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Edited Transcript of MSON earnings conference call or presentation 6-Feb-19 9:30pm GMT

Q2 2019 Misonix Inc Earnings Call

FARMINGDALE Feb 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Misonix Inc earnings conference call or presentation Wednesday, February 6, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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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* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Michael Kaufman

MK Investments - Analyst

* Norberto Aja

Jcir - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Misonix Second Quarter Fiscal Year 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead, sir.

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Norberto Aja, Jcir - MD [2]

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Thank you, operator, and good afternoon, everyone. Thank you for joining us on the Misonix Fiscal 2019 Second Quarter Conference Call.

We'll get started in just a minute with management's presentation and comments. But before doing so, let me take a minute to read the safe harbor disclosure. Today's call and webcast contain forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as anticipate, intend, plan, goal, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include statements we make regarding guidance relating to our financial results. Forward-looking statements are neither historical facts nor assurance of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risk and changes and circumstances, many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.

Important factors that could cause our actual results and financial conditions to differ materially from those indicated in the forward-looking statements today include, among others, our ability to achieve operational efficiencies and meet customer demand for products and solutions and the risks described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Any forward-looking statements made by us in today's conference call is based solely on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements that may be made from time to time, whether as a result of new information, future developments or otherwise.

Today's call and webcast will also include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as in the company's website.

With that, I'd now like to turn the call over to Mr. Stavros Vizirgianakis, President and CEO of Misonix. Please go ahead.

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

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Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on today's call to review our fiscal 2019 second quarter results. Joining me on the call today is also our Chief Financial Officer, Joe Dwyer.

Our strong financial results for the second quarter and first half of fiscal 2019 confirm the benefits of our go-to-market strategies and recent investments as well as the ongoing demand for the demonstrated clinical benefits that Misonix's ultrasonic medical devices deliver to physicians, hospitals and patients.

As outlined in this afternoon's release, the 25% year-over-year top line growth through the first 6 months of fiscal 2019 positions us solidly on pace to deliver on our target of 20% growth in total revenue for the full fiscal year, while maintaining a healthy gross margin of approximately 70%.

Turning to our Q2 results. The 22% rise in second quarter revenue to a record $10.2 million reflects continued strong growth across our BoneScalpel and SonicOne wound product lines, while our SonaStar platform performed below expectations.

Looking at our two revenue streams, consumable sales increased 23% and accounted for 74% of total second quarter revenue, while equipment sales grew 21% and represented 26% of total revenue. We're very pleased with this revenue mix as it reflects the recurring nature of our revenue and provides added predictability to our results.

Geographically, international sales grew 40% compared to the prior year period, including a 36% increase in consumables revenue and a 45% gain in equipment revenue. Overall, top line growth was driven by our continued momentum in China. We expect Chinese orders to slow slightly in the second half of the fiscal year, as the Chinese consumables order was only shipped in late December, so it will take a bit of time for the product to flow into the Chinese market. We do expect improved performance in other key international markets resulting from changes that we recently implemented.

On the domestic front, the 14% year-over-year rise in total domestic sales was driven by robust growth in consumables revenue of approximately 18%, partially offset by lower domestic equipment revenue, which was expected due to the upcoming commercial launch of our new platform, Nexus.

As we anticipated, the minor supply chain disruptions that we discussed on our prior earnings call continued to pose challenges for us in the fiscal second quarter. However, I'm pleased to share that we have largely addressed these issues and are confident that we will fully overcome these headwinds in the second half of the fiscal year. Notably, despite these short-term challenges, Misonix maintained its double-digit top line growth trajectory and generated a 22% year-over-year increase in second quarter gross profit to a record of $7.1 million.

In this regard, during the first half of fiscal 2019, we undertook a range of initiatives to eliminate inefficiencies in our procurement and distribution process, including bringing new supplies onboard and diversifying our supply chain to prevent any potential future disruptions.

While we are fully transitioned to a significantly more capable ERP system affording us added oversight and efficiency over the operational and financial elements of the company, we also instituted new policies to ensure optimal inventory levels and fulfillment outcomes. With these initiatives now largely behind us, we are confident in our ability to meet the added demand and that we have the infrastructure in place to support the rapid growth of our business, including the upcoming commercial launch of our new Nexus platform. The overwhelmingly positive feedback we've received since unveiling Nexus provides us with added confidence for its potential to serve as a significant growth engine for Misonix.

