Milestone Scientific Inc (MLSS) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Milestone Scientific third quarter conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Monday, November 14, 2011. I would now like to turn the conference over to Ms. Klea Theoharis of Crescendo Communications. Please go ahead.

Thank you. Good afternoon, and thank you for joining Milestone Scientific's third quarter 2011 financial results conference call.

On the call with us today are Leonard Osser, CEO of Milestone Scientific; and Joseph D'Agostino, COO and Chief Financial Officer. The Company issued a press release last Friday containing third quarter 2011 financial results, which is also posted on the Company's website. If you have any questions after the call, or would like additional information about the Company, please contact Crescendo Communications at 212-671-1020.

The Company's management team will now provide prepared remarks reviewing the financial and operational results of the third quarter ended September 30, 2011. Before we get started, we would 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 that are based on assumptions involving judgments with respect to future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately, and many of which are beyond Milestone's control.

Some of the important factors that could cause actual results to differ materially from those indicated by the forward-looking statements are general economic conditions, failure to achieve expected revenue growth, changes in our operating expenses, adverse patent rulings, FDA or legal developments, competitive pressures, changes in customer and market requirements and standards, and the risk factors detailed from time to time in Milestone's periodic filings with the Securities and Exchange Commission, including, without limitation, Milestone's September 30 report on Form 10-Q for the quarter ended September 30, 2011.

The forward-looking statements made during this call are based upon management's reasonable belief as of today's date, November 14, 2011. Milestone undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

With that, we will now turn the call over to Leonard Osser, CEO. Please go ahead, Leonard.

Thank you, Klea, and thank you, everyone, to joining us today.

A key metric measuring the adoption of our STA System in the dental marketplace is disposable handpiece sales, and we are pleased to report an uptick in these sales of 13.4% to $763,000 in the domestic market. Instrument sales were lower in North America for the third quarter of 2011 versus the third quarter of last year. This was due to a shift in our sales strategy for its Large Dental group, where the selling cycle is substantially longer than the sales to an individual vendor.

Large dental groups, representing a few hundred dentists each, have recently completed successful pilot programs for our STA System. We are looking forward to the prospect of signing on at least one of these groups by the end of the year.

I will discuss other aspects of our business later in the call, but at this point I would like to turn the call over to our CFO/COO, Joseph D'Agostino, who will review our financial performance in detail.

Thank you, Leonard.

Milestone's overall revenue decreased by $181,000 to $1.7 million in the third quarter of 2011 versus $1.9 million for the third quarter of 2010. Domestic sales volume decreased 1.9% to $849,000 from $866,000 in the third quarter of 2010. This decrease is primarily the result of a marketing shift in North America towards large dental groups that have the longer selling cycle than an individual dental practice. As Leonard mentioned, some of these groups have already completed beta testing our instruments, and we are optimistic that we can bring them on board.

The major area of growth in revenue for the quarter was the sale of instruments in the international market, with sales increasing by 30% to $325,000 versus $250,000 in the third quarter of 2010. Instrument sales worldwide including the United States decreased 2.5% to $417,000 from $427,000 in the third quarter of 2010. Our international STA instrument sales increased $142,000 or 78% in Q3 2011 over Q3 in 2010. International handpiece sales overall decreased by $235,000 to 29% in the third quarter, in part due to our conversion from an earlier version of our instrument to our new STA System.

Internationally, overall sales volume decreased to $897,000 in the third quarter of 2011 from $1.1 million in the third quarter of 2010. This decrease is primarily due to the slow downturn in the international footprint and demand for our product. The conversion of our technology has played a role in interrupting the sales cycle to some extent, but we expect the situation to normalize in the coming months. Gross profit margin increased by 4% to 66% of revenue in the third quarter of 2011 over the same period in 2010, attributable to a price increase in handpieces in June and in September of 2011. STA instruments increased in price in June of 2011 also.

Gross profit dollars decreased by $52,000 due to a decrease in revenue. Selling, general and administrative expenses were $1.7 million as of September 30, 2011, as compared to approximately the same amount in 2010. Net loss from operations of $540,000 was slightly below the net loss from operations in the comparable period in 2010 of $564,000. This decrease is due to lower sales levels and increased expenses related to the Company's new focus on group dental practices. Additionally, the Company recorded $60,000 of joint venture [invention] expense related to the development of two medical instruments. Interest expense was $36,000 in the third quarter of 2011, and the amortization of debt issuance was $1,500. Our net loss for September 30, 2011 was $637,000 or $0.04 per share, compared to a loss of $584,000 or $0.04 per share in the third quarter of 2010.

