Milestone Scientific Inc

AMEX:MLSS

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to Milestone Scientific's Third Quarter 2023 Financial Results and Business Update Conference Call.

[Operator Instructions]

Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. David Waldman, Investor Relations. David, over to you.

[David Waldman]

Thank you, Jenny, and good morning, everyone. Thank you for joining Milestone Scientific's Third Quarter 2023 Financial Results Conference Call. On the call with us today are Arjan Haverhals, Chief Executive Officer; and Keisha Harcum, Controller of Milestone Scientific. The company issued a press release today containing third quarter 2023 financial results, which is also posted on the company's website.

If you have any questions after the call, would like any additional information about the company, please contact Crescendo Communications at [phone].

The company's management will now provide prepared remarks reviewing the financial and operational results for the third quarter ended September 30, 2023. Before we get started, we would like to remind everyone that during this conference call, we may make forward-looking statements regarding the timing and financial impact of Milestone's ability to implement its business plan, expected revenues and future success.

These statements involve a number of risks and uncertainties and are based on assumptions involving judgments with respect to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond Milestone's control.

Some of the important factors that could cause actual results to differ materially from those indicated by the forward-looking statements are general economic conditions, failure to achieve expected revenue growth, changes in our operating expenses, adverse patent rulings, FDA or legal developments, competitive pressures, changes in customer and market requirements and standards and the risk factors detailed from time to time in Milestone's periodic filings with the Securities and Exchange Commission, including without limitation, Milestone's report on Form 10-K for the year ended December 31, 2022, and Milestone's report on Form 10-Q for the third quarter ended September 30, 2023.

The forward-looking statements made during this call are based upon management's reasonable belief as of today's date, November 15, 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.

[Jan Haverhals, executive]

Thank you, David, and thanks to everyone for joining us today. We achieved revenues of $2.1 million for the third quarter of 2023. However, these results do not reflect the true underlying improvements in the business. Most notably, domestic Dental sales increased by 45% due to the early success of our new online store for selling and shipping the STA, single tooth anesthesia system, and hand pieces directly to Dental offices and Dental groups within the United States.

We achieved these results while moving away from our former distributor, Henry Schein and thus an important validation of our strategy. Even more notably, the new direct selling model has resulted in an increase in gross profit for the third quarter of 2023. In fact, our gross profit margins increased from 66% for the third quarter last year to 73% for the third quarter of this year. We achieved growth in our domestic revenue and margins despite a small sales team, which shows the potential of our new business model.

And while we could spend more to bring on more sales representatives, our focus for the time being is on maximizing profitability with a streamlined operating structure. In addition to higher margins, this strategy has provided us a closer and more direct relationship with our customers, thereby increasing our stickiness with the dentists allowing us to do a better job selling and improving customer service.

In other words, based on the obtained customer identification and purchase patterns, we can now focus on the basic principles of sales execution, being new customer acquisition, developing existing customers, waking up so-called sleeping or dormant customers and upselling activities.

At the same time, we have engaged in more direct-to-consumer marketing. These activities have resulted in leads from dentists, contacting us directly to order our instruments because patients requested them to do so. We will continue to increase our marketing efforts with dedicated campaigns directly targeted at patients. Given the domestic traction, we are expanding our efforts to enter new international markets and deepen our penetration within existing international markets.

While international sales declined, it's important to note that orders from third-party distributors can be lumpy due to the timing and the size of the orders. Nevertheless, our international pipeline remains solid, and we expect our international sales to resume growth. We also look forward to announcing the addition of new international partners, which should support our global expansion strategy over the coming quarters. It's also worth noting that our Dental division continues to operate profitably.

In fact, the Dental division generated over $458,000 of operating income on a stand-alone basis, which is a 48% increase over the same period last year. 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 at attractive margins in the coming quarters. As we continue to grow our revenues, we expect to benefit from economies of scale as well as the recurring nature and high margins on our disposables.

Turning to our Medical division. We have made significant progress rolling out our CompuFlo Epidural System. Specifically, we have added a new distributor and expanded adoption of the CompuFlo technology in a prominent hospital system and pain management clinics. Towards this end, we commenced sales of CompuFlo Epidural disposables into Island Ambulatory Surgery Center in Brooklyn, New York. Adoption of the technology by this clinic follows a successful evaluation process by its founder and Medical Director, Dr. Leon Reyfman, an interventional pain medicine physician.

