Milestone Scientific Inc. (MLSS) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Milestone Scientific Second Quarter 2022 Business Update Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to David Waldman, Investor Relations. Please go ahead.

Good morning, and thank you for joining Milestone Scientific's second quarter 2022 financial results conference call. On the call with us today are Arjan Haverhals, Chief Executive Officer; and Keisha Harcum, Controller of Milestone Scientific. The Company issued a press release today containing second quarter 2022 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, reviewing the financial and operational results for the second quarter ended June 30, 2022. Before we get started, we’d 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 plan, 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, 2021, the Milestone’s report on Form 10-Q for the second quarter ended June 30, 2022. The forward-looking statements made during this call are based upon management's reasonable beliefs as of today's date, August 16, 2022. 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 Arjan Haverhals, Chief Executive Officer. Please go ahead, Arjan.

Thank you, David, and thanks to everyone for joining us today. I would like to start our discussion this morning by discussing the results within our Dental segment, and then take a moment to share some of the exciting developments within our Medical segment. As we shared in our press release this morning, I'd like to highlight that U.S sales within our Dental segment were relatively unchanged, which is noteworthy considering we had very significant orders from Henry Schein last year as they build up their inventory as dental offices were reopening. On the international front, we did not record any sales from our China distributor in the second quarter of 2022. Specifically, we have run into challenges dealing with them as well as doing business in China. Outside of China, our international sales would have been consistent with last year, had it not been for cancellation of orders in Russia and Ukraine. Importantly, we continue to add third-party dental distributors in other international markets. As an example we recently granted Hager & Werken exclusive distribution rights to market Milestone's STA Single Tooth Anesthesia System in Germany and Austria. Hager & Werken brings a proven track record introducing dental instruments in these two markets, which have a combined population in excess of 90 million people. We look forward to announcing additional international distribution agreements as we continue to build a network across Asia, Africa, South America and Europe. In the U.S., we're also looking to bring on new strategic channel partners that sell-through their network of dental customers, especially in specialized areas of dentistry, such as implant dentistry and aesthetics as well as large dental groups also known as dental service organizations or DSOs, reflected in the distribution agreements we announced earlier this year. So, overall, our Dental business remain strong and we remain encouraged by the outlook for the business going forward. Turning to our Medical segment, we have made significant progress rolling out our CompuFlo Epidural System across a number of important hospitals, health care systems and pain management clinics. Just last month, we were approved as a vendor within a leading medical center in Southern California, serving over 10 million members with more than 100,000 babies delivered each year across multiple states. This health care system was designated as having one of the best maternity care hospitals by Newsweek. Our selection by this leading medical center followed a thorough trial in an evaluation, which further validates the safety and efficacy of our technology. With each health system we sign, we benefit not only from the sales, but also growing validation within the market. In turn, this potentially helped shorten the sales cycle for subsequent hospitals and pain management clinics. In addition to our growing regional presence, especially in Florida, Texas and the New York tri-state area, we are also targeting Tier 1 university teaching hospitals. As I've mentioned in the past, several of these hospitals are among the top 20 in the nation. And as we begin to penetrate some of these larger well-recognized names, it will continue to add credibility and validation to the instrument, which we hope will create a snowball lead fact. We also continue to launch our CompuFlo Epidural System within pain clinics across the U.S. With over 11 -- sorry, with over 11 million reported epidural procedures each year, the pain management market is at least twice the size of the labor and delivery market segment. The pain management market not only includes numerous hospitals, but also specialty centers, outpatient centers and sports medicine centers. Shifting gears, it was an honor to have our CompuFlo Epidural System incorporated into the student registered nurse anesthesia or RSNA program at the University of Scranton. According to the United States Bureau of Labor Statistics, nurse anesthetists already outnumber anesthesiologists in the U.S. and every year, more nurse anesthetists are entering the field and playing an increasing important role in anesthesia. For this reason, having our instrument integrated into the curriculum is not just an important validation, but due to our long-term commercial strategy. Another major accomplishment this quarter was the receipt of a CPT code from the American Medical Association for the CompuFlo Epidural System. I cannot overstate the importance of having our own CPT code, which has the potential to open new doors by enhancing potential reimbursements. With the CPT code now in hand, we are seeing increased traction with potential customers. As an example, we expect to announce shortly another major health system that operates 6 hospitals and 4 medical centers providing patient care to more than 1.5 million patients each year. We expect this institution will immediately begin implementing CompuFlo across three distinct departments: the operating rooms, labor and delivery as well as acute pain. We look forward to providing an update on this institution in the days ahead. In addition to our direct sales channels, we are also expanding our network of distribution partners. We recently reengaged with our U.S. distribution partner clinical technology Inc., also known as CTI and added a new international distributor in Greece. CTI is a leading specialty distributor of medical products in the Midwest and East Coast regions of the United States. Although we initially started our collaboration with CTI in 2018, we mutually agreed to delay the launch based on customer feedback in 2018. Specifically, we agreed it would be helpful to have the economic benefit analysis in hand as well as initial adoption by key referenceable hospitals. We accomplished both of those goals including the addition of key referenceable hospitals, health care systems and pain management clinics as well as publication of the economic benefit analysis which demonstrated real-time pressure sensing technology, our technology, reduces cost by about $504 per average patient hospital stay. Equally important, to them was the issuance of our new CPT code, which I mentioned a moment ago. We are actively preparing a full launch plan in anticipation of this new AMA cleared CPT code that will be implemented in the first quarter of 2023. On the heels of receiving the CPT code, we immediately reengaged our partnership with CTI, which illustrates the significant progress we have achieved over the past years. CTI is an ideal partner bringing a sizable Midwest and East Coast sales force, extensive relationships with physicians, pain clinics and hospitals as well as a proven track record of introducing new medical devices. In Greece, our new partner, F&M Feed is a leading provider of medical equipment devices and consumables. They bring over 40 years of experience in the field of health care having a successful track record, launching new medical devices and equipment. We believe that Greece is another important market for us with a population in excess of 10 million people and 76,000 child births each year. We look forward to announcing additional international distributors as we advance our commercial rollout. So as you can see, we made significant progress for the Medical segment. Let me now take a moment to discuss some important financial initiatives that we have undertaken. First, we’ve reallocated additional resources towards our Medical segment, which we believe represents the future of the company. We expect our Dental business will continue to grow and now have a solid distribution network and marketing support in place to cost effectively scale the business. On the other hand, our Medical segment represents a much larger addressable market, not only driven by cost and convenience for the provider, but driven by the safety considerations, cost savings and the ability to have remuneration given the success of obtaining the CPT code, which we believe will ultimately lead to the CompuFlo becoming standard of care. In the meantime, we’ve significantly reduced our operating expenses and corporate overhead by nearly $700,000 in the second quarter. We are also implementing additional cost reductions beginning in the third quarter of 2022, which we believe will be reflected in our financial results in the coming quarters. As a result of these initiatives, we are implementing a much leaner cost structure that should drive operating efficiency and improve profitability as we continue to grow revenues. Combine that with our disposables, which provide high-margin recurring revenue, we believe we are well positioned to drive shareholder value for years to come. We also ended the quarter with approximately $11 million of cash on hand and no long-term debt, which provides us sufficient capital to continue executing our business strategy. So to summarize, we’ve positioned our company for positive growth in the coming quarters. We remain committed to our goal of establishing the CompuFlo Epidural Instrument as the new standard of care in epidural anesthesia by providing patients with effective pain relief while reducing the risk of complications. Given recent developments, including the addition of new hospitals, expanded distribution, the new CPT code and a streamlined operating structure, we believe the future is bright. At this point, I'd like to turn the call over to Keisha Harcum, Controller, to go over the financials in detail. Please go ahead, Keisha.