Now I would like to turn our attention to liquidity and capital resources. At September 30, 2011, the Company had cash and cash equivalents of $371,000 and negative working capital of $476,000. In July 2011, Milestone's joint venture partner, Beijing 3H Group, completed the first tranche of capital funding to the joint venture in the amount of $500,000, and we expect a second tranche of $500,000 to be invested in January 2012. The total amount of Beijing 3H's investment will be $1.5 million, and our expectation for commercialization of a product is less than two years from now.

I will now turn the call back to Leonard to elaborate on some of our initiatives. Then we'll open the call to questions.

Thank you, Joseph.

We've opened the door to a substantial opportunity for Milestone over the past few quarters that should prove beneficial to the Company, our shareholders, and the vendors that choose to use our STA System, not to mention the patients. We have been pleased with the initial responses to our pain-free injections, and hope to monetize the experience among large dental groups in the months ahead.

Pilot tests by large dental groups have recently been concluded, and the events of these are now in the decision-making phase. We are confident that our product quality and the top notch training by our hygienists will help influence a favorable decision. The fact that Milestone's pressure-sensing technology for pain-free injections can transform a cost center to the groups into a profit center is powerful, even more so in the current environment. Our recent analysis shows current usage of our product at over 1,000 injections per year per dentist trained. However, we can increase that usage through the training we offer by way of Skype oral hygienists that are out in the field.

The typical dentist administers 2,000 injections per year to different patients at a maximum usage. By charging $10 per patient injection, Milestone can generate revenues of $20,000 annually for an individual dentist, minus the cost of the actual instrument, which is about $4,000 for two instruments; and the cost of disposable handpieces at $2 each. Bottom line revenue for the dentist amounts to $12,000 for the first year and $16,000 for every year thereafter. We are presently selling into over 50 countries, compared with 26 countries two years ago. The quality of the distributor and the enhanced support from Milestone has made a significant positive difference in our international effort as evidenced by the increase in instrument sales overseas this quarter.

Once we receive regulatory approval in China, our China-based distributor can begin selling into that market, which is quite substantial. We expect the approval to come through in the next couple of months. The medical arena is a new frontier for our pressure-sensing technology, and we launched our entry into the sector through our joint venture with Beijing's 3H Group. Milestone and Beijing 3H are 50/50 partners in his venture, with Beijing 3H committing $1.5 million to the venture and Milestone providing the rights to use its CompuFlo technology. Milestone has also contracted with a significant vendor to develop intra-articular and epidural drug delivery instruments and related disposable, using the CompuFlo technology, as of September 30, 2011.

Milestone has received $500,000 from our partner thus far in this effort. We expect to commercialize a product for these medical applications in less than two years. Approximately 2.5 million women who give birth each year in the United States receive an epidural. This $1 billion plus worldwide market has a very high rate of complications caused by misplaced catheters, dural punctures, among other. CompuFlo accurately and consistently identifies the epidural space. This will significantly reduce the high morbidity rate. In addition, our product will transform the procedure from an art to a science, which will improve the efficiency of the procedure enormously.

Osteoarthritis is a huge market, with 33 million people affected in the US alone. This market is expected to grow to $7 billion by 2015, and we plan to be an aggressive participant in this arena. Other near-term applications for our technology include neurosurgical injections, ophthalmic injections, and cosmetic surgery, among many others.

So I'll wrap up. I would like to thank you for joining the call today. We look forward to keeping you apprised of new developments as they unfold.

At this point, we would like to open the call to questions. Operator?

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

And our first question comes from the line of Tom Brady, private investor. Please go ahead.

Yes. I don't know if this pertains to Leonard Osser or Joseph D'Agostino, but my question is, when I was reading on a statement that you had come with the income statement, you said that you had given your royalty-free license for all CompuFlo patents; and it appears to me that in this joint venture with this Chinese company that you basically allowed them to basically come up with and manufacture anything they want using your patents for free. So I'm trying to find out how there is going to be a profit derived from this in the event that you do a commercialization -- unless, of course, that the 50% is what you're hoping to get. But the royalty-free and licensing is what is a concern to me.

And the other question I have is a real simple one. You have a great product, have you ever thought about using it -- selling it to the end user for diabetic injections or cancer applications or just in-home applications of medicines in the form that would go through your CompuFlo?

Tom, Leonard Osser here.

The royalty-free license applies to the joint venture for only those two instruments which are being funded by 3H. The objective over the next year is to have joint ventures with other companies as well, where we, where Milestone donates its royal-free license only as far as those instruments which our partner is paying to develop. That will continue that way.

