Earnings Call Transcript - MLSS Q1 2021

Operator, Operator

Greetings, and welcome to the Milestone Scientific First Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, David Waldman. Thank you. You may begin.

David Waldman, Host

Good morning, everyone, and thank you for joining Milestone Scientific's first-quarter 2021 financial results conference call. On the call with us today are Len Osser, Interim Chief Executive Officer; Arjan Haverhals, President of Milestone Scientific and CEO of Wand Dental Inc; and Keisha Harcum, Controller. The company issued a press release today, Monday, May 17, containing first-quarter 2021 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 first quarter ended March 31, 2021. Before we get started, we'd 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 that 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 three months ended December 31, 2020, and Milestone's report on Form 10-Q for the first quarter ended March 31, 2021. The forward-looking statements made during this call are based upon management's reasonable beliefs as of today's date, May 17, 2021. 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 Len Osser, Interim Chief Executive Officer. Please go ahead, Len.

Len Osser, Interim CEO

Thank you, David, and thanks to everyone for joining us today. The first quarter and subsequent period have been highly productive for the company. First, I am pleased to report that our revenue for the first quarter of 2021 increased more than 61% to $2.9 million versus $1.8 million for the same period last year. We also achieved a strong sequential increase in sales of 32% versus the fourth quarter of 2020. Importantly, our dental segment remains cash flow positive on a standalone basis with continued growth opportunities. Clearly, our rental business is back on track. In terms of our CompuFlo Epidural and CathCheck systems, we have already added new hospitals that have purchased our disposables with the prospects of increased business in the coming months. We have many more that are starting trials and others that are at the latest stage of development existing trials that we expect to convert to commercial orders. During the first quarter of 2021, we began selling CompuFlo Epidural and CathCheck disposables to three premier medical centers in the United States and one in Europe. These hospitals include Regional Medical Center, a premier regional healthcare system in South Carolina; the University of Texas Medical Branch at Galveston, an institution of the University of Texas System, an agency of the State of Texas; and the nationally recognized Medical University of South Carolina, as well as a leading German hospital, the University Hospital of Würzburg. The purchase orders received from these four medical centers reinforce our confidence in the outlook for both CathCheck and CompuFlo, and the value proposition to other healthcare systems across Europe and the United States as we strive to become the new standard of care in epidural procedures in labor and delivery. It is also a validation that our technology provides a level of safety and efficiency not currently available to medical professionals. The clinical and safety benefits of the CompuFlo Epidural and CathCheck systems are backed by extensive published clinical data, demonstrating significant reductions in epidural procedures, as well as complication rates and contributing to time savings for anesthesiologists. Moreover, the CompuFlo instrument has the potential to significantly reduce costs associated with morbidity, providing a direct economic benefit to 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 one to two minutes versus 20 to 40 minutes using the traditional method. In summary, we are aggressively accelerating our commercialization efforts in both domestic and global markets as we pursue our goals and become the new standard of care for epidural procedures in labor and delivery. A key element of our sales strategy focuses on the disposable components of our system, which we believe will contribute to high margins and recurring revenue. In addition to hiring more salespeople and expanding our sales funnel, as I mentioned earlier, several advanced trials are already underway with hospitals that we believe will convert to commercial orders. At this point, I'd like to turn the call over to Arjan Haverhals, president of Milestone Scientific and Chief Executive Officer of Wand Dental Inc., to describe the sales and marketing activities around the Wand instrument in more detail. Please go ahead, Arjan.

Arjan Haverhals, President and CEO of Wand Dental Inc.

