Earnings Call Transcript - MLSS Q3 2022

Operator, Operator

Good day ladies and gentlemen and welcome to the Milestone Scientific’s Third Quarter 2022 Business Update Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host David Waldman, Investor Relations. Sir, the floor is yours.

David Waldman, Investor Relations

Good morning, and thank you for joining Milestone Scientific's third quarter 2022 financial results conference call. The company issued a press release this morning containing third 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. On the call with us today are Arjan Haverhals, Chief Executive Officer, who will provide an overview of the financial results and recent developments for the third quarter ended September 30, 2022. Due to personal reasons, Keisha Harcum, Controller of Milestone Scientific is unable to join the call today. So, Mr. Haverhals will also be covering the detailed financial discussion. 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 for the year ended December 31, 2021, the Milestone’s report on Form 10-Q for the third quarter ended September 30, 2022. The forward-looking statements made during this call are based upon management's reasonable beliefs as of today's date, November 15, 2022. 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 Arjan Haverhals, Chief Executive Officer. Please go ahead, Arjan.

Arjan Haverhals, CEO

Thank you, David, and thanks to everyone for joining us today. I'm pleased to report we are back on the solid growth trajectory in the third quarter with sequential sales growth of 34.4% over the second quarter of 2022. In addition, our revenue for the third quarter of 2022 increased 28.6% over the same period last year without the benefit of sales to China. As we discussed last quarter, our dental segment faced temporary challenges in the second quarter of this year, due in part to the challenging situation in China and the Russia-Ukraine war. We believe we have, in large part, overcome these challenges as illustrated by the fact we achieved both sequential and year-over-year revenue growth for the third quarter of 2022. The growth in revenue on both the domestic and international fronts reflects our successful decentralized multi-channel sales strategy. Importantly, we continue to add third-party dental distributors in international markets, which we believe will help further accelerate our growth. We look forward to announcing additional international distribution agreements as we continue to build our network across Asia, Africa, South America, and Europe. In the United States, we are working to bring on new strategic distribution and channel partners that sell through their respective networks of dental customers, especially in specialized areas of dentistry such as implant dentistry and aesthetics, as well as large dental service organizations or DSOs. DSOs play an increasingly important role within the domestic dental market. The current DSO market penetration of approximately 30% to 32% is expected to grow to 75% to 80% over the next 10 years. So to summarize, within our dental business, 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 due to the recurring nature and high margins on our disposables. Overall, our dental business remains strong. We are encouraged by the increased interest in our dental instruments and expect our momentum to continue. Turning to our Medical segment, we continued to advance our commercial efforts around the CompuFlo Epidural System and the CathCheck Verification System. As a result of our focused sales and marketing activities, we have trialed our CompuFlo Epidural System in key hospitals' healthcare systems and pain management clinics. As an example, in August, we announced the adoption of the CompuFlo Epidural System and its CathCheck capability at the University of Health, a leading academic health system based in Louisville, Kentucky. We are introducing CompuFlo across three distinct departments: labor and delivery, acute pain, and in the operating room. UofL Health owns and operates six hospitals and four medical centers, providing patient care to more than 1.5 million patients each year in the state of Kentucky. This is another important validation by a leading medical institution as we execute our strategy to become the new standard of care. With each health system we sign, we benefit not only from the sales but also growing validation within the market. As part of our sales strategy, we are targeting several tier one university teaching hospitals. Some of these hospitals are among the top 20 in the nation. We believe that as we begin to penetrate some of these larger, more recognized names, it will add greater credibility and reduce the sales cycle with smaller institutions. Our sales pipeline is solid and we are advancing discussions with a number of hospitals and healthcare institutions. We will provide further updates as soon as we commence formal commercial sales with these respective institutions. We also continue to introduce our CompuFlo Epidural System, targeting the pain management market, which not only includes hospitals but also specialty centers, outpatient centers, and sports medicine centers. With over 11 million reported Epidural procedures each year, the pain market segment is more than twice the size of the labor and delivery market segments. Importantly, we recently announced the issuance of a CPT Code from the American Medical Association. This code goes into effect on January 1, 2023. The code will allow billing and payment pathways for healthcare personnel who choose to use our technology for coverage and discretionary payment by payers such as Medicare and Medicaid, as well as commercial health plans. Specifically, we believe that reimbursement will accelerate our commercial rollout by aiding in the financial decision process within, in particular, private pain clinics. We are actively preparing our reimbursement plan to take advantage of this new AMA cleared CPT code that will be implemented in the first quarter of 2023. In addition to our direct sales channels, we are also expanding our network of distribution partners. On the heels of receiving the CPT code, in August, we announced our partnership with CTI, a leading specialty distributor of medical products in the Midwest and East Coast regions of the United States. We believe 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 