Misonex, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: MISONIX, Inc. (MSON)
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Misonex, Inc. (NASDAQ:MSON) F4Q08 Earnings Call September 24, 2008 4:30 PM ET


Michael McManus – President, Chief Executive Officer

Richard Zaremba – Chief Financial Officer


Steve Jones – Aspen Capital

[Kari Jukartin – Private Investor]

[Sandric Brink – Private Investor]

[Michael Kaufman – Kaufman Brothers]


Welcome to the fourth quarter 2008 Misonex earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Mr. Kevin McGraff of Cameron Associates.

Kevin McGraff

Before I turn the call over to Michael McManus, President and CEO of Misonex Inc., I need to inform you that with the exception of historical information contained in this conference call, contents herein may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in certain 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 general economic condition, delays and risks associated with performance of contracts, physics 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, [inaudible] levels of statistical relevancy, risks 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, the timing of finding strategic partners and implementing such relationships, regulatory risks including approval pending and/or contemplated 510-K filings, the ability to achieve and maintain the profitability of the company's business lines and other factors discussed in the company's annual report on Form 10-K, subsequent quarterly reports on For 10-Q and current reports on Form 8-K.

The company undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this conference call. With that said, I will now turn the call over to Michael McManus, President and CEO of Misonex.

Michael McManus

As you know we have a number of significant accomplishments over the past year. All of our businesses are growing. We've raised cash without diluting our shareholders. At the same time, we've maintained all of our rights to our important high food technology. We've realized the benefit of our investment in R&D by the introduction of two new and important products, the bone scalpel and the Sonic One.

We've set up our own Misonex label distribution network in the United States. We've significantly increased the international distribution for the SonaStar bone scalpel and Sonic One in South American and in Europe. We successfully applied for and received another 510-K for the HIFU kidney application. Again, I would note that it's the only one ever received by any company for a minimally invasive application of HIFU.

Our backlog of unfilled orders is up 51% as compared to last year. Let me just give you a little bit more detail. We've announced we've started shipping our new bone scalpel bone cutting device to Aesculap, a domestic distributor who's targeting the large neuro spine market. Aesculap is one of the largest suppliers of surgical instruments and is a member of the [B. Braun] family of health care companies, a large German company.

The bone scalpel as you know has many advantages including the ability of the surgeon to cut close to the nerve tissue and spare soft tissue at the same time, reducing the likelihood of injury. This revolutionary device has distinct, specific applications in neurosurgery, in orthopedic surgery. We're also looking at the applications in [maxi] facial surgery and plastic and reconstructive surgery as well.

On the distributor side, we announced in the fourth quarter that we had entered into a three year exclusive distribution and service agreement including minimum purchase requirements with privately held Siad Health Care of Italy for the distribution of the SoniStar, the bone scalpel and the Sonic One products in Italy.

Siad Health Care distributed medical devices and capital equipment throughout the Italian market with special emphasis on neurosurgery, spine surgery and wound management, and we're very pleased with this new relationship in our partnership with Siad over the years.

Additionally, we initiated sales of our SoniStar system through MD International, a Miami, Florida based distributor of high technology medical devices to Latin America and the Caribbean. MD International has an excellent reputation and a strong track record in successfully introducing state of the art medical devices to their customers. Our relationship is off to a solid start and we believe this agreement is a strong step forward in our strategy to achieve greater market recognition of our advanced medical device products throughout that region.

We continue to strengthen our distributor relationships after the close of the fiscal year by entering into a new three year exclusive distribution agreement with privately held Intermedica located in Russia for the distribution of the Sonablate 500 HIFU system. The agreement provides Intermedica with rights to sell in not only Russia but in Belarus, Kazakhstan and the Ukraine, and also includes minimum purchase requirements. Intermedica has a quality reputation and distributes medical devised and capital equipment throughout the Russian Federation and surrounding countries and has been doing that for a number of years with special emphasis on neurosurgery, spine surgery and cancer surgery.

Following the new distributor relationship in the Russian Federation, we entered into a new two year exclusive distribution agreement with privately held North Med based near Prague in the Czech Republic for the distribution of the SoniStar, the bone scalpel and the Sonic One products. We're particularly pleased that they will be distributing three of our products through their well established pipeline.

All of these new relationships are part of our strategy to grow our medical products sales in large markets throughout the world. We're very pleased with these new relationships and expect to see the benefits throughout fiscal 2009.