Thank you, Len. Our dental business is recovering nicely and continues to generate strong cash flow as a result of successful sales and marketing initiatives, as well as dental offices reopening across the country and around the world. We have begun implementing our three-year strategy to expand in the worldwide dental market. We believe our rapid progress illustrates the positive response and growing market demand for our dental instruments. Through our decentralized sales strategy, we accomplished our goal of building a robust distribution network covering important territories in the United States and Canada. We are now accelerating our efforts into new global markets while supporting our present distributors. We believe we have developed a highly cost-effective and scalable platform to help drive our dental instruments and handpieces sales in the coming years. In regards to our medical business, we were saddened by the tragic loss of our Vice President of Sales, Eric Gilbert. I would like to express our condolences to his family, and we continue to support his family in these difficult times. Although the sudden passing of Eric caused a temporary setback, we are now adding new sales territory managers with the necessary sales skills and experience that will help propel us moving forward. We have increased our sales team to nine territory managers covering the Central, Northeast, and Southeast areas. We've also appointed a territory manager in California to assist us in penetrating major hospitals in this state. We continued the execution of our digital marketing strategy and recently launched our new website presence. Furthermore, we increased our social media communication activities. All these efforts are focused on increasing our brand awareness and should result in additional lead generation for our sales team. I'd also like to take a moment on behalf of myself, the Milestone team, and our Board of Directors to personally thank Len Osser for his immeasurable contribution to the company over the years. He has been a visionary and guiding force for the company since its inception. He has helped Milestone navigate through both favorable and challenging market environments, investing his own capital when needed, carefully managing expenses, and serving as a strong steward looking after and protecting shareholder interests. We truly appreciate everything he has done for the company, building a foundation for growth and success in the years to come. We truly look forward to his ongoing contributions to the success of the company. At this point, I'd like to turn the call over to our Controller, Keisha Harcum, to go over the financials in detail. Please go ahead, Keisha.

Keisha Harcum, Controller

Thank you, Arjan. Total revenue for the three months ended March 31, 2021, was $2.9 million versus $1.8 million from the same period last year. Dental revenues increased approximately $1 million. Medical revenue for the three months ended March 31, 2021, increased by approximately $63,000 to $71,000 as compared to the three months ended March 31, 2020. Gross profit for the three months ended March 31, 2021, was $1.8 million or 63% versus $1.3 million or 71% of revenue for the three months ended March 31, 2020. The decrease in gross profit margin is due to the lower margins in sales in China. Operating losses for the three months ended March 31, 2021, were approximately $1 million versus approximately $1.6 million for the three months ended March 31, 2020. Net losses were approximately $1 million or $0.01 per share for the three months ended March 31, 2021, compared to a net loss of $1.6 million or $0.08 per share for the comparable period in 2020. Now I would like to turn your attention to liquidity and capital resources. As of March 31, 2021, the company had cash and cash equivalents of approximately $17 million and working capital of approximately $18.6 million versus working capital of $15.7 million on December 31, 2020.

Len Osser, Interim CEO

Thank you, Kisha, and thank you, Arjan, for the kind comments earlier. Our strong balance sheet with approximately $17 million of cash and cash equivalents as of March 31, 2021, provides us substantial resources and the ability to accelerate our sales and marketing activities around both our dental and medical instruments. We are very well funded and have no plans or need to raise additional capital. Included in the $17 million of cash, we generated over $3 million from the exercise of warrants and nearly $700,000 from the exercise of options. Our strong balance sheet also allows us to advance the development and commercialization of other indications for our proprietary DPS, Dynamic Pressure Sensing technology, which we believe represents further growth opportunities for our company. We believe the potential for this technology platform is quite robust with multiple opportunities available in large and underserved markets, such as Botox and peripheral nerve blocks, to name just a couple. Additionally, last week, we announced that we are promoting Arjan Haverhals to CEO and hired Scott Khan as our new CFO. Since joining the company last June, Arjan has been instrumental in implementing successful sales and marketing activities around the dental instrument and accelerating the commercialization of CompuFlo and CathCheck. As he described earlier, we are taking bold steps to further accelerate our medical sales going forward. Arjan's strong leadership will be invaluable as we work towards our goal of establishing our technology as the standard of care in epidural procedures during labor and delivery around the world. In addition to the many contributions he's already made to the Milestone organization, he brings more than 30 years of senior management experience and an impressive track record leading rapid growth initiatives across a broad range of industries, including dental and medical. We believe having such a strategic leader will support our transition from a research and development organization to a commercially focused medical device company. We are also excited to welcome Scott Khan to the management team. Scott brings more than 40 years of leadership with a proven track record in corporate finance operations. Scott will be instrumental not only in overseeing our financial infrastructure but also helping us to increase investor awareness as we execute on key milestones. In terms of my own involvement, I look forward to playing an active role in the growth and success of the company going forward as Vice Chairman and as spearheading some of our international expansion opportunities, especially within China where I have very deep long-standing relationships. So to wrap up, I truly believe 2021 will be a transformative year for our medical business and an important turning point as we move to our goal of establishing our medical instruments and disposables as the new standard of care for epidural procedures in labor and delivery. We remain 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 for our company. At this point, we would like to open the call to questions. Operator?