healthcare, having a successful track record, launching new medical devices and equipment. We look forward to announcing additional international distributors as we advance our commercial rollout. We have also invested heavily in our marketing initiatives to build brand awareness for the CompuFlo Epidural and CathCheck system and provide our sales representatives with the tools to be much more effective, including training videos, corporate brand videos, education, literature, digital marketing materials, and more. We continue to believe the Medical segment represents a large addressable market, driven not only by cost and convenience for the provider but also by safety considerations and cost savings. These factors, coupled with the recent issuance of a CPT code, will ultimately lead to the CompuFlo becoming the standard of care. Let me now take a moment to discuss some important financial initiatives we have undertaken. As announced last quarter, we continue to reallocate additional resources towards our medical segment, which we believe represents the future of the company. While increasing our focus on DSO and third party avenues of distribution in the dental segment, we have reduced a number of operating expenses and certain corporate overhead in the third quarter, which is evident in the reduction in our burn rate. We expect to see the continued benefits of these cost reductions in the coming quarters, which should help drive us towards improved performance as we continue to grow revenue. Combined with our disposables, which provide high margin recurring revenue, we believe we are well-positioned to drive significant shareholder value for years to come. We ended the quarter with approximately $9.8 million of cash on hand and no long-term debt, which provides us sufficient capital to continue executing our business strategy, including accelerating market activities around both our dental and medical instruments. Given our strong cash position, we are also planning to launch new instruments and are pursuing new indications. So, to summarize, we have positioned our company for positive growth in the coming quarters. We remain confident in the market potential of the CompuFlo Epidural system, which we believe will transform the industry, and ultimately become the standard of care for Epidural procedures and labor and delivery, as well as pain management by providing patients with effective pain relief while reducing the significant risk of complications with the associated costs. Importantly, we have begun seeding the market with our CompuFlo Epidural Instrument within a number of key hospitals, medical centers, and pain management clinics in the United States and Europe, and believe the issuance of the CPT along with other steps we are undertaking will contribute to our long-term success. At this point, I'd like to provide a quick financial recap of our financial results for the three months. For a more detailed discussion, including our nine-month results, please refer to our Form 10-Q, which has been filed with the Securities and Exchange Commission. Total consolidated revenue for the three months ended September 30, 2022, was approximately 2.2 million versus 2.1 million for the same period last year. Dental revenue increased approximately 130,000 as we expanded the partnership with new domestic and global distributors. Dental domestic revenue increased approximately $88,000, and dental international revenue excluding the Chinese market increased approximately $403,000, compared to September 30, 2021. The company recorded no revenue from China in the third quarter of 2022 as compared to approximately $360,000 for the third quarter of 2021. Medical revenue decreased approximately $23,000. Consolidated gross profit for the three months ended September 30, 2022, increased to approximately $1.5 million versus $1.4 million for the third quarter of 2021. Consolidated selling, general, and administrative expenses for the three months ended September 30, 2022, and 2021 were approximately $3.3 million and $3 million, respectively. The increase of approximately $315,000 was a result of the increase in warehousing, quality control, and professional fees for regulatory and other services. At the same time, we reduced employee salaries and related expenses, as well as certain marketing and other expenses, which also decreased during the period. As I mentioned earlier, we have increased our focus in dental and third party distributors and reallocated additional resources towards our medical segments. Consolidated research and development expenses for the three months ended September 30, 2022, and 2021 were approximately $166,000 and $356,000, respectively. The decrease of approximately $190,000 is related to the delay of certain enhancements to the STA Single Tooth Anesthesia System. The loss from operations was approximately 2 million for the three months ending September 30, 2022 and 2021, respectively. The net loss was approximately $2 million or $0.03 per share for the three months ending September 30, 2022 and 2021, respectively. On September 30, 2022, Milestone Scientific had cash and cash equivalents of approximately $9.8 million and working capital of approximately $10.8 million versus working capital of $15.8 million on December 31, 2021. For the nine months ended September 30, 2022 and 2021, we had cash flows used in operating activities of approximately 4.9 million and 3.6 million, respectively. So, 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. Within our dental segment, we are back on a solid growth trajectory with sequential sales growth of 34.4% in the third quarter, compared to the second quarter of 2022. Year over year, revenue for the third quarter of 2022 increased 28.6% over the same period last year, excluding sales to China. As you can see, we continue to grow our dental segment and believe this business will 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 have built a solid sales pipeline, added hospitals, expanded our list of distribution partners, and look forward to the formal implementation of the new CPT code, which will support planned initiatives on the reimbursement front. At the same time, we continue to streamline our operating structure and remain committed to driving shareholder value. We are encouraged by the outlook of the business 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 up to questions.