Sales to Island Ambulatory Surgery Center represent the company's first foray in the ambulatory surgery center market, an addressable market of more than 9,000 centers across the U.S. Dr. Reyfman was one of a team of 4 doctors who completed 18 cases using the CompuFlo Epidural System in which they reported 100% success.

The evaluation included Epidural selection procedures within the lumbar, thoracic and cervical thoracic junction of the spine. Additionally, we are working closely with a major hospital system to expand use of the CompuFlo beyond labor and delivery to now include use with neurostimulation spinal cord stimulator implantation procedures.

The CompuFlo Epidural System has proven to be of tremendous assistance in performing spinal cord stimulator cases. Specifically, CompuFlo helps to minimize postoperative complications of spinal cord stimulator implementation. These complications include intraoperative cerebral fluid leakage and trauma to underlying nerve routes. Cerebral fluid leakage requires a postoperative block patch as well as radiculitis cases that require extended postoperative admission and postoperative steroid injections as a potential complication of this procedure.

It has also decreased operative time for the surgery by around 15 to 20 minutes per procedure according to the clinician's feedback. As more and more physicians and anesthesiologists perform procedures and submit for reimbursement, our goal is to secure growth coverage for our technology as we continue to execute on our goal of establishing the CompuFlo Epidural System as a standard of care in epidural analgesia.

During the third quarter, we reported an important milestone, reimbursement from commercial payers for patients who were involved in motor vehicle accidents. We are now building on this success and making continued progress advancing our reimbursement strategy. Specifically, we are supporting clinicians' utilization of the CompuFlo Epidural System across a variety of use cases, which is building support for the appropriate level of reimbursement from insurance providers.

These physicians have reported back on claims activities for their payers, and we are encouraged by the feedback from the insurance providers. I'd now like to take a moment to discuss our reimbursement strategy in more detail as this is really critical to understanding our overall strategy and the outlook of our Medical business.

Significant progress has been made in 3 important areas related to reimbursement. One, provider utilization of CompuFlo. Secondly, claims submissions for CompuFlo and last but not least, acceptance of the CompuFlo new CPT code by health care payer systems for claim processing.

We have established advisory sites across the U.S. that are actively utilizing CompuFlo and submitting claims to payers across the country. This is important in demonstrating widespread utilization of the technology. To date, physicians have submitted a total of 87 claims to their respective payers using our tracking code to identify the use of CompuFlo technology when used with an epidural steroid injection, primary procedure CPT code, also called the primary code for epidural steroid injections.

If you recall, the American Medical Association assigned this CPT code, our code as an add-on code to be used in conjunction with one of the 8 existing epidural steroid injection codes. We are on target to meet our projection of over 100 claims submitted before the end of the year to payers across the country.

Claims are being submitted to Medicare as well as commercial payers. Additionally, some clinicians have submitted claims for motor vehicle accident patients. And as we reported previously, 3 commercial payers have responded to these claims submissions and paid for it.

I'm encouraged that health care payer systems appear to have our code loaded into their systems and the code is accepted for claim processing versus a claim rejection because the code is not recognized. Category III codes like ours are designed for tracking utilization of new and emerging technologies. The submission of claims by our providers and recognition of the Category III code by the payers is an important positive step along the journey to positive reimbursement for CompuFlo, which will drive further commercialization of the CompuFlo Epidural System.

Our advisory physicians are beginning to report back on claims activities from their payers. There is a wide range of responses, and I'm very happy to report that the mix of responses have been exactly as anticipated. Some of the payers are asking for more information about the CompuFlo because it is new to them. Others are covering based on their established policies.

While there have been denials reported rest assured, all denied claims are being appealed through each payer's individual appeals process. Denials are expected as part of establishing utilization and payment for a new code.

Moreover, the high level of claim activity that is being generated by our advisory sites is providing an opportunity to engage with the payers to directly educate them on CompuFlo technology and the unmet patient need the technology serves.

So to summarize our reimbursement progress, we are on target to deliver on our original plan to drive utilization by supporting our advisory clinicians in claims submissions, with over 100 claims expected to be submitted by year-end. Additionally, we are providing support for each individual claim to have an appropriate response.

Finally, the increase in utilization provides Milestone the opportunity to engage with payers to directly educate them on CompuFlo technology.