Thank you, Arjan. Consolidated revenue for the 3 months ending June 30, 2022, and 2021 was approximately $1.6 million and $2.4 million, respectively. Dental revenue decreased approximately $795,000 for the 3 months ending June 30, 2022 as compared to the 3 months ending June 30, 2021. For the 3 months ending June 30, 2022, dental domestic revenue decreased approximately $21,000, and dental international revenue decreased approximately $248,000 compared to June 30, 2021. For the 3 months ended June 30, 2022, the company recorded no revenue from China as compared to approximately $525,000 for the 3 months ending June 30, 2021. The Medical revenue increased approximately $17,000 for the 3 months ending June 30, 2022, as compared to the 3 months ending June 30, 2021. Consolidated gross profit for each of the 3 months ended June 30, 2022 and 2021 decreased approximately $689,000 or 41% versus $1.4 million or 56% of revenue for the quarter -- for the second quarter of 2021. The decrease is related to the company recorded an allowance of approximately $430,000 on slow moving medical finished goods during the 3 months ending June 30, 2022. Consolidated selling, general and administrative expenses for the 3 months ending June 30, 2022 and 2021 were approximately $3.3 million and $4 million, respectively. The decrease of approximately $729,000 is categorized in several ways. Consolidated research and development expense for the 3 months ending June 30, 2022 and 2021 was approximately $267,000 and $215,000, respectively. The increase of approximately $51,000 is related to the company exploring enhancements on the STA Single Tooth Anesthesia system product. The loss from operations was approximately $2.9 million for the 3 months ending June 30, 2022 and 2021, respectively. Consolidated revenue for the 6 months ended June 30, 2021, was approximately $4.3 million and $5.4 million, respectively. Dental revenue decreased approximately $1 million for the 6 months ended June 30 as compared to the 6 months ending June 30, 2021. For the 6 months ending June 30 of dental domestic revenue decreased $67,000, and Dental international revenue decreased approximately $216,000 compared to June 30, 2021. For the 6 months ending June 30, the company revenue to China decreased approximately $672,000 compared to June 30, 2021. The Medical revenue decreased approximately $46,000 for the 6 months ended June 30, 2022, as compared to the 6 months ending June 30, 2021. Consolidated gross profit for each of the 6 months ending June 30, 2022 and 2021 decreased $809,000, 25%. The decrease is related to the company recorded allowance of approximately $430,000 on slow moving finished goods for medical and the reduction of dental revenue. Consolidated selling, general and administrative expense for the 6 months ended June 30, 2022, and 2021 were approximately $6.4 million and $6.8 million, respectively. The decrease of approximately $363,000 is categorized in several areas. Consolidated revenue research and development expenses for the 6 months ended June 30, 2022 and 2021 was approximately $731,000 and $231,000, respectively. The increase of approximately $499,000 is related to the company continued enhancement of the SDA single anesthesia system product. The loss from operation was approximately $4.8 million and $3.9 million for the 6 months ending June 30, 2022 and 2021, respectively. As of June 30, 2022, the company has incurred net losses of approximately $2.9 million or loss portion per share for the 3 months ending June 30, 2022 versus a net loss of $2.7 million or $0.04 per share for the comparable period in 2021. As of June 30, the company has incurred a net loss of $4.8 million loss or $0.07 per share for the 6 months ending June 30, 2022 versus net loss of $3.7 million or $0.05 per share for the comparable period in 2021. On June 30, 2022, Milestone Scientific had cash and cash equivalents of approximately $11 million and working capital of $12.3 million versus working capital of $15.8 million on December 31, 2021. For the 6 months ending June 30, 2022 and 2021, we had cash flow used in operating activities of approximately $3.8 million and $2.1 million, respectively. At this point, I'd like to turn the call back over to Arjan Haverhals.

