Milestone Scientific Inc. (MLSS) Q2 2023 Earnings Report, Transcript and Summary

Greetings, and welcome to the Milestone Scientific Second Quarter 2023 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. David Waldman, Investor Relations. David, you may begin.

Good morning, and thank you for joining Milestone Scientific's second quarter 2023 financial results conference call. On the call with us today are Arjan Haverhals, Chief Executive Officer; and Peter Milligan, Chief Financial Officer of Milestone Scientific. Company issued a press release today containing second quarter 2023 financial results, which is also posted on the company's website. If you have any questions after the call, 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, 2023. Before we get started, we would like to remind everyone that during this conference call, we may make forward-looking statements regarding the 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 the year ended December 31, 2022, and Milestone's report on Form 10-Q for the second quarter ended June 30, 2023. The forward-looking statements made during this call are based upon management's reasonable belief as of today's date, August 15, 2023. 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'm pleased to report that we achieved revenue of $2.9 million for the second quarter of 2023, an increase of 77% over the same period last year. Sequentially, sales increased 12% over the first quarter of 2023. We saw solid year-over-year increases in both domestic and international sales. And at the same time, our gross profit increased 178% over the same period last year. The increase in revenue and gross margin was due in part to the success of our new online portal for selling and shipping the STA, single-tooth anesthesia system and handpieces directly to dental clinics and dental service organizations, or DSOs, within the U.S. Establishing a direct relationship with our clients has not only improved margins by cutting out our prior distributor but has allowed us to do a much better job in selling to and supporting these dentists. Since the launch of the portal in the beginning of this year, we have been able to track the sales data and thus conduct sales analysis. We know now the customer identity and their purchase pattern of our instrument and handpieces enabling us to really improve the sales execution in terms of growing the existing customer base and acquiring new customers through upselling activities and reactivating these customers in the U.S. At the same time, we've engaged in more direct-to-consumer marketing, targeting patients specifically. We have seen more patients asking their dentists about the STA that has helped drive inbound interest to us from the dentists. In addition, we saw a strong increase in international dental sales during the second quarter as we are entering new international markets and deepening our penetration within existing international markets. It's also worth noting that our Dental division continues to offer it profitably. In fact, the Dental division generated approximately $600,000 of operating income on a standalone basis, which is a more than threefold increase over the same period last year. So to summarize, within our Dental business, our revenues increased, we're benefiting from higher gross margins, and we continue to generate solid cash flow on a standalone basis. As we continue to grow our revenues, we expect to benefit from economies of scale as well as the recurring nature and high margins on our disposables. Turning to our Medical segment. We are making good progress advancing our commercial efforts around the CompuFlo Epidural System. Most notably, just last week, we announced reimbursement from commercial payers for the use of the CompuFlo Epidural System for patients who were involved in motor vehicle accidents. These payments are a significant achievement for the company. I would like to be clear that reimbursement can be a time-consuming process which is standard for all new medical devices. Nevertheless, we are making more than good progress, and these payments are further validation of our technology and reimbursement strategy. We continue to expand the foundation of physicians utilizing our technology, which is building support for the appropriate level of reimbursement from insurance providers which would stimulate then the adoption and utilization of the technology in their practices. Towards this end, we commenced sales of CompuFlo Epidural Disposables into the Pain and Rehabilitation Medical Group in Torrance, California. Adoption of the technology by this clinic follows a successful evaluation process by its founder, Dr. Fabian Proano, an interventional pain medicine physician. Dr. Proano initially conducted data cases using the CompuFlo Epidural System in which he reported 100% success. The evaluation included epidural steroid injection procedures within the lumbar, thoracic and cervical thoracic junction of the spine. As more and more physicians and anesthesiologists such as Dr. Proano performed procedures and submit for reimbursement, our goal is to secure broad coverage for our technology as well as established the CompuFlo Epidural System as standard of care within the industry. We also believe there is a market opportunity for our CompuFlo Epidural Instrument within federal and other government agencies as our system can contribute to increased efficiencies. On the international front, we are expanding our network of distribution partners. Specifically, we are targeting independent distributors with existing relationships within key global markets and proven track records, introducing medical devices within their territories. We look forward to announcing additional international distributors as we advance our commercial rollout. At this point, I'd like to turn the call over to Peter Milligan, Chief Financial Officer, to go over the financials in detail.