Turning to the international front. We are expanding our network of distribution partners for CompuFlo. Most recently, we appointed a premier distributor in Spain, which we look forward to announcing in the near term. Spain represents an important market for us with a population in excess of 48 million people and the growing number of epidural procedures each year in pain management and anesthesiology.

Overall, we are targeting independent distributors with existing 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. We also believe there is a market opportunity for our CompuFlo Epidural Instrument within federal and other government agencies as our system can contribute to both improved patient outcomes as well as increased efficiencies.

As we have discussed in the past, we are advancing initiatives following SAM approval and working to secure approval within FSS, the federal supply system. At this point, we believe it's not a question of if, it's a question of when. FSS approval would open up the sizable government markets. With this goal in mind, we are doubling down on our efforts to penetrate the DoD and government markets.

We were recently invited to present at the International Healthcare Summit, which took place last week in Kyiv Ukraine. The event was an initiative by the U.S. Department of Defense in which they invited companies like ours that bring new technologies to collaborate with the Ukrainian Ministry of Health and Hospitals.

We are advancing these initiatives with the DoD whereby we could conduct trials in the Ukraine using our technology, which would be funded by the DoD. In addition to the humanitarian aspects of our work, we believe this would be an ideal opportunity to fortify our relationship with the DoD by highlighting the safety and efficiency of our technology.

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.

At this point, I'd like to turn the call over to Keisha Harcum, Controller, to go over the financials in detail. Please go ahead, Keisha.

[Keisha Harcum, executive]

Thank you, Arjan. Revenue for the 3 months ended September 30, 2023 and 2022 were approximately $2.1 million and $2.2 million, respectively. Due to an increase in domestic revenue, sales of $386,000, offset by a decrease in international dental sales of $539,000. Gross profit for the third quarter ended September 30, 2023 was $1.5 million or 73% of revenue versus $1.5 million or 66% of revenue for the third quarter ended September 30, 2022.

The increase in gross profit was due to the higher margin sales with the launch of the new online portal. Operating losses for the 3 months ended September 30, 2023, was approximately $1.5 million versus approximately $2 million from third quarter ended September 30, 2022.

The reduction in operating losses reflects the increase of gross profit and the decrease of selling and general and administrative expenses. The net loss was approximately $1.5 million or $0.02 per share for the 3 months ended September 30, 2023, versus net loss of $2 million or $0.03 per share for the comparable period in 2022.

For the 9 months ended September 30, 2023, revenue increased 15% to approximately $7.6 million compared to $6.6 million for the same period last year, driven by an increase of domestic dental sales of $1.3 million, particularly offset by a decrease of international sales of $135,000.

Gross profit for the 9 months of 2023 was $5.3 million or 70% of revenue versus $3.8 million or 58% of revenue for the first 9 months of 2022. Operating losses for the first 9 months of 2023 was approximately $5.1 million versus approximately $6.8 million for the first 9 months of 2022. Net loss for the first 9 months of 2023 was $5 million or $0.07 per share versus net loss of $6.8 million or $0.10 per share for the comparable period.

As of September 30, 2023, the company had cash and cash equivalents and short-term securities of approximately $4.6 million and working capital of approximately $6.7 million.

At this point, I'll turn the call back over to Arjan Haverhals.

[Jan Haverhals, executive]

Thank you, Keish. Through our new dental sales strategy, including our online store, and our enhanced marketing efforts, we are increasing domestic sales at higher margins. While our international sales pulled back, this was largely a result of the timing of orders and our focus on the domestic market.

That said, we expect to resume solid international growth going forward and continue to add new distributors. Our Dental business continues to generate positive cash flow on a stand-alone basis. And 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.

We believe we have developed a scalable platform to drive our Dental instrument and hand piece sales in the coming years. On the Medical side, we remain encouraged by the outlook for the business given our sales pipeline, the addition of new hospitals and expansion in existing pain management clinics as well as expansion of our distribution partners. Most importantly, we are now making progress advancing our reimbursement strategy around the CompuFlo Epidural System.

As I mentioned earlier, we expect to reach over 100 claims submitted by year-end and these physicians have reported back on claims activities from their payers.

We are encouraged by feedback from the insurance providers to the clinicians and are engaging with the directly payers to educate them on the CompuFlo technology. We are also advancing initiatives following our SAM approval and leading up to potential federal supply system approval, which would open up the sizable government market.

