Milestone Scientific Inc (MLSS) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Milestone Scientific Inc. Q1 2010 results conference call. (Operator Instructions). I would like to remind everyone this conference call is being recorded today, Thursday, May 13, 2010 at 4.15 PM Eastern time.

I will now turn the conference over to Dodi Handy. Please go ahead.

Thank you, Matt. And good afternoon. I too would like to thank everyone for joining our call today. It is my pleasure to welcome you to Milestone Scientific's quarterly conference call. Among other discussion items of interest, today our management team will be reviewing the financial and operational results for the three months ended March 31, 2010.

As the operator noted, my name is Dodi Handy, and I am President and CEO of Elite Financial Communications Group. Elite has the privilege of managing Milestone's investor and media relations.

Once I cover the Safe Harbor statement I am going to then read a formal statement prepared by Milestone's Chief Executive Officer, Leonard Osser. Len is currently traveling on business in China and was unable to join us today. Nonetheless, he wanted to share a few thoughts with you. After reading Len's statement I will then turn the floor over to Milestone's Chief Financial Officer, Joseph D'Agostino. And Joseph will be summarizing the first-quarter financial results for you. Then Milestone's Chairman of the Board, Ms. Leslie Bernhard, will make some final comments before we open the floor for some questions.

Allow me to remind you 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 the Company's 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 annual report on Form 10-K for the year ended December 31, 2009 and its quarterly report on Form 10-Q covering the period ended March 31, 2010.

The forward-looking statements made during this call are based upon management's reasonable beliefs as of today's date, May 13, 2010. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Now before I introduce Joseph, who will be commenting on the financial results, Mr. Osser has asked that I read the following statement to you in his absence. Here we go.

Ladies and gentlemen, thank you so much for taking the time to join our quarterly call and for your continued support of Milestone. I am not able to be on today's call due to the fact that I am currently traveling through China. My mission on this trip is to help progress our joint venture discussions with our Chinese partners regarding the development and subsequent commercialization of the CompuFlo-based devices for epidural delivery and intra-articular injections.

As I have noted on past calls, this joint venture represents a mission-critical objective for Milestone, and one that is expected to propel our product expansion efforts in the global medical arena. I am hopeful that we will be able to bring the JV negotiations to conclusion in the very near term, so we can then focus on moving this exciting development project forward.

Then continuing Len says, while in China I will also be meeting with officials at China National Medicines to gain greater perspective on the timing for receiving government regulatory approval for our STA System. Once this required approval is received, we expect to commence shipping instruments to China immediately, pursuant to terms and conditions of the 12,000 unit blanket purchase order received late last year.

Moreover, in anticipation of receiving this approval, our China partners have been actively engaged in conducting ongoing STA training at dental schools throughout China, helping to set the stage for a successful product launch and rapid market adoption.

With millions of dollars in new annual revenue for Milestone at stake, you can bet that we are pulling out all the stops to help ensure that the regulatory review process advances without any unnecessary delay.

I would also like to use the opportunity on today's call to formally welcome Dale Johnson to the Milestone management team. Dale, who joined Milestone to manage and expand our European distribution network, is already hard at work meeting with both existing and potential new distributors in the European Union.

There is a prevailing opportunity for Milestone to materially improve market penetration in this region of the world, thus helping to promote even greater STA unit and returning handpiece sales for our Company as we move forward.

We were very impressed by Dale and his track record of success when we first met him, and have confidence in his ability to make a pronounced impact on Milestone's future growth in the international dental markets.

Before I conclude I would like to note that we are very proud of our profitable first-quarter results, which reflect the first net profit from our business operations that we have achieved since the first quarter of 1998. It goes without saying that our year is off to a fantastic start, and we are looking forward to a good year. Moreover, once we begin shipping STA Systems to China following regulatory approval then our growth prospects for the year will only get stronger.

Looking ahead you can count on the fact that our attention will remain on optimizing Milestone's tactical approach to driving greater global product sales of the STA and recurring sales of the related disposable handpiece. And we will continue pursuing strategic collaborations to jointly develop new medical applications that leverage our valuable and growing body of intellectual property.

Thank you again for your continued support. I look forward to joining you all on our next quarterly call in August.

Okay, that completes Leonard's prepared remarks. Now I would like to introduce Joseph D'Agostino, Milestone's Chief Financial Officer.

