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Misonix Inc (NASDAQ:MSON)
Q1 2021 Earnings Call
Nov 5, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Misonix, Inc. First Quarter Fiscal Year 2021 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja -- Investor Relations

Thank you, operator, and good afternoon, everyone. Thank you for joining the Misonix Fiscal 2021 First Quarter Conference Call. We'll just start in just a minute with management's comments. But before doing so, let me take a minute to read the safe harbor language. 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 and can be identified by words such as anticipate, believe, estimate, expect, future, likely, may, should, will and other similar references to future periods. Examples of forward-looking statements include statements regarding guidance and relating to our financial results. Forward-looking statements are neither historical facts nor assurance of future performance and because forward-looking statements relate to the future.

They are subject to inherent uncertainties, risks and changes in circumstances. Therefore, you should not rely on any of these forward-looking statements, and the company undertakes no obligation to publicly update in 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 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 in percentage in accordance with GAAP can be found in today's press release as well as the company's website.

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

Stavros George Vizirgianakis -- President and Chief Executive Officer

Thank you, Norberto, and good afternoon, everyone. Thank you for joining us on the call today to review our first quarter results. Joining me on the call is Joe Dwyer, our Chief Financial Officer. The format of today's call is going to be slightly different than in the past, as we will be discussing the fiscal 2021 first quarter results first, and then we will be providing some overall guidance as I feel that some expectations are not well aligned. As previously discussed, the COVID-19 pandemic has had a significant impact worldwide on our company in 2020. We have had to make many tough decisions on a daily basis, and our team has been tested in unimaginable ways. We have had to adjust our behavior and business practices to be able to not only survive but prosper in this disruptive and uncertain environment. While we believe that the worst of the pandemic is behind us, we cannot say when this COVID-19 disruption will end and when things will be more predictable.

Although we exceeded our expectations and grew our business organically on many fronts, we reported a 9% overall pro forma decline in sales for Q1 versus prior year. The $17.7 million of revenue included growth of 21.5% in our domestic surgical business, that represented a decline of 12.6% in our wound business. International sales declined 35% over prior year. Our Nexus platform helped drive domestic revenue growth of 21.5% in the quarter, and we had some significant wins in both spine and neuro. As both spine and neuro procedures generate significant profits for most hospitals, we believe that this segment will remain healthy for the foreseeable future as long as we do not have further significant shutdowns. We are seeing hospitals, surgeons, nurses and patients adjust behavior in order to keep functioning in this environment. Our neuro spine sales teams have found innovative ways of engaging with customers, and we are looking to hire at least five to six new individuals by the end of fiscal second quarter as we experienced more overall stability in this market.

In a recent clinical publications in the Journal of Podiatric Medical Association titled, Diabetes-related Amputations, a pandemic within a pandemic, but also spoke of a tragedy unfolding during COVID-19, where diabetic patients with severe infections were between two to 10 times more likely to undergo an amputation. As we know, major implications are also associated with a 70% five-year relative mortality rate, but it's essential that diabetic patients needing care, do not experience any delay. As the delays could have catastrophic effects as we are seeing with a significant uptick in numbers of amputations globally. During the pandemic, a lot of wound care centers were forced to close, resulting in patients either not receiving care or going to alternative sites of care such as physician offices. We estimate that there has been between a 30% to 35% reduction in the number of patients treated in wound care centers. We have found this to be particularly challenging and a key reason for our decline in our tissue business.

Access is also very limited in these centers, and even patients and the members are restricted, making it almost impossible to launch new products during this time or to grow your market share. We have also seen disruption in certain markets more than others during this quarter. We have had some success with physicians' offices, but our established product is less favored to the setting of care than others due to the fact that it requires cold chain management and is also not the most profitable solution to providers that are more profit-orientated. We have ever grown our ultra sale debridement business over 30% during the quarter, as a result of increased focus in the hospital -- in the hospital OR. And this bodes very well for us, given our recent deal with Ginza to distribute their bilayer wound matrix, which is aimed at the larger wounds in the OR.

We are confident that when we are able to introduce our full range of products to the wound care centers and physicians, we will once again return to overall growth in the segment. Our international business came in better-than-expected at 35% below the prior year in spite of some tough comps, which included significant revenue from China during Q1 last year. I'm happy to report that we've managed to restore sales during the quarter and look forward to renewed Chinese revenue during the latter part of fiscal 2021. As you may know, certain major European countries started going back into lockdown and canceling elective surgeries for the rest of the year. So the international markets will be challenging for the remainder of the calendar year.