During the quarter we took a very important step in establishing a new team of regional contract sales agents that will sell Mixonex label products on a commission only basis, directly to hospitals and clinics throughout the United States. As you know, the Sonic One wound management system is the first product sold by this new sales team. Sonic One is our ultrasonic wound debridement system which we believe represents breakthrough advancement for more effective cleansing and debriding of chronically infected wounds such as those contracted by diabetic patients.

The establishment of this sales group is designed to increase our market penetration and revenue potential for this important new product, as well as to build customer awareness and brand equity for Misonex in the United States. Additionally, we believe that this sales team which is highly experienced the in the sale of medical equipment and disposables, will provide us with the capability to more effective sell other Misonex labeled products to U.S. clinical customers in the years to come.

Among our other initiatives, we continue to develop our sales platform our line of products using high intensity focused ultrasound, our HIFU. These activities include the distribution of the Soniblate 500 for HIFU treatment of prostrate cancer in Europe on a fee per use basis. Although this program is running at about the same level as this period last year, as we transition from capital sales to a fee per use model, we anticipate the addition of new distribution agreements combined with an intense wide sales campaign that will expand SP 500 utilization in Europe.

We're on track with clinical evaluations using our Sonitherm product for HIFU [inaudible] of kidney tumors. After the close of the quarter we received yet another 510-K clearance from the U.S. Food and Drug Administration to market our Sonitherm 600-I HIFU soft tissue ablate in the United States which we use to ablate certain soft tissues and lesions, excluding the prostate gland and general surgery.

The Sonitherm 600-I system adds imagery in motion capability and represents an evolution in our Sonitherm 600 system that received FDA clearance in January 2006. Our Sonitherm system is the only HIFU based soft tissue ablation system that has received FDA clearance for general surgery.

We are supporting the development of our HIFU based soft tissue ablation system through a series of clinical cases being conducted under the guidance of noted HIFU expert Dr. Michael Marburger, Chairman and Professor of the Department of Neurology, Vienna, Austria. According to Dr. Marburger, procedures to date were successfully completed with positive ablation effect noted in tumors within human kidneys.

We expect to arrange for a number of leading physicians from the United States to observe the Sonitherm 600-I in clinical practice at the University of Vienna Hospital prior to performing surgical procedures in the United States. Once this is completed we anticipate the clinical data collection will take place at several sites in the United States prior to commercial sale of the product.

Our laboratory and scientific businesses continue to grow and we've seen a steady improvement in its performance. In early July, we announced the appointment of Neal Blewitt to be Senior Managing Director of our Labcaire subsidiary. Neal comes from to Misonex with over 20 years of business unit and general manager experience all in international manufacturing companies. Under Neal's leadership we expect to see continued growth in our Labcaire business.

For fiscal 2009 we're very focused on strengthening our distributor relationships, successfully launching SonicOne and the bone scalpel and developing important new sales channels for all of our medical device products in the U.S., Europe and South American. Together, we believe these strategic initiatives will deliver significant growth to Misonex in fiscal year 2009.

Let me now turn the call over to Rich for a review of our financial results.

Richard Zaremba

Revenues for the three months ended June 30, 2008 were $11.7 million, a 1% increase when compared with revenues for $11.6 million for the same period in fiscal 2007. The increase in revenues was due to a $177,000 increase in sales in laboratory and scientific products to $5.3 million partially offset by $39,000 reduction in sales in medical device products to $6.4 million.

The company reported a net loss for the fourth quarter of fiscal 2008 ending June 30, 2008 of $2.4 million or $0.34 loss per share compared with a net loss of $302,000 or $0.04 loss per share for the same period in fiscal 2007.

The company recording during the fourth fiscal quarter 2008 a $1.6 million non cash one time charge relating to the establishment of evaluation allowance against tax benefits taken against the company's losses during the past three years. As the company becomes profitable, we will be able to utilize the loss carried forward for a period of up to 20 years.

Revenues for the 12 months ended June 30, 2008 were $45.6 million, a 7.6% increase when compared with the revenues of $42.4 million for the 12 months ended June 30, 2007. Medical device product revenues increased $733,000 to $24.3 million and laboratory and scientific product revenues increased $2.5 million to $21.3 million.