Thank you, Arjan. Revenue for the three months ended June 30, 2023 and 2022 was approximately $2.9 million and $1.6 million, respectively, driven by an increase in domestic dental sales of $444,000, an increase in international dental sales of $589,000 and dental revenue from China of $270,000. Gross profit for the second quarter was $1.9 million or 65% of revenue versus $681,000 or 41% of revenue for the second quarter of last year. The increase in gross profit was due to higher margin sales with the launch of the new online portal. Operating loss for the three months ended June 30, 2023, was approximately $2.3 million versus $2.9 million for the second quarter of last year. The reduction in the loss reflects the increase in revenue and gross margin, partially offset by some temporary increases in selling, general and administrative expenses. Net loss was $2.2 million or $0.03 a share for the three months ended June 30, 2023, versus $2.9 million or $0.04 a share for the comparable period in 2022. As of June 30, 2023, the company had cash, cash equivalents and short-term securities were approximately $5.7 million and working capital of approximately $7.4 million. At this point, I'll turn the call back over to Arjan.

Thank you, Peter. We believe our new sales strategy, including the launch of our new online portal in the U.S. as well as our enhanced marketing efforts around STA have been effective, as illustrated by a solid revenue growth and margin improvement during the quarter. We believe we have developed an efficient and scalable platform to help drive high-margin, recurrent handpiece sales in the coming years. We also continue to expand our dental sales in both the domestic and international fronts. The Dental business should not only contribute to our revenue growth, but also provide a steady stream of cash flow that will continue to help fund our initiatives within the Medical segment until that becomes self-sustaining on a standalone basis. Within our Medical segment, we continue to add prominent physicians and pain management clinics as well as expand our international distribution partners. But most importantly, our news last week regarding reimbursement from commercial payers marks an important inflection point for the business that we look forward to be building upon. We are also advancing initiatives following SAM approval and leading up to potential federal supply system approval, which would open up the sizable government market. So to wrap up, we are witnessing growing interest in both our dental and medical instruments, and we believe we are well positioned to take advantage of the opportunities available in the market. At the same time, we continue to streamline our operating structure and remain committed to driving shareholder value. We look forward to providing further updates as developments unfold. 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 the Maxim Group. Anthony, your line is live.

Thank you. Arjan, I was just wondering if you could give a little more update on the pain clinics. It's obviously a huge market opportunity. We've heard from some of the pain docs that they find the CompuFlo System superior and improved comfort, improved precision. I was just wondering how that's rolling out? Are they acting as -- some of these early adopters and they're acting as referral sites because usually word of mouth among the physicians is probably even more powerful than anything you can do on the marketing side. I was just wondering how that's playing out with the pain centers that are currently using the system and then just any feedback or color on those efforts in the pipeline for those customers?

Yes. Thank you very much. Good morning, Anthony. No, absolutely. Like I said, it's a major achievement for the company. I think part of the question is also how are they using it? And what has been the feedback on reimbursement activity. So I think in a nutshell, we have been able to establish good utilization of our technology amongst clinicians. And the claim responses these clinicians received from Medicare and private insurance providers has been as expected. Clinicians have not received denials, except for cases where preauthorization was necessary resulting in resubmission of the claim. In addition, insurance providers have raised questions about the technology and clinical benefits for claim evaluation. To your point, absolutely, the clinicians, amongst each other, word of mouth is much more important and easier to access through them than through our direct marketing activities because we have to let the clinicians speak to each other as we are not entitled to use this in a heavy marketing campaign based on the feedback that we received.

Okay. Great. And then just can you also just talk about the success of your new online store? I know that's been -- you've been ramping that up. And then do you have any metrics to measure how that's going in terms of site visits conversion, what the customer acquisition costs are at this point?

Well, the customer acquisition costs are very low because it's mainly through our, let's say, telephone activities what we have been doing in a nutshell is analyzing the data that was available after six months, right, and which is important for the company because now we know the identity of the customers, we know the purchasing patterns, we can call them by saying, you have ordered two boxes of handpieces in the first quarter, it's time to order more or why do you have low utility and utilization of these handpieces? So in a nutshell, what we are doing now is really per definition is sales execution, calling upon customers that have not ordered in the past or have a slow reordering pattern. We call the customers to understand better how many operatory rooms they have. In other words, upselling opportunity for instruments provide increased customer service to these customers, thereby driving utilization and helping them in the aftersales support and education of the technology and the application of the technology into the patients. So it's a unique opportunity. And what we have been doing is mobilizing more people internally to actively - proactively reach out to the customers. That has been - and that is, I think, an important factor to know because that would give us the opportunity to continue the solid revenues in the Dental business.

Right. And then internationally, sales are picking up, and you mentioned new distributors. Have you signed - I know you signed some new ones, but are there any countries where you still feel you need new distributors? Or do you feel like you're covering the territories you need to cover now in international?

No, there's still a handful of countries where I would like to be in, in particular, in Latin America. I think we are well covered in the international markets for the Dental business, but the activities are primarily focusing on making existing distributors, better distributors. So the growth of the international markets is very heavily related to existing distributors in major markets where we have seen a double-digit growth increase in the ordering pattern compared to prior years due to also our increased activities in meeting these distributors as a minimum every quarter of the year. Not only the Senior Vice President of Sales, but also myself, I'm taking regular meetings in these markets by meeting these important distributors for us, major countries, U.K., Scandinavia, Poland, Germany, to mention a few.

