Milestone Scientific Inc. (AMEX:MLSS) Q4 2022 Earnings Call Transcript

Milestone Scientific Inc. (AMEX:MLSS) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Greetings. Welcome to the Milestone Scientific 2022 Year-end Financial Results and Business Update Conference Call. At this time, all participants have been placed on a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, David Waldman, Investor Relations. You may begin.

David Waldman: Thank you, Holly. Good morning and thank you for joining Milestone Scientific’s 2022 year-end financial results conference call. On the call with us today are Arjan Haverhals, Chief Executive Officer; and Peter Milligan, Chief Financial Officer of Milestone Scientific. The Company issued a press release today, March 31, containing 2022 year-end 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, (212) 671-1020. The Company’s management will now provide prepared remarks reviewing the financial and operational results for the year ended December 31, 2022. 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 the 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, 2022.

The forward-looking statements made during this call are based upon management’s reasonable belief as of today’s date, March 31, 2023. 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: Thank you, David, and thanks to everyone for joining us today. 2022 was an eventful year for the Company as we achieved a number of milestones related to the rollout of the CompuFlo Epidural System. Most importantly, we were successful in seeding the market across a number of key hospitals, health care systems and pain management clinics as well as key opinion leaders in the field of anesthesiology and pain management. The fact that our technology was adopted by these leading physicians and hospital systems reinforces our confidence in the market potential for our instrument, particularly within the labor and delivery and pain management markets, where we focused our initial efforts in 2022. More recently, we received 510(k) FDA clearance for use of the CompuFlo Epidural System in the thoracic region of the spine, including the cervical-thoracic junction, where the incident rates of morbidity are believed to be much higher than in the lumber spine region at 17% and 30%, respectively, due to the difficulties accessing the epidural space.

These widely acknowledged risk factors have helped drive adoption of our CompuFlo Epidural system within a number of prominent pain management clinics. The importance of the pain management market cannot be understated. The pain management market is believed to be at least twice the size of the labor and delivery market segment. And not only includes numerous hospitals, but also specialty centers, outpatient centers and sports medicine centers. Furthermore, we have experienced that the decision making time or sales cycle is much shorter in these private pain clinics compared to the labor and delivery department at hospitals. In other words, the recent FDA 510(k) approval increased our accessibility to the total addressable market for epidural analgesia.

Within just 2 weeks of receiving the thoracic clearance, we announced that we commenced sales of CompuFlo Epidural disposables across 3 pain management clinics in Colorado. Adoption of the technology by these clinics follows a successful evaluation process by Brad Sisson, MD, a recognized pain management doctor. Dr. Sisson initially conducted several cases using the CompuFlo Epidural instrument, in which he reported 100% success. The evaluation included procedures within the thoracic region of the spine. Similarly, Dr. Demesmin, an interventional pain medicine physician, has begun using our technology within his practice at University Pain and Spine Center following a similar successful evaluation. As a result, we commenced the sales of our CompuFlo Epidural disposables across the University Pain and Spine Center in Somerset, New Jersey, which operates in another 7 offices across New Jersey and New York.

We remain encouraged by the interest in our epidural instrument by anesthesiologists and pain management providers, especially for patients with complex anatomy and difficult cases that involve the thoracic and cervical-thoracic junction. The further evaluation of our technology by these physicians illustrates their commitment to incorporating the latest technologies to improve patient outcomes and safety. Another important milestone in 2022 was the issuance of a Category 3 CPT code, which became active on January 1 of this year. We believe this would potentially allow billing and payment pathways for health care personnel who choose to use our technology for coverage and discretionary payment by payers such as Medicare and Medicate, as well as commercial health plans.

