Earnings Call Transcript - MLSS Q3 2020

Operator, Operator

Greetings, and welcome to Milestone Scientific Third Quarter 2020 Business Update Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, David Waldman, Investor Relations. Thank you. You may begin.

David Waldman, Investor Relations

Good morning, and thank you for joining Milestone Scientific's third quarter 2020 financial results conference call. On the call with us today are Len Osser, Interim Chief Executive Officer; Arjan Haverhals, President of Milestone and CEO of Wand Dental Inc.; and Joseph D'Agostino, Chief Financial Officer. The company issued a press release today, Tuesday, November 17, containing third quarter 2020 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 third quarter ended September 30, 2020. 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 plan, expected revenue 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, 2019, and Milestone's report on Form 10-Q for the third quarter ended September 30, 2020. The forward-looking statements made during this call are based upon management's reasonable beliefs as of today's date, November 17, 2020. Milestone undertakes no obligation to revise or publicly update any forward-looking statements for any reason. With that, we'll now turn the call over to Len Osser, Interim CEO. Please go ahead, Len.

Leonard Osser, Interim CEO

Good morning. Thank you, David, and thanks to everyone joining us for the call today. I am pleased to report that our dental sales increased more than seven-fold versus the second quarter of 2020 as dental offices began to reopen across the country and around the world. Our marketing initiatives and back to work promotions have been well received, and we are working hard to address the needs of both dentists and their patients during the pandemic. Although we continue to witness the negative impact of the COVID-19 pandemic, the dental business has proven quite resilient, illustrating the loyalty of our current users and reinforcing the long-term positive outlook for the business. Moreover, we have enhanced our sales and marketing activities, which should boost sales of our dental instruments as the market recovers, which in turn, should help drive incremental high margin recurring disposable sales. Our sales and marketing initiatives around the CompuFlo epidural system are also taking hold. With a number of hospitals reopening to outside vendors, we are advancing our sales efforts around the CompuFlo epidural system and the CathCheck technology. Specifically, we are expanding our business development pipeline while concentrating our efforts to close our first U.S. hospital. Most recently, we were awarded a group purchasing agreement for CompuFlo epidural system and CathCheck with Premier, a leading group purchasing organization with approximately 4,100 U.S. hospitals and 200,000 other providers within their network. This agreement provides us enhanced access to Premier's members, and we believe should help accelerate our mission to become the standard-of-care. We believe this agreement is further validation of the growing awareness and importance of our instruments in improving health outcomes and significantly lowering costs for healthcare institutions. The clinical and safety benefits of the CompuFlo epidural system are backed by extensive published clinical data demonstrating significant reductions in epidural punctures and complication rates. Moreover, the CompuFlo instrument has been shown to significantly reduce total costs per hospital stay, providing a direct economic benefit to the healthcare institutions. Similarly, the CathCheck technology has the potential to transform the monitoring of catheter placement following an epidural procedure by confirming the placement of a catheter within two minutes, versus 20 to 40 minutes using conventional methods. This will make a significant difference to patients, and to the time that a patient has to suffer pain after birth. We are expanding our trials in major hospitals and medical schools, as well as partnering with anesthesiologists to approach the purchasing departments of hospitals together. We are very encouraged with the feedback we received from anesthesiologists in the U.S. Most recently, we published a video interview on our website with Dr. Ayman Alian, Division Chief of Obstetric & Gynecological Anesthesiology at the Yale School of Medicine, who discussed the benefits of the CompuFlo epidural system, and CathCheck, including verification of epidural placement during an epidural procedure and confirmation of catheter placement. Dr. Alian stated, and I quote, 'It does improve the block. It does help you make a decision. It does decrease complications. It does decrease length of stay and improve patient satisfaction.' We believe the support from Dr. Alian and other anesthesiologists is further validation of our technology and advances towards our goal of CompuFlo and CathCheck becoming the new standard-of-care, replacing the 1860 technology of the hypodermic syringe and a procedure that came forth in the 1920s. Moreover, we are in late stage discussions at the committee levels with a number of hospitals, and we'll provide further updates as soon as they unfold. At this point, I'd like to turn the call over to Arjan Haverhals, Chief Executive Officer of Wand Dental to describe the sales and marketing activities around the Wand instrument in more detail. Please go ahead, Arjan.

