Executives
Joe Dorame - IR, Lytham Partners
Michael A. McManus, Jr. - President and CEO
Richard Zaremba - Senior Vice President and CFO
Analysts
Joseph Munda - Sidoti & Company
Steve Kruger - Foresight Investing
Misonix Inc. (MSON) F4Q 2013 Results Earnings Call September 24, 2013 4:30 PM ET
Operator
Good afternoon and welcome to the Misonix fourth quarter fiscal year 2013 financial results conference call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.
I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead.
Joe Dorame
Thank you, Amy, and thank all of you for joining us today to review the financial results of Misonix Inc. for the fourth quarter and fiscal year 2013, which ended on June 30, 2013.
As Amy indicated, my name is Joe Dorame, I'm with Lytham Partners, and we are the Investor Relations consulting firm for Misonix. With us on the call representing the company today are Mr. Michael A. McManus, Jr., President and Chief Executive Officer; and Mr. Richard Zaremba, Senior Vice President and 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, you can retrieve it 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 during the course of this conference call that are not historical facts are considered to be 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 similar statements of expectation identifying forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.
Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the statements made. These factors include, but are not limited to: general economic conditions; risks associated with international sales and currency fluctuations; uncertainties as a result of research and development; acceptable results from clinical studies, including publication of results and patient procedure data with varying levels of statistical relevancy; risk involved in introducing and marketing new products; potential acquisitions; consumer and industry acceptance; litigation and/or court proceedings, including the timing and monetary requirements of such activities; regulatory risks, including approval pending and/or contemplated 510-K filings; the ability to achieve and maintain profitability; and other factors discussed in the company's annual reports on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. The company disclaims any obligation to update any forward-looking statements.
With that said, let me turn the call over to Mr. Michael McManus, President and Chief Executive Officer of Misonix. Mike?
Michael A. McManus, Jr.
Thank you, Joe, and welcome to the call to all of you on. This was a year of good growth for Misonix in terms of sales of its BoneScalpel, SonicOne and SonaStar throughout the world, it was honestly not as fast as I like, but we're working on that. We also strengthened our distribution and clinical foundation. We've reduced orders from older products such as the AutoSonix that we’ve talked about before from Covidien and the Lysonix for liposuction which is with J&J resulted in lower sales of these products when compared to prior years.
This reduction was expected and we've been seeing that over the last several years. When you take out these older products revenue, our core medical devices increased by 13%, in what we have to say is a difficult selling environment.
Last year was also one of the continued investment in the marketing and sales of our products worldwide, if you think about it for a company with our revenue base to be in 49 countries around the world is a rather significant broad-based distribution. We added additional distributors of our products both domestically and internationally and provided them with training and necessary demo equipment.
We added line extensions in blades to participate in the production of six clinical studies, conducted an increasing number of cadaver training labs and also actively participated in professional shows and conferences worldwide.
We continue to develop scientific data to represent our products and to respond to the value assessment committees that continually look at all new products. We also continue to qualify and register with the GPOs, government purchasing organizations around the country that are gatekeepers for some hospital purchases. The present healthcare environment makes it more difficult for hospitals to spend funds on new products prior to an evaluation of need and benefit.
We have a well documented book for each of our products to help customers understand the benefits. With the BoneScalpel we can show increased safety, less bleeding, less bone fragmentation and better results for the patient, the doctor and the hospital. With the SonicOne we can show more consistent debridement, more viable tissue and the antibacterial effect of ultrasound and its sensitive affect on tissue regeneration.
As you know the present environment makes it more attractive for us to consign our products in the United States, together with a commitment to purchase a set number of disposables. This sales strategy results in not only lower early revenues but greater higher margin sales. As a result of the consignments, we look to unit growth as an indication of true growth for the company and both units of systems and blades increased in 2013.
In international markets, as we've talked about before we sell our products to our distributors including the systems and the disposables, which they then resell in their territory. Revenues and units grew in both systems and disposables internationally.
Sales of our SonaStar were down partially because of the rigorous approach in some foreign countries. This is a problem we are working on it, as is every other medical device manufacturer. The acceptance profile on growth of our BoneScalpel continues worldwide.
More doctors are asking for the product and our referrals from present customers are increasing. All of our customers have to experience using the BoneScalpel in the cadaver lab or on animal bone prior to an evaluation, it’s just a different way of practicing. During the evaluation we have one of our people present to assist with the first several cases.