This code will be a focus of ours in 2023 and is expected to play an important role, especially in private pain clinics, where administration or financial decision-making will be made easier, thereby potentially helping accelerate our commercial rollout. In addition, we were recently granted registration with the U.S. Government System for Award Management, also known as SAM, which is a key step in the overall governmental decision-making and payment process. The SAM registration is required for entities to bid on contracts and conduct business with the Department of Defense and the Department of Veterans Affairs, Indian Health Service and other government agencies. We are actively pursuing U.S. Federal Supply Service approval for the CompuFlo Epidural instrument, which, if granted, would provide uniform pricing and reimbursement across government agencies.

In addition to our direct sales channel, we are also expanding our network of distribution partners to assist in further adoption of CompuFlo Epidural System. We recently added a new international distributor in Greece and reengaged with our domestic partner Clinical Technology, Inc., a leading specialty distributor of medical products in the Midwest and East Coast regions of the U.S. Each of these distributors brings relationships within key global markets and proven track records, introducing medical devices within their territories. We look forward to announcing additional international distributors as we advance our commercial rollout. So to summarize, we are continuing our efforts to seed the market with our technology among key physicians, which we believe will ultimately translate into widespread adoption.

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. Turning now to our Dental segment. We made a number of key changes to our sales and marketing strategy this past year that we believe will enhance our long-term growth. In the United States, we launched a new online portal for U.S. dentists to order the STA single-tooth anesthesia system instruments and hand pieces. This new site went live on January 3, 2023. We ended the agreement with our prior distributor at the end of 2022. This change in U.S. distribution strategy resulted in lower fourth quarter 2022 sales, as the prior distributor wound down its operations and did not preorder hand pieces for the first quarter of 2023, as they did in the fourth quarter of 2021.

Despite the short-term impact, we expect our new direct online channel will provide us with a closer and direct relationship with our customers, which we believe will result in better follow-up and improved margins. In turn, we believe this strategy could result in an increase in dental sales at higher margins in the U.S. market in the coming quarters. Meanwhile, we continue to work closely with other channel partners for our STA instruments, 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 DSO. Offsetting the temporary weakness in domestic sales due to our transition to a direct sales model, we witnessed continuous growth in international sales, excluding China.

As part of our strategy to grow our Dental business, we have placed a major emphasis on entering new markets and expanding our penetration within existing international markets. Specifically, we have added new global distribution partners. For instance, we recently granted TEKMIKA Health Technologies, exclusive distribution rights to market milestones STA single-tooth anesthesia system in Brazil, one of the 3 largest world markets in dentistry. In fact, Brazil has a population of more than 200 million people with over 240,000 dentists. We also recently appointed Sweden and Martina as our exclusive distributor in Italy, France, Spain and Portugal. We believe that Sweden and Martina is an ideal partner given their deep penetration within these key European markets, which represent a combined population in excess of 180 million people.

We look forward to announcing additional international distribution agreements as we continue to build our network across Asia, Africa, South America and Europe. At the same time, we continue to carefully manage our expenses, while investing in sales, marketing and new product development along with analyzing new areas for our technology. So to summarize, we believe that through our new sales strategy, in combination with our increased marketing efforts, we aim to further grow the Dental business in the coming years. Our Dental business continues to generate positive cash flow on a stand-alone 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.

At this point, I’d like to turn the call over to Peter Milligan, Chief Financial Officer, to go over the financials in detail. Please go ahead, Peter.

Peter Milligan: Thank you, Arjan. Total revenue for the year ended December 31, 2022, was $8.8 million versus $10.3 million for the same period last year. Dental revenue decreased by $1.4 million due to lower revenue from China of $1.4 million and a decrease in domestic revenue of $278,000, of which $179,000 related to an allowance for sales returns due to the termination of the U.S. distributor agreement. Medical revenue for the 12 months ended December 31, 2022, was approximately $53,000 versus $152,000 for the prior year, which was primarily the result of changes to the Company’s near-term commercial strategy. Gross profit for the year was $4.9 million or 56% of revenue versus $6.3 million or 61% for the prior year. The year-over-year decline in gross profit was driven by lower revenue and the impact of an approximate $400,000 noncash inventory reserve related to medical products.