The company's gross profit as a percentage of revenues increased to 42.4% for the 12 months ended June 30, 2008 from 41.7% for the same period in fiscal 2007. The increase in gross profits as a percentage of revenues is predominantly due to increased margins on both therapeutic and diagnostic medical product revenues as a result of favorable mix of high and low margin product deliveries.

The company reported a net loss for the 12 months ended June 30, 2008 of $2.9 million or $0.41 loss per share compared with a net loss of $1.3 million or $0.19 loss per share for the same period in fiscal 2007. Excluding the one time non cash tax valuation allowance of $1.6 million, the company would have reported a net loss of $1.3 million or $0.19 loss per diluted share for the 12 months ended June 30, 2008.

Working capital for the 12 months period ending June 30, 2008 was $8.8 million. Cash provided by operations totaled $680,000. The company used $1.7 million in investing activities, primarily for the increase in ownership of Senora to 95%. Cash used in financing was $41,000 which consisted primarily of netting proceeds and payments against the company's short term credit facility.

The company's backlog of unfilled orders as of June 30, 2008 were $10.9 million a 51% increase as compared to $7.2 million as of June 30, 2007. Medical device product backlog was $4.9 million and laboratory and scientific product backlog was $6 million.

I'd like to turn it back to Mike.

Michael McManus

We'd be happy to take questions at this time.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Steve Jones – Aspen Capital.

Steve Jones – Aspen Capital

I guess like all of your other shareholders, we're wondering when you're going to make some money. I realize you don't give guidance but you're now trading at a 12 year low. The last time you're stock traded this low was September 1996. You've been on the cusp of turning the corner now for several years. We've put a lot of money into R&D. Your cash flow comes up positive. I applaud that, but I think it's going to take some revenue growth and some profitability to get the stock moving. I'm wondering if you can give us some insight into fiscal '09 and whether or not you're going to continue to spend $3 million on R&D or whether there's some savings that can be had there now that you're through the 510-K process with a lot of these products. And wondering if you can give us some general thoughts on when we can expect to see some revenue upticks.

Michael McManus

We're very much aware of the beginning remarks that you made with regard to where we've been and what we have or have not been able to accomplish. I can assure you that we focus on that every day and we're not happy with the results this year either, although I do think that there's a lot of positive here.

When I look forward to 2009 I think there are a number of things that are important to recognize, and that is that our core platform of our medical devices, the product the AutoSonix with the [covidian], the mentor product, the neural aspirator, all of those are growing and will continue to grow. The AutoSonix has been flat and is an older product with U.S. surgical. That won't grow at the same rate to be sure, but the rest of our medical device products are going to continue to grow.

We've added value to them through line extensions. And we've also delivered into the market place the two new products that we spent some of the $3 million that you referred to on last year. I think both of those products are important products, unique products and very large categories. They're in the market place now. They're sales will be totally incremental to sales of last year because they weren't in the market at all. They'll be sold through Aesculap as part of a company that we've had a relationship with a long period of time and associated to some extent with the surgical aspirator in the domestic market place.

In the international market place you'll see that all of those products including the bone scalpel and the wound debrider, the SonicOne will be sold through a much broader distribution. The international distributors that we've developed over the last year, and not only South America but throughout Europe, that is growing substantially and I think the sales through those pipelines of professional distributors will grow as well.

I think the important element in the United States will be the establishment of our first ever opportunity to set up our own Misonex label distributorship for the SonicOne. That is in place now with approximately ten contract distributors that we paid on a commission basis only. We'll be growing that to a larger number.

We've brought those distributors from international markets and our new distributors in the U.S. markets into this company over the past several months. Some are here today being trained not only in sales of the product but in service as well. So we think the combination of the growth of our platform across the board, the fact that we have two new important medical devices that are in the market with broad distribution will help to grow not only the top line but the bottom line and I think there's a lot of reasons for us to be positive as we look into 2009.

Steve Jones – Aspen Capital

I know your balance sheet says $1.6 million in cash at June 30, but can you give us a feel for the fourth quarter and what your cash flow from ops was? Are you going to need to raise more money in the next 12 months or do you have enough cash resources to continue to run? As your sales go up you're going to have to feed receivables, that's a problem and if you're going to continue the R&D spending without sales going up. I think the whole market is nervous about things. Can you just give us some insight as to cash flow from ops, investing and financing in the fourth quarter?