Operator, Operator

Your first question for today is coming from Anthony Vendetti at Maxim Group.

Anthony Vendetti, Analyst

Thank you. Thank you, Arjan. I just wanted to talk a little bit more. I think it's a major deal to have a CPT code for the Epidural that goes into effect January 3. So, right around the corner here, can you tell us what the actual code is, is it a temporary code that's good for five years and what the reimbursement amount is going to be at this point?

Arjan Haverhals, CEO

Thank you for your question, Anthony, and good morning. So, the reimbursement code is defined as a pressure sensing guiding system during Epidural analgesia. So, what I'm always explaining is that we have been granted a technology code, which is then called a Category III code, which is a temporary code. And to your point, yes, the trajectory is normally one to five years to make that from a Category III code, a Category I code. The beauty is that the healthcare personnel and providers that want to use our technology can apply for billing and coding based on their cost structure with their local insurance company, including Medicare and Medicaid, as well as private insurance companies. What we are doing is working with a number of clinicians to provide them with all the information necessary to submit to their local insurance company. For example, we prepare the needed paperwork like a letter of medical necessity and justification because as it is a new technology, clinicians need to explain to the insurance companies the benefits of this technology compared to existing technologies and also why it is essential to use our technology. Now, regarding the pricing. The clinicians will decide on the pricing during their discussions with the health insurance companies, but we can provide guidance on the paperwork. Our goal is for them to receive reimbursement for the cost of the consumables, plus something extra that still needs to be defined. For instance, if you look at the current reimbursement policies, Medicare in the New Jersey area for a private pain clinic reimburses $304 for an Epidural procedure. Additionally, if the clinician uses fluoroscopy in that procedure, there’s an extra reimbursement of $150. Our goal is to position ourselves between that $150 and $300, so the private pain clinics or clinicians can have additional opportunities to receive reimbursement and submit our documentation to the insurance company, ultimately enabling them to generate more revenue. It is important for everyone to understand that in today's healthcare environment, simply having a more efficient or safer technology is not sufficient for market adoption, as clinicians need to see financial benefits as well. So that is the landscape where the CPT code and reimbursement come into play. We are prepping all the necessary paperwork and documentation. For example, we will also establish a hotline for clinicians to assist them when they submit documentation to healthcare insurance providers, as they will receive either acceptance or denial. We can’t negotiate directly with the insurance company regarding that, but we can provide support to clinicians in crafting strong arguments to address denial or acceptance of submitted reimbursement claims. It is a complex but promising area for the company moving forward. Does that answer your question, Anthony?

Anthony Vendetti, Analyst

Yes, Arjan. No, that's great. It sounds like you're doing everything from your end, providing the paperwork as well as the hotline for providers as they go through, because it's a new process for them with your particular device. So, helping them to make sure that they get properly reimbursed makes a lot of sense. In terms of now negotiations with customers, has that sort of paved the way or made it easier at least, I know it's early, but at least from initial conversations, has it made it easier to sell the CompuFlo system now that there's a code right around the corner here?

