Milestone Scientific Inc (MLSS) 2019 Q4 法說會逐字稿

Greetings and welcome to the Milestone Scientific 2019 Year End Business Update. (Operator Instructions) It's now my pleasure to introduce your host, Natalya Rudman of Crescendo Communications. Thank you. You may begin.

Thank you, Donna. Good morning, and thank you for joining Milestone Scientific 2019 Year-end Financial Results Conference Call. On the call with us today are Len Osser, Interim Chief Executive Officer; and Joseph D'Agostino, Chief Financial Officer.

The company issued a press release yesterday, Monday, March 30, containing 2019 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 at (212) 671-1020.

The company's management will now provide prepared remarks reviewing the financial and operational results for the year ended December 31, 2019.

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 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 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, 2019.

The forward-looking statements made during this call are based upon management's reasonable belief as of today's date, March 31, 2020. 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 Len Osser, Interim Chief Executive Officer. Please go ahead, Len.

Thank you, Natalya, and thank you everyone for joining us today. We have made considerable progress in advancing our CompuFlo Epidural System in 2019.

Our primary focus in 2019 was successfully trialing our CompuFlo Epidural System in multiple hospitals and medical schools, placing the system with key opinion leaders, continuing important clinical studies and working with anesthesiologists in the U.S., Europe and Chile.

These were necessary first steps in order to establish credibility before institutions would formally adopt and begin broader deployment of the CompuFlo Epidural System. We continue to receive positive feedback and the CompuFlo Epidural System has exceeded our expectations with over 2,000 successful procedures to date.

This is a significant achievement compared to the traditional loss of resistance technique, which had a high medical risk and associated morbidity. 9 clinical studies were published, which further validated the CompuFlo Epidural System's ability to safely and effectively identify the epidural space. We have strong clinical data, showing a reduction in epidural punctures and complication rates by using the Epidural CompuFlo system.

As seen in the Hidalgo study published in the Open Journal of Anesthesiology, October 2019, in which 600 cases were completed without a single dural puncture. Dural puncture is a known risk of epidural anesthesia and occurs when the needle accidentally punches the dura because the anesthesiologist does not recognize the location of the needle in the space, resulting in the leakage of cerebral spinal fluid. This can lead to severe headaches and other significant morbidities requiring additional procedures and sometimes significant additional cost. This and several other studies have proven the validity of the CompuFlo Epidural System, which not only benefits patients, but also, should lower the costs associated with treating these complications.

Up until now, there have been no other available procedures in labor and delivery. The present standard of care utilizes the hypodermic syringe developed in the 1860s, with a technique developed in 1921.

Our unique computer controlled real-time pressure sensing technology provides anesthesiologists an objective and quantifiable technique to build confidence and success.

We have begun speaking with group purchasing organizations in order to obtain approval of the CompuFlo Epidural System within their facilities. The GPOs represent a sizable opportunity, since some of these groups have hundreds of hospitals within their network. Once we obtain approvals, it should shorten the sales cycle and open us up to larger markets.

At the end of the day, our technology is about providing the best possible care for patients. We strongly believe that our technology has the potential to transform the industry, and ultimately become the standard of care, replacing the hypodermic syringe.

Turning now to our dental business. We saw a decrease in sales, which was largely related to a decrease in sales in China. Due to the current COVID-19 pandemic and the reduced hours and closings of dental offices throughout the world, we anticipate that our revenue for the second quarter and possibly the third quarter may be affected.

However, it is too early to determine what the second or third quarter impact will be or the effect of COVID-19 may have on our revenue.

We, however, maintain a substantial inventory in the United States to prevent any disruptions in shipping.

At this point, I'd like to turn the call over to our CFO, COO, Joseph D'Agostino, to go over the financials in detail. But I will be back at the conclusion of Joseph's discussion. Please go ahead, Joseph.

Thank you, Leonard. Total revenue for the year ended December 31, 2019 was $8.4 million versus $9.6 million for the same period last year. Dental revenue for the 12 months ended December 31, 2019 was approximately $8.3 million versus $9.5 million for the same period last year.

Dental revenues decreased by approximately $1.2 million, which was related to a decrease in sales to China of approximately $741,000, decreased device and handpiece sales in the United States and Canada by approximately $256,000, and a decrease in international sales by approximately $118,000 in 2019 compared to 2018.

Domestic inventory purchases by Henry Schein have been reduced due to lower target inventory models within Henry Schein.

However, in the domestic market, our exclusive distribution agreement with Henry Schein continues to pay off as the sell-through has been consistent.

