Milestone Scientific Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 14, 2017. Milestone develops computer-controlled anesthetic delivery systems and disposable handpieces, with dental sales established and a U.S. medical-market launch planned following FDA clearance.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $2.524 million | $2.372 million | $6.213 million | $5.836 million |
| Gross profit / margin | $1.650 million / 65% | $1.582 million / 67% | $3.937 million / 63% | $3.678 million / 63% |
| Operating expenses | $3.203 million | $3.600 million | $6.015 million | $6.745 million |
| Operating loss | $(1.552) million | $(2.018) million | $(2.078) million | $(3.067) million |
| Net loss attributable to Milestone | $(1.479) million | $(1.587) million | $(1.984) million | $(2.379) million |
| Basic and diluted loss per share | $(0.05) | $(0.06) | $(0.06) | $(0.10) |
- Revenue rose about 6% in both comparison periods. Domestic sales increased, driven chiefly by handpieces; international sales fell, largely because Milestone China reduced purchases while working through inventory.
- Q2 gross margin declined from 67% to 65%, which management attributed to a price reduction for instruments in a key market. First-half gross margin remained 63%.
- Lower SG&A and research and development costs helped narrow operating losses. Management cited completion or reduction of medical-device clinical-study and development costs.
- First-half operating cash use was $0.952 million, versus $3.023 million in 2016. Cash and cash equivalents declined by $0.657 million during the half.
Liquidity, balance sheet and financing
- At June 30, 2017, cash was $2.946 million, current assets were $11.499 million, and current liabilities were $4.036 million; reported working capital was approximately $7.5 million. Total assets were $13.097 million and total liabilities were $5.436 million.
- No conventional bank or bond debt is identified in the supplied filing text. A June transaction involving Milestone China was accounted for as a secured financing: $125,000 was paid in cash and a $1.275 million non-interest-bearing secured note is receivable in quarterly installments. The balance sheet records $1.275 million in notes receivable and a $1.4 million financing deferral.
- Management said available cash, receivables and expected dental revenue should cover anticipated obligations for at least 12 months, while cautioning that additional capital may be needed before sustainable positive operating cash flow is achieved.
Outlook, risks and notable items
- The FDA cleared the CompuFlo Epidural Computer Controlled Anesthesia System for U.S. marketing in June 2017. The company was beginning distributor outreach and expected the clearance to create future revenue; the filing does not provide a revenue forecast or quantified guidance.
- The FDA had not cleared the CompuFlo intra-articular system: the company said its prior application lacked sufficient evidence of equivalence and that it planned to provide additional data, potentially including a human-factors study, for a new application.
- Sales and collections are concentrated: two distributors accounted for about 69% of Q2 sales and 75% of first-half sales; one was a related party. Two customers represented about 75% of accounts receivable at June 30.
- Milestone China shipments are affected by its inventory and liquidity concerns. The company defers revenue and related costs on certain shipments until resale to third parties and had $659,931 of deferred profit at quarter-end.
- In July, the company issued 1,646,358 shares valued at $2.486 million to acquire intellectual property. It also entered into new executive employment arrangements, including a ten-year agreement providing the former CEO annual compensation of $300,000, partly in stock, and a related ten-year consulting arrangement at $100,000 annually. These arrangements and the share issuance may affect future costs and dilution.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. The filing reported no legal proceedings.
Investor verification checklist
- Track conversion of the FDA epidural clearance into distributor agreements, product shipments and revenue, and monitor the status of the intra-articular application.
- Verify collection and repayment of the Milestone China-related receivable, subsequent related-party sales, deferred revenue/profit, and the purchaser’s quarterly note payments.
- Assess distributor and customer concentration, especially Henry Schein-related sales and the effect of Milestone China’s inventory levels on international revenue.
- Compare operating cash use with management’s 12-month liquidity assertion and monitor whether further financing is required.
- Review dilution and compensation implications of the July intellectual-property share issuance, executive options, stock-based compensation and employment agreements.