Milestone Scientific Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Milestone develops computer-controlled anesthetic-delivery instruments and disposable handpieces for dental and medical markets, sold through distributors in the U.S. and internationally.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparator |
|---|---|---|
| Net product sales | $3.57 million | $2.77 million |
| Gross profit / margin | $2.20 million / 62% | $1.84 million / 66% |
| Operating expenses | $3.14 million | $1.91 million |
| Operating loss | $943,388 | $71,143 |
| Consolidated net loss | $1.26 million | $427,634 |
| Net loss attributable to Milestone Scientific | $750,059; $0.03 per share | $419,375; $0.02 per share |
| Cash used in operating activities | $1.39 million | $681,191 |
At March 31, cash and cash equivalents were $2.67 million, down from $4.19 million at December 31, 2015. Current assets were $10.66 million and current liabilities $3.24 million; derived working capital was approximately $7.41 million. The filing presents no conventional borrowings on the balance sheet; it does not provide a clear total-debt measure. Management attributed the cash decline primarily to operating losses and financial support of Milestone Medical.
Material changes and operating developments
- Sales rose approximately 29%, primarily from higher instrument sales. Domestic sales increased to $1.68 million from $868,000, while international sales were nearly flat at $1.89 million versus $1.90 million.
- Gross margin fell four percentage points, which management attributed to instrument price reductions in key markets to encourage volume. Gross profit dollars nevertheless increased by approximately $364,000.
- Operating expenses increased by about $1.24 million. Management said consolidation of Milestone Medical drove much of the reported increase in SG&A; on a consolidated comparison adjusted for that change, expenses increased approximately $400,000.
- Milestone Medical was consolidated as a variable interest entity after its financing plans were suspended and Milestone Scientific concluded it required additional financial support. Subsequent to quarter-end, Milestone Scientific acquired another 37% of Milestone Medical through a share exchange, obtaining equity and voting control.
- The China joint venture contributed a reported $269,726 loss, compared with $96,674 of equity earnings in Q1 2015. Milestone also shipped $1.0 million of instruments to the venture; $825,340 was receivable at quarter-end.
Outlook, risks and other notable items
- Management expects the Henry Schein non-exclusive U.S. and Canada distribution agreement, effective January 1, 2016, to support dental revenue growth over the next 12 months. The distributor made its first instrument and handpiece order in Q1. No quantified revenue or earnings guidance is provided.
- Management stated that cash reserves should cover anticipated obligations for at least 12 months, assuming increased dental sales and control of Milestone Medical’s FDA-related spending. It also described Milestone Medical funding during 2016 as limited and expected FDA clearance for its epidural and intra-articular instruments around mid-year 2016; these are forward-looking expectations, not assured outcomes.
- The company has a history of operating losses and negative operating cash flow. Risks include dependence on distributors and major customers, reliance on contract manufacturers without long-term purchase commitments, and possible cost or delay if manufacturing relationships are interrupted. Two distributors represented approximately 21% and 35% of Q1 2016 sales.
- Notable expenses and compensation items include $310,000 of common stock to be issued for employee bonuses, $190,626 in technology royalties, and approximately $51,000 of quarterly expense under the CEO’s annual benefit-payment arrangement. A state income-tax provision of $46,834 was recorded.
- The filing reports no legal proceedings and states that disclosure controls were effective, with no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether Henry Schein distribution translates into sustained sales growth, and whether sales remain concentrated among a small number of distributors.
- Cash burn, working-capital needs, and the assumptions supporting management’s 12-month liquidity assessment, particularly funding needs for Milestone Medical.
- Timing and funding requirements for FDA clearance, and whether the expected clearances and resulting financing opportunities materialize.
- The economic and accounting effects of consolidating Milestone Medical and the post-quarter share exchange, including resulting dilution and obligations.
- The filing’s cover-page checkboxes indicate “No” for having filed all required reports during the preceding 12 months and for submitting required Interactive Data Files; investors should verify the company’s filing-compliance status and related context.