Operating loss for the year was approximately $8.8 million versus $7.4 million for the prior year and then a loss to common shareholders was $8.7 million or $0.12 a share versus a $6.8 million or $0.10 a share for the comparable period in ’21. Now I’d like to turn your attention to liquidity and capital resources. We continue to carefully manage expenses and have maintained a solid balance sheet. Company had approximately $8.7 million at the end of 2022. Current assets were $13.7 million and working capital was nearly $10 million. At this point, I’d like to turn the call back over to Arjan.

Arjan Haverhals: Thank you, Peter. As Peter mentioned, we continue to maintain a strong balance sheet with approximately $8.7 million of cash and cash equivalents as of December 31, 2022, which provides us substantial resources and the ability to accelerate our sales and marketing activities around both our dental and medical instruments. Through our new sales strategy and our enhanced marketing efforts around the STA single-tooth anesthesia instrument, we believe this will increase our market penetration as we focus on the significant value drivers of our instruments including safety, efficiency and importantly, supporting the growth of dental practices. We believe we have developed an efficient and scalable platform to help drive our dental instruments and hand pieces sales in the coming years.

In addition, 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. In summary, we are gaining momentum, building upon the early success of our initiatives. And given the recent developments, including the addition of new hospitals and pain management clinics, expanded distribution and our streamlined operating structure, we believe the future is bright. We are excited about the recent 510(k) FDA clearance for use of the CompuFlo Epidural system in the thoracic region of the spine, including the cervical-thoracic junction. And finally, we look forward to continuing our efforts regarding the implantation of the CPT code, which will support planned initiatives on the reimbursement front.

We also look forward to advancing a number of key initiatives following SAM approval and leading up to potential federal supply system approval, which would open up the sizable government market. We remain committed to drive shareholder value and look forward to providing further updates as developments unfold. I’d like to thank you for joining the call today. And at this point, we would like to open the call up to questions. Operator?

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Q&A Session

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

Anthony Vendetti: Arjan, I was wondering if you could talk a little bit about the transition away from your previous dental product distributor towards an online platform. If you could just — I know that impacted sales in the fourth quarter. Can you talk about the uptake that you’re seeing or the traffic numbers that you’re seeing in terms of your on-site sale? And do you feel like that transition is complete? All the customers are aware of it? Or do you think it will continue to play out over the next couple of quarters?

Arjan Haverhals: Anthony, thank you for your question. I would be delighted to shine some more light on the situation. As we reported, historically, we all know that the agreement with our prior distributor automatically ended by the end of last year. And then the Company, of course, has several opportunities, as we all know, we have a pool of smaller distributors or you do a hybrid or you decide to go direct. And we took the decision to go direct for the very simple reason. And the simple reason being that the in-market price, so let’s say, if we sell our products at a transfer price to a distributor compared to the in-market price, the price would almost double thereby also our margins would significantly increase to different levels than historically within the Company.

Now, was there a risk in that operation? Absolutely. But I made the decision or we made the decision that there was no other opportunity. And in particular, for the midterm and the long term, there was so much upside potential that we decided to launch the portal. So that activity already and that preparation took place during the mid of the third quarter last year, fourth quarter last year to be prepared for the official launch of the portal in the beginning of this year. Now, the challenge, as you say is, of course, how do you reach out to the entire dentistry population in the United States. I don’t know if everybody has seen that. But I would say, we did not overload the market, but we made sure that the dental population was targeted and received as a minimum the information that we went with our portal and that they could order the products online over our portal.

And that brings me to the second question or the second part of your question, how the pickup has been and how the take-up has been. Again, without going into detail, I can assure you that I am pleased with the development of the portal in the first quarter. And to shine a little bit more light on that, not only am I pleased but I’m also convinced this has been the right decision for the Company moving forward, which I believe that in part of — or despite of the, let’s say, the lower results in the fourth quarter, that we will gain and enjoy increasing revenues and higher margins in the next coming quarters. I’m very pleased with the development that we have seen as a direct result of the portal. And also, I would say, of the number of customers that we have been able to serve.