Michael McManus

We have positive cash flow from operations. We generated cash without diluting our shareholders by the deal that we did with U.S. HIFU to raise cash. We got our debt paid back from a small private company and developed some liquidity in the shares that we had there. That's difficult to do and in this market would probably be impossible. I'm glad we had an opportunity to do that while at the same time maintaining all of our rights with regard to the various HIFU products.

We are generating cash flow. We finance our receivables through our line with Wells Fargo that has some additional room and we have cash that we have generated without diluting shareholders. At the end of 2009 we'll get the second portion of our debt repayment by U.S. HIFU including interest. So with the reduction that we would expect to see in R&D but including the additional expenses of growing out this network of distributors and a couple of additional people associated with that, I would expect that for fiscal '09 we have sufficient cash.

Richard Zaremba

Also the cash from the U.S. HIFU transaction does not reflected in our financial statements. That occurred in the beginning of July so that will be a first quarter event.

Steve Jones – Aspen Capital

What is the amount available on the Wells Fargo line right now?

Richard Zaremba

Up to $8 million.

Steve Jones – Aspen Capital

And how much is drawn?

Richard Zaremba

We have $2.4 million.

Steve Jones – Aspen Capital

You have $5.6 million or is that the max amount? Isn't it based on level of receivables?

Richard Zaremba

That's the max. It depends upon the level of receivables and some inventory.

Steve Jones – Aspen Capital

What's the available amount versus the drawn amount as of today?

Richard Zaremba

We have about $1.2 million that we have available to us as of today. But again that fluctuates depending upon the receivable position.

Steve Jones – Aspen Capital

How much is drawn? Is it all drawn right now?

Richard Zaremba

No. We have $1.2 million available that we have not drawn down that we could draw down today.

Michael McManus

In addition to the cash that we have on the balance sheet.


Your next question comes from [Cari Jukartin – Private Investor]

[Kari Jukartin – Private Investor]

I would like to see you continue to reduce the short term borrowing for the year. I don't quite understand why the accounts payable swelled by the amount they did and accrued expenses. Those three line items concern me in particular. I think it's very important after having several years making long term investments in R&D and developing sales channels that the company and one of the things that bothered me with your statement was that there was really in that mission statement you just made for going forward, there was no outward statement about keeping the balance sheet in control and moving us into the black.

I think it's very important that along with the employees, the shareholders have to be considered here. And the fact is that we're running a business and there really isn't much reason to run a business over a period of a decade or so if we can't do it profitably. I'd like to ask, where are the opportunities to save money in the company? We have three divisions and I don't know how many overlapping, overhead positions there are, but I don't know if this is the case, but if we have three accounting, payroll and three HR staffs among the different divisions I think that might be one area to look at reducing costs in and consolidating. Is there any possible initiatives that we can make there?

Michael McManus

We don't have that overlap. We do have a business in Longmont, Colorado that is doing extremely well on both the top line and the bottom line. It's growing very nicely. We've got a business in the U.K., Labcaire with a new product that we think is going to do very well, but most of those functions that you related to is potential overlap don't exist. Most of that is being run out of here.

One of the things that you said that I think I just have to make a comment to is that we are conscious every day of the fact that the owners of this company are the shareholders. My family is a large shareholder and so I'm reminded every day even when I go home. When I look at the balance sheet, when I look at our cash, when I look at what we have here to be able to run this company, and I look at the fact that this is a company with a balance sheet with very little debt and the ability to raise cash without diluting our shareholders, which a lot of people and investment bankers that come every day suggest we do in order to raise some additional cash, we've been very careful to make sure that we maintain our cash level such that we haven't diluted our shareholders, and we're not carrying excess cash without a use of proceeds for it.

I don't think that's fair to our owner shareholders. So I can assure you that we look at this balance sheet every day. We look at reducing our expenses. At the same time, there are some things that you need to do in terms of bringing on some additional people to run a new distribution network in the United States for the first time with a private label to be able to grow our distribution in the world.

For a small company in Farmingdale, Long Island to be able to have the distribution that we're building now around the world is an important growth factor for our shareholders. As you well know, there are a number of things in G&A that small companies can't control like an additional $200,000 for our first year compliance of stocks and a number of other things like that.

But all I can do is say to you that Rich and I and a number of people here scrub this as often as we can. We look at expenses and opportunities to cut and when we find them, I can assure you, we'll cut.