Okay. Great. And then last question before I hop back in the queue. Just in terms of the Medical segment, the sales force there, what's that number at? And at this point, do you feel like you need to add to that?

We currently have covered the medical activities with three people. I do not feel currently to add on that. The main reason is that I continuously focus on adding additional clinicians in increasing the volume of procedures done, primarily focusing on the pain and the ambulatory surgical centers. And of course, we have also CTI being our distributor that is covering about 22 states in the United States. So currently, I do not have any plans to expand further on the sales force.

Okay. Thank you very much. I'll hop back in the queue.

Thank you very much. Your next question is coming from Robert Brennan, who is a Private Investor.

Good morning, Arjan.

Good morning, Rob.

Good morning, Arjan. How're you? Congratulations on a really good quarter. And you sound really confident, which is obviously always good to hear. So I guess, my question is you're looking at an addressable market of about $4 billion. And I applaud you also on shifting to the online portal in terms of shifting your business model on the dental side, which is going to give you a lot more stability, obviously, in my opinion anyway. So - but considering the size of your sales force, are you going to be actively engaging with potential strategic partners to gain traction more rapidly, considering the size of the market because I think most people do anticipate you become a standard of care?

Yes. Strategic partnership is definitely always something that's on our radar screen because the size of the company and the activities and the potential might open up for entertaining these discussions. However, I also think it is of extreme importance that we establish a success in the reimbursement because that will trigger potential interest of other companies. As a matter of fact, in one of the most important Pain Society meetings that I attended in Florida, we are approached by not only clinicians and anesthesiologists and pain centers, but also have had the opportunity to entertain discussions of making our technology known to other companies. But most importantly, we have to do our homework first and to get the evidence and the validation of our technology within the reimbursement segment, so to say, and that's the reason why I'm personally very pleased that we have had that achievement that we announced last week and that we are talking about today because that is encouraging - more than an encouraging step moving forward for the company.

No, I agree with that. I think it's -- hopefully, it's the hole in the down that's going to allow the time to break. So as there have been -- and I realize it's early days, you only released the information last week. But has there been any response at all in terms of post-positive reimbursement from any other pain management clinics? Or is this just part of the ongoing job that you're doing?

No. So like I answered the question of Anthony earlier, right? The feedback of - first of all, like I said, we are very happy with the utilization. We have done more than 50 cases that are actually currently have been submitted to health insurance providers. And like I said, the clinicians have not received any denials except for those cases where preauthorization was necessary. So what they do then is they resubmit the claim. And then in addition, a number of insurance providers through the clinicians, we don't get that feedback directly. The clinicians get that. They've raised questions about the technology and the clinical benefits for the claim evaluation. So that is an ongoing process. Now nevertheless, what is very important, even when we have received the first reimbursement for the motor vehicle accident patients, that is from state to state. It's a very important activity that gives clinicians of course, the opportunity to treat these patients and to provide them the technology for those procedures. And that's definitely going to be an important triggering effect.

Well, again, great quarter. I think it's just continuing to point to the promise that you guys are bringing to the medical market. So well done and continued good hope.

Thank you, Rob.

Thank you very much. [Operator Instructions] Our next question is coming from Tucker Andersen from Above All Advisors. Tucker, your line is live.

Good morning, Arjan.

Good morning, Tucker.

Congratulations. I add my congratulations, and thanks for taking our questions. This is real progress. I have a couple of questions. First, in the dental area, you alluded to the fact that the new operating methodology of having your online store in direct contact might open you to not only better utilization by the existing owners of the equipment but perhaps getting new adopters. And I was wondering if you've had enough time to figure out how best to get new adopters and if there has been any progress in that direction?

There absolutely have been new adopters and new customer acquisitions in this process that I explained earlier on the call, Tucker. And I'm pleased with that process. Actually, if you look at the development of the instruments and also our goal is, of course, to outperform what Henry Schein normally would do on new instruments and new customer acquisition. That's one part. The second part, we should not forget that there is a unique upselling opportunity to increase the number of instruments in one practice.

Yes. Well, congratulations on that because not only has it been surprising to me that there hasn't been greater adoption, but it seems to me, given your profit profile in that area of your business, as you point out, that, that's a real opportunity to fund the other business. On the prior authorization question and the medical reimbursement that you've been successful, you sort of alluded to a couple of things, but I'd love to delve into them a little deeper. Is part of whether you're getting that usage with regard to automobiles, strictly a question of state law? Or is it more that those are emergency procedures and therefore, it's more easy for doctor to get reimbursement for something like that than for a standard procedure?

