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Edited Transcript of MSON earnings conference call or presentation 7-Nov-17 9:30pm GMT

Q1 2018 Misonix Inc Earnings Call

FARMINGDALE Jan 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Misonix Inc earnings conference call or presentation Tuesday, November 7, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Diaz

Misonix, Inc. - IR, Lytham Partners, LLC

* Joseph P. Dwyer

Misonix, Inc. - CFO, Treasurer & Secretary

* Stavros George Vizirgianakis

Misonix, Inc. - President, CEO & Director

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Conference Call Participants

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* Michael Kaufman

MK Investments - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Misonix, Inc. Reports First Quarter and Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Joe Diaz of Lytham Partners. Please go ahead.

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [2]

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Thank you, Kate, and thank you for joining us to review the financial results of Misonix, Inc. for the first quarter of fiscal year 2018, which ended on September 30, 2017. As the conference call operator indicated, my name is Joe Diaz. I'm with Lytham Partners. We are the investor relations consulting firm for Misonix. With us on the call, representing the company are Stavros Vizirgianakis, President and Chief Executive Officer; and Joe Dwyer, Chief Financial Officer.

At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

If anyone participating on today's call does not have a full text copy of the release or the referenced 10-K and 10-Qs, you can access them from the company's website at misonix.com or numerous financial websites.

Before we begin with prepared remarks, we submit, for the record, the following statement. Statements made by the management team of Misonix, Inc. during the course of this conference call that are not historical facts are considered forward-looking statements, subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other statements of expectation identify these forward-looking statements.

Investors are cautioned that forward-looking statements made during this conference call are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligation to update forward-looking statements. Risk factors include, but are not limited to, factors discussed in the company's annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

With that, let me turn the call over to Stavros Vizirgianakis, President and Chief Executive Officer of Misonix. Stavros?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [3]

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Thank you, Joe, and thank you to all for participating on today's call. We appreciate your continuing interest in Misonix. As you saw in today's press release, fiscal 2018 is off to a good start. The financial results of the first quarter were very solid and continued the strong results that we achieved in the second half of last year.

Total revenue increased 18%, primarily on the strength of a 25% increase in domestic consumables sales. The domestic business is the core business for Misonix. We are refocusing our strategy and redeploying our assets to drive our recurring revenue model. We continue to add clinical sales specialists to support our U.S. distribution channel. We now have 28 dedicated domestic sales and clinical resources in the field to support the use of our products and drive utilization towards our stated goal of 100,000 surgical procedures per year within the next 3 years.

For the quarter, total consumables sales, which we define as recurring revenue, accounted for 74% of total Q1 sales. We have a growing installed base in the U.S. that we believe will continue to increasingly make use of our consumable products, drive recurring revenue and do so at a solid margin, which came in at 70% for the first quarter. We believe this is a sustainable level in the coming quarters.

During the quarter, the growth rate of BoneScalpel in the U.S. increased to 35% as our distributors and clinical sales specialists continued to successfully market our products and the innovation they bring to the surgical suite. The U.S. market continues to be the most advanced for medical technology. And although there are challenges in terms of insurance coverage, reimbursement issues and the efficient delivery of health care services across the various segments of the population, the U.S. remains on the cutting edge of scientific and technological breakthroughs.

We firmly believe that our ultrasonic technology for surgical instruments is an example of that innovation. Our leading-edge tools provide surgeons greater control and accuracy, the ability to complete procedures with less operating room time, generate cost savings for the health care systems and improve patient outcomes.

During November, we participated in the 32nd Annual Meeting of the North American Spine Society, better known as NASS, one of the largest surgical trade shows of its kind. The company had a very strong presence at the event, demonstrating new technology on the booth as well as in our innovation room. In addition, the company also trained numerous surgeons at the packed-to-capacity cadaver lab.

During NASS 2017, Dr. Wade Jensen of the Center for Neurosciences, Orthopedics & Spine presented data showing a significant reduction in the use of bone grafting material when the Misonix BoneScalpel is employed compared to the use of a standard power drill instrument. An estimated $1.9 billion is spent annually on bone graft substitutes. We believe that the BoneScalpel can become the standard of care in a number of important surgical procedures as more hospitals in the U.S. recognize the efficacy and the significant cost savings that our technology brings to the operating room.

International revenue for the first quarter of fiscal 2018 also grew at a double-digit rate as the company continues to reconfigure its business strategy outside of the U.S. We now have end market support personnel in key markets, and we believe we will further strengthen our distribution networks and ensure that our distributors are focused on driving consumable and widespread adoption of our technology.