With the surgeon support we then go to the value assessment committee review which depending on the schedule could take some time. This sales cycle is our greatest hurdle. Doctors love the product. We both hate the process. As you know the BoneScalpel is finally approved for sale in China and we are very excited about the potential for the product in that new market.
I just return from China on Friday. They have great enthusiasm for our products. I met with surgeons at several hospitals that are already using the BoneScalpel. One doctor who has already done 45 cases showed me a tape of procedure he has done using the BoneScalpel where he removed the large tumor from a man’s spinal column. He was anxious to point out to me the speed, the accuracy, the safety and the reduction in blood. He will be presenting at an upcoming Spine Meeting in Beijing.
I saw three or four doctors in the largest hospitals, several of them, leading doctors in there, associations for spine neurosurgery and we have a number of them that are going to be presenting at Chinese conferences in the very near future. Some of them will be coming here to the United States to talk about what they have been doing in China with doctors here in the U.S.
It’s exciting to see the importance of new technology to Chinese doctors and I am excited about the prospects and the opportunities to grow both the BoneScalpel and SonaStar business in China.
Line extensions will improve our SonaStar ability to compete better outside the United States and particularly in China. At the same time, we're very encouraged by the acceptance we are finding for the SonicOne for wound debridement in the operating room environment, where clear reimbursement allows for the sales of our disposables.
Surgeons are finding they prefer our product over the present market leader which is called Versajet. The benefits can show a surgeon - that we can show a surgeon are on cost, tissue selectivity, tissue regeneration and overall healing. The ability to use the shaver with the SonicOne is also a distinct advantage. The opportunity for growth of the SonicOne in the clinic will also continue to grow through our seasoned sales team and the rental fee per service model.
We will be doing clinicals this year to reinforce earlier work and to show the anti-bacterial effect of ultrasound as well as its effect on proteins and growth factors to cause a wound to heal faster.
Let me just turn the call over to Rich now to go through the financials and then we will come back to you for questions.
Richard Zaremba
Thanks, Mike. Revenues for the 12 months ended June 30, 2013 were $14.8 million, a 5% decrease when compared with revenues of $15.7 million for the same period in fiscal 2012. The BoneScalpel increased 33% to $6.3 million, SonicOne revenues increased 43% to $1.9 million and SonaStar revenue decreased 9.7% to $5.3 million as compared to the 12 months ended June 30, 2012. BoneScalpel, SonicOne and SonaStar revenues increased 13.1% for the 12 months ended June 30, 2013, compared to the same period of fiscal 2012.
Domestic sales excluding Lysonix and AutoSonix products to Covidien increased 11.2% to $7.2 million for the 12 months ended June 30, 2013 compared to the comparable period of fiscal 2012.
There are 38 BoneScalpel consigned units placed in fiscal 2013 and the company has a total of 51 units on consignment. BoneScalpel disposable revenue increased 65%, SonicOne disposable revenue increased 115% and SonaStar disposable revenue decreased 3% for the 12 months ended June 30, 2013.
Net royalty income increased 249% to $2.4 million for the 12 months ended June 30, 2013 compared to the same period of fiscal 2012. The company reported a net loss for the 12 months ended June 30, 2013 of $2.7 million or $0.38 loss per share including a $176,000 income from discontinued operations compared to net income of $366,000 or $0.05 earnings per share, which included $975,000 of income from discontinued operations as of June 30, 2012.
The 12 months ended June 30, 2013 also included inventory reserves for Soma and Anika Hyalomatrix of $850,000 and Soma minimum gross profit accrual of $440,000 for total charge against gross profit of [$1,290,000] [ph].
Revenue for the three months ended June 30, 2013 was $3.8 million, 17 BoneScalpel units were consigned for the quarter, which resulted in total BoneScalpel domestic disposable revenue increasing a 167% to $339,000 from the same period in the previous year. SonicOne disposals for the quarter increased 309% to $101,000 from the same period in the previous year. The company recorded inventory reserves for Soma and Anika Hyalomatrix of $850,000 and the Soma minimum gross profit accrual of $188,000 for a total charge against gross profit of [$1,038,000] [ph] for the quarter.
The company reported a loss for the three months ended June 30, 2013 of $1.5 million or $0.22 loss per share. The company’s cash position as of June 30, 2013 was $5.8 million, days sales outstanding at 73 days, inventory turnover is 1.8 times and the company has no long-term debt.
The company’s backlog of unfilled orders as of June 30, 2013 was 579,000 most current orders are shipped when received. I’d like to turn this back to Mike.
