Milestone Scientific Inc. (MLSS) Q4 2018 Earnings Report, Transcript and Summary

Good day and welcome to the Milestone Scientific Incorporated 2018 Year End Investor Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to David Waldman with Crescendo Communications. Please go ahead.

Good morning and thank you for joining Milestone Scientific’s full year 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 yesterday, Tuesday, April 3 containing full year 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 212-671-1020. The company’s management will now provide prepared remarks, following the financial and operational results for the full year quarter ended December 31, 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, 2018. The forward-looking statements made during this call are based upon management’s reasonable beliefs as of today’s date, April 3, 2018. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason. With that, we will now turn the call over to Len Osser, Interim CEO. Please go ahead, Len.

Thank you, David and thanks to everyone for joining us today on the call. We achieved a number of major milestones in 2018, was the commercialization of our CompuFlo Epidural System. But before I discuss CompuFlo and the medical side of the business, let me first provide an update on the dental division. I am pleased to report we achieved 70% year-over-year growth in revenue and positive net income for the fourth quarter of 2018. Turning now to the medical side of the business, we are gaining momentum in the first phase of the commercial rollout of the CompuFlo Epidural System. Over the course of 8 months, three major anesthesia journals published positive results of our 4 CompuFlo clinical studies, Anesthesia & Analgesia, Anesthesiology Research & Practice and the International Journal of Obstetrics Anesthesia all featured studies that found CompuFlo consistently differentiates false loss of resistance from true loss of resistance during epidural placement. This should help drive market adoption as these peer-reviewed studies offer independent evidence to providers that CompuFlo is a proven, safe alternative to the current standard of care. Keeping in mind that the current standard of care utilizes technology from 1860, more than 1,500 epidural procedures have been performed by key opinion leaders across the globe reported that the patented dynamic pressure sensing technology in CompuFlo offers quantifiable data that builds physician and resident confidence. Most recently, we announced that Ospedale Pugliese Ciaccio at Catanzaro is the first hospital in Italy to use CompuFlo for all epidurals in labor and delivery. CompuFlo was selected for its real-time objective verification that can help reduce failure rates, which require further treatment and intervention adding significant cost to the institutions, which in the United States are now responsible for their own medical errors. We anticipate more hospitals will follow soon. As CompuFlo provides objective that needs for locating the epidural space not available to medical professionals using conventional syringes that rely on subjective perception to identify the epidural space. We believe more and more providers are recognizing that CompuFlo offers the standard of care that can objectively boost confidence. In the United States, we have signed 8 independent distributors covering key markets across the country, including the Pacific Northwest, Southeast, Southwest, Midwest, Northwest, and Mid-Atlantic Regions. We believe our progress is due to our new decentralized sales strategy, whereby we are targeting independent distributors with existing physician and hospital relationships within their respective territories and clinical specialties. In November, we announced that we have received a notice of allowance for a key patent from the U.S. Patent Trademark Office. The patent covers the method and apparatus for performing a peripheral nerve block. This patent will further expand our intellectual property portfolio by leveraging our proprietary dynamic pressure sensing technology to develop an instrument that will allow medical professionals to precisely control the numerous critical parameters of performing a PNB procedure to improve safety, efficacy, and efficiency. At this point, I would like to turn the call over to our CFO, Joseph D’Agostino to go over the financials in detail. I will be back at the conclusion of Joseph’s discussion. Please go ahead, Joseph. Joseph D’Agostino: Thank you, Leonard. Total revenue for the 3 months ended December 31, 2018 were approximately $3.8 million and $2.2 million respectively, with total revenue increased by approximately $1.6 million, or 70%, which is due in part to a restocking order from Henry Schein, which was received and shipped in the fourth quarter of 2018 and the realization of deferred revenues associated with sales to Milestone China and its agents. Gross profit for the fourth quarter ended December 31, 2018 was $1.9 million, or 50% of revenue versus $1.2 million or 55% of revenue for the year ended December 31, 2017. The decline in gross profit percentage was related to inventory reserves and an allowance for sales related to Milestone China. Operating loss for the 3 months ended December 31, 2018, was approximately $211,000 versus $1.7 million for the quarter ended December 31, 2017. Net profit for the 3 months ended December 31, 2018 was approximately $550,000 or $0.02 per share versus a net loss of $1.8 million or $0.05 per share in the prior year. Total revenues for the years ended December 31, 2018 and 2017 were approximately $9.6 million and $11.3 million respectively. Total dental revenues decreased by approximately $1.8 million, which was principally related to decreased devices and handpiece sales in the United States and Canada by approximately $541,000 in 2018 and a decrease in international sales in 2018 by approximately $1.2 million due to a reduction in shipments to Milestone China. The reduction in shipments to Milestone China is due to Milestone China’s working through inventory purchases from 2017 and a modification to their business strategy to better serve the China dental market. Domestic revenue purchases by Henry Schein have been reduced due to a lower target inventory model with Henry Schein. Medical revenue for the 12 months ended December 31, 2018 was approximately $120,000 versus $2,000 for the year ended December 31, 2017. Gross profit for the year December 31, 2018 was $4.4 million, or 46% of revenue versus $6.9 million, or 62% of revenue for the year ended December 31, 2017. Gross profit for the year ended December 31, 2018 included a reserve of approximately $309,000 for handpieces and a reserve of $1.2 million for deferred costs in handpieces for Milestone China. Operating loss for the year ended December 31 was approximately $8 million versus $5.2 million for the year ended December 31, 2017. Operating loss for 2018 included a $1.5 million write-down of long-lived assets. Net loss for the year ended December 31, 2018 was $7.4 million or $0.21 per share versus a net loss of $5.1 million or $0.16 per share in the prior year. Now, I would like to turn my attention to liquidity and capital resources. At December 31, 2018, the company had cash and cash equivalents of approximately $700,000, total current assets approximately $5.9 million and working capital of approximately $1 million. At this point, I would like to turn the call back over to Leonard. Leonard, it’s all yours.