Thank you, Keisha. To wrap up, we believe we have developed a cost effective and highly scalable platform to drive growth within both our Dental and Medical divisions. We are witnessing growing interest in both our instruments and our disposables, and we believe we are well positioned to take advantage of the opportunities available in the market. I'd like to thank you for joining the call today. And at this point, we would like to open the call up to questions. Operator?

[Operator Instructions]. Your first question is coming from Anthony Vendetti of Maxim Group. Please post your question. Your line is live.

Thank you. So Arjan, just want to understand the Dental business, obviously, some of the stuff out of your control with the ongoing war in Ukraine and it sounds like you had Russian and Ukraine customers that cancel orders, which totally makes sense. What's the magnitude of the business that you were doing in Russia and Ukraine prior to Russia's invasion?

Yes. Thank you, Anthony, and good morning. First of all, the results in the Dental division are, of course, disappointing. On one hand, we can say it is out of our control because the situation in China and the situation in Russia and Ukraine. I can share with you the magnitude of the business impact that we had in the first half of the year. with Russia and the Ukraine, which was the magnitude of about $300,000 combined that we could not deliver. And on top of that, of course, the company has taken the position that we based on the world do not want to do any business with Russia.

Okay. Absolutely. That makes sense. And China, I know has been lumpy in terms of some quarters, you get a fairly large order other quarters, like this quarter, there's no order. But you also mentioned that it's getting more difficult to do business in China as well. Does that mean that you're not expecting future orders from China? Or it's just less predictable?