[Kari Jukartin – Private Investor]

I do want to mention, regarding shareholder equity, even though there hasn't been any significant share dilution the creditors of the company, as debt goes up, they slowly take a bigger position in terms of standing on the balance sheet. That is a concern, that there hasn't been direct dilution but clearly the debt situation is one that bothers people, and I think with the share price doing what it did today, it kind of speaks for itself that there has been a loss of confidence. While I applaud the initiatives, I applaud the products and your where with all and ability to bear through these storms of developing new products over the last several years, I applaud greatly, but I think we just have to put more emphasis on doing it profitably, even if it's a minor profit that we keep this balance sheet in a clean position and moving a little bit more into the black.

Michael McManus

I don't mean to dismiss one word of what you're saying. I agree with all of it. There is an issue here of credibility and confidence in what we're doing and we need to restore that. The best way that we can do that I believe is to grow the top line and the bottom line by bringing these products to market. We've taken the time to invest in them. I think it was the right thing to do.

The people and the doctors and the distributors, the customers that have seen them believe in the products. I think they're going to sell well, and that's the best way to grow ourselves out of this. I'm not happy with the share price, but I do agree with you that it does show that there is a question as to whether or now we're performing the way we said we were going to perform, and there's some credibility in whether or not we can deliver what we say.

Believe me, that's troubling to me, and we talk about it every day. At the same time, I believe that bringing these products to market was the right thing to do, and I think it's going to be reflected in a much better 2009 than what we've seen in 2008.


Your next question comes from [Sandric Brink – Private Investor].

[Sandric Brink – Private Investor]

You understand that you're market cap is probably one-third of sales which is pretty low, making it kind of vulnerable for buy out I would think.

Michael McManus

I can assure you I'm aware of that.

[Sandric Brink – Private Investor]

I'm in conversation a lot with some of the larger shareholders that I've helped put in this stock and recently they expressed some concern and some problem with executive compensation increases that you've put in place recently. I don't even know what you've done, but in light of the performance, maybe it shouldn't have been done.

Michael McManus

I don't think they're executive compensation increases. They're more people. That reflects the fact for instance, Mike Ryan, our new Senior Vice President of Sales and Marketing was not here last year. As a matter of fact, for some period of time after Paul Constantine left, I was your Senior Vice President of Sales and Marketing which may be a good or bad thing. The important thing was to find the right person to fill that slot, and when we did, our executive compensation went up as a result f that.

We also brought on a new gentleman with a tremendous amount of experience in building distribution networks to put together this sales force that we've been talking about to bring our own Misonex label to the market in the United States for the SonicOne, and we've hired a new person in Europe to help us build out the platform there.

So I think what's reflected in the question is really a couple of additional people more than anything else. If you look at the proxy statement for instance, certainly I haven't taken a salary increase for years, and most of the other salary increases are pretty much below market at about the 3% level. Because of the results, we haven't been paying big bonuses, so I think we've been responsible in that area.

But from time to time, you do have to bring on new people to either replace people or to build out the platform that's important for your growth.

[Sandric Brink – Private Investor]

My concern is with the Soniblade 500 in Western Europe, you don't seem to be growing very rapidly there. Are you having trouble training and motivating doctors to use the Soniblade 500?

Michael McManus

I'm not happy with the speed of the transition there, but the word transition is important. We don't want to be a seller of capital equipment. It's a one time sale. We recognize that we do have to do some of that, and one of the important additions that we've made just recently is a new distributor in Russia. Those will be capital equipment sales. They've done a lot of mining of the doctor universe n Russia and we think we'll see some good sales there.

On the other hand, what we've been doing in transitioning our old distributor network into more of a fee per use model and that takes some time. We've had some exclusive distributors in certain countries that had the right to be a distributor for a period of time and we have to wait until those people either want to revise those contracts or they were terminated. And then we would find a new distributor.

I think you'll see some new distributors coming on line. We do have some fee per use sales in Italy where we recently placed a product in Sardinia and Sicily. I think you'll see some sales in France. The U.K. will be growing and we'll be bringing on some fee per use distributors as well as selling capital equipment.

But the transition from the old network of exclusive capital sales, distributors to fee per use distributors is taking a little longer.

[Sandric Brink – Private Investor]

I've been trying to get a handle on the percentage of performance and the problems that have come up. There's some conflicting numbers. In the incontinence side I've heard 2% all the way to 22%. On the impotent side I've heard that as well, and then the urethra scarring, what are those numbers?