Arjan Haverhals, CEO

Thank you for your question. Yes, I have been actively engaging in the field as I typically do, enjoying several meetings over the weekends. Recently, I attended the American Society of Anesthesiology, and about ten days ago, there was a meeting with the New York, New Jersey chapter of the American Society of Interventional Pain Physicians. I can share that we announced the temporary code, which I previously mentioned, and it is indeed opening doors that are usually closed. Clinicians and the industry are impressed that a smaller entity like ours has been granted this temporary code. This opens up numerous opportunities with ambulatory surgical centers and private pain clinics, which are eager and enthusiastic to establish a reimbursable fee for this technology within their practices. It's definitely a win-win for both the company and the clinicians, but most importantly, for patients, as we aim to enhance their quality of life.

Anthony Vendetti, Analyst

No, I agree. I mean, it should become the standard of care. Just lastly, you said you have enough cash to explore new products and applications. I know we've discussed in the past, I was wondering if you can remind us which applications might be at the forefront now, which ones are you starting to contemplate pursuing at this point?

Arjan Haverhals, CEO

Yes, the applications there, as I’ve explained several times, are numerous. As we speak, we receive requests from other companies to explore different areas. We have been granted a patent for peripheral nerve block in Europe and recently, a patent in the U.S. for peripheral nerve block. Therefore, peripheral nerve block is high on our radar. We have also obtained a cosmetic patent for botulinum toxin in cosmetic medicine applications. We are looking into interarticular applications as well. The opportunities are numerous here. I believe it could be interesting to discuss potential cooperation partners, although we have not yet identified any. Developing new technology within certain indication areas is one aspect, but we also need to ensure that we have the means to sell the products that emerge from the research and development pipeline effectively and to capitalize on revenue generation. For the near term, we are focusing on enhancements of the STA dental instrument. We have not initiated any major R&D projects in the medical area yet. As I mentioned earlier, we are still assessing and prioritizing several opportunities. I want to remind everyone joining this call that we remain a smaller-sized company where each employee wears multiple hats. I always encourage my team to execute on what we can manage effectively rather than overcommitting to too many projects at once.

Anthony Vendetti, Analyst

Okay. Thank you for all that color. Arjan, I'll hop back in the queue.

Arjan Haverhals, CEO

Thank you. Thank you, Anthony.

Operator, Operator

Your next question is coming from John Korb, a Private Investor.

Unidentified Analyst, Analyst

Hello.

Arjan Haverhals, CEO

Good morning, John.

Unidentified Analyst, Analyst

Good morning, Arjan. How are you?

Arjan Haverhals, CEO

I'm doing well.

Unidentified Analyst, Analyst

Good. I wonder if you could help me understand where milestone is as a company and how this rollout might have changed and how your expectations in the beginning were maybe not correct because you went from 10 salesmen to 5. I'm not sure if you even have the 5. What happened there and how has your view going forward changed from the original time when you started out with that sales force of 10 and then it kind of dragged on and on and then you cut back to marshal your resources and save costs? And where are we now? I have a bunch of questions and I don't want to jumble them all up, but help me understand, let's say you go into the university or the system at Louisville, introduce it. Then what happens? Does it just sit in the hands of one person? Are they actually using this CompuFlo system or where does that go when a hospital accepts your technology? Do they say, we can't do anything until we get the code? Help me understand where we are with all that, please.

Arjan Haverhals, CEO

Absolutely. Thank you for your question, John. To address your first point, you're correct that my initial vision was to build up a direct sales force with 10 people. At one point, we had 11 in total. As I announced in the prior quarter, we released some of those team members. It was not solely due to cost measures but also related to performance issues. We were taking too much time, and some individuals did not possess the right attitude or skill set for direct sales. What’s important to note is that at that time, we had successfully partnered with CTI, which has a presence in 22 states and about 32 sales representatives. We trained their entire organization, so instead of having 10 direct sales reps in our organization, I now have four, coupled with over 30 representatives from CTI. This strengthens our ability to penetrate the marketplace while also positively impacting our cost structure. Regarding your second question, concerning the University of Louisville in Kentucky, the process involves the approval of our system for use. We had to attend meetings and undergo a vetting process. They placed an initial high-volume order for 200 consumables in August after getting trained and approved. The hospital has commenced the procedure, and during the first 2.5 weeks, they conducted about 30 cases. Typically, hospitals use new technology in complicated cases, especially with patients that have high BMI or other challenges. Over time, they will ramp up usage as part of their daily clinical routine. Our sales team steps in to ensure adequate product supply and continued demand every time a patient requires a procedure. It’s not a sudden transition to complete clinical department utilization; rather, there are typically 10 to 15 anesthesiologists, with two to four champions advocating for the technology. The University of Louisville is now using our product in the operating room during labor and delivery, and I believe this signifies enormous potential for our future purchase orders.

