Earnings Call Transcript - MLSS Q2 2022

Operator, Operator

Good morning, ladies and gentlemen. Thank you for being here. Welcome to the Milestone Scientific Second Quarter 2022 Business Update Call. All participants are currently in a listen-only mode. I would now like to turn the call over to David Waldman, Investor Relations. Please proceed.

David Waldman, Investor Relations

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, and 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.

Arjan Haverhals, CEO

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 built 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 remains 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 and 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 helps 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 effect. We also continue to launch our CompuFlo Epidural System within pain clinics across the U.S. 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 increasingly important role in anesthesia. For this reason, having our instrument integrated into the curriculum is not just an important validation, but crucial 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. (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 the publication of the economic benefit analysis which demonstrated that our technology reduces costs 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 of 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, driven not only by cost and convenience for the provider, but also 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 the 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, and 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.

Keisha Harcum, Controller

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 second quarter of 2021. The decrease is related to the company recording 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, 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 from 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. The decrease is related to the company recording an allowance of approximately $430,000 on slow moving finished goods for medical and the reduction of dental revenue. Consolidated selling, general and administrative expenses 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 STA 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 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 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.

Arjan Haverhals, CEO

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, Operator

Your first question comes from Anthony Vendetti of Maxim Group. Please go ahead with your question. Your line is open.

Anthony Vendetti, Analyst

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 canceled 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?

Arjan Haverhals, CEO

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 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 based on the world, we do not want to do any business with Russia.

Anthony Vendetti, Analyst

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?

Arjan Haverhals, CEO

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 due to 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.

Anthony Vendetti, Analyst

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 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?

Arjan Haverhals, CEO

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 situations. 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 inflection 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.

Anthony Vendetti, Analyst

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 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?

Arjan Haverhals, CEO

Let me clarify your question, Anthony. We have received a CPT Category 3 code that will be effective from January 1, 2023. Our goal is to prepare ahead of time so that we can engage with insurance companies for pricing and reimbursement for the pain clinics, instead of waiting until January or February. The code has been confirmed for January 2023, and we are proactively getting ready to fully utilize the CPT code's benefits in the first quarter of next year.

Anthony Vendetti, Analyst

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

Arjan Haverhals, CEO

Thank you, Anthony.

Operator, Operator

Your next question is from Jon Korb. Please go ahead and ask your question. Your line is open.

Unidentified Analyst, Analyst

Arjan?

Arjan Haverhals, CEO

Yes, good morning, Jon.

Unidentified Analyst, Analyst

Hello, Arjan. This is Jon Korb, a longtime shareholder, and we've spoken before. I wanted to mention that this summer, I experienced the STA technology at my dentist, and it truly lives up to everything Milestone claims – it was a completely painless injection. Both my dentist and I were impressed. This raises questions about the wide-scale use of this technology in the dental field, which has faced challenges for some time. While I didn't ask my dentist, I assume he obtained it through a distributorship. I'm particularly interested in the developments in the United States compared to other countries in the dental sector. Are you still optimistic that instead of just experiencing fluctuations, like the downturn this quarter due to comparisons with Henry Schein's developments and losing traction in China, Milestone Scientific is on track to gain momentum in the dental market?

Arjan Haverhals, CEO

Thank you for your question, Jon. I'm glad to hear that you had a positive experience similar to many other patients with our STA Single Tooth Anesthesia Technology. To answer your question, yes, we are indeed focusing on expanding our dental business in the United States. You're correct in noting that we initially relied solely on our distributorship with Henry Schein at the beginning of last year, but we've since added several other distributors. This shift from exclusive to a multi-channel sales strategy was a necessary step. However, we realized that this alone would not be sufficient to achieve our desired growth and recognized the need to do more. We are currently exploring partnerships with other channel partners, one notable example being Keystone Dental Group, a dental implant company with a sales team of around 75 people. They focus primarily on dental implants and related prosthetic components, and we see a great opportunity in offering our products to help them increase their business and market penetration without impacting their profit margins. Moreover, another significant avenue for growth we are pursuing is the development of dental service organizations (DSOs) both in the U.S. and Europe. Approximately 22% of all dental business in the U.S. is conducted through these organizations, which provide central purchasing, administration services, and various insurance offerings. Gaining access to the DSO market is crucial. Earlier this year, we secured an agreement with a DSO called ADA, and we are actively working to engage with more DSOs, particularly their C-suite executives, as we have a strong value proposition that can significantly boost their revenues by increasing patient acceptance based on documented evidence. In summary, it's not just about closing the gap for us; it's more critical to focus on sustainable growth for our dental business in the U.S. as we move forward.

Unidentified Analyst, Analyst

Thank you for that answer. Moving on to CompuFlo, I haven't been fully updated, but I remember the initial strategy involving milestone and CompuFlo. As I recall, you hired 10 salespeople and planned to focus on the eastern side of the Mississippi River. I was surprised when you mentioned that the sales team was not making progress without the CPT code, and I wasn't even aware that CPT codes existed. Additionally, I was unaware that the relationship with CTI was not progressing.

Arjan Haverhals, CEO

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

Operator, Operator

I can hear you.

Arjan Haverhals, CEO

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

David Waldman, Investor Relations

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

Arjan Haverhals, CEO

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 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 optimize the product based on some customer feedback and also in parallel with that to conduct 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 have 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 leads, 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 reengage with CTI.

Operator, Operator

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.

Arjan Haverhals, CEO

Yes. Well, again, thank you for your time. As I've stated before, we remain positive about, and encouraged by 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 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.

Operator, Operator

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.