So to wrap up, we are witnessing growing interest in both our Dental and Medical instruments, and we believe we are well positioned to take advantage of the opportunities available in the market. The Medical segment represents a large addressable market, and we remain confident in our belief that CompuFlo will ultimately become the standard of care, given both the safety advantages as well as cost savings to the providers and payers. These factors coupled with our reimbursement strategy, should ultimately lead to increased sales and adoption of the CompuFlo system.

At the same time, we continue to maintain a lean operating structure and we are laser-focused on driving shareholder value. We 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?

[Operator]

[Operator Instructions]

Your first question is coming from Anthony Vendetti from the Maxim Group.

[Jeremy Pearlman, analyst]

This is actually Jeremy on the line for Anthony. So just a general question, overall macroeconomic conditions. A lot of our other companies were following, they are being affected by higher interest rates and inflation over the last couple of months last year. Have you seen any of that affecting your business at all? Or was the softer sales than we had expected more -- just like you mentioned on the call in the earnings is just the lumpiness of international?

[Jan Haverhals, executive]

No, I have not seen, let's say, any effect on interest or macroeconomic environment changes that affect our business. On the contrary, we have announced our price increase in the fourth quarter. We have to do that because we have to give our international business partners a 90 days, so to say, pre-warning of price increases. Also during the month, July, we increased our prices on the hand pieces by 10%.

We have not received any firm complaints about customers, about pricing or the availability to pay for these components and for our products. So the answer to the first part of your question is no. Secondly, you asked a question about lumpiness. I think we -- there's always a story behind the numbers, right? Seasonality is mainly in the international markets in Europe.

Where we are coming from, and I want to refresh everybody, if we look in the second quarter last year and the third quarter last year, business was dramatically hit by the Ukrainian-Russian war.

That was a result of $1.6 million in the second quarter in net revenues in last year. If you compare, and it's pretty obvious, if you compare our current second quarter results and you combine the second quarter and the third quarter results, we have surpassed and closed that gap of the loss in the second quarter of -- and the third quarter of this year.

So in other words, over the 9 months, I think we are trading about $1 million compared to last year, which is a 15% growth. So we should not just look at seasonality or lumpiness, there is some reason why things are happening.

Some of the markets, like, for example, in last year, we won a big tender business in Qatar, onetime event, which is about $100,000 and those onetime events will definitely influence your further revenues as well. Another distributor that we signed up a year ago then the first year, they bought for about $500,000. This year, they will buy for $210,000. So it's not a matter of the business lagging behind.

It's a matter of adding new distributors as we continuously doing, they stock up their inventory. And in the second year, they purchased less than in the first year. Nevertheless, of course, what is key for the company is to enter new markets where we currently are not present. I mentioned in previous call, Brazil, the ramp-up is slow. But the investment of this company, they go from 2 salespeople to 6 salespeople.

So it is a matter of time when we really can harvest the efforts of these distributors based on their investments. And there are other markets where we have already been given presentations for larger dental service organizations, in particular in countries. And I can mention that we have to be seen when the agreement is going to be signed, but there are a couple of countries in Latin America. We recently have been also in Lithuania, which is an important market within dentistry.

So it is not that nothing is happening on the execution side. On the contrary, increased activities. We do not see them yet, but I'm 100% convinced that in the future, we will see the results of these activities. And then, of course, people might believe that the portal is simple and easy to establish and the customers will call up automatically. That's not always the case. We have to make an effort to reach out to these customers as we have been doing through the third quarter.

And we have been able to get upselling activities and wake up sleeping customers and have changed our current instrumentation from the old instrumentation. So there's a heck of a lot of activities going on in the background of which I believe that we will see the results moving forward. Sorry for my little bit lengthy reply, I think it's important that everybody understands this.

[Jeremy Pearlman, analyst]

Yes. No. It was really good information. And then just switching to the medical side, one question there. It's great you had -- you said 87 claims submitted using your tracking code, you expect to have 100 by the end of 2023.

So just trying to figure out what is -- how many claims you think need to be submitted? How much data do you need to collect before you think you'll really be able to approach payers and now really just across the board, you'll get the broad coverage that we're looking for that would really help snowball the adoption of the CompuFlo?