Arjan Haverhals, CEO of Wand Dental

Thank you, Leonard. As Leonard mentioned, our Wand dental business has begun to recover as dental offices reopened across the country and around the world. While we are not back to pre-pandemic levels, I'm pleased to report our sales are trending in the right direction. An important revenue driver in our business model is the recurrent sales of our disposables. However, to drive further growth we are working aggressively to expand our installed unit base. For this reason, we have launched a series of back-to-work promotions on both of our Wand instrument and disposables to incentivize our distributors and dentists, as well as support them in the business and practice growth during this difficult period. The initial feedback has been promising on both the domestic and international fronts. As an example, I'm pleased to report we recently signed an important new agreement in Russia as a result of our efforts. It is important to note that the Wand instrument offers significant benefit in terms of establishing a safe environment for patients and staff as we use sterile single-use disposables. In addition, when using the Wand, a dental procedure can start in as little as 60 seconds after making the injection. For this reason, unlike conventional procedures, the dentist does not need to move from one operatory room to another and change protective gear while waiting for the anesthesia to set in. Accordingly, we believe there is significantly less risk of cross-contamination, which has been reinforced based on the feedback we received from dentists. Our enhanced marketing efforts around the Wand focused on the significant value drivers of our instrument, including safety, efficiency, and importantly, supporting the growth of dental practices. As said, I'm pleased to report the sales for the dental business are trending in the right direction. This positive trend continues, and we expect sales for the dental business to be a minimum of $1.7 million in Q4. This does not include sales to China of $450,000 because we can only recognize these sales once sold through by our Chinese distributor. With hospitals reopening to outside vendors, we are advancing sales efforts around the CompuFlo epidural system and CathCheck technology. To support the hospitals in performing procedures during the pandemic, we decided to make the CompuFlo instrument more readily available to hospitals by lending the instrument to the hospital in exchange for the commitment to purchase a minimum number of disposables; this offering is limited to the first hospitals that sign up for this program. At the same time, we are partnering with anesthesiologists in order to approach the purchasing departments of the hospitals together. We believe our current strategy allows us to streamline the value analysis team approval process, and thereby shorten the sales cycle. The response thus far has been encouraging and we are increasing new trials in major hospitals over the coming weeks. Our sales pipeline is more robust than ever, and we look forward to finalizing agreements with several premier hospitals in the near future. At this point, I'd like to turn the call over to our CFO, Joseph D'Agostino to go over the financial details in detail.