With that, I'd like to now turn the call over to our CFO, Joe, before continuing with the rest of my updates.

Joseph P. Dwyer -- Chief Financial Officer

Sure. Thanks, Stavros. Good afternoon, everyone. Taking a look at our financial results, first quarter revenue increased 59.1% to $17.7 million compared with $11.1 million in the first quarter of fiscal 2020. On a pro forma basis, assuming we had acquired Solsys for the full fiscal quarter 2020. And total revenues decreased 9%, driven by domestic surgical growth of 21.5%. Our pro forma wound revenue decline of 12.6% and as international revenue decline of 35%.

The our top line growth was achieved while maintaining healthy margins, with a gross margin percentage on sales for the first quarter coming in at 71.2% and compared with 71% in the first quarter of last year. Operating expenses increased by $6.5 million during the first quarter of 2021 to $15.7 million compared with the first quarter of last year, primarily reflecting incremental expenses associated with the acquisition of Solsys ended September last year. We also had higher bad debt expense in our first quarter.

I also want to highlight that if we look at operating expenses on a pro forma basis, assuming that we had acquired Solsys for the full fiscal first quarter last year and excluded M&A fees and bad debt expense. Our opex is actually down over 10% this year compared to last year. We have instituted cost reductions across the board, including salary and headcount, T&E, marketing activities and trade shows, discretionary spending and in a number of other areas where we see room for leverage without impacting our business effectiveness. In addition, we've taken a good hard look at additional cost efficiencies from our acquisition of Solsys and have been able to drive incremental cost savings on the back of the merger of the two companies.

Importantly, we have done this while ensuring that we adequately supported our revenue growth, including increasing sales headcount where necessary in supporting R&D initiatives. This led to a net loss of $5 million or a loss of 29% -- $0.29 per share compared with a gain of $1.8 million or $0.17 per diluted share in the prior year period. As a reminder, the prior year period included a onetime income tax benefit of $4.1 million. Adjusted EBITDA for the quarter was a loss of $2.2 million compared with a gain of $300,000 in the prior year period. This marks a significant sequential reduction of our adjusted EBITDA loss from $5.9 million in our prior quarter ended June 30. Moving on to cash flow and the balance sheet. We had $34.9 million in cash at September 30, and ended Q1 with approximately $44 million in debt.

We continue to be in compliance with all our debt covenants and we're very comfortable with our liquidity position. As it relates to working capital, at September 30, we had $42 million compared with $47.4 million at June 30. For the three months ended September 30, our cash used in operations was down to $3.8 million, reflecting a use of $2.8 million for working capital for inventory and accounts receivable, in addition to the net loss for the quarter. This compares favorably to cash used in operations of $5.4 million for our last quarter ended June 30 and the approximate $8 million used in the second and third quarters each of fiscal 2020, providing further proof of our efforts to streamline operations. We've been able to lower our cash burn during the last three quarters of Lighter South.

Also on the good news front, in October, we were able to resolve the payment issues with our Chinese partners, which resulted in $2.6 million of incremental cash, which further strengthened our cash position. In closing, our efforts during these unprecedented times replaced by -- in a position of added strength and improved our ability to leverage our opportunities ahead of us in the near, mid and long term. With $35 million in cash, we have to adequately support and invest in the growth drivers of the business. So with that, I'd like to turn the call over to Stavros for some additional commentary. Thanks, Joe. During this unprecedented time in our history, it's been very difficult to provide investors and analysts with 100% accurate forecasting data as things can change on a daily basis or a single announcement.

For those of you who have come to know me and Joe and the rest of the management team, you will know that we do not like to speculate or take an overly optimistic view of things as we value our credibility. We've been as transparent as possible during this pandemic by preannouncing results so that we can give you more insight into the business in a timely fashion, but we have found this to be more of a disruption in constructive. Thus, going forward, we don't intend to be preannouncing revenue results in the ordinary course of business. It's important to understand that we are building a differentiated business. And in spite of the challenges we are facing, we are staying the course and remain on track to reach our goals. We are neither a pure-play surgical or wound company, but a disruptive ultrasonic technology company that does not have a direct comparable company in the market today.