Thank you, Dodi. And good afternoon to all of you who have joined our call today. I would like to start by confirming that we filed our Form 10-Q for the three months ended August 31 with the SEC yesterday afternoon, and we issued a related press release shortly before the market opened this morning.

Milestone's SEC filings, including the 10-Qs and 10-Ks, include a detailed analysis of our financial condition and operation, and generally are informative documents, so I encourage you to thoroughly review them.

I'm very pleased to report that during the first three months of 2010 Milestone achieved positive cash flow, generating $248,000 from operating activities. This compared to using $200,000 in our operating activities during the same period in 2008.

As of March 31, 2010 our cash and accounts receivable totaled $2.15 million. Working capital was $1.94 million, and our total shareholder's equity was $2.92 million.

Now turning our attention to our Statement of Operations revenues for the first three months ended March 31, 2010, totaled $2.56 million, a 15% increase over revenues of $2.2 million in the prior year's first quarter.

When reviewing our revenue performance geographically, sales in the international markets we currently serve represented 52% of our total sales in the first quarter of 2010, which compared to 33% in the first quarter of 2009.

More specifically, international sales rose 85% to $1.34 million from $726,000 last year. This notable increase is largely attributable to the $0.5 million order for STA disposable handpieces shipped to China National Medicines earlier this quarter. I will remind you that these handpieces are being used for training dental practitioners and dental students in China, related to the initial STA Systems ordered by China National Medicines last summer.

As Leonard noted in his prepared statement, once we receive regulatory approval from the Chinese authorities to begin actively marketing and selling the STA in China, we expect to begin shipments of STA units immediately, and anticipate receiving additional handpiece orders to support those units.

On the domestic front US sales decreased 19% to $1.2 million in the first quarter of 2010, which compared to $1.48 million in the same three months in 2009. STA unit sales in the US dental market continued to be somewhat choppy due to the nature of the market. Nonetheless, internal efforts to support and promote sales growth from our domestic distribution network continue. And we are being systematically enhanced through the deployment of our national detail team of dental hygienists.

When breaking our revenue results down by product category, we saw comparable quarter-over-quarter sales of our disposable handpieces rise 39% to $1.94 million from $1.40 million. As I noted earlier, this increase is due primarily to the shipment of handpieces to China in the first quarter of this year. Overall sales of instruments declined 24% to $600,000 from $792,000 on a quarter-over-quarter basis.

Moving on, our gross profit margin greatly improved, increasing to 65% for the three months ended March 31 of this year compared to 58% last year. The increase is largely attributable to the volume of handpiece sales that provide a higher gross margin than our instrument sales.

Milestone's total operating expenses declined 9.3% to $1.63 million from $1.8 million. Digging a bit deeper the SG&A expenses for the three months ended this year totaled $1.54 million, down 10.8% from $1.73 million in the comparable three months in 2009. This decrease was offset by a modest increase in research and development costs, which totaled approximately $88,500 in the first quarter of this year compared to $67,600 in the prior year.

Due to higher revenues, the improvement in gross profits, and the reduction of operating expenses Milestone reported net income from operations of $32,000 for the first three months of this year, which compared to a loss from operations of $562,000 in the previous year. This reversal of losses is a major accomplishment for our Company, and one not seen by us in more than a decade.

Moreover, after factoring interest income and expenses and other income of approximately $62,000 from the balance of a sale of tax credits pursuant to the 2008 New Jersey Technology Business Tax Certificate Program, net income for the current three months reporting period was $84,000 or $0.01 per basic and diluted share compared to a net loss of $562,000 for the same period in 2009 or $0.05 per basic and diluted share.

As Leonard noted in his prepared comments, this was the first time in 12 years that Milestone has seen a return to net profitability in our day-to-day business operations. We are very pleased by this accomplishment, and believe that this is a sign of greater things to come for our Company.

That now concludes my summary of our profitable first-quarter financial results. If you have any questions relating to the numbers, please feel free to ask me during the question-and-answer period that will follow Leslie's comments.

So with that, I would like to turn the floor over to Leslie Bernhard, Milestone's Chairman of the Board.

I would like to use my time on today's call to discuss the ways and means that Milestone is endeavoring to build our business, scale our product offerings, and allocate more financial and human resources to those areas around the globe that offer the most promise for profitable growth.