Operator, Operator

[Operator Instructions] Our first question comes from Anthony Vendetti with Maxim Group.

Anthony Vendetti, Analyst

So congrats, Arjan, on the promotion and, Len, continued success and thanks for all your contributions. I just wanted to ask some questions on the medical side. Obviously, this could be an important year and you’re ramping up by adding some salespeople. Can we talk about how many sales reps you have added and when they were added? Because there's a cycle, a training period to get them up to speed before they can probably contribute right away. I was just curious, is that three months or is it longer before they can hit the ground running?

Arjan Haverhals, President and CEO of Wand Dental Inc.

So we already started the recruitment earlier this year during the first quarter. By the end of the first quarter, we had about four territory managers or a sales team of four. And then, of course, the tragic news with the passing of Eric, that was a situation that we had to handle. And then we expanded the sales organization. So as of today, we have now a sales organization of nine individuals, one sales director, and eight territory managers. And they all started primarily at the end of March, beginning of April. As we speak, we have trained three of the new reps already during the course of April, and the second onboarding is starting right now. Now to your question, is it going to take three months? No, because the whole goal and the objective of the onboarding is to get the people up to speed as soon as possible. And that is, for me, a three-week lead time, including the onboarding, including the technicalities, the product knowledge more importantly, and including the building of the sales funnel. Because the people that we have recruited as well they are experienced in either pain management or have worked in an anesthesiology department. There's actually one territory manager that was a director of a surgery department. So we have focused also on the skill set that is required to be successful in the industry and the field of expertise that we are working at. Does that answer your question?

Anthony Vendetti, Analyst

So it sounds like you've been able to compress the training period because the people you've hired have some experience already in the industry, and you feel that within three weeks they can be trained and ready to go out and sell. So that is helpful. Can you talk about the hospitals that you're trying to access? We've heard over the last several weeks that most of the hospitals have opened up and they're easier to access than they were during the pandemic, but there's still a percentage that are still difficult to access. Can you talk about, in terms of your target market, your ability to access them? Has that been helped by your relationship with the GPOs? And can you talk about how that's going to play in with your nine-person sales force, eight direct sales reps?

Arjan Haverhals, President and CEO of Wand Dental Inc.

So I think you raised a couple of questions here. So let me try to answer them in chronological order. GPO focus, of course, the endorsement that we got last year in November by being awarded the contract with Premier has helped us and also the hospitals that we are active in. A couple of them that have purchased the product from us belong to the Premier Group. That is an endorsement, but you still have to undergo and follow the sales process within these hospitals anyhow. But we continue to target hospitals that belong to the Premier Group because, like I said, it lowers the threshold and it lowers the barrier of getting a foot in the door of the hospital. So that's one aspect, absolutely. Secondly, we are now in the process that the hospitals that we have been in contact with prior to the pandemic, and there are a number of larger accounts that we have been in contact with more than a year ago, that said was, okay, you have to wait a year until the situation is back under control; you can return, and that's actually taking place as we speak. So for the past month, we have been going back to accounts that have shown initial interest for more than a year ago, and that have made it possible for us to revisit them again. And then a third tier, of course, is a mix of, I would say, regional, smaller hospitals and larger accounts that come through our network that come through our marketing activities and that come also through the salespeople that potentially bring these accounts with them. So that's also the reason why we remain positive. And also, as we speak, there is a high activity level from a demo and trial perspective going on. And that also allows me to say here as well that we remain positive that that turning point, as we have mentioned several times, that is actually taking place, and that we have to work hard to execute on all the plans and all these accounts that we are having.