Thank you. As discussed, our dental division seems to be back on track as we head into the New Year. In February, we completed a $2 million public offering, plus a $250,000 private placement by an entity affiliated with Gian Domenico Trombetta, a Director of Milestone Scientific and Chief Executive Officer and Director of Wand Dental Inc., a wholly owned subsidiary of Milestone Scientific. His investment, coupled with my own participation in the public offering further illustrates both the board and management’s confidence in the outlook for the business. Within our medical division, we have received very favorable feedback in the market from key opinion leaders and physicians. We expect to start to see sales ramping up in our medical division this year as the initiatives we have put in place begin to take hold. One final note, we have recently announced plans to establish a Special Committee of the Board to evaluate strategic options, which can include the potential sale or licensing of different instruments or other business combinations. Our goal has always been to advance our technologies to a commercial level whereby we could either sell or license the technologies for specific indications in order to maximize value for our shareholders. The CompuFlo Epidural Instrument is beginning to generate commercial traction following publication of clinical research that found it to be a safe alternative to the current standard of care. The board decided that this is the time to establish a Special Committee to carefully evaluate all the potential strategic options available to us. So to wrap up, we are encouraged by the outlook for the business and look forward to announcing additional developments as they unfold. I would like to thank you for joining the call today. And at this point, we would like to open the call to questions. Operator?

Thank you. [Operator Instructions] And we will take our first question from Alexander Scharf with Maxim Group. Please go ahead.