So we cannot be compared to other medical companies of our size as we are truly different, both in our business model and in the solutions we bring to the market. Nexus is at the center of our universe, and we're intent on leveraging our proprietary technology to disrupt various markets, improve patient outcomes and lower overall healthcare costs. Our disruptive business model was a winner before COVID-19 struck and is now even more relevant given the fiscal constraints and challenges, most healthcare providers face across the world today. When we made our first acquisition of Solsys Medical, our reasoning was not just to acquire revenue in a product, but much more important to acquire a larger sales channel and the opportunity to bundle ultrasonics and tissues in a way that have not been done before and that would be disruptive over time.

In a very short period, we've added both an amniotic, --and the bilayer wound matrix, Ceregene, to our human skin allograft solution, Theraskin, so that we have a more complete product offering. In the midst of our integration and launch phase, COVID-19 hit. So we'd only started seeing the early results of our vision, integrating two organizations in different locations is challenging in a normal environment so things have taken a bit longer than we originally planned. But we're almost done consolidating our Virginia operations and streamlining the team to yield a more effective and efficient operating platform. As you're all acutely aware, the failed tissue product space is a competitive space. So private healthcare funders are limiting reimbursement to products that have relevant clinical data.

Since we see ourselves as a long-term player in the space, we have made a significant investment in a 100-patient randomized controlled trial for diabetic foot ulcers. We hope to have enrollment completed by the end of 2020, and the overall study finished by the end of March or April of 2021. This will give us a good chance of getting expanded coverage with more private payer insurance company, which will help drive significant growth over time. We believe that with our unique ultrasonic debris in technology, combined with our regenerative portfolio, Theraskin Perion and Theragenics, that we are well positioned for growth over the long-term while enduring some choppiness in the short term. We exited the fiscal year having sold over 70,000 ultrasonic disposables, confirming that we are leading the ultrasonic resolution globally.

We are more convinced than ever that Nexus is a game-changer in the operating room, and we hope to achieve our goal of placing another 180 to 200 units during this fiscal year. We have numerous R&D projects on the go related to Nexus handpieces and disposables development and we're in the soft launch phase of our CTX probe for advanced agreement and hope to be able to do a limited launch of the microdiscectomy solution before calendar year-end as we continue to gather clinical data during the year. Microdiscectomy is an important opportunity for the company as we have seen added pressure to move spine procedures from the OR to the ASC setting, the ultrasonic microdiscectomy could offer surgeons and patients a great solution for the setting of care.

On the IP front, we have a healthy portfolio of over 122 issued patents, with more than 50% being issued during the last five years. We also have over 79 pending applications. So I'm confident that our new product pipeline has never been healthier. Our supply chain problems are squarely behind us, and our relationship with our vendors has grown during the pandemic as we have been fully transparent and they have accommodated our request without any disruption. During the pandemic, we've continued to invest in product registrations around the world that we can launch Nexus in many international markets in 2021 when business conditions normalize.

Our domestic sales force is back to almost 150 resources, and we will start adding additional resources again this quarter in select areas. As Joe has already shared, we have undertaken various initiatives to limit our cash burn, so we're in a good overall position from a financial perspective. While we expect to return to 20% plus sales growth over time, we are focused right now on getting back to base revenue of prior year over the coming months. And we are hopeful that we'll return to growth by our fourth fiscal quarter. In closing, I'd like to thank my team for their loyalty, hard work and dedication during this challenging period. As well as our shareholders for their patience as we continue to build a great business as 2020 will go down as the loss year for everyone.

With that, I'd like to turn the call over to the operator for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And we will take our first question today from Alex Nowak with Craig-Hallum Capital Group.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Let's start with sales. You mentioned the weakness that -- within the wound segment as a whole there, but you also mentioned that your debridement business is doing very well. Do you think the bundling of debridement and the tissue is still the game plan and the right strategy going forward? And maybe just comment on how that cross-sell strategy is working amid the overall market weakness.

Stavros George Vizirgianakis -- President and Chief Executive Officer

Yes. Thank you, Alex. Thanks for the question. I certainly think the strategy of bundling debridement and tissue is the right strategy over the long term. What we are seeing in the marketplace today is that it's increasingly difficult to get access to the OR if you're selling tissue alone. These are products that are seen by OR supervisors as reps not adding incremental value sell these products, physicians know how to use them. So debridement definitely gives the team a way to get into the OR. It also gives us access to the patient early on during the whole room healing process.