Joseph D'Agostino, CFO

Thank you, Arjan. Revenue for the three months ended September 30, 2020 was $1.2 million versus $1.9 million for the third quarter of 2019. Dental revenue decreased by approximately $644,000 due to the impact of the COVID-19 pandemic on the company's customers, suppliers, vendors and other business partners. Medical revenues for the three months ended September 30, 2020 and 2019 are nominal, reflecting our strategy to place the instruments with key opinion leaders at no cost to drive awareness and then adoption of the instrument. Gross profit for the third quarter ended September 30, 2020 was approximately $836,000 or 67% of revenue, versus approximately $1.4 million or 72% of revenue for the third quarter of September 2019. Operating loss for the three months ended September 30, 2020 was approximately $1.5 million versus approximately $1 million for the quarter ended September 30, 2019; the increase in loss is the result of a decrease in dental revenues. Net loss for the three months ended September 30, 2020 was approximately $1.5 million or $0.02 per share, versus a net loss of $2.8 million or $0.06 per share in the prior period. Now, I'd like to turn your attention to liquidity and capital resources. At September 30, 2020 the company had cash and cash equivalents of $14.4 million compared to cash and cash equivalents of approximately $1.5 million as of December 30, 2019. As of September 30, 2020 the total current assets were approximately $18.9 million, and working capital was $15.4 million. Revenue for the nine months ended September 30, 2020 was $3.2 million versus $6.1 million for the nine months ended September 30, 2019. Dental revenues decreased by approximately $2.8 million, which is related to the decrease in sales of hand pieces and devices throughout the country and internationally due to the COVID-19 pandemic. Gross profit for the nine months of 2020 was $2.2 million or 68% of revenue versus $4.2 million or 69% of revenue for the nine months of 2019. Operating loss for the nine months of 2020 was approximately $6.3 million versus approximately $2.9 million for the nine months of 2019; this increase in loss is due to the result of a decrease in dental revenues. Net loss for the nine months of 2020 was $6.3 million or $0.11 per share, versus a net loss of $4.7 million or $0.11 per share for the comparable period in 2019. At this point, I'd like to turn the call back over to Leonard Osser.

Leonard Osser, Interim CEO

Thank you, Joseph. We remain encouraged by the outlook for the business as the dental business is starting to bounce back. In addition, we remain confident in the market potential of the CompuFlo epidural and the CathCheck, which we believe will transform the industry and ultimately become the standards of care. Overall, we are in a strong financial position, given the fact that we had over $14 million in cash on hand as of September 30, 2020. In the meantime, gross margins from the dental business have held steady in the high 60% range. We continue to carefully monitor expenses, and we have maintained appropriate inventory levels to ensure available stock as dental offices begin to return to more normal levels. Given the increase in dental sales which contribute substantial margin, our burn has remained approximately the same for the present quarter. We are committed to driving shareholder value, and look forward to providing further updates as developments unfold. I'd like to thank you for joining the call today. At this point, we would like to open the call for questions.

Operator, Operator

Thank you. Our first question is from Anthony Vendetti with Maxim Group. Please proceed.

Anthony Vendetti, Analyst

Thank you. Good morning.

Leonard Osser, Interim CEO

Good morning, Anthony. Hope you're well.

Anthony Vendetti, Analyst

I just wanted to discuss the recent agreement announced in Russia. Could you provide some details on its significance and implications? Additionally, can you share how being on Premier's preferred list is impacting our opportunities, and whether COVID-19 is affecting progress in that area?

Leonard Osser, Interim CEO

Thank you for the question, Anthony. In regards to Russia, we have signed a renewed 3-year agreement with our distributor. Without going too much into the details, there is a significant growth of the business in the order of 20% to 25% year-over-year compared to the previous agreement; and that's definitely encouraging as it starts moving forward. The second point of your question in relation to Premier; of course, we are very delighted that we have been awarded that agreement. Prior to signing or being rewarded the agreement, we already were active with demos and trials, and we're targeting hospitals that belong to the Premier Group, and the agreement has definitely helped us in lowering the threshold of entering these hospitals, and also performing the number of demos and trials. So, we remain positive about the first commercial sale of one of the hospitals belonging to the Premier Group.

Anthony Vendetti, Analyst

Okay, great. In terms of COVID-19, you've seen a seven-fold increase in dental sales sequentially, indicating that things have improved. Based on the current situation in the country, has that progress slowed down? Have your customers and Milestone found ways to continue holding meetings and completing sales in this environment?

Leonard Osser, Interim CEO

Yes. Currently, we are positioned in the dental sector to increase sales and maintain margins for the dental division this quarter. We are resuming sales to China, as I mentioned earlier, but we cannot book these sales yet because we own about 28% of the distributor, who is required to pay for the product. Therefore, we can only record this once they complete their sales. That said, our current performance allows us to inform our shareholders that the fourth quarter is significantly better than the third quarter. As for how this trend will continue into the first quarter next year, we cannot predict. However, we believe the efforts dentists make in maintaining safety for their patients and themselves will lead to increased usage of our product. While we cannot foresee the future due to the unpredictability of the pandemic, it appears likely that we will maintain the level of performance we see in the fourth quarter, which is an improvement compared to the second and third quarters. Nonetheless, there's no way to tell for certain, especially regarding the pandemic's trajectory, but we do provide dentists with a preferable method of anesthesia compared to the competition.