Hi, good morning. Thanks for the questions. Starting with the dental business, obviously in the past couple of years, you have seen some lumpiness quarter-to-quarter due to the timing of orders from Henry Schein? Is that something that you expect to continue? And with the restocking orders, how frequently do you expect them as it seems like every other quarter you get a large restocking order, is that how we should think about it going forward? Joseph D’Agostino: This is Joseph D’Agostino. To answer your question, generally there is a stocking order at the end of each quarter. However, there are routine orders that come in every day from the various locations, 11 or so warehouses. The difficulty for Henry Schein at this point, obviously because of our size in their total over scheme of business, we become lower on the scale of review for purchasing. However, we have and continue to focus on those restocking orders because the worst thing for us to do is have a customer, one of our dentists looking for supplies or parts that they cannot receive. So, we are working with Henry Schein to try and simplify the process, to clarify the process, and to make sure that the lumpiness is out of the scheme and we have a steady flow. As you know, we have a minimum purchase requirement for Henry Schein on a yearly basis, and Henry Schein is also monitoring that to make sure that they fulfill that requirement at the same time and make sure that their inventories aren’t stuck. So we are working with them both on the overall scheme for the year, but also on the quarterly basis. Does that answer your question?

Yes, yes, that’s helpful. And then on the epidural side, what’s sort of the challenge going forward, what are you focused on? Do you need to add more distributors or do you think you’d have distributors in place? And now it’s a matter of the demand from doctors and sort of education to doctors that this is really, really good product?

The product has already proven itself both in our clinical study, independent clinical studies, and in the field. So, at this point, we are finding no pushback whatsoever on the quality of the product and that it does what it’s supposed to do. Keep in mind that the studies that we have done thus far are with the most difficult patients by KOLs, in other words high BMI, high body mass, which of course every woman in labor has, also with rescues when a doctor inadvertently poses a wet tap, the needle goes beyond the epidural space and punctures the membrane that surrounds the spinal column that creates morbidity. So, there has to be a rescue, there has to be blood pooled and a blood patch given over that. Our device is proven by doctors to be far more efficacious in doing that on the standard of care, especially in these very difficult patients. So the proof of the instrument and the technology is already there and well accepted with doctors in various parts of the world, including the United States. So, the next thing that has to happen is simplicity of the product, because you are dealing in a very fast-moving environment. A woman is in labor, they want to move as quickly as possible. So, we are at the point now where we have quite a bit given the amount of injections we have given of end user feedback where we are making certain modifications to the product to simplify the product’s setup. As far as the usage goes, that’s accepted, there is no changes that will be implemented in the usage, but simplicity in the setup of the product. The next area that we have to get through is the economics of the product. So, our model is at the beginning to go into the area of training. When you are training people on the ground, you have a professor sitting next to the resident and the resident is advancing the needle into a woman that is in labor, that’s our first target market for epidurals. So, the professor really doesn’t know where the tip of the needle is. And so, in the first case, it’s quite often while you are teaching the residents in this environment that they will believe that they are in the epidural space prior to being in it and will inject the drug prior to reaching the epidural space and have no effect of anesthesia. That’s the first issue, and that’s a very frequent event with new residents. The other issue which is far more dangerous and creates the morbidity is, when they are in the epidural space, they don’t realize it. So, the professor sitting next to the resident is really, I guess, we would call it flying blind because they don’t know where the tip of the needle is, because the thumb is the instrument of pressure flow feedback, and the thumb being used is the resident’s thumb. What we do is we allow the professor to know because of our instrument exactly where the tip of the needle is. So, in the first instance, it makes a very tense situation for both the resident and the professor far better for them. It makes it – it gives great confidence to the resident far faster than using the traditional method from 1860, and obviously far safer for the patient. So, we believe that our target market at the beginning is to get to the institutions which teach residents, because it’s quite obvious what our product can do there. And from there, we move on to using the product and hopefully get to a point of having the product be standard of care. The other issue is, of course, economics, that we cost a lot of money, that we add money to the system, which could be very problematic, in fact, it’s the opposite. If you look at our product in distribution, the model will be to the distributor based on us – an agreed upon usage by the institution, the distributor will purchase the instrument from us, but he’s a landlord give it to the institution, so there’s no capital cost or sell it to them at a price below where it would go to a capital cost committee. So that barrier is no longer there. If you look at the cost and we don’t have final analysis on this though we do have an analysis through IBM and we’re working on an analysis now with another institution, it’s – a stay in the hospital due to a puncture or wet tap is on average seems to be 2 days. So, if the mother has to stay an extra 2 days due to this morbidity so does the new-born. The average cost in the United States for this is $12,000 – is $3,000 a day, so that would be $12,000. Then by our law in the United States, another anesthesiologist has to do the – has to go in, do another epidural and close the hole that was created, which is creating the morbidity as full blood in order to do so, that is the rescue. So that adds significant cost to the institution, which is now – which they are now responsible for their own medical errors. So, if you look at an institution that has these costs, which does not include cost of litigation, which is significant, but these direct costs, the costs may be anywhere between $12,000 and $20,000. We don’t know yet, but the cost is significant. So, if they are in a normal facility with residents that let’s assume that’s $1 million cost, if they purchase from us 300,000 disposables and use our product for all their epidurals, they will save $700,000. They will also add significantly to that rating as far as safety goes as an institution and practice what we believe will become the standard of care. So, we are now in the process – the very long answer to your question, we are now in the process of no longer proving the products’ efficacy that’s already proven. We are now proven that the hospitals to bake it part of their system at least at the beginning for training residents. Does that answer your question?