By incorporating multiple modalities into one modern platform with extensive functionalities, including more power and an improved interface, we believe Nexus will enable us to benefit from cross-selling opportunities by further penetrating current customer accounts and expanding our addressable market to a broader range of procedures. While medical professionals are the driving force behind successful outcomes, Nexus presents surgeons with a powerful tool to remove hard and soft tissue with greater control, accuracy and efficiency. As a result, we believe Nexus will be a requisite addition to the operating room as it delivers demonstrated clinical benefits at a compelling value proposition for hospitals, outpatient clinics and patients. We've filed our 510(k) application for Nexus with the FDA and continue to anticipate its commercial launch in the second half of 2019.

In summary, our financial results for the second quarter and first half of fiscal 2019 highlight the benefits of our recent investments and the progress we are making to position Misonix for ongoing sustainable growth and profitability. With the positive operating momentum across our business and strong balance sheet, Misonix has a solid foundation to continue pursuing a range of near- and long-term growth opportunities that we are confident will deliver enhanced returns for our shareholders.

Looking ahead, we expect to grow product revenue by 20% for fiscal 2019, while maintaining a healthy gross margin of 70%. We'll also look to expand our direct sales channel and successfully launch our Nexus product line.

With that, I'd like to now turn the call over to our CFO, Joe Dwyer, to review our financial results and future outlook. Joe?

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

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Thanks, Stavros, and good afternoon, everyone.

Revenue increased 22.3% in the second quarter of fiscal 2019 to $10.2 million, marking our best quarter ever for products revenue and our fifth consecutive quarter of record product revenue. Domestic sales for Q2 increased by 12.6% to $6.1 million and international sales rose 40.2% to $4.1 million compared with last year's second quarter.

Taking a closer look at the top line, equipment revenue increased 20.6% or $400,000 to $2.6 million in the second quarter, representing a 37.2% increase for the first 6 months. The quarterly increase was mainly attributable to growth in international equipment revenue, reflecting our continued momentum in China and other key international markets. Consumables revenue, our higher-margin recurring revenue stream, increased by approximately 22.9% overall, reflecting an 18.5% growth in domestic consumables and a healthy 36% increase in consumables revenue.

Our gross profit margin was a healthy 70.0% in the second quarter compared with 70.4% in the same period last year. This is largely driven by our higher-margin consumables revenue, which represented 74.4% of total revenue in the second quarter and 71.2% in the first half of fiscal 2019.

Selling expenses increased by $900,000 or 22.5% to $4.8 million in the second quarter of fiscal 2019 compared with $3.9 million in the prior year period. The increase is primarily related to higher compensation costs and travel-related expenses resulting from the continued build-out of our direct sales force as we transition away from third-party distributors. We ended the second quarter with 55 global sales team members compared with 41 at the end of the second quarter of last year. Looking ahead for the balance of the fiscal year, we see selling expenses running in the $5 million range per quarter.

G&A expenses of $2.3 million were flat compared with the second quarter of fiscal 2018 and increased by $600,000 or 11.6% to $5.5 million for the first half of the year, mainly related to a noncash compensation charge of $500,000 in connection with the acceleration investing of an existing restricted stock award and a severance charge during that period. Looking forward, in 2019, we see G&A expenses running in the $2.5 million to $3 million range per quarter.

Research and development expenses decreased by $100,000 or 12% to $800,000 in the second quarter of fiscal 2019 as investments in the design and development of Nexus decreased approximately $300,000 as we completed the development phase of that project. For the first half, R&D expenses increased by 15% or $2.1 million compared with the prior year. In the upcoming quarters, we expect R&D expenses to settle into a quarterly run rate of about $1 million or less.

Our net loss for the second quarter was $800,000 or $0.09 per share, favorably comparing to a net loss of over $6.9 million or 76% -- $0.76 per share in the prior year period. $5.5 million of last year's loss related to our income tax provision.