Michael McManus

I'm not sure what numbers you're referring to, but we haven't seen any incontinence in the work we've been doing recently in Europe, so I'm not sure where those numbers are coming from. With regard to impotency, the numbers about 22% but a great percentage of that, some 85% come back over time either naturally or with the use of, we use Cialis in Europe. So our numbers are not consistent with the numbers that you're talking about.

[Sandric Brink – Private Investor]

If I was going to be a prospective user of this equipment, where would I go to find the real numbers?

Michael McManus

I think you probably out to go to the two most recent papers that were put out by among other people, Dr. Mark Amberton out of the U.K. who presented one of them last year at the American Urology Association meeting and the numbers are consistent with the numbers that I just gave you.

At the same time, we have started a registry now in Europe, and that registry over time will include all of the procedures using the SV500 whether they're out of Japan, out of Mexico, Canada or out of Europe, so that a doctor will be able to go on to the registry and get an accurate update of the actual results that we're seeing.

It's going to be very transparent and people will be able to see the results that we're getting and they'll be able to identify the doctors that are getting the best results.

[Sandric Brink – Private Investor]

You're saying incontinence now is only around 2%?

Michael McManus

We haven't seen any incontinence recently in Europe.

[Sandric Brink – Private Investor]

You've been doing some road shows, meeting with some small institutions or as potential investors and I haven't seen any signs of any real success there in the market place. What are some of their objections to moving with purchasing of the shares?

Michael McManus

I've always said I'll go anywhere to talk to anybody and I'm happy to do that. We go to see people at some of these shows that are folks that are among other things could do some research on the company and some of them are people that invest in companies our size. I can tell you that in 95% of the cases that I sit down and talk to people they walk away interested in the story and one of their reactions is typically why haven't I heard of this before which suggests to you that we have to get out more.

On the other hand, in some cases when they look at the story and they look at a stock that is trading below five with very little volume and the size of some of these entities, these funds, are interested in taking a position of something like 200,000 shares typically. They're concerned about their ability to get in and out of the stock, and that has been a bit of a handicap.

[Sandric Brink – Private Investor]

Are you predicting any particular quarter when you'll gain profitability?

Michael McManus

No, I'm not giving any guidance on that except to say that I believe that our top line will grow significantly over what accrued last year across the board, and the bottom line will improve dramatically. Obviously we are a for profit company and we want to get there as quickly as possible.


Your next question comes from Steve Jones – Aspen Capital.

Steve Jones – Aspen Capital

The directors and officers of your company own about 24.5% of the shares as of the last proxy. Why haven't there been any insider buys? It strikes me that if everything is going as well as you say it is, there should be a lot of insider buying going on right now. That's something that I find odd, if you could comment on that.

The second piece is, I know your contract comes up here at the end of October. What is the status of that? Are you in negotiations to redo that and how many more options is that likely to cost the shareholders?

Michael McManus

As you know, insider buying is something that we're limited to some extent on certain windows, so obviously you're not going to see insider buying right now because we just released today. I would expect to see insider buying after this release when the window opens.

The second part of your question is that I serve at the pleasure of the Board of Directors and I think there is no issue with my contract and options is not a contractual thing in my contract. It's something that the Board and I discuss and they decide. So I'm going to be here. I'm planning on being here. I don't think there's an issue with the contract and whatever the options are, they are.

I can't tell you what they'd be right now, but I suspect on the basis of this performance, until we really get going there's not going to be a large number of options as part of any contract or agreement that I have. I think we have to prove to you and the other shareholders that the time that we've been putting in over the last couple of years and the investments that we've made are going to do now what we expect them to do.

I know we've said that in the past and we've wound up having to spend more money than we thought we were going to spend for things like FDA approval and some of those things can be predicted and some can't. Maybe we should be better at predicting them.

The answer to your question really is that I'm going to be here and I'm not expecting to be overpaid or to be over granted in terms of options until we do what we say we're going to do in terms of turning this company around.

Steve Jones – Aspen Capital

A couple of well placed insider buys will get your stock soaring and will shore up a lot of investor confidence. I know you know that but it bears, for all the directors of your company who may listen to the replay of this. The market is watching and it bears some thought about that.

It strikes me that we may be able to lessen some of the R&D expense this year. Is that an accurate statement or do you intend to keep it around where it is?

Michael McManus

I think that we spent a lot of money to accomplish what we've accomplished which is to bring two products to market. That's not to say now you can stop and not spend anymore. We also spent money to get the second 510-K approval in connection with our HIPU kidney product. That's expensive and we don't have to do that anymore.