[Jan Haverhals, executive]

Yes. No, that's a very good question. And if somebody would be able to give me that answer, I'm all ears because there's no rule of thumb and there's no golden rule of how many claims do you have to submit. I think it is of extremely importance that, like I've always said, you cannot reach out to insurance providers if you have not submitted claims and if you are not within the process. And this is what I meant with my statement, and I would like to repeat that again.

The fact that our code is uploaded in the insurance systems, that is fantastic because what other people tell me, what other companies have been seeing in the past is that if insurance providers would not be interested in a new technology like ours, you will get a denial within 2 weeks.

On the contrary, we are uploaded in their system. They look at it. They evaluate it. They give a response. Some denials, some payers, some motor vehicle as we have reported previously, but the opportunity for us is now that we finally can help the clinicians to educate directly and ask for meeting with health care insurance providers that we are active in, in the region to explain in detail, not only the technical and the clinical benefit, but why it is a no-brainer that health care insurance providers should adopt our technology and should allow for the payment to these clinicians, in particular, for Medicare.

[Jeremy Pearlman, analyst]

Right. No, I understood. And then just -- and then maybe just last question. How are you finding a balance between -- over the last many months, year-over-year, you're always putting out the news, it's great.

You're signing up new pain clinics, new hospital centers to selling the CompuFlo. But how are you finding the balance between a focus on this advisory board, these advisory positions who are leading the pack when it comes to submitting the claims and trying to get that -- you said that's what's going to be needed, to get that broad adoption and also just signing up new centers, new hospitals where how you split your -- the -- you said you're limiting, you're trying to keep your costs, limiting your resources, your sales team down.

Where are you finding that balance between signing up new customers and also focus -- being laser-focused on getting that broad coverage, which will then hopefully leads to just wider adoption across the board?

[Jan Haverhals, executive]

Yes. No, that goes hand-in-hand. Of course, for me and for the company personally, it goes back to your question, is there a number of 100, 200 or 500. What we need to do is I need to drive utilization, and it goes hand-in-hand. First of all, yes, we will work further because I would like to add additional clinics that drive that volume. But also existing customers that were joining us, let's say, a year ago, they are also willing to do these cases and in particularly fueled by the thoracic and the cervical thoracic junction approval by the FDA, right?

Now what is important to understand, of course, the existing customer base, we are in continuous contact and the simple fact, and I want to allude on that a little bit more. This hospital that I alluded on for spinal cord stimulator procedures, I can share with you that, that's a major breakthrough for the company. The breakthrough is that it is an existing hospital and that we have been working with in the last 1 to 2 years and the neurosurgery department they have used a system for spinal cord stimulators.

At a price level, which is 3x the price level that we did 2 years ago or 2.5 years ago when I started with this company, driving the margins to almost 90%, 9-0 percent for these procedures.

So what we are doing is we are establishing a pricing that is important for the reimbursement and also of what we believe is the right balance on the price [indiscernible] scale, so to say, perceived value versus what the company -- what the customer is willing to pay for that. And in this case, we followed the entire process within the hospital, having meetings with the financing department and with the value assessment committee department, and it went through.

So that's the reason why I'm very encouraged also that we get access and that we increase the penetration in these type of hospitals for these type of procedures, which is important. So the balance is really we take whatever opportunity there is, even in the aftermath of the motor vehicle reimbursement that was obtained. That clinician in question has increased the number of these patients and the number of these cases has enjoyed an increase in coverage for these patients. But in the aftermath of that, it also opens up other clinicians and other clinics that we are talking to.

Now the reason I only release clinics when there is real news. And by meaning that, that I released the news on these clinics when we have signed them up, when they have ordered the products, when they have paid for the products and when they have done 18 to 20 patients because it also gives us the opportunity to get a quotation and get the feedback by the clinician. I'm not going to hindsight and say, okay, it might come in a couple of weeks. Now this is the real world, and this is the transparency and the directness that we provide with our company.

[Operator]

Thank you very much. Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Arjan for any closing comments.

[Jan Haverhals, executive]

Yes. Well, thank you all for joining this call. Again, I would like to confirm and repeat that there is increased level of activities.

We create a solid baseline. There's a lot of activities going on, of which we believe that the company and the shareholders will benefit from in the future.

I wish you a good day. Stay safe, and we will keep you updated and reach out to you with any further news that we can provide in due time. Thank you for your time, and have a good day. Bye-bye.

[Operator]

Thank you very much, everybody. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.