Taking a look at EBITDA. Second quarter adjusted EBITDA was a positive $381,000 compared with the second quarter adjusted EBITDA of $422,000 last year. During the first half of fiscal 2019, we reported an adjusted EBITDA loss of $200,000, meaning we are running close to EBITDA neutral at this point in the year. We define adjusted EBITDA is earnings before interest, depreciation, amortization, taxes, noncash compensation expense and R&D expenses for the Nexus project. We exclude the Nexus related expenses as they're not typically part of the company's R&D run rate.

Moving on to our cash flow and balance sheet. Working capital at December 31, 2018 was $16.3 million and cash used in operations for the first 6 months of fiscal 2019 was $1.1 million, mainly due to the net loss for the first half. Working capital remains relatively unchanged for the first half. We ended the second quarter of fiscal 2019 with $10.2 million in cash and no debt. This compares with $11 million in cash at June 30, 2018.

And as Stavros mentioned, as it relates to guidance, we reiterate our forecast for revenues to grow by 20% for fiscal 2019 and expect our gross margins to remain at approximately 70% making for a very compelling shareholder value story.

In closing, we're encouraged by the possibilities ahead of us, both domestically as well as internationally and across all of our product lines. Health care practitioners continue to invest in deploying technologies to improve efficiencies and efficacies in order to minimize cost, shorten patient recovery times, avoid treatment complications and improve overall outcomes, all of which positions us well, given the value proposition our products bring directly to address these very issues.

I'd now like to turn the call open to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Kyle Rose from Canaccord.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [2]

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Congrats on another good quarter. I wanted to touch a little bit on the U.S. business first. Specifically, I understand the growth and the commentary on the call, but maybe can you help us understand what, if any, impacts the supply shortfall had on maybe U.S. numbers, in particular? And have there been any sort of impacts or headwinds that the organization has faced? I'm just -- I think about everything on the implementation of the ERP side. It sounds like this is a supply issue. I'm just trying to understand, it was a good quarter to begin with, but how much better could the quarter have been if everything was status quo and the inventory was there?

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

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Kyle, this is Stavros. I think looking at the inventory, the area that we really are the most impacted is on the disposables. So if we look at the disposables, items like BoneScalpel, the inventory impact means that we couldn't start a lot of new evaluations when we wanted to have those evaluations. I think we certainly lost out on a significant amount of cases during the quarter because we were literally allocating product as it came in on a customer-by-customer basis. So if a customer had ordered 10 probes, they would literally get 2 or 3 probes for that week. So I think they were using the technology only sporadically and not for all their cases. So it obviously slowed down some of the momentum that we had built up, especially with new evaluations on the BoneScalpel side.

On the wound side, we still saw a 40% growth in spite of the supply shortfalls. But it would have probably been even more because that side of the business, really the second growth engine has really taken off well in the last couple of quarters. So I think just a lot of frustration on the domestic side, with the sales team not having adequate inventory. This also means that we had to prioritize. So it was pretty much supply the domestic market first, then supply the Chinese market and then supply the rest of the world, because from a margin perspective, we obviously have to look after the domestic side first because the margin is so much bigger.

So I think it was a lot of manual interventions in terms of managing the inventory closely. Because on an item by item basis, we had to just do hard allocations. Also, what you find happening is where customers would substitute 10 millimeter blades for 20 millimeter blades, you find you then ended up running onto backorder on another line item, which was typically out of sync from a forecast perspective. So I think a number of frustrations certainly slowed down some of the momentum that we had built up. But I think that still getting that 18% number domestically wasn't bad, given the headwinds that we had.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [4]

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Great. I appreciate that. And I -- just one follow-up on that and then another question. Just how long do you expect the supply issues to persist and kind of continue to affect? I mean, just when I look at the whole of the U.S. business this third quarter and, call it, mid- to low-teens, and I understand the headwinds on the capital equipment side given the transition to a consignment model. But I guess I'm just trying to really understand when we see the unconstrained supply environment, is it reasonable to expect the U.S. business to grow at or above that 20% rate that you talked about with the combined business?

And then secondly, you gave the sales rep number and talked about ending up 55 and continuing to add sales reps through the year. Can you maybe just talk about the state of the sales force? I think I saw an 8-K over the past couple weeks that talked about some turnover in some senior leadership there. Just trying to understand what the state of the sales force is, the strength of the sales force and then maybe how you're thinking about hiring over the next 3 to 6 months?