And in addition, there’s a lot of marketing — market intelligence coming our way of which we can benefit from. And also drive upselling through our portal and the people internally that provide excellent customer service and support, thereby growing the business further. Does that answer your question, Anthony?

Anthony Vendetti: Yes, Arjan. And then — maybe as we shift to the medical side, you’ve had a couple of recent events, including the 510(k) clearance for the CompuFlo Epidural System in the thoracic region, including the cervical-thoracic junction, which obviously, there’s — one of the areas where there’s increased rates of morbidity, and we all know the lumbar spine is a big area. Can you talk about the opportunity now because you’ve mentioned that it’s much easier to get into the pain management clinics much shorter sales cycle. Where you — how you see that opportunity playing out over 2023? Because now you also have a Category 3 CPT code. Do you feel like your 2023 is well set up now to really develop the medical side of the business?

Arjan Haverhals: Yes. Thanks for the question, Anthony. Personally, I believe, without sounding arrogant or bullish, but I do believe that the Company has now better tools in the toolbox, so to say, compared to 1, 2 years ago. And the main reason is the following. Of course, for good reasons, the Company entered the labor and delivery market segment. We all know that the decision-making process within the L&D department is much longer. It’s 6 to 9 months without, let’s say, the larger hospitals where it can even be longer. And remind ourselves that 1 year ago, we made an attempt to go in the price of pain clinics. I personally visited a number of that. And I challenged the organization to reapply or resubmit for a CPT code. And in addition to that, we made the decision to submit an FDA file to — the 510(k) file to the FDA for the cervical-thoracic indication.

Now beautifully, all these elements came together by the end of last year and the beginning of this year. And let me explain what I mean by that. First of all, we had success with price at pain clinics. Some of them decided to use our technology because of allergic reactions to fluoroscopy and contrast media dye. Some of them used our technology in complicated cases for spinal cord stimulators. But we all knew that being successful or having an opportunity to be successful within the private pain clinics, you need to have access to a reimbursement code, right? Now what I’ve always have said is the reimbursement code is a journey. We have a temporary code. We work with professionals that have a lot of know-how within that whole reimbursement environment.

And as a result of the 510(k) approval, we also were able to get the official approval of using our system within the thoracic-cervical spine. I can share with you that since that announcement, there are a number of hospitals that not only we have contacted, but also have contacted us. Because to your point, the unique selling proposition of our technology within the cervical-thoracic spine is much better understood and higher than in the lumber. Because of the mobility rates in lumbar being 5%, in the thoracic being 17% and in the cervical spine being 30%. But in addition, the CPT code, our code, our temporary code, what we should not forget is it is an additional code to existing codes, including cervical and thoracic. So for example, the 2 clinics that we announced, they have used our technology in the thoracic spine and the cervical spine.

And as we speak, they have submitted the paper work also to their local insurance providers, which is a mix of Medicare and private health care insurance providers. And now we wait for feedback of the insurance providers, whether they accept it or whether they deny it, and then we help the clinicians through a service network to have these discussions with the health insurance providers. It’s of most important to understand the following. We, as a company, and our management team is in no way entitled or allowed to give direct recommendation to the clinician, what the price of the reimbursement would be or having direct relationship and communications with the healthcare insurance providers. So during the fourth quarter, the third and the fourth quarter of last year, we have prepared exactly what we are currently doing right now.

Now to your last part of your question, do I believe that, that will have an impact on the medical revenue? Potentially, yes, it will have an impact on the medical revenue. It remains to be seen what the magnitude will be on the revenues that we have projected internally. So in parallel, just going one step further, it is a combination of both the FDA approval, as well as also the potential of access to our federal supply services or the governmental business. I’m not saying that we are only focusing on the governmental side. Every time we have to do our work and we have to execute on the plans that we have provided. But I do believe that — and that’s the goal and the aim of management of this company, that we should see results of the pathway that we have chosen and of the initiatives that we have undertaken.