Anthony Vendetti, Analyst

Just in terms of looking at the pipeline compared to last year, like you said, it was a difficult year to access hospitals. But how would you quantify the pipeline today versus 12 months ago? Is the pipeline of potential customers based on the sales leads you have plus based on hospitals opening up? Would you say that pipeline is 2x what it was last year? 1.5x? 3x? How should we look at the potential customer opportunities?

Arjan Haverhals, President and CEO of Wand Dental Inc.

So I will refrain from mentioning a number whether it is a factor of 1.5, 2, or 3. My comment or my answer to this question would be that we are in a better situation than 12 months ago in relation and in regards to the pipeline and the contact that we have established with the hospitals. I would say, not only on a national level but definitely from an international point of view as well where we have been able, in a rather short period, to come in front of a number of key universities in Europe as well. So the situation is definitely better than it was 12 months ago.

Anthony Vendetti, Analyst

And last question is on China. That put a little bit of pressure on the gross margin this quarter. I know those sales can be somewhat volatile in the sense that sometimes they come in in a particular quarter, and in certain quarters they don't come in at all, they're much lower. Are you expecting gross margins to move back up in the second quarter, or is China going to be more of a consistent contributor on a quarter-to-quarter basis?

Len Osser, Interim CEO

We're hoping that they will be as China has significantly opened over the last 90 days. So even though the margins are far less and it brings down the overall margin, it does bring in money. We do double our money on the containers which we send to China. So it is important that they've reopened, and we're certainly hoping that we'll have quarter-by-quarter container delivery. But because of shipments, we cannot guarantee that it will come in quarter-by-quarter. We are looking to a minimum of four containers to China this year. However, as I say, because of the shipments and the form of payment and because they are a variable interest entity and the way we deal with that, it may not come in - you may not see it quarter-by-quarter, but I believe we'll see a minimum of four for the year.

Operator, Operator

[Operator Instructions] Our next question comes from James [Vistas].

Unidentified Analyst, Analyst

To piggyback on the gross profit, that was kind of disturbing that this decreased from 71% to 62%, and I guess you've kind of answered that. The second question I have is, was there a need to get pharmaceutical salespeople in there for the medical sales? Has there been any thought given to working with a large pharmaceutical organization to either utilize some of their sales force or purchase a portion of Milestone in order to extend and improve the sales abilities worldwide?

Arjan Haverhals, President and CEO of Wand Dental Inc.

Yes, it has been given thought. And also, we have to remind ourselves that we historically also worked with a hybrid model in terms of we had our own direct salespeople. But we also worked with other distributor companies in the United States that gave us the lead engagement access to the hospitals. We have not made any attempt to reach out to larger pharmaceutical hospitals and look at that from a global perspective because we strongly believe that we first have to create that baseline and that platform from where we can act from. And then over time, we first have to deserve the place in the market and create a basis, build that baseline further out, expand on it until we have reasonable revenues. Perhaps at a later stage, we can reach out to other companies, whether it is a pharmaceutical company or a medical device company that can be considered. But we do get from time to time also requests, and we continue having discussions with organizations that see it as a benefit, including from a distribution point of view, our concept, our instruments into their sales activities. But for the time being, there's no formal agreement in the make or even considered with any larger entities like we mentioned.

Len Osser, Interim CEO

Just to add to that, the integrities of the margins have held pretty much as they have in the rest of the world, other than China. But as China plays a smaller and larger role, you will certainly see that effect with blended margins. However, we have either kept or increased our margins in the rest of the world.

Operator, Operator

Our next question comes from Gary Carroll.

Unidentified Analyst, Analyst

I'm glad to hear your consideration moving forward into expanding into a further distribution network perhaps. So in the interim, what do you think you guys have for a target of employing direct people? I think now we're at eight plus a sales director. Do you have plans any further this year to add some more direct sales reps in the US?

Arjan Haverhals, President and CEO of Wand Dental Inc.

Yes, we have more plans. If you ask a number, we are not going to expand into a sales team of 20 or 25 or 30 people. I think where we are currently at is the right level, but I foresee that we will add two to three additional positions, in particular depending on territory to territory and that's the plan moving forward. So with the eight plus one, we will probably end up in the first phase, ramping it up to a 10, or 10 plus one, or 10 plus two type sales organization to establish that baseline I mentioned earlier in the call.