Medical revenue for the 12 months ended December 31, 2019, was approximately $38,000 versus $120,000 for the year ended December 31, 2018.

Gross profit for the year ended December 31, 2019, was $5.7 million or 68% of revenue versus $4.4 million or 46% of revenue for the year ended December 31, 2018.

During 2018, the company recorded a reserve of approximately $1.2 million for the underlying inventory associated with deferred costs due to milestone China's market underperformance and liquidity constraints.

Operating loss for the year ended December 31, 2019, was approximately $3.9 million versus approximately $7.9 million for the year ended December 31, 2018. Operating loss for 2018, included a $1.5 million impairment of long-lived assets related to noncore patents.

In 2019, the company incurred a noncash expense of approximately $3.65 million due to shares and warrants issued in public and private offerings as well as other issuances of common stock during 2019, for which the company did not have sufficient number of authorized shares of common stock to cover the exercise and issuance of approximately 5.85 million outstanding equity instruments.

After the impact of the derivative liability, the net loss was approximately $7.5 million or $0.16 per share for the year ended December 31, 2019, versus a net loss of $7.4 million or $0.21 per share for the comparable period in 2018.

Now I'd like to turn our attention to liquidity and capital resources. As of December 31, 2019, the company had cash and cash equivalents of $1.5 million, total current assets of approximately $6.1 million and working capital of $1.2 million.

At this point, I'd like to turn the call back over to Leonard. Leonard?

Thank you, Joseph. We believe that our technology can be used for a variety of epidural procedures and other medical applications.

However, our initial focus is on the labor and delivery market. With close to 4 million births in the U.S. each year, we believe the risk factors and potential liability associated with the traditional loss of resistance technique, make this market ideally suited to a new technology to replace the loss of pressure technique which utilizes, as I've said, the 1860 syringe.

In terms of the broader epidural market, over $5 billion is spent annually on epidural injections in the U.S. alone, with over 11 million epidural procedures performed each year in the U.S. and over 30 million worldwide. Importantly, we continue to evolve and innovate our technology.

In the beginning of 2020, we announced that we received a notice of allowance from the U.S. Patent and Trademark Office for a key patent on the CompuWave technology, which is being integrated into the CompuFlo Epidural System, utilizing a high-resolution in-line pressure sensor in combination with the unique data processes within the CompuFlo system, makes it capable of detecting both the NC2 pressure as well as the presence of a pulsatile pressure waveform.

The pulsatile waveform is representative of the detection of pressures that are produced by the cardiovascular system, either directly or indirectly. This, in turn, can be used to aid in the identification of a needle or a catheter within an anatomic structure such as the epidural space, but not limited, to the epidural space.

This advanced and breakthrough technology provides further verification of the epidural placement and real-time notification of obstruction or displacement of the catheter, which presents our company with a broad and new market.

We believe the CompuWave technology represents a breakthrough for the CompuFlo Epidural System. This technology also has other medical applications, and we are planning to incorporate this innovative capability into future medical instruments for other indications as well.

This patent provides IP protection around the CompuFlo instrument for another 20 years, which further enhances our position at the forefront of the computerized injection market.

So to wrap up, we are encouraged and optimistic for the future of our company. I'd like to thank you for joining the call today.

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

(Operator Instructions) Our first question is coming from Anthony Vendetti of Maxim Group.

So I'm glad to hear that we have 9 clinical studies that were published. I was just wondering with the current COVID environment, I know it's going to impact dental since that's considered obviously nonessential or nonemergency. I'm sure a lot of the dentists are not going to be doing as many procedures, some may be closing down. I was wondering what your thoughts are on how it's going to impact the rollout of the epidural product as well?

Well, for the very near future, I believe, for the next 2 quarters, it probably will have a moderate effect, not a very significant effect because we are already in quite a number of hospitals that have already trialed the unit with -- and what they are waiting for, as I've said in the past is to shorten the time to use our disposable. To use our present disposable requires approximately 1 to 2 minutes to set it up.

The anesthesiologist, generally in the United States felt that, that's much too long because they have the family there, the husband there, the woman's in labor. So they want something very simple, in other words, plug-and-play.

So we have now been working on assembling those 3 parts together, which we've now done. We are going to do a letter to file for this with the FDA, and this should be ready within a matter of a few weeks or sooner. We've had a setback in that for a different reason. But we believe that, that's imminent and perhaps even a week or 2 away.

That is what the hospital -- the anesthesiologists have been waiting for as far as the epidural goes. So I -- so as soon as that is completed, we will be able to go back to that group of hospitals with the enhancement that they've looked for.