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

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Sure, sure. Couple of things to address there. I think in terms of the supply of product, I would say that during the third quarter, we'll be completely out of backorder and rapidly taking on new evaluations. I think that we will probably be at a normalized state by the end of March. We're already seeing big improvements from January onwards, but I would say that we'll be back to a normal situation by end of March, which is going to mean that, from beginning of March to really April, the evaluations that should have probably kicked off 3 to 6 months ago are really going to be kicking off and in full swing.

What this has given us the time to do is to restructure some of the sales force. So we have got rid of a few representatives and brought in some new ones. So we haven't added as quickly as we wanted to add. What we've done is we've gone from 5 regions to 7 regions. So if we look at -- 4 of our sales managers have joined us literally over the last 6 months. So there's been some changes there in terms of the way that we structure the management of the territories.

In terms of the addition of salespeople, at the next new hire training, which is scheduled to kick off in the first week of March, we're adding 4 new hires and 3 back folks. So there will be another 7 people coming on board this quarter.

In terms of the 8-K announcement and some of the leadership change, we had a structure which was maybe a little top heavy in that we had a senior VP of Sales as well as a domestic VP of Sales. And we thought that this was adding another layer of complexity to the organization. So when this individual came to us with another opportunity, we let him go and decided not to replace that position because our feeling was that with the SVP taking direct control of the domestic sales force, this would eliminate a layer and basically result in more direct communication with the sales force.

So overall, we're quite upbeat about the change. We feel that, that's a positive and that we're removing that layer to the organization. And we didn't see it as a pressing need to replace that position. So I hope that answers all of your questions, Kyle.

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Operator [6]

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(Operator Instructions) We will take our next question from Michael Kaufman with MK Investments.

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Michael Kaufman, MK Investments - Analyst [7]

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Very encouraging quarter. And just wanted to get a little granularity on the rollout in China. At what point do you switch from selling product to a royalty base? And how do you see this product moving forward?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [8]

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Michael, I think with that, the intent has been that, as soon as the Chinese manufacturer is up and running, have the quality control systems validated and receive approval from the Chinese government, the Chinese FDA, they would start producing product on the SonaStar product line and switch to a royalty. We don't have a lot of clarity on that because things are pretty opaque when it comes to China. But we're probably 12 to 18 months away from that happening on the SonaStar product line.

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Michael Kaufman, MK Investments - Analyst [9]

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And, I guess, another question, not related to China, is when do you expect to see first revenue from your new Nexus product?

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

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We're hoping, if we get approval by the end of May, that we would still have a little bit of revenue in June this year. So basically last month of the fourth -- of the fourth fiscal quarter. Failing that, from July onwards. Again, we're not sure what impact the potential shutdown of the government will have again on the FDA, if things will be delayed. So we're assuming that everything goes to clockwork and that it's normal, our estimate is June or July. We're hoping to see some commercial efforts.

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Michael Kaufman, MK Investments - Analyst [11]

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Will you be reporting any granularity between the BoneScalpel and the wound products in the quarterly reports?

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

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At this stage, not. We feel it's giving our competitors more insight into our business than we'd like. So at this stage, we're not breaking it down by product.

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Michael Kaufman, MK Investments - Analyst [13]

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Well, all in all, sounds very good and I'm encouraged and keep up the good work.

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Operator [14]

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We'll take our next question from Alex Nowak with Craig-Hallum Capital Group.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Congrats on the great quarter here. Just on the sales team, up until now, the salespeople have pretty much free reign to go after any customer type they really wanted to. As you continue to expand here and launch Nexus, have you thought about bifurcating the sales team at all? Align one group to go after spine and neuro, while the other goes after wound?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [16]

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At this stage, Alex, I think we've given it some thought. I'd say if we look at the sales team today, probably 98% of their time is spent really between spine and wound. Only a limited amount of time is spent on neuro. I think what we'll do is we'll probably reevaluate when we launch Nexus. Because with Nexus, there will be an added focus on neuro. I think it's early to say what we'll do. What we are constrained with is we don't have a huge sales force. So to split it further to focus on individual specialities, we've thought of doing wound by itself and then adding on neuro and spine and there's certainly benefits to this. But I think, at this stage, a little bit early in terms of Nexus rollout and how much time and effort we're going to have to spend on the neuro side.