Yes. I think the honest answer here, Anthony, is we don't know because, to your point, it is less predictable. On one hand, you have, of course, also the economic and governmental situation in China. We know the real estate market, the GDP development in China is not in favor for the business, as well as what we reported in the K and also in the first quarter this year that we have some challenges with the Chinese distributor. So it is very difficult to predict what that effect will be, and we are investigating the position towards China and the distributor, but we have decided that for the time being, we are not going to undertake any actions because of the situation in China because of the costs involved. And that's has been concluded for us that we take a wait-and-see approach. And to that point, it is extremely difficult to predict what and when and if we would get additional revenues within this year on the China business.

Okay. And then shifting gears, I just wanted to ask a couple of questions on the Medical side. So I noticed throughout the quarter, obviously, you've signed up was some nice university hospitals that hopefully help drive the disposable component of the CompuFlo System. Can you talk about where we are in terms of hitting an inflection point, at least in your judgment, where you will start to derive material revenue from the medical side.

Yes. So I think there are three important factors, right? If we go to the hospitals where we are currently active, -- we are in a number of hospitals active in trial and evaluation situation. And as you know, in labor and delivery, that sales cycle is rather, let's say, longer compared to the pain segment. Nevertheless, we continue to penetrate these hospitals, and I'm very pleased with the activity level that we are having based in this hospital. So in light of that, it's also very important that we have access to a distribution partner, which is CTI because they are covered in about 22 states in the United States. So they have a very large footprint. So that's the labor and delivery market segment. I think that the turning point or the reflection point not only from the hospitals, but also more importantly, from the private pain clinics and the ASCs is all very much dependent on getting the reimbursement pricing for the CPT code ready. And that's -- as I mentioned in the call this morning, the preparation of the loans for the CPT code is of utmost importance for the company moving forward, not only because of the addressable market size, the pain segment is about 2x to 3x the labor and delivery market segment, but also more importantly, the shortest sales cycle. So all the work that we put in the Medical segment is staying laser-focused on those territories and geographical areas where we are already active as well as preparing for the CPT code. And then thirdly, also looking into other channel partner opportunities where we get access to other organizations and institutions thereby driving penetration and adoption of our medical technology.

Just the last follow-up on the CPT code. Typically, there's a common period and then the code goes into effect each year on 1/1 -- on January 1, January 2, whichever the case. But are you confident that the starting in January of '23 that you will have a new code that's approved by CMS?

Okay. So let me explain it, if I understand your question correctly, Anthony. So we have been granted a CPT, Category 3 code, which is bridge becomes effective as of January 1, January 2 next year 2023. What we have to do then is in the extension to that, and that's where we are working and preparing for right now is instead of waiting to January and February and then getting access to insurance companies and getting a price or a reimbursement for the pain clinics, we are trying to set it up right now. So the first part of your question, the code, it's already confirmed that we will get that in January 2023. But we are preparing well in advance to be even more ready in the first quarter of next year because we strongly believe that we will sort -- hopefully sort the effect of the CPT code during the first quarter of 2023.

Okay, great. That was helpful. Thanks, Arjan. I will hop back in the queue.

Thank you, Anthony.

[Operator Instructions] Your next question is coming from Jon Korb [ph]. Please post your question. Your line is live.

Arjan?

Yes, good morning, Jon.

Hello. Hi, Arjan. Jon Korb, a longtime shareholder. I've talked with you before. First of all, I want to share with you that this summer, I was the recipient of the STA technology with my dentist. And it's everything Milestone has claimed totally pain -- injection. It's that Dennis loves it. I loved it. Makes the question how does wide scale and use, the dental business has been in a long time part of [technical difficulty]. I didn't ask my dentist, but I assume he got this through a distributorship. I'm more interested, maybe I shouldn't be, but I'm more interested in what's going on in the United States versus other countries with the dent -- are you still hopeful that instead of muddling along with ups and downs of just down this quarter because we are comparing with Henry Schein uploading and then we lose China and then we gain this get traction in the dental area. Is that still a hope and a plan for Milestone Scientific?