So if we were able to establish a link early on in the overall continuum of care, it gives us an opportunity to sell tissue at a later stage. So we think again that we've seen early signs of the success in our strategy in the market. We call 1, two punch the debridement and tissue. And what this is resulted in us doing is just having to refocus the sales force in just spending more time in the OR because we believe that we have a it offering and we need to get people into those cases of difficult the bigger wound that you traditionally don't find at the wound care centers and that you would find in the OR. So I think it's the early innings still of us rolling out the strategy. And what we're seeing, we're encouraged by.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

How do you think about taking that 1, two punch and now going over to spine and neuro? You obviously mentioned the microdiscectomy pot in the last call and then the neopatch, I think, applies to the neuro space. But what else can you do within those two categories to replicate what you're doing in wound?

Stavros George Vizirgianakis -- President and Chief Executive Officer

Yes. I think, Alex, it's all about building procedural solutions. So we looked at different segments of the market, whether it be spine or neuro. And we're looking for complementary products. So if you look at procedures like tumor removals, for instance, there are a number of other products that go with the ultrasonic technologies such as patches and sealants. So I think that we're continuously scouring the landscape for those opportunities.

And as we've always said, Nexus is the center of our universe that we want to use that technology to give us access to the physician and the OR and then drag along complementary product. It's our goal within the next two quarters to announce another collaboration strategically that will bundle products together with our ultrasonic technology. So we can't say much today, but we are looking at that strategy. We've taken that from the room strategy, and I believe we can apply it to the rest of our ultrasonic business.

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

That's great. And then maybe can you provide a bit more detail on what's happening in Europe right now with the recovery, obviously, had to surge cases way back then a long time they go now is just a couple of months ago than the summer holiday started and another surgical now. So where is Europe from a sales perspective and just your overall thoughts there?

Stavros George Vizirgianakis -- President and Chief Executive Officer

Yes. The last couple of months, we definitely saw some improvement in Europe, and we were getting pretty optimistic that the pandemic seem to be under control. Our sales team has weekly calls with our European partners. And just this week, my VP of Sales came in and was giving me an update on the latest developments in Europe, and they were told by our partners in the U.K. that the U.K. was essentially shutting down left of surgery until January next year.

And we expect the same to follow in Italy and Spain. So it looks like Europe is going to shut down pretty significantly on the left of surgery front. So that was a little bit of a a dampen it for us. But we also know that these cases are not going away. So one of the things that we did see during the pandemic when things opened up again, we saw disposable revenue pickup. I think capital equipment sales will still be disrupted. But I think the encouraging thing that we saw was these patients didn't just Vanish there was a bigger volume uptick when surgeries did reopen. So we can just really look at this as delayed surgery into 2021.

Operator

Our next question is from Kyle Rose with Canaccord.

Ian Tolle -- Canaccord -- Analyst

This is Ian Tolle for Kyle. You've mentioned before that you mentioned the farther you were seeing some of the less complex spine procedures moving over to the ASPS. Have you seen that continue over the last few months? And then can you talk a bit more about what kind of opportunity that environment would be for you? Is there anything missing from the portfolio right now that would help there?

Stavros George Vizirgianakis -- President and Chief Executive Officer

Sure. Thanks for the question. I think before the pandemic, we've seen a big shift in orthopedic procedures to the ASC centers, but our spine was one of the areas that was really lagging. So I think engaging with more of the spine surgeons closely during the pandemic because a lot of the surgeons had a lot of time on their hands. We're talking to them about the future of spines earlier and where they see it going. And there's definitely pressure on them to move the less complex procedures like single-level laminectomy and micro defect to those ASC centers. The other trend that you're seeing is in many instances, these spinal surgeons are going to have direct financial interest in these ASC centers.

So I think they're more motivated than before to do surgery in these centers for economic reasons. I think we have also realized that there is some reluctance from patients to go into hospital for smaller procedures. So I think they've also experienced demand, quite frankly, from patients. Ask them if they can do surgery in these other sites. When we look at procedures like microdiscectomy, we know there's more than 100,000 of these procedures being done a year. So the numbers could be pretty significant because if you look at it, these less complex spine procedures, you can do quite a couple of them on a single surgical list. So we think that it's an interesting space.

And it will be a good test in the next year. I think if we see the less complex procedures moving to the ASC center, there could be a bigger shift in the overall market over time. So I'd say, watch the space but we see this as really a new setting of care for spinal surgery.

Ian Tolle -- Canaccord -- Analyst

Perfect. And then on the last call, I think you mentioned that 15% of Nexus placements also included the neuro handpieces. Are you still seeing that same kind of ratio? Has there be any changes in terms of handpiece ordering patterns here over the last few months? And then any more details on the early uptake of that CTX Pro would be great as well.