Michael A. McManus, Jr.
Operator we will take some questions now.
Question-and-Answer Session
Operator
(Operator Instructions). And our first question comes from Joe Munda at Sidoti & Company.
Joseph Munda - Sidoti & Company
Real quick. Just a couple of housekeeping questions, just looking at the release here and we appreciate the breakout, it’s very helpful. So BoneScalpel revenue for the year was 6.3 and BoneScalpel disposable revenue was $4 million, so I am assuming $2.3 million of that was direct system sales, is that correct based on its placement model?
Richard Zaremba
It's systems, it could be accessories and it could be rentals.
Joseph Munda - Sidoti & Company
Okay. And I guess the same goes for SonicOne system sales, I'm looking at roughly $875,000, so it's the same type of situation?
Richard Zaremba
That is correct. Yeah.
Joseph Munda - Sidoti & Company
Okay. Rich on the gross margin, it took a dip here in the quarter, but I realize you took some reserves here on Anika and Soma. Can you give us a little bit more color on what exactly you are doing with Anika and Soma and what's going on and what we can expect going forward?
Michael A. McManus, Jr.
Yeah. So let me handle that if I could Joe please. So we had two agreements one with Anika Therapeutics to distribute their products called Hyalomatrix, which is a tissue regeneration product that is put on a wounds after they’ve been debrided. And they had a change in their 510(k) that took away some of the market rights that we had negotiated for that and a couple of the other product related reasons caused us to terminate that agreement. And we are in discussions with them about settling our dispute with them and resolving those issues. And the product that we have in the meantime, the date, the shelf life is running out. So we thought it was appropriate because of the status and because of the shelf life to take a reserve against the Anika inventory.
With Puricore we had a distribution agreement to distribute a product that is a wash for wound that was called Soma. They had a problem with their 510(k) with the FDA where the FDA changed the label and the product had some difficulties meeting the specifications and we terminated that agreement. They claim that we hadn’t or couldn’t. And we are in discussion with them. We think that matter will be resolved, but we did reserve for some of the inventory that we have there as well.
Joseph Munda - Sidoti & Company
Okay. So I mean are we expecting this, I guess did you included all in this fourth quarter or are we expecting further I guess reserve write-downs going forward?
Richard Zaremba
It is included in the fourth quarter and the full, as Mike had mentioned, the full Soma inventory is reserved and probably 90% of the Anika inventory is reserved.
Joseph Munda - Sidoti & Company
Okay. So if I back that out, I mean and add back let’s say that inventory, you guys would have been at roughly a 60% gross margin, is that correct?
Richard Zaremba
I would say that's fair.
Joseph Munda - Sidoti & Company
Okay. And is that a sustainable, and that leads to my next question, is that sustainable going into fiscal ’14, is that a type of margin that we should expect going forward?
Michael A. McManus, Jr.
I think the model is based, as we've said upon in the United States the consignment of the product and the margin on the blade, so long as the pricing of the blades maintains its present level, we should expect to be able to make something around that margin.
Joseph Munda - Sidoti & Company
Okay, okay. That's very helpful. And as far as just to go over one more time, the payback on the consignment what on BoneScalpel and SonicOne, what - I mean what are we talking as far as the timeframe, you consign it and then the disposables, I mean how long till you see your breakeven on that or the payback is on both of those machine?
Michael A. McManus, Jr.
So that depends upon exactly the formula we use for selling. And in the United States right now we will consign a unit and reach an agreement for X number of disposables per month for a year. And let’s say that agreement is for five disposables at $400 of disposable the payback is three months.
Joseph Munda - Sidoti & Company
Okay.
Michael A. McManus, Jr.
So it’s very quick.
Joseph Munda - Sidoti & Company
Okay.
Michael A. McManus, Jr.
Thanks to the margin in the blades.
Joseph Munda - Sidoti & Company
That’s helpful. As far as the regulatory approval, congratulations I know that’s a big deal. When can we expect you guys to start shipping product or have you shipped product and you were just waiting for the approval or your Chinese distributor was just waiting for approval. When can we start to see incremental revenue from that Chinese approval?
Michael A. McManus, Jr.
We have started shipping product to China, we shipped some product early for them to demo the product at a show. You might remember in Shanghai last year where they had something like 100 doctors that had the opportunity to use a couple of BoneScalpels and that's really helped to feed the interest that the Chinese are showing now. So we're shipping now and we would expect that to build over the year.