Yes. Thank you for your question, Jon, and I'm very pleased that you had the experience that many other patients had with our STA Single Tooth Anesthesia Technology. So let me answer your question. You're absolutely right. Yes, I'm focusing -- we are focusing as a company of further growing the dental business in the United States. And to your point, not being only dependent on the distributorship with Henry Schein as we started with in the beginning of last year. We added a number of other distributors. So we went from exclusive distributorship with Henry Schein to a multichannel or a multi-distribution sales channel. Now was that enough to achieve the growth that we would like to see for the company. We came to the conclusion that, that is not necessarily enough and we have to do more. So to do more than at that time that we looked into other, what I call channel partners. A very good example is Keystone Dental Group, which is a dental implant company, having a sales force of about 75 people and only carry, let's say, a dental implant and some of the prosthetic components in their portfolio. So having then the opportunity to also offer our product and technology, giving them the opportunity to increase their business and increase their penetration in the general practitioner market segment without having an erosion of their, call it, their profit margins on their core business was a very attractive value proposition, and they jumped on to it. So that's another important factor that we continue to look at and to identify those channel partners as, for example, Keystone Dental Group. But even more important, I think, from a growth perspective point of view, is the development of the dental service organizations, not only in the United States as well as in Europe, but let's go back to the United States. I think currently, about 22% of all the dental business, is done through these dental service organizations. So they have a central purchasing, administration services, insurance, health -- private health insurance is that they offer to their patients. So getting access to the DSO market segment is of utmost importance. And that's culminated in us signing up an agreement with the dental service organization called ADA in the beginning of this year. But as we speak, we are continuing in an accelerated approach to get in front of the dental service organizations and then in particular, with the C-suite, so the CEO, the COO, the CMOs of these dental service organizations because we have a fantastic value proposition for the DSOs to increase their revenues dramatically and drastically as we are able to document and demonstrate based on literature that they can increase their patient acceptance. Now I know it's a little bit a long answer to your question. But in short, it's not for me coming out of the valley and closing the gap. It's for me more important and for the company more important to focus on sustainable growth for the dental business in the United States moving forward.

Okay. Thank you for that answer. Moving on to CompuFlo. I haven't been up to speed, but I'm reminded of the initial thrust with milestone and the CompuFlo. As I recall, you hired 10 salesmen and going to focus East of the Mississippi River. I was [technical difficulty] you made that statement, we’ve 10 capable sales force on hand that they were going nowhere without the CPT code, and I didn't even know there was such a thing as a CPT code. And then you [technical difficulty] CTI relationship. I was not aware that wasn't going anywhere [technical difficulty] the CPT code. And that [technical difficulty]

Hello, excuse me. Can everybody hear me? Because we have lost.

I can hear you.

Okay. I didn't hear the second part of Jon's question. I think we have lost Jon.

Yes, I think we lost him. You can go ahead and address the first part.

Yes. So I think the comment or the question was 10 sales reps, not necessarily being aware of the CPT code or the importance of the CPT code and the relationship with CTI. So I will keep it -- will keep it short. The relationship with CTI, as we stated, there was a relationship in 2018, but that was also at the time where the company decided to improve and to optimize the product at that time based on some customer feedback and also in parallel with that to conduct or in an independent study to conduct and to search for the health economic benefits of our technology and our system, which then resulted in the $504 cost saving per average patient hospital stay. So the question on the 10 sales representatives, as we also have mentioned in the Q, we have reduced the medical sales team in half. So we’ve a sales team of five dedicated people on the ground, which is a result of being laser-focused and focusing on those areas where we have the best and -- the best lead, so to say, in the highest activities in the hospitals in those territories. But the reason why we also want to go for a hybrid model is, of course, that through CTI, you get a geographical coverage and spread much higher than we can do on our own as well as the cost efficiencies because having a direct sales organization of 10, 20 or 30 people is a tremendous cost on our balance sheet. And therefore, we also decided to be reengaged with CTI.

Thank you. There appear to be no further questions in queue at this time. I would now like to turn the floor back over to management for any closing remarks.

Yes. Well, again, thank you for your time. As I've stated before, we remain positive about, and encouraged about the developments that we’ve seen and that we are focusing on in both the Medical segment. We are working hard also and we believe also that we have the strategic plan identified to further substantiate on the dental business. So we remain encouraged and positive about the company moving forward and continue to create shareholder value. So I will thank you again for your time. Stay safe and looking forward to either meet with you or speak to you in the near future. All the best.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.