In another important development in our international business, during the quarter, we entered into a license, royalty and manufacturing agreement with Hunan Xing Hang Rui Kang Bio-Technologies, a Chinese corporation under which Misonix has licensed certain manufacturing and distribution rights to its SonaStar product line in the People's Republic of China, Hong Kong and Macau, in exchange for payments totaling a minimum of $11 million over the next 4 years. We look forward to a long and mutually beneficial business relationship with our new partner.

As you can see, we've made measurable progress in reigniting the Misonix growth engine as well as addressing the loss of historical royalty income relating to the Medtronic U.S. surgical agreement. We maintain a strong cash position in excess of approximately $10.5 million, and we have no long-term debt. We are dedicated to achieving consistent double-digit revenue growth into the future.

Again, we're off to a strong start in fiscal 2018. The second half of our fiscal year is traditionally stronger than our first half. That being the case, we look forward to the opportunities ahead in the remaining 3 quarters of the fiscal year.

Let me now turn the call over to Joe Dwyer, our Chief Financial Officer, for a review of the financial highlights. Upon the conclusion of Joe's prepared remarks, we will open the call for your questions. Joe?

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [4]

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Thanks, Stavros. As mentioned, we had a good first quarter with net sales increasing 18% or $1.1 million to $7.3 million for the first quarter, up from $6.2 million in the first quarter of last year. Domestic sales increased 22%, and international sales increased 12%. Domestic sales represented 65% of total revenue, up from 63% last year.

Total consumables sales increased by 18%, and equipment sales increased by 17% during the quarter. Consumables sales represented 74% of total sales for the quarter, in line with our expectations. Gross profit came in at 70%, also as expected.

Operating expenses were $7 million for the first quarter, up $1.3 million from the first quarter of last year. The increase resulted from 3 principal line items, which included an increase in G&A noncash compensation expense of $847,000, a $500,000 increase of research and development cost for the ongoing development of our Nexus next-generation project and $325,000 for increased compensation and sales commissions. These increases were offset by a $330,000 severance charge last year relating to our former CEO.

We're being careful to manage our operating expenses as we grow our business. General and administrative expenses were $9.6 million in fiscal '17, which included $2.4 million of professional fees relating to our investigation, $361,000 of noncash comp costs and $330,000 in the severance costs. In fiscal '18, those same professional fees should go down from $2.4 million to only about $300,000, but noncash comp costs will increase to $1.3 million.

With that being said, if you do the math to calculate the G&A expense run rate, excluding the noise, meaning if you exclude the investigator fees, noncash comp and severance, our G&A run rate for fiscal '18 is really about $1.8 million per quarter compared to $1.7 million per quarter last year.

Some of our investors have been concerned about the G&A level and the expenses and whether they are under control. I'm happy to report that they are under control, as I pointed out, and the current year's run rate is only slightly higher than last year, and we continue to look for ways to achieve further cost savings.

We recorded royalty income of $450,000 in the first quarter, representing the final payment of the U.S. surgical royalty. However, the new Chinese technology transaction we recently executed, we expect to receive an additional $5 million of cash during fiscal 2018, which we will record as both revenue and other income relating to the technology that we've licensed. For fiscal '18, this offsets the impact of the U.S. surgical royalty, which we lost, which averaged about $3.8 million last year.

Our net loss for the first quarter was $1.2 million compared with $500,000 last year. The diluted loss per share was $0.14 compared with $0.07 in the first quarter of last year.

The financial condition of the company remains strong. We have a solid cash position of $10.5 million at the end of the quarter, with no bank debt. Working capital was $16.5 million, with a healthy working capital ratio of 5.2x. Given the strength of our cash and working capital position, the additional expected revenue and cash flow from our new China deal and our expected continued revenue growth, we're encouraged with our financial position and are excited about the prospects for the remainder of fiscal 2018 and beyond.

Let me turn the call back to Stavros.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [5]

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Thank you, Joe. I'd like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [2]

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This is Joe Diaz with Lytham Partners. While we have the queue filling up, I'd like to pose a question to Stavros and to Joe here. As it relates to the recent NASS event that you presented at, can you give us a sense of the information that Dr. Wade Jensen provided in terms of the savings related to the use of your product? Can you tell us how that works? And what that really means in terms of the value proposition of the BoneScalpel?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [3]

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Sure, Joe. I think one of the questions that we get on a routine basis from hospital administrators is what value does our product provide in the clinical setting. So we were fortunate enough for Dr. Jensen to do a study which compared the bone cut that you would get using the Misonix ultrasonic 1-millimeter blade versus a 3-millimeter traditional matchstick bow, which is commonly used in surgery today.

And because of the way that our BoneScalpel is able to cut bone, we have more usable bone, which is healthy and can be used for grafting purposes. We're also are sparing of the surrounding soft tissue. So what we were actually able to demonstrate in the study, which was a study on single-level as well as double-level and up to 5-level fusion procedures, is a 40% reduction in the cost of biologics because we were able to provide more viable bone.