Joseph Munda - Sidoti & Company
Okay. Any words from the J&J and Covidien I guess lawsuit that’s going on and what that means to Misonix, any update?
Michael A. McManus, Jr.
The only thing we know Joe is that, J&J has noticed an appeal. I don't know that they filed the appeal papers, but they did over the summer notice the appeal. So I would expect that, that's a while before that will be heard and determined. In the meantime, the interest continues to grow.
Joseph Munda - Sidoti & Company
Okay. And then last one and then I’ll hop back in the queue. In your prepared comments you talked about investing roughly $1.7 million extra this year in SG&A, (a) is that a level that we should expect going forward or as a percentage of sales or what basically is that. What is being invested, I mean is it more reps, where is that money going?
Michael A. McManus, Jr.
Well, it was last year for a director of sales for spine, it was for a couple of regional reps, it was for a marketing person and we'll see some additions to our staff. But I don't see a lot of additional expenditures for people. Our level right now in terms of managing our distributors is where we wanted to be. We may be adding some more people on the marketing side and we may be doing some things that are marketing support kinds of things for shows and certainly we will be investing some more and supporting our science which continues to be important. So there will be some clinical expenses, but I don’t think you’ll see the expenses accelerate to the extent they did last year.
Joseph Munda - Sidoti & Company
Okay. So we are talking on selling expense line roughly $2 million a quarter then?
Michael A. McManus, Jr.
$2 million a quarter?
Joseph Munda - Sidoti & Company
Yeah.
Michael A. McManus, Jr.
No.
Joseph Munda - Sidoti & Company
No?
Richard Zaremba
Well, that's what the fourth quarter was.
Joseph Munda - Sidoti & Company
Yeah, that’s what the fourth quarter was.
Richard Zaremba
Yeah, I mean, some of the expenditures we’re timing when the expenditures came in and we expanded the effort, so I don’t think it’s going to be at that level.
Michael A. McManus, Jr.
I think it will be below that Joe.
Joseph Munda - Sidoti & Company
Okay. All right, that's helpful. Thank you, guys.
Operator
(Operator Instructions). Our next question comes from Steve Kruger at Foresight Investing.
Steve Kruger - Foresight Investing
In the press release, I see that you placed 165, sold or placed 165 BoneScalpel units in fiscal 2013. Later in the press release it says there were 17 BoneScalpel units placed during the fourth quarter that on the surface looks like huge deceleration in quarterly units placed. Am I reading that right or if not what am I missing?
Richard Zaremba
Well, first of all, the domestic consignments are in the U.S. The second is, it’s sold or placed so outside the United States. We had quite a few units that were sold. The consigned units were again just the domestic and 17 were in the quarter, 38 were in the year and the point on that is what is driving the disposable revenue.
Steve Kruger - Foresight Investing
So the 17 units placed in the fourth quarter, is only in the U.S.?
Richard Zaremba
That is correct.
Steve Kruger - Foresight Investing
Okay. Because the wording in the press release doesn’t make that clear right on thing, but anyway I might check that. All right so what were the total number of units sold or placed in the fourth quarter domestic and international?
Richard Zaremba
I have to work that number up, I don’t have right off hand.
Steve Kruger - Foresight Investing
Let me ask at this way then, are you seeing an acceleration in the rate of placement or say and/or sales in the BoneScalpel units?
Richard Zaremba
I mean we grow revenues by 33% year-over-year, so that indicate…
Steve Kruger - Foresight Investing
Throughout the year Rich, is the pace increasing?
Richard Zaremba
We’ll have to get to the numbers, but it should be there, a couple of factors there. One is how quickly the international distributor after they start pre-order and -- we because it's -- we don't have a firm history of that country by country, but it also depends upon when our funnel actually gets through this last gating period which of these valuable assessment committees, where we don't control the timing. So it could ebb and flow a little bit on the basis of that, but it should be in a positive upfront.
Steve Kruger - Foresight Investing
And what's the total number of active BoneScalpel units, either in place or in clinics around world right now?
Michael A. McManus, Jr.
Well, you mean that have been consigned or sold?
Steve Kruger - Foresight Investing
Yes.
Michael A. McManus, Jr.
Because there are some that have been evaluated and we don't talk about that number, but the total number of...
Steve Kruger - Foresight Investing
Yeah. The point that are either sold or placed and what's the installed base so of speak?
Michael A. McManus, Jr.
I think it is about 350 units sold or placed.