The prevailing opportunities for Milestone to help redefine the standard of care for medical and dental injections is both real and inspiring. This is why despite the global economic and reformative challenges that continue to impact our industry and the world at large, I am optimistic about Milestone's prospects to help lead the new era of healthcare delivery.

Underneath the surface turmoil this moment presents a rich, transformational opportunity for our Company, and one we are working very hard to capitalize on.

On the dental side of our business long-term sustainable growth and enduring profitability will come first from getting the STA System into the hands of the dentists themselves, and then benefiting from the reordering of disposable handpieces.

As you know, we are accomplishing this objective through ongoing branding and educational initiatives that have included participation in trade shows, advertising in trade publications, and supporting the sales and marketing teams of our distributors.

As we move forward, we will be complimenting this promotional activity through the adoption of social media and networking tools, the production of instructional videos, and the building of an internal detail force comprised of dental hygienists capable of providing hands-on training in support of individual dentists and their practices.

In addition, we intend to continue strengthening our global distribution network with initial focus on enhancing our presence in the markets we currently serve, followed by our granting distribution rights to new, leading dental supply companies operating in emerging key dental markets, including Russia, India and Brazil.

Milestone will also persist in its effort to win the endorsement of industry thought leaders. Although I am sure you share our disappointment that Leonard was unable to join today's call in person, it is essential that we recognize the important role he is playing in advancing Milestone's market presence and success in China.

Over and above the success he has achieved in winning our Company access to one of the world's largest and fastest growing dental markets, Len's effort to establish teaming relationships with China's largest pharmaceutical companies is expected to yield us new product commercialization opportunities that in many people's opinions, mine included, have not yet been factored into Milestone's true long-term value proposition.

As we persist in building our business through promoting mass-market adoption of the STA System as the new standard of care for dental injections, we are also intent on expanding our product portfolio to provide for the delivery of advanced injection solutions capable of disrupting the status quo for medical treatment.

By offering products that help us to mitigate or eliminate the fear and pain attributable to conventional needle injection technologies, we believe we can help to achieve much greater patient compliance with treatment regimens, and in the process enhance the quality of life for millions of people who suffer from a wide range of severe and chronic diseases and ailments.

Moreover, these noble objectives also pose highly attractive financial benefits for drug producers. Greater patient compliance equals greater revenue growth. Herein lies the real value building opportunity for Milestone, and one with which we hope to gain meaningful traction over the coming months.

To help better convey Milestone's business and our vision for the future of our Company, while also providing our shareholders and prospective investors with greater transparency into our operating activities, we are moving forward with developing an entirely new Web presence. Within the next 90 days we hope to unveil this new website, with hopes that it becomes a popular Web destination for medical and dental professionals, investors and strategic business collaborators alike.

In addition, we have engaged a specialized public-relations company, who is currently in production on a series of videos that will help us to better describe our Company, our products and their applications, our patented technologies, and information on how to collaborate with Milestone to commercialize new computer-controlled injection products using our much prized IP.

Allow me to close by expressing my pride in the men and women at Milestone who have brought us to what I believe is an important inflection point in our Company's history. Let me express my gratitude to you, our shareholders, for your unwavering support. I hope that you are as pleased as we are with how Milestone is performing and evolving.

I trust that you share our excitement about the role we can play in what promises to be a new epic for the healthcare industry, for the patients and care providers we serve, and for the future of Milestone's business.

In two weeks we will be hosting our annual stockholders meeting in New York City. For those of you planning on attending, I look forward to having the opportunity to personally thank you at that time.

Now, Dodi, why don't we take some questions.

Okay, Leslie. Matt, would you now kindly provide instructions to our call participants on how they may direct a question to Leslie or Joseph?

(Operator Instructions). [Steve Kleeman], [Kleeman Capital Management].

I had a couple of questions. On the way you reported these numbers your international sales were up 85%, that includes the $0.5 million that you sold the disposable handpieces to China?

Correct.

So the US sales declined 19% to $1.2 million. Could you break that down into what the STA sales were and what the disposables were?

I could do that. Unfortunately -- let's see if I can pull that up for you right now as we are talking. If not, I will get back to you right after the call on exactly the detail. We have information in the 10-Q, and I wanted to bring that up as we are speaking.

I am just curious that the disposables were up at all for the -- for sales in the US.