So I don't think that we should be significantly affected in the following quarter. However, as you are aware, no vendors in the United States are allowed in hospitals now. So we will not be able to meet in person with any groups or anesthesiologists in a hospital environment. So that will affect us going forward depending on how long that remains in effect.

The other issue is we have discovered the other market, which I mentioned, which is catheter placement. What happens is, the next day when another anesthesiologist is doing the rounds, if a patient is not receiving pain relief. And what it is, is there is a catheter that is -- that has been placed after a -- at the time of the original epidural.

The patient then is moved 2 or 3 times, they are moved out of the operatory, they are moved onto a movable bed, they are moved to recovery, then they're put on a movable bed a couple of hours later, then they're moved once again onto a bed. So the chance of catheter displacement is apparent. However, there can be 2 reasons why the patient is not receiving drug from the pump with the pain relief medication.

One is which the medication is not substantial enough. There's not enough of the lidocaine or whatever it is there, they're using to reduce the pain or the catheter's been dislodged. That problem is ascertained by the anesthesiologist putting a large bolus, a large amount of that anesthetic solution into the patient waiting 20 to 40 minutes for that patient to receive pain relief.

If the patient has received pain relief, then the determination is made that there was not enough drug. If the patient has not received pain relief, which I believe from what I'm told is the case most of the time, the catheter has become dislodged. So this is a very costly period of time. It could be 20 to 40 minutes. Then if it is dislodged, another epidural has to be done. So it's quite costly for the institution.

We have shown that we can make that determination in less than 10 seconds as to whether the catheter has been dislodged or not, which is of significant value according to the anesthesiologists that we spoke to, both of the patient, of course, the anesthesiologists and the institution and the cost factor.

We have been working on another letter to file for a quick start program that will allow us to utilize this for the catheter placement and a slight change in the disposable to accommodate a different pressure transducer, with a longer tube in order to reach the pump that's used to pump in the medication.

This also has been in process now for a couple of months and we expect the result of this will be a letter to file, not a 510(k) in our belief, and this will be done in a matter of very few weeks.

Does that answer your question, Anthony?

Yes, Len, that was the part to the FDA. So this is a letter to file. Typically, how long does the FDA, because this is just a slight change, how long does it take typically for the FDA to respond to that?

They don't respond. It's a letter to file. In other words, we, as the company, make a determination that this is, in fact, a letter to file, not a 510(k). We then go to our consultants, who either agree with us or not. In this case, they agree with us. And then we do a letter to file. So the FDA is not involved in that.

In the event that during our next review by the FDA, they feel that it should have been a 510(k), then that's another issue. But in these 2 cases, which I just mentioned, we believe it's a letter to file as to our consultants. It's a big change. In other words, with the catheter, we're doing a quick start program, so we're eliminating some screens on the computer, on the -- but basically, it's still the same location. As far as the disposable goes, we're really lengthening the tube, so to speak, so that it can reach the pump. So we believe these are very simple modifications that would require only a letter to file.

Okay, that's helpful. So the old way, it took 1 to 2 minutes to set up. Now that you've assembled all 3 parts together, what is the time now? It's reduced to approximately what?

Really nothing. They just have to open it and plug it in.

Okay. So literally seconds versus 1 to 2 minutes?

Correct. Correct. There are other doctors throughout the world that are using our product. For example, in the clinical studies, they're doing this in vivo, they're doing it on patients in labor that have not even mentioned this as being a problem. But in the United States, it has been a major issue for anesthesiologists.

Okay. And you mentioned the COVID-19 impact on the second and third quarter. One of my companies also mentioned, obviously, there would be an impact in the first quarter, particularly the month of March. Did you see a similar impact on the dental side of the business in the month of March?

A slight impact, not so much in March. But we anticipate, obviously, in the second quarter. We don't know for the third quarter because we don't know the timing.

(Operator Instructions) Our next question is coming from James Terwilliger of Northland Securities.

Len, can you hear me?

Yes, James.

I've got 2 quick questions. I'll start with the dental first in terms of Henry Schein. In the past, we've talked about Henry Schein's sales force and that would be my first question, has there been any change in the Henry Schein sale -- there's nothing you can do about the virus, and there's certainly some things here for every company that's out of your control. But on the dental side of the business, has there been any change in the sales force? Or the investment that Henry Schein is making into your dental business? And then in the past, sometimes Henry Schein took some inventory as we went into a new calendar year, I believe there was price increases. Are there any price increases or anything else that you can discuss in terms of the dental business with Henry Schein besides this -- the slowdown, which has nothing to do with your ability to execute?