Steve Kruger - Foresight Investing
350, okay. And the total disposable revenue was $4 million for the year. And I know that you don't get a full year of disposables for the units placed this past year, that works out somewhere here in order of magnitude around $10,000 in disposable revenue per unit, installed (inaudible) right?
Michael A. McManus, Jr.
Well, remember the units that are sold outside the United States or sold to a distributor had a discount from the price that we sell them for in the United States. So the revenue to us from a BoneScalpel blade outside the United States is not the $400 we get in the United States.
Steve Kruger - Foresight Investing
Okay. But doing the arithmetic the average is also about $10,000.
Michael A. McManus, Jr.
On average, yes.
Steve Kruger - Foresight Investing
On average. And it’s a little bit higher in the U.S. a little bit lower internationally?
Michael A. McManus, Jr.
Yes.
Steve Kruger - Foresight Investing
Okay. And in terms of the number of reps, a feed on the street who are actively out marketing this in the U.S. Can you give us that number right now?
Michael A. McManus, Jr.
I think the number of distributors that we have that are managed by three regional reps of ours are our employees is 42 and the total number of feed on the street I believe is about 170 right now.
Steve Kruger - Foresight Investing
170 I thought it’s 42 (Inaudible)
Michael A. McManus, Jr.
Right.
Steve Kruger - Foresight Investing
And are you expecting that to continue to increase or.....
Michael A. McManus, Jr.
We've got pretty good penetration right now and that there are couple of holes we have to fill, but it’s, the difficulty is getting the right distributor and we think we’re getting to the point where we have better distributors than we had say a year ago. This requires a distributor that has a unique background in the spine market and has a unique relationship with the key doctor. The difficulty is that a lot of these distributors are spoiled and they are used to selling [bolts and screws] where you walk in and you can sell them pretty quickly. To sell a BoneScalpel you have to wait and spend some time with the doctor. And so we’re making sure that we have the right people with the quality relationships and with the ability to stick with it through a process that honestly have taken a little bit longer than we’d like. So we are starting through the distributors, but we think the number that we have right now is about right, we had about this time last year I think about 19.
Steve Kruger - Foresight Investing
Right. So you are reasonably comfortable that the distributor network is built out pretty much we wanted to be and then therefore increases in sales going forward are going to come from increasing productivity form the rep?
Michael A. McManus, Jr.
That’s right. And one of the keys to this is that the right distributors, the distributors that hunts and fishes and plays golf with a doctor that’s a high volume surgeon and can get us into see that doctor faster than any sales person that we could hire could ever do because the distributor in a lot of these cases is a guy that’s got a $15 million to $20 million business of his own and he has made his living over the last 20 years by selling quality products to his friend, a doctor who is probably making $1 million a year and does a lot of surgeries. That’s our kind of guy.
Steve Kruger - Foresight Investing
Yeah, okay. If I look at you have got about 170 or so that ballpark feet on the street selling this or placing it and your placements in the U.S. last year total were 38 that’s one for every four reps that leaves a whole lot of room for increases in productivity, does it not?
Michael A. McManus, Jr.
It does, but it also means that we didn’t have 41 reps for the whole year.
Steve Kruger - Foresight Investing
Okay. So that mean it’s if the product is as good as some of the doctors say as we should be saying a pretty steep ramp going forward?
Michael A. McManus, Jr.
Yes. As I said, I have yet to come across a doctor who didn't like and want to use the BoneScalpel. The difficulty for us right now is to get the right distributor, but also to get through this gaining process that our healthcare system has strangely and not only for the new best technology, if you are old technology, you don't have to go through this process. If you are new and better and unique, you have to go through a process and the process isn't determined by doctors, it's determined by not even just financial people, administrative people as well.
So, we're getting better at providing these [backs] as we call them with the kind of information they need to make a decision quickly based upon the doctor’s input, the science and the benefit that the product can have to the hospitals, the doctor and the patient.
Steve Kruger - Foresight Investing
Okay, very good. Thanks very much guys. Good luck
Michael A. McManus, Jr.
Sure. Thanks.
Operator
(Operator Instructions). Seeing no further questions, I would like to turn the conference back over to Mr. McManus for any closing remarks.
Michael A. McManus, Jr.
Thank you very much operator and thank you to everybody on the call. We appreciate your interest and involvement in the call. As I think you can see we're working very hard at not only introducing this unique technology to doctors, but also to build the important scientific support for what we do.
These efforts are ongoing around the world and will enable your company to realize continued strong growth we believe in fiscal 2014. Thank you again for being on the call. And have a good afternoon. Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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