strategy going forward, being a research and development company, to produce many different instruments for the medical market all with their related disposables. Because we view ourselves so there every say device which we make money on, we view ourselves as being in the disposable business. So as look forward to the company sales, we will -- we believe to do better for the dental in 2019 and 2018, but we are not putting energy into that. All of our energy is being placed into the medical area. As you know, we have developed a Botox instrument that is finalized and it's designed. We need another six months for that, but we are taking that capital and put it into the epidural area. Now the way this basically works is, you have the invention, you patented and you get -- you rewarded the patents, you introduced the new product to practice, you then have it used, you get regulatory approval for the product, and you then begin to demonstrate the product and put on distributors. You then train the distributors, people you co-travel with them, and then you put on, as you know, key opinion leaders throughout the world. It was relatively easy to get the key opinion leaders because the competitive technology was born on in the 1860s. You then hope to publish your key study after getting regulatory approval, which we received from the FDA and the CE community, and because of that, some other countries as well. Having accomplished all of that, the next phase is to get it into major universities that are major users and also are prestigious, which allow you to bring the product to many other universities would be whole becoming the standard-of-care in the area. In order to do that, one needs further clinical studies in various other countries, because some countries will accept the studies in the United States, some want their own studies in their own country. To those end, we are now working on -- thanks to key opinion leader in Europe, a multi-country study with approximately 1,500 to 2,000 patients and 10 KOLs will participate in that study, pretty much tendered maybe eight or maybe 12. That is very important to us. And that is being done without any cost to the company other than lending the devices and supplying disposables. We have another study that we will be doing in the United States. We need an IRB, because it’s not included in our FDA approval for another area of the body where epidurals have done, which are very, very dangerous. So we’re in the process and where we are -- where we hopefully would be in the process at this point with the epidural. If we were better funded, we would also have teams working on the Botox and the intra-articular instrument as well in addition to developing other products with their associated disposables. But keep in mind, the strategy for the company is not to build the dental division by 5%, 10%, 15%, 20% a year. The strategy is to partner-up or sell or license to major institutions that have the reach both marketing and sales wise in their geographic areas of the world. This is what we are working on. So it’s not something that investors and stockholders should look on quarter-by-quarter growth that we’re hoping to have that in the dental division. What we’re looking to do are major deals with companies far larger than we are in the medical sector. And this, we believe, would be the far, the best way to advance stockholder value. And sitting here with me is Joseph D’Agostino when we were both stockholders and we’re both working now for less money than our contract provides for. So we’re all looking to these arrangements with large companies. We are speaking with large companies. I have no idea when or if that’ll come to provision. But I do believe, given the enormity of the success medically of our products and the difference that we think that it can make not only medically safety-wise, pain-wise, but also to cut costs. I think we’ll help us to have this product -- the epidural product becomes the standard-of-care. Keep in mind Keith that when you have the training that takes two years of a resident reduced to one to two days and then they’re perfect with our instrument that is very, very significant. Also, since the study, we have had 100% success in locating the epidural space, and we’ve done over 1,500 injections. I just found out that one of the KOLs in South America has just finished 500 injections with 100% success. So the validity is there. So the next thing that situation will ask for as well what's the cause factor? Obviously, it's going to cost 100 times more if we don't have a product. But if it saves money in addition to everything else, we believe we have the future standard-of-care in the area. Standard care means, they have to use it. And just giving you an idea on cost cutting, and we don't have these exact numbers yet, but we will have them in about 10 days. We've been working on this for a while. If you have a problem where you have a wet tap, in other words, the needle has gone beyond the epidural space and you've now touched the membrane surrounding the spinal column, which keeps the cerebral liquid in that area protecting the spinal column, you now have a puncture. If it just touches that membrane, you have a puncture. So you have the leakage of cerebral liquids, so you have morbidity. The patient then has to remain in the hospital for an average of two days plus, which in the United States is about $3,000 a day. These patients are in for labor and delivery. So there is a new bone involved. So the new bone has to spend two days and additional costs. By law, the -- another anesthesiologist has to do another epidural, it's a course factor to that. Then you have to do an MRI or a CAT scan. It's about $s525. Then there is medicine involved. So this is a very significant problem. And the reason we decided to do the epidural instrument prior to all the other possibilities is this happens not one out of the million, but 4.5% of the time. And then there is litigation, the average settlement in the litigation is approximately $400,000 each time that happens. Patient can have severe migraine headaches up to six weeks, a transient paralysis of up to two years from the point of injection down or permanent paralysis. There is other morbidity as well. So we believe, given the clinical studies that have been -- that we've had so far and the injections given since our clinical study, which in itself was enormously successful, that we provide the answer to this. We will significantly reduce the morbidity, significantly reduce the cost to the institution and significantly reduce the malpractice settlements and the malpractice insurance. And we are at the point now where we are -- we have demonstrated to leading institutions, and they are evaluating our product at this point. So that's what I think we have to look forward to and I think the next major event for the company rather than quarter-on-quarter movement in the dental business what we -- stockholder should looking for our arrangements with other companies to bring the product worldwide.