So there will be I think the opportunity to have some reductions is R&D but there will also be some requirements of spending some additional money on the sales and marketing side. So I think, net net the important thing here is to grow the top line and I think we'll do that. I think the margins on the products that we're going to selling through the distribution that we have now in place are going to be better.

I think we'll manage the G&A now that we have the two or three new people on board that we need. Sales and marketing I think will be something that will be fairly level with what we have right now, and R&D ought to be a little bit less. So I think there's some opportunities in there to grow the top line to reduce some expenses, and to grow the bottom line.


Your next question comes from [Michael Kaufman – Kaufman Brothers].

[Michael Kaufman – Kaufman Brothers]

I see where you've done some really good things during the quarter but I share the concern of the prior shareholders. This is not a usual financing environment, and it's really critical that the company does what it has to do to get on an even keel financially in terms of cash flow because you never know when the bank are going to be not around even though they say they're around right now. We've seen it happen to much bigger companies that Misonex.

Because of these times, what can we do to ensure that we do have, we were approaching profitability but now the quarter shows a loss of 800 if I read the release, which means that our margin, we have to grow the top line $2 million to be profitable. Since the quarter over quarter or year over year increase was only 1% on the top line, and as the gestation period for getting these medical equipment products moving in terms of sales, that could be an extended period of time, and therefore the only way to ensure getting to a point of cash flow positive would be some action on the expense side. So I'm interested in your comments.

Michael McManus

I agree with all of your concerns and what you said. You and I have talked about this before. I think there's a couple of things. One is, I think we did the responsible thing in the U.S. HIFU transaction because I think that allowed us to raise some cash again without diluting our shareholders.

If you look at the 10-K and you look at some of the other information we've got out there, you'll notice that we about a year ago did a sale leaseback of our building that we owned in the U.K and we generated some cash from that. There's a second trigger on that transaction which is a company by the name of Tesco which is the large U.S. supermarket company is about to put a plan in place to be able to take over that property and to build out their supermarket that they have right next door.

They plan on putting that into the planning board shortly. There's a window within which the planning board acts and once the planning board has approved that plan which may be in this calendar year, we will have a payment to us of $200,000 and then after that we will have a payment of another $1.2 million as part of the completion of that transaction as we move Labcaire into a facility nearby that we will lease.

So there's a generation of cash there that we started about a year ago in anticipation of our cash needs. We'll also be getting some cash back from the second portion of the payment of our debt that's owed to us by U.S. HIFU. So we have put in place a number of things that I believe are going to help us generate some cash in addition to the cash that we'll be generating from operations.

I think you're exactly right in terms of the fact that we have to grow the top line, but you're also right in the fact that it's not just the top line, it's the reduction of expenses to be able to grow the company to a profitable position. We think that the growth on the top line is going to come from factors that we talked about; the new products in the market place, the fact that all of our businesses are growing. The international distribution, the U.S. distribution; all of those things are going to add up to incremental growth and new product incremental growth for 2009.

We just talked about the fact that with the people in place, and the fact that we've now gone through [Sox's] and the fact that we don't need to spend at the same R&D level necessarily there will be opportunities to reduce expenses as well.

So I think all of the points you made with regard to the important drivers for profitability and for the growth of this company can be put in place this year, fiscal year '09.


There are no further questions at this time.

Michael McManus

Thank you all for participating in the call. We continue to be excited about the opportunities that our medical device products have across the broad spectrum of applications. We recognize your concerns and as I said during the Q&A, we focus on them all the time. We are shareholders. We are owners in addition to being employees, so the fact that this is a for profit corporation is something that's important to us.

We think we've made some good progress in establishing a foundation for increased growth across all of our business segments. We remain optimistic about the markets we serve and the opportunities there. We believe that the new products we've created are going to be important, unique products in very, very large markets.

We're impressed by the opportunities that we have with some very large companies with success in distributing products around the world for them to distribute not only one but three and perhaps four of our products through a pipeline that already exists. The strength of our customer relationships is there, and most importantly, the important benefits that our products can provide to both patients and the medical community, because of their uniqueness and because of the markets that they serve, and the differences they can make in the procedures for which they are applied, we think it's going to generate substantial growth for us in fiscal year '09.

We thank you for your interest and we look forward to updating you on our next quarterly call.

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