Yes, yes, that does answer the question and I appreciate the detail. I do have one more question. Just on the intra-articular looking at the 10-K, it looks like the clock ran out on your 510(k) submission. Can you talk about what happened there? Was it because of the unexpected trial from the FDA and then what sort of the timing going forward do you look to potentially resubmit?

Well, I’ll give you the overall answer to where your company is at the moment. We have a dental division that’s generating about $2,250,000 EBITDA. The – normally that division would be using that capital to building that company up to a much higher number. Instead, we are – we have stopped the dental division. We do not have a marketing person. We don’t even have people traveling around the world to enhance that division with distributors. We have a team that’s working on social media and other areas, which look like it will be successful, but basically, the future of the company as we view it is in the medical area, not the dental area. So, we’re taking whatever monies we can from the dental division and we’re putting it into making the epidural the standard of care, that’s the model at the moment. So, we’re not putting money back into the dental division, which if we had enough capital we certainly would and we’re not putting it into at the moment on our Botox instrument or our intra-articular though we are cleared in the European community to sell, we are making no effort whatsoever to sell because all of our energy because of low capital reserves of going into making the epidural successful.

Okay.

So, that’s the broad answer to your question.

Great, thank you very much. Appreciate, you taking all the questions.

You’re welcome.

And we’ll take our next question from Anthony Marchese, Private Investor. Please go ahead.

Yes. Hi, Len [ph]. It’s nice to see the dental division back.

Good morning, Tony.

Hey. Are there differences in the way you market – in that market hospitals except the epidural product in Europe versus the United States, seems like obviously you’re making your first sales meaningful on Europe versus the United States. I’m just wondering, is the United States a longer process or it’s just you did your studies overseas?

No, it’s – the process seems to be pretty long anywhere, everywhere, until as our CFO calls of getting the first all of out of the bottle, which we have yet to do in the United States. So, what the team is aiming to do and might add we have an excellent team in the medical sector for the epidural is to get a major teaching hospital to bring on the product that will give us not just sales, which are very important, but it will give us the validation to move through the system with many, many other hospitals. So, that’s really what it is at this moment to get the first hospital in the United States to take the product on to teach residents, that’s the model at the moment. And as I say, we’re far beyond the point, where anyone is challenging what this product and technology can do. It’s well accepted. It’s a matter at this point with how quickly they can set up the product and the economics of the product and we are working on both of those issues and we think we will work through them very well in a relatively short period of time.

Right, okay, thank you.

You’re welcome.

[Operator Instructions] We’ll take our next question from Les (sic) Collins, Private Investor. Please go ahead.

Hi, Mr. Osser.

Good morning. I missed your name. What is your name, sir?

My name is Les Collins. I hope to find you and Mr. D’Agostino? Well, I have a quick question, you referred yourself as a interim CEO? Does this mean that Milestone is actively seeking a permanent CEO?