Stavros George Vizirgianakis -- President and Chief Executive Officer

Sure. It's on the neuro side, we don't give specific numbers, but it is a healthy percentage. It is in the range that you referred to, and we remain enthusiastic that we will continue to see success in that neuro arena. CTX has been very, very well received. We've only introduced it into a handful of centers. Because one of the things is that during the pandemic, it's difficult to get new products into hospitals. But the early feedback from surgeons is they really love the probe, where they're doing these bigger trauma cases.

There's certainly a time saving, and the device also from a power perspective, functions very well because with an excess system, we're able to drive the power into this product more efficiently than we could with our smaller products on the analog platforms. So physicians are saying that in terms of feel, tittle factor and overall performance, there's a noticeable difference in CTX. So again, it will be interesting to see when we go into full launch in calendar One fiscal Q3 next year, what it looks like. But we think that, that's an exciting opportunity for us and the first new product on the Nexus platform. So an important one for us.

Operator

Our next question will come from Ryan Zimmerman with BTIG.

Carolyn -- BTIG -- Analyst

This is actually Carolyn on for Ryan. Can you -- us on Nexus, as some installed base growth, how should investors think about the incremental contribution from each system? And then could you maybe discuss the drivers to increase utilization there? Are there new indications or maybe new procedures? I think earlier, you mentioned new bundling strategy that you might be adding? And then I have one follow-up.

Stavros George Vizirgianakis -- President and Chief Executive Officer

Sure. Thank you. Thanks for the question. I think in terms of driving utilization in the accounts, we've seen that Nexus has got a lot of utility to a number of different specialties within the hospital. So it's still early to see and to quote accurate numbers of utilization per system. But we can tell you early data is telling us that the average revenue-generating the hospital on an expert system is higher than the legacy systems. First start, you have access to the soft tissue platform as well as hard tissue, where we want to go longer term, the microdiscectomy is really the first test of our thesis over here is to be able to do soft and hard tissue in a single procedure.

So right now, everybody is familiar with our business model. It's confining the console unit and then selling handpieces and disposables, but the difficult thing is that we are selling disposable one probe at a time. So when we look at procedures like microdiscectomy, you're using a probe and activating the bone cutting capabilities of the --to essentially perform the big compression and then you're using the aspiration capabilities of the units to actually remove the disk fragment.

So in that way, you can actually provide a procedural solution to the physicians, use twice the amount of probes that you would on a single procedure and also ensure that there's no subtle factor or downtime with surgeons having to bring in other technologies in the actual procedure. Everything is done on one platform, but with just two different disposables. So that's something that we're excited by. And quite frankly, why microdiscectomy is an important project for the company.

Carolyn -- BTIG -- Analyst

And then turning to tissue regeneration, specifically Taragen -- and Perion. What's the incremental margin contribution there? And do you need more headcount or more account managers to increase utilization? Or are your kind of traditional sales rep appropriate to carry those products?

Stavros George Vizirgianakis -- President and Chief Executive Officer

Sure. I think the whole idea behind bringing those products in there was to provide a wider range of solutions to the customers. And also to increase our revenue contribution by rest. So the idea is that these are products that we can plug-and-play into our existing sales force. I think that what we're seeing this quarter is we're expanding our sales force today.

And I think we'll continue to do that as we drive deeper penetration within accounts, I think we will get to the stage where you will to add additional people because of the revenue coming from this product. In terms of margin contribution, they're both in the range of 65% to 70% from a margin perspective. So not really dilutive to our overall margin. But early days in terms of success and how we measure this in the marketplace. But that answers the question.

Operator

And that will conclude our question-and-answer session. I would like to turn the call back to Stavros for any additional or closing remarks..

Stavros George Vizirgianakis -- President and Chief Executive Officer

Thank you, operator, and thank you, everyone, for spending time with us today. We appreciate your interest and continued support at Misonix. We look forward to talking to you next quarter. Goodbye.

Operator

[Operator Closing Remarks].

Duration: 31 minutes

Call participants:

Norberto Aja -- Investor Relations

Stavros George Vizirgianakis -- President and Chief Executive Officer

Joseph P. Dwyer -- Chief Financial Officer

Alex Nowak -- Craig-Hallum Capital Group -- Analyst

Ian Tolle -- Canaccord -- Analyst

Carolyn -- BTIG -- Analyst

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