On the domestic side the handpieces were just about flat -- the US. $931,000 for the first quarter -- $931,000 in the first quarter of 2009, $930,000 in the first quarter of 2010.

One last one. With the sales of instruments decrease, you had no instrument sales to China in the first quarter?

That's correct. The first quarter only had approximately $500,000 of handpieces.

Okay, thank you very much.

Kevin Sarsany, Legend Merchant.

My first question is on the China regulatory environment. Is something changing there? It kind of seems a little more like a desperate kind of situation.

Leslie, do you want to answer that or do you want me to do that?

I would be happy to comment on that. From what Leonard has learned, there is a generalized slowdown in China with the regulatory environment. It is generalized. It has nothing to do specifically with us or with China National Medicines, but rather a generalized slowdown. There have been some breaches or problems and so we appear to be now subject to that.

Our best estimate -- and I spoke to Leonard last night, he informed me that his latest information is that the expectation of China National Medicines is that the approval will come through in June.

Does that answer your question?

Yes, I do. Now on the mix that boosted the gross margin, the 65%, and that sounds like it was related a lot to the distribution sales in China. Do we expect the gross margin to come back down?

Let's answer that first on a de novo basis. First of all, the gross margin percentage is to the fact that handpieces generate a higher margin than units. So when units -- handpieces are up (technical difficulty) stays up, and it continues to stay high.

As we look forward into 2010 we expect that GP margin to stay in the 60% range between 65% and somewhere in the low 60%s. But we don't expect it to drop significantly, no.

So the disposable increase that obviously was favorable mix was those sales, but also just your efforts in getting more disposable sales, correct?

Yes. As a perfect example, when Steve had a question before, if you look at our handpiece sales in the first quarter of this year compared to last year are relatively the same in the US, and our unit instruments had decreased, it shows that our dentists in the marketplace are continuing to use the units and reorder handpieces, which is really what our focus has been in the past with the razor blade model. And it is continuing to grow that way.

Now I guess on that front, what is driving that? And the part of that conversation, I wanted to hear more about the hygienist program and how you think that is going at this point, because I think on the last call exactly what you're talking about is what the whole program was about.

Leslie, is that you or I?

That is you, Joseph. Go ahead.

Okay, thank you very much. So the thumbnail answer to that is that the hygienist program is working. We are in the process of expanding that program. And as a matter of fact, just a point of current interest, today -- tomorrow starts the CDA South show in Anaheim, California.

At that show we have two of our people from the New Jersey office, and actually four hygienists from the Southern California area joining in, making connections, making contacts with the people in that territory. And it is moving forward on a steady base over the next several months. We will be in the Pacific Northwest and in the Southeast, and then back again to the center of the country and also to the Mountain States. So the answer is it is working.

Remember, as we have people that are trained professionally in a hygienist environment, they can easily identify, present and also increase the usage of the handpieces by accelerating the number of injections -- different types of injections that the unit can give. Not only the single tooth anesthesia, but a plethora -- I guess there is at least seven or eight other injections that we are expanding now in the market.

That's great. That is a great change in strategy, especially that you're seeing results so quickly. Now my next question -- or let me preface it, congratulations for being profitable. It looks great. I am prepared to see the leverage in the business.

But on the other side you're talking about going after the pharma community, more of the medical technology companies and going global. What is your strategy there? And is that going to require some people and other expenses that are now going to be flowing in the line that might change some of the positive profit profile?

I would be happy to answer that. If you recall, our joint venture in China is coming with $1.4 million to help offset the development costs of the epidural injection and also the intra-articular. We announced, I guess it was last week, the notice of allowance on the self-injectables will be self-financing -- some of that, and seeking pharma partners for that.

So we believe that -- and Leonard's strategy has been, that by partnering with the pharma companies and by having the development costs offset by them, we should be able step out really smartly and efficiently here. So that is the plan.

Okay. My last question -- and congratulations. I mean, having positive, given the period of time that it was negative, is quite a task. And you guys have done a fabulous job.

Share count, by my math it increased a little bit. And in the cash flow statement you are using shares to settle accounts payable. Why are you doing that, and why the share count -- why is the share count increasing over and above that?

Joseph, you want to address that?

Sure, I could do that. This Company has historically utilized shares as a method for payment. If you look back historically we have done that over the last at least 2.5 years that I've been here.

