Milestone Scientific Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company develops and sells computer-controlled injection devices and related products, principally for dental use, and is seeking to commercialize its CompuFlo epidural system in medical markets. The statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $167,674 | $2,257,851 | $1,979,060 | $4,173,759 |
| Gross profit | $112,048 | $1,505,668 | $1,363,734 | $2,802,883 |
| Gross margin | About 67% | About 68% | About 71% | About 68% |
| Operating loss | $(3,172,890) | $(1,107,831) | $(4,781,496) | $(1,926,015) |
| Net loss | $(3,178,202) | $(1,053,243) | $(4,791,155) | $(1,846,438) |
| Net loss attributable to Milestone | $(3,166,464) | $(1,041,284) | $(4,766,679) | $(1,824,036) |
- Revenue and margins: Q2 sales fell 92.6% year over year; six-month sales fell 52.6%. Sales were overwhelmingly dental, with only $2,000 of medical sales in Q2 and $9,800 for the first half. Reported gross margin held relatively steady despite the sales decline.
- Expenses: Q2 SG&A was $3.18 million, up 26.2%; first-half SG&A was $5.93 million, up 28.2%. Management attributed increases partly to employee compensation and hiring for CompuFlo commercialization, relocation costs, and a $370,260 charge associated with the United Systems receivable transaction. First-half R&D rose to $215,650 from $101,875, primarily for CompuFlo and handpiece enhancements.
- Cash flow: Cash used in operations was $4.11 million for the first half, versus $622,279 a year earlier. Investing used $15,499; financing provided $19.22 million, primarily from equity offerings and warrant exercises.
- Liquidity and debt: Cash was $16.61 million at June 30, versus $1.52 million at year-end; working capital was approximately $16.5 million versus $1.2 million. Total liabilities were $4.00 million, including a $272,099 PPP note payable and operating and finance lease liabilities. Management stated that liquidity was sufficient to fund operations for at least a year after issuance of the statements.
- Equity financing and dilution: April and June public offerings generated approximately $19.7 million gross and $18.0 million net proceeds. The offerings included 12.19 million common shares and warrants; 63.20 million shares were outstanding at June 30, and 65.87 million as of August 14. Warrants and other share-based awards add potential dilution.
Material changes, outlook, and risks
- Management linked the steep sales decline to COVID-19-related dental office closures and reduced operating hours. It reported a slow pickup in dental instrument and disposable sales beginning in Q3, but said the impact on Q3 and possibly Q4 revenue, and on 2020 CompuFlo commercialization, could not yet be estimated.
- The company aims to expand dental sales, establish CompuFlo epidural distribution in the U.S. and Europe, and restart the intra-articular 510(k) application process later in 2020, subject to resources. The intra-articular device had not obtained FDA clearance; the epidural system had FDA clearance, but commercial sales remained limited.
- Key risks include continued pandemic effects on demand, customers and supply chain; dependence on two third-party manufacturers under informal arrangements; concentration in distributors; and uncertain acceptance and commercialization of medical products. One domestic distributor accounted for 37% of first-half sales; Q2 sales were also concentrated in one domestic and one international distributor.
- Milestone recorded a $370,260 expense related to acquiring United Systems’ unpaid China-related receivables. United Systems is a related-party manufacturer whose controlling shareholder is a significant company stockholder. The company also agreed to acquire Milestone China’s 50% interest in Advanced Cosmetic Systems through forgiveness of $900,000 in previously reserved receivables, with a one-year repurchase option for Milestone China.
- The China distributor restructuring remained delayed by the pandemic and regulatory closures. Milestone had received no China sales in the first half, and China investee financial information was unavailable. The company cited no material litigation and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether dental demand recovered and how Q3/Q4 sales, operating cash burn, and liquidity developed after June 30.
- Actual progress, distribution agreements, regulatory status, and revenue from CompuFlo and the intra-articular device.
- Offering proceeds, share and warrant terms, subsequent share counts, and the resulting dilution.
- Recoverability of China-related receivables and completion and terms of the China/Advanced Cosmetic transactions.
- PPP loan forgiveness status and any changes to manufacturing arrangements, distributor concentration, or supply continuity.
Note: The filing’s MD&A contains some inconsistent figures and typographical errors. Financial statement amounts above are taken from the condensed consolidated statements; confirm detailed comparisons against the filed statements and subsequent reports.