I don't see it, but Joseph is much closer to that than I am. Joseph?

Sure. On the personnel side, the exclusive group, who -- the exclusive sales group for Henry Schein has increased from approximately 25 to 32-ish, 34-ish people. So we have new people that we're training. Unfortunately, with the epidemic, we can't get those people into the field working with the end users, which are the dentists.

However, they have increased their staff. We see that from our side that the new staff is energetic and ready to go, just being held back by the situation that we have with the COVID virus. As far as price increases, effective January 1 of this year, we've increased our price to dentists throughout the world by approximately 3% over 2019. And it has -- at least for the first quarter, it's been holding itself and without a problem. And it looks like we will continue on in that process without a price reduction for the rest of the year.

Good. Good. All things considered, that's well positioned in terms of what you can control. My second question is going to go back to the GPO contract. And my question here is many times those are either sole sourced or dual sourced. Am I thinking about this correctly? You really don't have a competitor besides the syringe. So you would be -- I mean, even if they said you're a dual sourced on a GPO, there would be you and the syringe? And then secondly, what is the timing, assuming you would get a GPO positioned and a contract would be awarded, when does the GPO contracts go into effect?

Well, as you know, we never know timing, unless we're in total control of it. And in this case, we're not. We're in discussions with GPOs at the moment. Let me first characterize that other than one GPO that we're speaking with, that is also the insurance company and the GPO, the others are buying groups. So basically, when one has the contract with a GPO, it's a license to hunt. It's not a sale.

So having said that, we're in discussions now. It will probably be as a unique product without any competition, to answer your question. And it's as fast as they can move. We're hoping that we're looking at no more than 2 months. But given what's going on in the world, it's impossible to give a timing because it's totally in their control.

So would they just add you or update the GPO contract, which again is a license to hunt? I mean, you still have to do the work at the hospital level. But would they -- do they come out with a brand-new contract with a -- like a master list of technologies? Or would they just add you to the current contract that's in effect?

It depends on the GPO.

It depends on the GPO.

So it's either 1 of those 2. Or depending on which GPO, it is, they can also mandate that the product be used. So there are 3 alternatives, not 2. The very large GPOs, the ones with 3,400 hospitals don't do that, but there are smaller ones that could do them.

(Operator Instructions) Our next question is coming from Patrick Metcalf of Newbridge Securities.

I wanted to ask, going into the end of 2019, you were pretty confident that within weeks, you would get some sort of hospital wins or something. And then that got delayed assuming it was the modifications to the CompuFlo or disposable? Is that correct?

It was the modification in the first instance to the disposable and it was also the modifications to a quick start program. When we did the computer originally, we made it very, very safe. Kind of like when you're -- when you enter the country on Global Entry, you have a number of screens, and you say, no, I don't have more than $10,000. Are you sure, you don't? I'm sure, we don't. Are you absolutely sure? That kind of thing to make it very safe. The anesthesiologists don't want that. They want to press a button and get to work right away. So we had to modify that. In order to modify that, one has to change the software. Then one has to do a letter to file and where you're in agreement with your consultants and sometimes your notified body. So it's a process.

Okay. So I guess my question is going to circle around. It seems like back in November, October, you were dealing with one hospital or just individual hospitals. Today, it seems like you're dealing with GPOs, which represents hundreds, if not thousands of hospitals. So my question is, is it the GPOs that told you to modify this and will give you entry into hundreds of hospitals? Or was it more single hospitals that were pointing you in that direction?

Well, neither. It was individual anesthesiologists. And it was the end user that caused us to make these modifications.

Okay. Okay, great. And then, where do you stand on possibly working out something with the dental group, spinning it off, licensing it out or selling it?

I can let you know further on that, but I can't today. It is in -- it is our strategy to sell off the dental group. But I cannot speak to it today, I'm sorry, but I will be able to speak to it very shortly. I'm not trying to give you any indication either way, though, Patrick.

No, I understand with COVID that things could be held up in this environment. So the fact that you can even speak to it is great news. And then, I guess, that's all my questions.

I'm showing no further questions at this time. I would like to turn the floor back over to management for any additional or closing comments.

Okay. I would like to thank everybody for joining the call. We are doing, in a very difficult situation for everyone, not just us, the best that we possibly can in this situation. We are continuing through this situation with our research and development and believe that as we have in the past, we will continue to leapfrog ourselves, making the technology easier, more profitable for the shareholders. Thank you very much. All the best. Stay safe.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.