Unidentified Analyst, Analyst

It does. Thank you. I have an additional question. You've used the word, and I believe this is how it might play out. You've used the word snowballing, that to get it started in various places is the most difficult and then it might snowball because new prospects are told, while Louisville is using it, and others are using it, contact them and find out how they like it. And then the sales are easier, and they're beginning to grow in a hockey stick effect. Is that still what you're looking for?

Arjan Haverhals, CEO

Yes, but let me explain it in more detail. I absolutely believe in the snowballing effect or the domino effect when we get institutions like Louisville or others supporting and utilizing our products. However, we must consider the lengthy decision-making process inherent in these hospitals. For instance, in Texas, it took nine weeks just for us to register to conduct a trial. I do believe in this snowball effect, and as we secure more institutions that validate and use our products, we can expect it to accelerate. However, what's even more important is that we now have a second and third avenue for growth with the introduction of the CPT code alongside the advancements in the pain market segment. This development provides an essential driver for growth moving forward. With the CPT code, decision-making does not take six to nine months. In a private pain clinic, the owner can make a decision immediately without lengthy committee evaluations. This also presents a strong financial incentive for the clinic to adopt our technology. Over the past year, we have evolved from relying largely on labor and delivery hospital markets with long cycles to being positioned better to seizing many market opportunities concurrently. I anticipate that all these factors will culminate in enhanced medical revenues in the coming year.

Unidentified Analyst, Analyst

So, then if I understand you correctly, the immediate hope and trust of Milestone is to work with pain clinics, getting that going to a great degree and the Epidural and hospitals might take a little longer. Do I understand you correctly?

Arjan Haverhals, CEO

Yes, but don't forget that we have already been in these hospitals, so we will continue working with them as well. We are trialing and evaluating products with several hospitals currently. I’m not suggesting we are abandoning the labor and delivery aspect; not at all. My point is that we are taking both paths concurrently, and both are significant in our strategy. However, the private pain clinics offer a more rapid decision-making process, which could yield faster results than the hospital labor and delivery pathway. At the same time, we will continue pursuing opportunities in hospitals and their corresponding pain management departments and operating rooms. The internal processes differ between these two entities, but both paths are equally important to us.

Unidentified Analyst, Analyst

Okay. I guess I understand a little better. I must say, I'm a little disappointed in the length of time the rollout has taken, and maybe you are too. I'm not sure. But as a firm believer in this product, I expect the embracing of this new technology to be at a faster track. Are we on the threshold, maybe of that in the coming year or so, or is it still going to be more of a drawn-out process? How do you envision it?

Arjan Haverhals, CEO

I think we are in a good position, and better positioned than I was allowed to say a couple of years ago, given the opportunities and initiatives we have in place now compared to last year. We should not forget that we have submitted an FDA application for widening our indications, not just focusing on lumbar but also thoracic and cervical spines. Of course, we cannot control how quickly the FDA will respond, but securing those indications is essential since the mobility rates are significantly higher in the thoracic and cervical regions than in the lumbar spine. You mentioned disappointment in our rollout taking time. Personally, I am pleased with our achievements, especially when compared to where we stood last year.

Operator, Operator

There are no further questions in queue. I would like to turn the floor back to Mr. Haverhals for any closing remarks.

Arjan Haverhals, CEO

Yes. Well, thank you very much for your time, and I enjoyed the questions and the sessions. Please do not hesitate to contact me personally if you have additional questions. I believe we are in a good position to continue creating shareholder value in the coming months and years. I wish you a very good Tuesday. Please stay safe, and I'm sure we will meet again and talk to you soon. All the best. Bye-bye.

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.