Unidentified Analyst, Analyst

And Len, you're the connection with China. Do we have any issues at all with supplies regarding our instruments as far as getting a supply?

Len Osser, Interim CEO

Yes. We would have, but the company has taken steps to add to the inventory with components for the next perhaps two years, so we feel very confident that will not be an issue for us.

Unidentified Analyst, Analyst

Because I know that as we close accounts, the instruments are going to be going out the door fairly quickly, whether on consignment or being purchased. So I know going forward, if we open a fair number of accounts, that we need enough instruments to go into a hospital, let's say, need six or eight instruments. So that's good to know that we have an adequate supply.

Len Osser, Interim CEO

We have taken that step — we've had the foresight to take care of that, and any other problem that would develop, if it does develop into a problem with the amount that we just ordered, that would be extraordinarily good news.

Unidentified Analyst, Analyst

All right. Well, thanks, guys, and continued good luck and success. Good to hear the growth and the plan sounds like it's coming together. And we look forward to some announcements on some more new accounts.

Operator, Operator

[Operator Instructions] Our next question comes from John Cord.

Unidentified Analyst, Analyst

Congratulations on the new position, and all the best moving forward. I have a question for both of you. Let me start with Len first. And thank you, Len, for your efforts over the years. I've talked to you many times as a shareholder for many years. When you first talked about China, as I recall, it was a while back, you considered China to have really open-ended possibilities in the dental arena because of their culture, their extreme reticence to go to a dentist and their fear of dental procedures. And over time, there's been a number of changes and setbacks. But as of today, how do you view the dental prospects in China? Do you still feel as confident as you did in the beginning? Or have things changed? How do you look at Milestone's possibilities in China?

Len Osser, Interim CEO

I think they are very strong. I think that what has occurred is a huge investment and a move towards group practices in China. It's grown from actually 20 years ago zero to about an 18% market share at this point with extraordinarily high investment, opening up offices with 12 to 20 operatories and the best equipment available. Our partner there has sold to quite a number of these, and those instruments are in each operatory. So as the economy comes back with great strength in China over the last few months, we look forward to increased sales. Given the change in the amount of people that would be viewed as middle and upper middle class, the importance of dental care is certainly recognized. So I'm very optimistic regarding China and dentistry.

Unidentified Analyst, Analyst

Arjan, then I have a question for you also on the dental. The change in strategy from Milestone from one big distributor, maybe Shine or whatever, to the smaller distributorships with more of a local relationship with dentists. You mentioned there were a few or a number of them signed on with distributorships of Milestone. My question is, how many of these smaller distributors are there in North America? How many do you have and how many are you looking to possibly sign on as distributors?

Arjan Haverhals, President and CEO of Wand Dental Inc.

So currently, we have, since the beginning of this year, where we have the full dependency prior to that on Henry Schein, added seven distributors in the United States and one in Canada. So that brings the total number of distributors in Canada to two and in the United States to eight. But we continue to add distributors to that, call it, portfolio of distribution channels. We are currently in discussions with a couple of them as we continue to have additional distributors to further expand the sales activities and to increase our footprint in terms of the number of new customer acquisitions and the number of new instruments placed in the marketplace because, as we have said in all the other calls as well, that's one of the main growth drivers for our business moving forward. Now if that's going to be — I do not have a target if it's going to be 14, 15, or 20. I'm looking more at the quality of the distributor in terms of having their own sales team, having feet on the ground, having experience with selling medium to high-tech capital equipment, and familiarity with the razor and the razor blade business model, having their own marketing activity. So there are different criteria that apply to the final selection of the distributors. It is not just adding a distributor wherever we feel that we need one. It is a continuous selection process. What’s important for us, of course, is the earlier in the year as possible to have a number of distributors because that is important for growing the business moving forward.

Operator, Operator

There are no further questions at this time. I'll now turn it back to Leonard Osser for closing remarks.

Len Osser, Interim CEO

I'd like to thank the investors for all the support they've given the company over the years. I feel very confident that with our new staff and Arjan in charge of the company, we will move forward rapidly. And all the best. Stay safe.

Operator, Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.