Everything you just said there is exactly well on board better for the healthcare system, better for the doctors, cost-wise, patient, safety, I don't -- I'm just surprised how long it's taken to either make sales or refine someone who agrees with you and wants to own this thing and take it to the next level. And I'm glad to hear that you're going through that evaluation process. Any idea how long something like that would take?

Well, unfortunately, it's taking us no longer than it takes any of the company. If you look at the pharma companies, they invest about $1 billion, 10 years, and quite often the product is not approved then they just write it off. Devices could take 4 years to 8 years to reach their number. We are considerably ahead of where we thought we would be at this point as far as key opinion leaders, luminaries and studies and have, in fact because of the level of the KOLs that are involved found yet another area that we would be going into with this instrument for epidurals. So there’s no timing that I could give you, but I can tell you that the epidural instrument is being now tested and trialed in various institutions. We will have our cost factor analysis within the next 10 days or so, which will help us enormously. And we feel that we have the right team of people to make this happen. So the important thing to look at is that the product is working as advertised perfectly, I mean, certainly when we give 1 million injections, it’s not going to be a 100% success, but thus for it is. And we have the right team and we’re in the right institutions for trial. So the next thing we should look at is our sales to those institutions. And then we want to look at what is the usage, what is the disposables being sold to them. But there’s no way I can tell you, if those announcements or announcements of licensing arrangements, of joint ventures, of sales, of different areas, of medicine, obviously, we’re talking to companies that are in totally different areas of medicine where the product may be a value to them from the broad platform of technology. When the deal is closed, we will announce them. But to give you timing, it’s just impossible to do that. I can tell you that we’re working [indiscernible] on that, but cannot give you timing Keith is to when that will happen.

[Operator Instructions] And I’m showing no further questions in the queue. We did have one joined. Anthony Vendetti with Maxim Group.

I just kind of focus a little bit on the China outstanding receivables with the Milestone China. What’s your recourse if they continue to not pay? What is the -- yes, I guess, what’s your recourse? Or how are you -- how do you expect to pursue payment and what do you think the likely outcome at this point?

Well, at this point, they are, in fact paying. We have an arrangement with them where they’re paying $200,000 a month, I think, at this point in the quarter. Joseph D’Agostino: Two months through December.

Yes, $200,000 a month that presently down to 18, isn't? Joseph D’Agostino: 21.

21. Okay. So the debt has come down to $2.1 million. They’re paying $200,000 a month. They have been late but paid, I think, within two or three weeks of the time that was supposed to be for the last two months. And they're now paid up through October. Is that correct? Joseph D’Agostino: Correct.

Okay. So we're waiting for the November payment. I just got it back on Monday from China. They are in the process of raising capital, but they are also selling extraordinarily well. They are, by far, a best distributor we have in the world. Their model which was put together by [indiscernible] who was one of the original people in Sinopharm, who headed up to very large companies for them over 15 years. He has gone through many, many different models where his present model both in clinics, which have much room throughout the country, and in hospitals has been to stress safety. So they have symposiums throughout China on safety. They go through all the shows. And of course, the safety they feature are instruments. So they're not selling it based on pain, they're selling it based on practicing medicine from the 21st century not the 19th century and a much safer delivery of anesthesia to the patient. And while I was there they reported two large sales and -- I'll go over with you see have an understanding, one sale to a major hospital -- the major hospital in [indiscernible] province of 100 STAs at $4,000 each to that hospital. And the model for Milestone China in that case is to have five people from Milestone China to spend six months in the hospital, working with all of the doctors and staff, training them. Keeping in mind that in China, it's a profit center, they charge for the use of the disposables. So there is a reason for the provider to consume more disposables. So what happens is, by having the people in the hospital, the doctors are perfectly trained, but so as the staff. So the devices is set up when the doctor walks in, the patient is taught before the doctor sees them about anesthesia and what it provides and they recommend using our instrument for the anesthesia. They have also made a sale to another hospital in China. I forgot where, but that's 80 instruments. The problem for us is the way the accounting works, which Joseph can explain, is because of our partial ownership that we don't have any control over Milestone China, but our partial ownership of that company, we cannot put revenues of our sales to them until they have sell-through. So even though they take the product from us, in many cases they get paid for right away, because they sell it to one of the two major, they sale to either Cardinal or Sinopharm and they get paid right away. We cannot recognize that sale until the end-user pays for it. And that's a problem of recording the numbers, but that’s something that we have to live with. So we believe that we will be paid. They are under economic stress or we would have been paid. We have been owed money by them before and sometimes in this range, and when they’ve gotten their money, they have paid us. And we believe that they have an excellent team there that they have a marketing method and opportunity in China that far exceeds anywhere else in the world. They are truly pristine marketing people and sales people. And we believe that they will be very successful. And we’re trying to be as supportive as we possibly can in major part because they are, in fact, our best distributor, but also we own a small part of that company. Operator?

[Operator Instructions] I’m showing no further questions in the queue at this time, sir.

Yes, I’d like to thank everyone for joining us on the call. And we look forward to reporting the events that I described on this call, and hopefully in the near rather than the further future. Thanks again.

Thank you everyone. This concludes today’s teleconference. You may now disconnect.