As far as the self-injectables which you're referring to, yes. We are in discussions with more than one group regarding exactly what you mentioned, which is self-injectable. The self-injectable market in the United States for drugs is about $29 billion. There are quite a number of players, and the biggest problem in that area for the sale of the drug and for the benefit of the patient, is compliance. Compliance for those injections is low because many of those injections, for example for Crohn's disease, diseases of the anti-immune system, are injected in the abdomen. When the patient is feeling better they often skip the injections; the doctor doesn't know about it.

We can develop a computerized injector for home use, for the patient's use, which can not only inject pain-free but it can keep a record for the doctor as to when the injection occurred and how much was injected. This, we believe, will be an enormous benefit, certainly for the patient, but also for the drug company and for the doctor. So, yes, we are looking into that marketplace as well.

Okay, thank you.

You're welcome.

Thank you, and our next question is from the line of Raymond Myers of Benchmark Capital. Please go ahead.

Yes, thank you for taking the questions.

I wanted to ask what we expect to happen after the anticipated approval in China? If you could lay out what your launch process is, and what do we anticipate for sales in the first several months, or years? What benchmark should we be using for the launch in China?

Well, our Chinese partner has already expended a considerable effort and considerable funds in pre-marketing the product. For one, they have already engaged a number of key (inaudible) in leaders. They have placed the product in numerous hospitals already. They have educated the professors, students, and dentists throughout the country. They have set up five or six courses in five or six different hospitals to teach doctors around China to use our instrument. So they've already made the effort.

Unfortunately, we're at a standstill, other than our partner delivering handpieces to these hospitals until we receive approval on the product. So they are still lecturing. They have invited and paid for the world authority on computerized injections, Dr. Mark Hochman. He has been in China probably over ten times at this point. Has brought to China at their expense Professor Stanley Malamed from USC, who's the world authority and literally writes the textbook on anesthesiology in dentistry. He has lectured in China. So they have been enormously supportive of the process.

We are, obviously, awaiting for approval, which will come within the next few months -- hopefully, within the first quarter, which is what our experts (inaudible.) When that happens, they will once again start ordering instruments, start marketing and advertising the product for a re-entry into the marketplace. What those sales will be, I don't know at this point. I don't know whether they will bring other distributors on board to help us launch the product much faster, given the delay. I think that will probably be the course of action.

They have an order for, I believe, 12,000 instruments from us, which is supposed to happen over a 3.5-year period. They have ordered and taken 1,000 of those waiting for regulatory approval. When they will start ordering based on that contract will be at some point after regulatory approval. I would assume, given their inventory now of approximately 1,000 instruments -- it's less than that -- I would assume that, that would start not immediately but in three to six months after approval.

Okay. Thanks for discussing China.

Next, I wanted to ask about the trial for the going on in the US. You mentioned several trials by large group dentistry practices in the US. How are those going and what are the milestones to sales? When will we get some activity in terms of sales from those?

This is Joseph D'Agostino.

The trials have been progressing very well. From a clinical side, we have acceptance from essentially all of the beta sites, with substantial values and usage of handpieces; and we are now working through the process with the [organ], operational, and administrative groups to perfect an agreement and a rollout schedule. As we look into the future, obviously, we're in mid-November at this point. So the first time I think we're going to see some real activity on any volume basis is going to be in Q1 with these groups, and there are several of them that we're in the process of right now. We are in communication.

We still have people testing, even though the testing period has been over, the instruments are still in place and the docs love them. They don't want to give them back. So I believe that we'll see progress in the first quarter, with at least one or two of these organizations. And the build-out will take place on a basis of geographical territory because two of them are so far -- their offices are located throughout the US. We'll do it by region, and then we'll roll them out.

At this point, we have approximately 40 hygienists that are in the field that we can use to train and make sure that the training process for all the offices is complete, and we'll build out by placing hygienists within a regional territory to cover all those sites. So if you're looking for hard numbers as to how many locations and how many instruments we project, I can't give that information at this point; but I can tell you that we are very close.

Okay, that sounds great. Thank you.

(Inaudible) are substantial.

Thank you.

(Operator Instructions)

One moment, please. And at this time, we have no additional questions. I would like to hand the call back to Mr. Leonard Osser for closing remarks.

Thank you very much for joining us on the call. If there are any questions, please call either David Waldman or Klea at Crescendo, and their number is 212-671-1020.

Thank you very much. Good day.

Ladies and gentlemen, this does conclude the Milestone Scientific third quarter conference call. We would like to thank you for your participation. You may now disconnect.