Yes, we are going to be entering the process in the coming weeks with a major headhunter in order to find a medical CEO for the company.

Thank you very much. I appreciate that.

You’re welcome so does my wife.

Yes, good afternoon.

You too, Les.

And we’ll take our next question from Tony Kamin with Eastwood Partners. Please go ahead.

Hi. I’m kind of mystified by the – by sort of the valuation accord of the company given all you’ve achieved. And I’m wondering whether you could comment on whether there might be metrics that the company can start to put out going forward showing beyond actual sales, how you’re getting sort of increased use and acceptance of the epidural, whether that’s – whether that is sort of sales orders or it’s procedures performed, because I think given everything that that you’ve said and the company has done, it would seem like we’d start to see however low the real numbers are now, it would seem we start to see a steady progression of use?

Yes. The board and the employees and management are certainly totally in agreement with you. The issue is, if we were a private company going public given the technology that we have, obviously, the market cap would be infinitely better than it is today, but we’re saddled in the tertiary market with a dental division that has been pretty stagnant over the last number of years and therefore we have a market cap not dissimilar from a candy store in Manhattan. So, the answer we believe is putting all of our energy at the moment into the epidural, supporting our team, going to exhibitions throughout the world and moving as quickly as possible into hospitals and starting the sales. I think it seems to me in speaking with people from the industry and Wall Street that the most important thing at this point is to begin to show traction to the epidural. We believe that we have done that significantly in creating the product, having numerous patents around the product and the technology and we now have to prove that it could be turned into sales. So, we’re at that process today. We are in a number of hospitals for trials. We have as I said an excellent team and we’re waiting to close on the first hospital and utilize that being that these hospitals will be significant – any of these hospitals that we close now will be significant validation, and we believe that we can steadily close hospitals starting very, very soon in the United States. So that’s the – the model is to prove to the investment public that the epidural not only have we finalized it and have that ability not only do we have worldwide patents, not only do we continue to increase our IP portfolio, which we’ve done for many years now, but we have to turn it into profitability. So, people are looking for sales and then of course they will be looking for profitability. And that – that’s what we’re trying – that’s what we’re trying to do.

Yes, I do think that if you can show those metrics of steadily increasing usage again from no matter how low a base, I think that will go right along with an increase in valuation of the shares and hopefully sort of a steadier trading environment than you’ve had. But I do really think the company is very materially undervalued and – but congratulations on what you’re doing, I think you’re building an incredible product with the epidural.

Thank you very much. Excuse me, but I missed your name.

It’s Tony Kamin.

Thank you very much, Tony. I appreciate that.

Thank you.

And we’ll take our next question from Ricky Solomon, Private Investor. Please go ahead.

Yes, thanks. I was wondering if you can comment at all on either the process or the interest in the dental division in terms of getting that division sold, because when that happens, I believe that’s going to be a two-fold [ph] significant event for the company, in other words, the equity valuation should go up substantially and you’ll have plenty of capital to invest in the epidural division. So, to me that’s going to be the turning point when that division gets sold. So, is there any comments you can make about that?

No, we haven’t announced anything regarding any particular strategic initiative. What we’ve announced is that we’re – we have created a – we are going to create a committee of the board to look at strategic possibilities for the company, that would include everything, but we haven’t specifically defined anything for the marketplace yet. I believe within the coming few days we will have the specific committee chosen of the board, which will then evaluate, pardon me, different ways we would move forward in these areas, which may or may not include the sale of Dental Botox, anything else that we’ve discussed and things that we haven’t discussed, that is the model for the company, and given the achievements that we’ve made thus far in the marketplace, the company is ready to move ahead. So, the answer is, we’re looking at all possibilities to move ahead and perhaps a number of different areas to make that happen.

Okay, thank you.

You’re welcome.

It appears there are no further questions at this time.

Okay, I want to thank you very much. As always, as information comes forth, we will put out releases. Thanks again. All the best.

This concludes today’s call. Thank you for your participation. You may now disconnect.