Anthony Vendetti, Analyst

Understood.

Leonard Osser, Interim CEO

Yes, we believe that our enhanced balance sheet, supported by the capital we raised, allows us to mitigate risks for at least the next 12 months, regardless of the developments with COVID-19. This is why we no longer need to seek additional funding; we are well-equipped to handle potential challenges from the virus over the next 12 to 24 months, although we hope it won't come to that. Furthermore, the funds we have will enable us to advance other products currently in various developmental stages. The capital will not only support our marketing and sales efforts to significantly grow our dental business, which has seen limited growth over the past four years, but will also facilitate the introduction of new technologies. This will allow us to conduct the necessary marketing and sales both in the United States and internationally for products like CompuFlo and CathCheck.

Anthony Vendetti, Analyst

Okay, that's helpful. And it sounds like, in terms of where you are with the products and with your balance sheet; it's arguably the best position you've been in even in the face of the pandemic, correct?

Leonard Osser, Interim CEO

Yes, absolutely. I think that we're in the best position that we've been in, in many years given the patent portfolio, the team that we presently have working with us, and the enormity of the success that we've had with key opinion leaders throughout the world on the present technology. So yes, I think that we're in the best position we've been in many years.

Anthony Vendetti, Analyst

Lastly, I would like to ask about the hospitals that have received the CompuFlo system. What has been their response, and is it too early to tell, or have they made any commitments to purchase more based on its performance?

Arjan Haverhals, CEO of Wand Dental

Yes, it definitely has helped the sales process or the potential shortening of the sales cycle because the value analysis team, normally we have to go through the hospitals for that value analysis team assessment, which especially for the capital equipment is a longer process. So we eliminate that part and it is easier, a shorter process to go through the value analysis team for the new products which is going to be the disposables. So that is definitely a benefit. The feedback has been very promising because the initial hurdle of the cost of the capital equipment is no longer existing anymore. Also, based on the demos and the trials we are doing in particular, also based on the CathCheck, let's say unique selling proposition, and also, in a way the ease of using the CathCheck with immediately giving the confirmation of the right positioning of the catheter is very well perceived and received by the clinicians once we are doing the trials and the demonstrations. So my comment also to your question is that, as we speak, all our individual sales people are in the field and are conducting trials and demonstrations, and that is a daily activity for the next coming weeks.

Leonard Osser, Interim CEO

As Arjan has said, Anthony, the product is continuing to perform as it has over the last year. The anesthesiologists recognize the value, they certainly recognize the value of CathCheck because it's blatantly obvious how much time they can save and avoid the pain of the patient, and the old way of analyzing the 20 to 40 minutes can be reduced to two minutes or less. So as far as the anesthesiologists, they recognize this very quickly, and the fact that we have such a broad array of clinical studies published in the major journals throughout the world, assures them that they should try it; but then once they try it, they are convinced with themselves. That's not the issue, the issue at the moment and what's delayed the sales is the pandemic; it's the budget committees in the hospitals that are at the gate at the moment. And we're getting around that gate now in the way that Arjan has explained, by removing the capital equipment for one unit as a loaner to the institution when they commit to a pre-determined amount of disposables over a 12-month period. So there is no issue that we've had with the anesthesiologists, it's all based on the unfortunate situation with COVID-19.

Anthony Vendetti, Analyst

Understood, thanks. I'll hop back in the queue. Appreciate it.

Leonard Osser, Interim CEO

Welcome.

