Milestone Scientific Inc. — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2017, with results compared with Q1 2016. Milestone develops computer-controlled anesthetic-delivery products, principally for dentistry; its medical products had not yet been sold in the United States. Dental products were sold domestically and in more than 47 countries.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Product revenue | $3.689 million | $3.569 million |
| Gross profit / margin | $2.287 million / 62% | $2.201 million / 62% |
| Operating expenses | $2.813 million | $3.145 million |
| Operating loss | $526,000 | $943,000 |
| Consolidated net loss | $578,000 | $1.261 million |
| Net loss attributable to Milestone Scientific | $505,000 | $750,000 |
| Basic and diluted loss per share | $0.02 | $0.03 |
| Cash used in operating activities | $874,000 | $1.389 million |
Revenue increased approximately 3%. The filing attributes the increase principally to instrument and handpiece sales to China. Gross margin was unchanged. Lower selling, general and administrative expense and research and development expense—primarily following completion or reduction of medical-product clinical and development work—contributed to the narrower operating loss. The China joint-venture-related loss was $44,000, versus $270,000 in Q1 2016.
Financial position and liquidity
- At March 31, cash and cash equivalents were $2.942 million, down from $3.602 million at December 31, 2016. Current assets were $11.337 million and current liabilities $3.622 million; reported working capital was approximately $7.7 million.
- Operating cash outflow was partly offset by $213,000 of financing proceeds, including a public-offering over-allotment and employee option exercises. The net decrease in cash was $661,000.
- The balance sheet lists no interest-bearing debt. Total liabilities were current liabilities of $3.622 million.
- Receivables from related parties were $683,000 on the balance sheet. The notes report that Milestone China owed $1.358 million at quarter-end; the filing’s presentation and reconciliation of these amounts warrant review.
Material developments, outlook and risks
- Commercialization and distribution: Management’s priorities included obtaining FDA 510(k) clearance for epidural and intra-articular instruments, developing medical-sector distribution, and expanding dental sales. Henry Schein’s exclusive U.S. and Canadian dental distribution arrangement was in place, with 25 sales specialists trained and in the field. Management expected the arrangement to support domestic sales, but gave no quantified sales guidance.
- FDA and development uncertainty: Management said epidural-device clearance might occur by the end of Q2 2017, while cautioning that timing and outcome were uncertain. The FDA had advised in December 2016 that the intra-articular device submission did not adequately establish equivalence; additional data, potentially including a human-factors validation study, was planned at an estimated cost of about $100,000.
- Liquidity outlook: Management believed cash, receivables and anticipated dental revenues would fund operations for at least 12 months from the filing date. The company nevertheless reported a history of operating losses and negative operating cash flows and said it might need additional capital before achieving sustainable positive cash flow.
- Customer and related-party exposure: Two distributors, one related party, represented approximately 79% of Q1 sales and 83% of accounts receivable. Milestone China paid $1.002 million in April 2017 for prior-period instrument sales, which the company recognized as Q1 2017 revenue. China-related revenue recognition also depends on payment and resale of inventory, with deferred intercompany profit of $675,000 at quarter-end.
- Supply and commitments: Products depend on third-party manufacturers; the filing warns that disruption or a change in supplier could materially affect operations. The company had instrument purchase commitments and advances on contracts totaling $862,000 at quarter-end.
- The company reported no legal proceedings and no material changes in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the anticipated FDA timing and any subsequent clearance for the epidural device were achieved, and what further evidence or costs the intra-articular submission requires.
- Whether Henry Schein’s sales activity translated into sustained revenue growth and whether its contractual minimum-purchase requirements were met.
- Collection of Milestone China receivables, resale of inventory, and the basis and timing of the $1.002 million prior-period sales recognized in Q1 revenue.
- Customer concentration, manufacturer continuity, cash burn and the company’s ability to fund operations without additional capital.
- The filing reports 167,081 common shares issued in the quarter, but the listed issuance categories sum to a different total. Verify the share-issuance reconciliation and outstanding-share disclosures.