So in hard dollar terms, what we were actually able to demonstrate to administrators is that there is a saving, an average cost saving of about $1,066 in bone grafting material. So again, this is an example that our technology not only provides a better patient outcome but we're able to actually reduce cost in the overall system. So we believe that this data is really going to be compelling data.

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [4]

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Joe in his comments referred to R&D costs, and I'm curious about -- maybe you're providing us some clarity on -- in terms of what's coming in the reasonably near future in terms of new products or other research and development type outputs.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [5]

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Yes, thank you, Joe. I think one of the items that we had at this year's NASS was an innovation room. And the innovation room was used to showcase some of our future products that are coming down the line. One of those products is our new surgical platform called Nexus, which we will be unveiling and officially launching at next year's NASS.

So we were able to get some of the experienced BoneScalpel users into the innovation room to actually trial the new device from cut bone and witness some of the performance enhancements that we are putting on to the new platform. So all very exciting.

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Operator [6]

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The next question comes from Michael Kaufman of MK Investments.

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Michael Kaufman, MK Investments - Analyst [7]

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Very good quarter, guys. Keep up the good work. Now that there's a little bit of growth and stability. I think Joe went through a lot of the ins and outs of expenses going up because we're adding people. The new OEM contract, which will replace the old OEM contract, and growth of the overall business. At what point are you willing to talk about the longer-term model for profitability? And when do you think you can get to a cash flow positive position?

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [8]

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Thanks, Michael. With respect to giving guidance, we're not ready to do that yet. But I guess with the new China deal that we've announced coming in, and that will be accretive to earnings this year, we expect that we could be EBITDA positive this year.

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Michael Kaufman, MK Investments - Analyst [9]

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One follow-up question. I applaud the kind of value-based sales and marketing that you've applied to the BoneScalpel, and I'm wondering if you're going through a study to look at the value proposition for skin graft in terms of the success rate versus the cost of an operation to repeat the process? And where do you stand on trying to gather data on that?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [10]

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Absolutely. Thank you, Michael. I think on wound, we're probably further along than where we were with BoneScalpel in terms of producing data. So we do actually have data in our VAC, which is a value-add committee booklet that we provide for hospitals. So we do already have data which shows that there is a reduction in -- or actually a higher uptake in graft where you use the SonicOne OR technology to perform wound debridement. So that is some data that we have, and there are actually a number of studies that are ongoing.

So what we're going to do is continue to update the investor segment on the web so this data will be available for you to view from time to time. But with regards to wound, we certainly are ahead of the curve.

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Michael Kaufman, MK Investments - Analyst [11]

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I guess the last one. When do you plan to update your corporate presentation for the results of the first quarter?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [12]

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Probably in the next week or so. I think we've -- we'd made a lot of changes to the overall deck. At NASS, we'd also done an analyst presentation on the booth. So you will see there are a lot more animations available, which show the use of our product. So I think that, together with the Q1 results, will probably be out in the next week or 10 days.

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Joseph P. Dwyer, Misonix, Inc. - CFO, Treasurer & Secretary [13]

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And Michael, that new investor presentation that we presented at NASS, I put that on the website this afternoon.

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Michael Kaufman, MK Investments - Analyst [14]

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Okay. I didn't see it. The -- I guess the last point, as of 4:30, somehow or other, you didn't send out the earnings through the normal business wire, but I was able, at the last minute, to find something on your website. So I don't know what your plans are on the future, but normally, it's good like to have something 20 minutes before the conference call.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [15]

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Absolutely, Michael.

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [16]

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Michael, this is Joe Diaz over at Lytham Partners. And one of the issues that we're having here is that the wire service has run into a technical problem in terms of getting the press release out on time. So it's strictly an issue of that. The 8-K was filed right at the top of the hour along with the 10-Q, so all of the information is out there. It just has been a little bit of a struggle for the wire service to get the information.

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Michael Kaufman, MK Investments - Analyst [17]

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Because at 4:20, when I went online to the company's website, it still hadn't showed up yet, any of them.

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [18]

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Yes, they're having a technical issue. There's no...

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Michael Kaufman, MK Investments - Analyst [19]

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No, but I'm saying, even the 8-K and the 10-K and all that junk.

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Joe Diaz, Misonix, Inc. - IR, Lytham Partners, LLC [20]

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I found the 10-K and the 10-Q out at about 4:05 Eastern Time. So they're out there.

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Michael Kaufman, MK Investments - Analyst [21]

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Really? Okay. I must have a slow processor.

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Operator [22]

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There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Vizirgianakis for closing remarks.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [23]

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Thank you. I'd like to thank you all for your participation on today's call. We look forward to talking to you again after the conclusion of the current quarter. Thank you, again, and have a great day.