It's definitely an insurance issue, I would say. But if and when we did not have an available 777 T code, which is called our the code - the tracking code for our technology, the doctor would not have been able to make that claim or to get reimbursement for our procedure in addition to the epidural steroid injection. I think the second part of your question, my understanding is based on the research that I've been doing that it definitely is also dependent from state to state. I know, for example, in Florida, that the number of motor vehicle accident cases can be more than significant where a lot of clinicians are treating these patients.

And are those also different insurers that is - would these primarily be automobile insurers as opposed to the standard health insurers?

Sorry, say that again? I did not understand your question.

I'm wondering if reimbursement is coming from the standard health care insurance issuers or whether it's coming from motor vehicle insurers and that may also be a difference. If this is covered under somebody's personal liability, in the moto will be of - because I'm wondering about the transfer effect from if an insurer pays some of these claims, are they then more likely to be up-to-date on your technology and things like that.

Yes. That's - I'm happy that you asked that question because that is my working hypothesis here as well because without going into the detail of who these insurers are because I cannot -- and I'm not allowed to comment on that. There is a tricking, an effect, right? Because if they would already pay for these specific patients, they become aware and they are aware of our technology that would potentially then also have an effect on, I would call it, then the standard procedures, which is an epidural steroid injection in a private pain clinic for the high volume in these clinics, absolutely. That's my hypothesis as well.

Well, thank you. Good luck because we all know that would be a major way to break the log jam. Congratulations, and we look for continued progress.

Thank you, Tucker. Have a good day.

You also.

Thank you very much. Your next question is coming from [John Cobb], who's a Private Investor. John, your line is live.

Thank you. Good morning, Arjan. How're you today?

I'm doing well, John. How're you?

Good, thanks. I'm trying to piece this all together in my head where Milestone is in the process, how it's evolving or has evolved and where we're going from here. Not so long ago, and I think Milestone was talking about epidurals for delivery, babies and hospitals, hospital systems, but some seem to be imminent as signers on that never seem to materialize and now you're kind of retrenchment and focusing strictly on paying clinics with going to the very basic element of reimbursement and validation by insurance companies. Are you still working with hospitals? Are you still working on other applications for the Milestone's delivery system? Or have you retrenched and so we got to get back to just going to baby steps for pain clinics? I'm just trying to understand this and what the time line, not specifically, but how long might it take for the commercial rollout that we're all looking for on a sustained basis?

Okay. Thank you for your question, John. First of all, I would like to take away the misunderstanding. We are not exiting labor and delivery and the hospital market segment. We are continuing to calling upon these hospitals. And actually, one of our major customers within the Medical business is still two or three major hospitals in the United States. I mentioned UTMB in Texas. And I mentioned the University of Louisville in Kentucky. So we continue to call upon labor and delivery, the strategic imperatives of entering also the pain segment has been several. First, decision-making cycle is shorter. There are no financial constraints and more importantly, we have been able to expand our indication to the thoracic and the cervical thoracic junction where the benefits of our systems in terms of safety and efficacy is even more clear than in the lower part of the spine. So I think that's very important to understand. And then fourthly, the reimbursement. Reimbursement, we focus initially on private pain clinics, then the ambulatory surgical centers and then the hospital. So everything comes together. So we are focusing and capturing the entire marketplace here. Now your second question is time. We cannot look into a crystal ball. The only thing that I can do with my team is continuing the efforts and to execute on our strategy, i.e., reimbursement, indication widening. Then your third question was, are there any new applications? Well, we look in particular, we are looking in the field of how to support spinal cord stimulator procedures. That's what we are currently doing. So you also asked the question going back historically. I personally believe that we have now the tools and the means in place and created the baseline to further execute on the plans and the activities that we have undertaken.

Okay. And my last question is, you mentioned at this time and previous quarterly updates. This government rollout, how big a market - is that a huge market? And how long - far along on the process is Milestone with maybe government adoption? And if they do adopt it, would that be an extraordinary catalyst for further growth in the private sector?

It's a significant market, and it's a very important segment when we get the approval of the government on the federal supply schedule. I do believe strongly that, that's the market segment on its own. The dynamics are different than from the private sector because reimbursement in the government sector, that's not an issue. So the difference between the private sector and the government sector is you have to establish the right pricing and the reimbursement is different. In the government, no reimbursement, they can start using it. You may, and in the commercial sector, we are dependent on reimbursement.

And I hope they sign on even sooner than I do.

That's what I hope.

Okay. Thank you very much.

You're welcome, John.

Thank you very much. We appear to have reached the end of our Q&A session. I will now hand back over to the management team for any closing comments.

Well, thank you all for your time. As we stated today, we are encouraged with the development of the revenues and the activities that we are undertaking. And I'm looking forward to provide you continuous updates. Thank you for your time. Be well, stay safe, and have a great day. Goodbye.

Thank you, everybody. 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.