So summing that, I think we will keep evaluating every quarter. We spend a lot of time talking about this internally, have we got the right approach, have we got the number of people, are we scaling fast enough. I think we've learned a number of lessons in the last year. It certainly does take longer to get these salespeople to be fully productive. It has taken us a little bit longer as well to dissolve the distribution network that we had. Those tails have gone a little bit longer than expected. But I think it's something that we're constantly reviewing and asking ourselves those questions and trying to find the most optimal distribution outlet to the market.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Okay, that's helpful. And then you have the sales team coming together here, Nexus seems pretty close to approval. It sounds like fulfillment is largely fixed. Over the next 12 months, where do you think you need to focus your investments on Misonix? Where are you going to put the dollars at work?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [18]

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What we'd like to do is really enhance the Nexus offering. As we've said, we see big opportunity to cross sell into more specialities. We believe one of the big benefits that Nexus gives us is the ability to resect hard and soft tissue on the same platform. So I think, one of the areas that we will be spending a lot of dollars is the development of the discectomy product line because we think that in the space that we're at right now, when we look at spinal fusions, we are really just cutting bone. If we could cut bone and remove soft tissue the likes of disc, that, we think, would offer us a significant opportunity with our existing install base of customers and also allow us to introduce the technology to customers that haven't picked up and adhered for bone cutting.

So I would say that the near-term objective for the next 12 months in Nexus will really be enhancing the spinal product offering with soft tissue as well as doing more on the shaver side. I think there's an opportunity for us with a more powerful platform to do more with ultrasonic shavers. So those are really the areas that we'll probably be spending the dollars.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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Okay, understood. And then I missed the comments you made on the Nexus 510(k) filing. When did you file it? And I'm sure the shutdown has slowed down some things, but have they sent back any comments directly to you? Or have they -- have you not heard anything since the submission?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [20]

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We've not heard anything. We filed on the 30th of January. So it's literally a week ago. So we are waiting in anticipation of what we can get back from the FDA, but the clock is running.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [21]

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Okay, understood. And then last question from me. Just any updates on your thoughts to M&A and what do you think makes most sense here? Additional products in the bag? Some larger organization add-ons? Can you even acquire some additional technology to use on Nexus, anything like that?

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [22]

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I think we're active in that front. We certainly are looking at different areas of business development. I think that our view hasn't changed. We want something to be complementary to what we do in one of the silos. So I think we're more inclined to look in the wound space and neuro followed by spine. So those are the areas that we're actively looking. And I think we're pretty open, whether it be technology and add-on to the bag, an additional channel or organization. I think early days, but we're out there actively looking because I think we would certainly like to grow faster. I think we've got the organic growth engine working well at Misonix, but we need to do even more just to establish more critical mass. We think that that's our prerogative going forward.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [23]

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Okay, understood. Congrats on the great quarter.

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Operator [24]

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It appears there are no further questions at this time. And I'd like to turn the conference back to Stavros Vizirgianakis for any additional or closing remarks.

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Stavros George Vizirgianakis, Misonix, Inc. - President, CEO & Director [25]

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Thank you. As I said, this is an exciting time for Misonix. During the past 18 to 24 months, we've worked hard. We've worked smart to turn around our business. And I think now it's a matter of how well we manage the growth possibilities. While there's still a lot of work to be done, we're pleased with the progress we've made in fiscal 2019 towards meeting our goals for the rest of the year and beyond. We like how we're positioned to continue our business momentum and create significant future shareholder value. We're also fairly well insulated from the vagaries of the general political and macroeconomic environment that we're facing, and this gives us confidence that we can continue to deliver growing revenue margins, profitability and overall improved results.

I'd also like to take this opportunity to extend a special thanks to our talented and dedicated Misonix team for their valuable contributions and really our success is a reflection of their success. I look forward to speaking to you all again when we report our fiscal 2019 third quarter results. And if there's any additional questions that arise in the meantime, please contact our Investor Relations firm, JCIR, at (212) 835-8500, and you can chat to Norberto or Jennifer.

Thank you very much. Goodbye.

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Operator [26]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation.

You may now disconnect.