The idea is to conserve cash because in the past we had not been in a situation where we did or wanted to increase borrowings. And, number two is that from a conservative basis, as this Company has generally been, is that the cash is better utilized in providing marketing and other developments than is in paying for some of our consulting fees. And our consultants were happy to take the shares.

So we have done that historically. First quarter is not a significant aberration. And I think that the Company will continue to do that under certain circumstances in the future.

What do you price the shares, at market value? How do you calculate that and --?

The shares are calculated -- are priced at market value. So in one of our accounts there is a specific day, as of the day of the month where their invoice is due, and the market price as of that day is what is translated into shares issued. For others it is the same, with the date of the transaction or the due date is the date that we transact the shares.

Then if it is options, it is Black-Scholes, correct, Joseph?

Yes, then in the option case it is the Black Scholes formula, and we work our way through that somewhat using that calculated methodology.

I know you don't issue guidance, but any commentary on current trends, China, not China, just anything that we can hang their hats on to get a good feel for short-term?

Well, we have quantified for you the value of our 12,000 unit purchase order over the next three years. We have been able to do that. That, of course, is -- I think the number is $34 million potentially if all the handpiece orders come in as well. We have no reason to disbelieve they will.

That is probably as far as we can go at the moment. We are busily quantifying the market potential for some of our new medical products. Of course, we've got a period of time of probably about two years before we are commercialized and to market on those.

We are actively seeking research coverage on MLSS so that we can start getting some numbers out there, as opposed to us having to produce guidance at this juncture. That is the best --.

You don't want those South Side guys putting numbers out there all the time.

Hint hint.

Thank you very much. Congratulations. I will talk to you soon.

(Operator Instructions). There are currently no more questions on the phone lines. Please continue with the presentation.

Thank you, Matt. Okay, before we officially close for the day let's take some closing comments from management. Joseph, let's start with you.

Sorry to interrupt. I do have another question that is queued up. Do you want to take it?

Yes, absolutely.

Steve Kleeman, Kleeman Capital Markets.

I just had one follow-up. Talking about the big China contract will there be some shipments in the second quarter as far as the units to China?

We are right now prepared to ship. We are stuck behind regulatory approval. The latest estimate of when that is going to come is during the month of June. If it does, we are 100% ready to go. If it does not, it will be more than likely in the third quarter. The quantity we are expecting to ship is 1,000 units.

Then what about the handpieces, will any of those be shipped in the second quarter?

It is not clear at this point. We did just ship 0.5 million of them over there. And so it is questionable if some of those might overlap into being used with some of the first tranche of instruments going. But we don't -- we are not really clear on that yet.

Okay, thank you.

There are no other further questions. Please continue with your closing remarks.

Great question, Steve, by the way. Okay folks, again, get let's take some closing comments from management. Joseph, let's hear from you.

Thank you, Dodi. First of all, I would like to thank the shareholders. Shareholders have been with this Company, many of them, for a number of years. And have been, as we have here, anxiously awaiting for a turn in profitability. Although it is not $1 million, it is $32,000 in operations and $84,000 overall, it is still a great position to be in. And I would like to thank the shareholders for sticking with us during that time period.

Looking forward, I hope that some of the shareholders, if not all, can attend the annual meeting. I would also like to say a few words on the staff. The staff in the Company is still focused on continuing profitability, continuing our sales, continuing customer service, which we consider to be one of the most important parts of our business, because in that we can continue to train the dentist, have them purchase and utilize more handpieces in more applications and then just grow our business exponentially.

Well, thank you again, and talk to you soon.

Thank you, Joseph. Okay, Leslie, what about you?

I echo Joseph's thank you to everyone. We have been, particularly myself and Joseph, in conjunction with working with Dodi, been getting out there and telling our story to as many current investors or prospective investors who are willing to listen. We will continue to do that. If at any time you require anything from any of us, we are always available. You can reach us either through Dodi or directly through the Company. Again, thank you.

Thank you, Leslie. Thanks again, Joseph. Before we do officially close, allow me to remind you that if you would like to continue receiving ongoing information about Milestone and are not currently on an e-mail or fax or mail or phone database, give Elite's office a call. Our number is 407-585-1080. And of course you can reach us via e-mail at mlss@efcg.net.

So with that, I would like to wish everyone a great evening. Thanks.

Ladies and gentlemen, this concludes the conference call for today. Thanks for your participating. You may now disconnect your lines.