Operator, Operator

Our next question is from James Terwilliger with Northland Capital Markets. Please proceed.

James Terwilliger, Analyst

Hey, can you hear me?

Leonard Osser, Interim CEO

Yes, James, I can. How are you?

James Terwilliger, Analyst

I'm well. Thanks for asking. Very quickly, nice quarter. Just for some housekeeping; in the prepared remarks did you say $1.7 million for the fourth quarter of 2020, for revenue? Is that correct?

Leonard Osser, Interim CEO

Yes. Our current projection, which we haven't done in the past, is influenced by COVID-19; therefore, we are being very conservative. Arjan is estimating a minimum of $1.7 million, not including sales from China. We expect that sales in China this quarter will be around $450,000, but we cannot record that until they establish their own sell-through, as Arjan mentioned earlier. China has not been purchasing for a significant time, but they are now through their inventory. Fortunately, China is moving past the virus and is recovering economically, though their GDP is not yet back to where it was at this time last year. However, the growth trajectory in China looks very promising, and we have internal projections for next year as they return to normal after having no sales in the first three quarters. So yes, we believe that the $1.7 million figure given by Arjan is the minimum we will reach in the fourth quarter.

James Terwilliger, Analyst

Thank you. That number is quite positive and slightly exceeds my expectations. It's a nice recovery from the COVID low in Q2 regarding revenue. My next question is about SG&A expenses; you have done an excellent job managing expenses sequentially, keeping them well below my estimates. How should I view SG&A expenses moving forward? Can you sustain the current level of $2.3 million? I understand you need to expand as COVID permits, but what should I anticipate for SG&A expenses in actual dollar terms going forward?

Leonard Osser, Interim CEO

Currently, our business's burn rate for the third quarter was around $350,000. This amount remains consistent over the quarter. With the anticipated increase in sales for the fourth quarter, we expect that burn rate to stay around the same level. Looking ahead to next year, we are focused on several development projects in different areas of medicine that are still in progress. However, we foresee our burn rate staying relatively stable since we also expect sales growth from our medical products, including the epidural and CathCheck, as well as our dental product. Additionally, our long-time CFO, Joseph D'Agostino, adheres to the principle of being financially prudent, and I believe this approach will lead to our success.

James Terwilliger, Analyst

Could you remind me of your U.S. sales and marketing platform? Additionally, given your current balance sheet and the measures you've taken to reduce expenses, what are you planning in terms of R&D, especially considering you have a platform technology with promising clinical applications? I will return to the queue after that. Thank you again, and congratulations on a strong quarter.

Leonard Osser, Interim CEO

Thank you very much, James. Currently, in the organization’s sales and marketing efforts, we have three dedicated salespeople in the medical or epidural segment, along with one open position in one market area. Before expanding our sales team, we want to achieve commercial success and see results that we are confident in, as a prerequisite for further investment in sales expansion. On the marketing side, we are enhancing our web presence and conducting research to better understand our target groups in both the dental and medical fields. Regarding our research and development pipeline, we are exploring technology for other uses. As mentioned in previous discussions, we are considering a project related to cosmetic Botox injections, although the specifics are not finalized. Our priorities include accelerating growth in the epidural business, recovering the dental business to pre-pandemic levels, and pursuing future applications for our technology.

James Terwilliger, Analyst

Nice quarter, guys. Thanks. Good job with your operations underneath the COVID cloud. And thanks for taking my questions. Thank you.

Leonard Osser, Interim CEO

Thank you very much.

Operator, Operator

Okay, there don't appear to be any more questions at this time. I would like to turn the conference back over to management for closing remarks.

Leonard Osser, Interim CEO

I'd like to thank you very much for joining the call today. I know everyone is certainly eager for us to close our first hospital and hospitals in the United States; I assure you that we're working every day tenaciously to make that happen. And as soon as we do, we will certainly let you know. All the best, stay safe. Thank you very much for your support.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.