Milestone Scientific Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited, condensed consolidated financial statements. The company develops computer-controlled anesthetic delivery systems and related disposable handpieces for dental and medical markets.
Financial performance and position
- Revenue: Q3 net sales were $1.90 million, up 17% year over year; nine-month sales were $6.07 million, up 4%. Dental sales were $1.88 million in Q3 and $6.04 million year to date. Medical sales remained small: $15,500 in Q3 and $31,000 year to date.
- Gross profit and margin: Q3 gross profit was $1.38 million, a 72% margin, compared with a $120,000 gross loss and negative 7% margin in Q3 2018. Nine-month gross profit was $4.18 million, a 69% margin, versus $2.53 million and 43% in 2018.
- Operating expenses and loss: Nine-month SG&A declined 21% to $6.94 million; R&D declined to $110,000 from $216,000. Operating loss narrowed to $2.87 million from $7.97 million. Net loss was $2.85 million in Q3 and $4.70 million for nine months, compared with $4.40 million and $7.73 million, respectively, in 2018. Q3 2019 included a $1.90 million loss from changes in fair value of derivative liabilities.
- Cash flow and liquidity: Cash was $1.71 million at September 30, versus $743,000 at year-end 2018. Operating cash use was $1.28 million for the first nine months, partly offset by $2.25 million of financing proceeds, primarily from February equity offerings. Management reported negative working capital of approximately $1.9 million, compared with positive working capital of $1.0 million at year-end.
- Balance sheet: Total assets were $6.24 million and total liabilities were $7.65 million; stockholders’ equity was a deficit of $1.40 million. Current liabilities included a $3.22 million derivative liability. The filing does not report conventional interest-bearing debt as a separate balance-sheet line.
Material changes and unusual items
- Q3 domestic revenue benefited from a Henry Schein restocking order; international dental revenue declined, and China sales were zero in Q3 versus $300,000 a year earlier. Nine-month China sales fell to $100,000 from $300,000.
- Comparisons benefited from prior-year charges: a $1.54 million impairment of APAD patents, inventory and handpiece reserves, and China-related allowances. In 2019, a supplier credit of approximately $151,000 for defective handpieces reduced cost of sales.
- In February 2019, public and related-party private offerings generated approximately $2.25 million in net financing proceeds. The mandatory conversion of preferred stock in May resulted in 5.98 million common shares being issued.
- Because the company lacked enough authorized common shares to cover certain outstanding equity instruments, warrants and shares to be issued were classified as liabilities and remeasured through earnings. The company planned to seek shareholder approval to increase authorized shares at a December 17, 2019 meeting.
Outlook, risks and contingencies
- Going concern: Management concluded that available cash and liquidity were insufficient to fund operations for at least 12 months from the filing date, raising substantial doubt about the company’s ability to continue as a going concern. Additional financing or other strategic plans are needed; management gave no assurance they would be available on acceptable terms or at all.
- The company expects commercialization costs for its FDA-cleared epidural device to continue or increase. It was pursuing U.S. and international distributors; management said funding constraints could delay, scale back, or eliminate commercialization or development programs. The intra-articular 510(k) process was dependent on funding.
- NYSE American had accepted a compliance plan, but the company remained below continued-listing standards and was required to regain compliance by May 20, 2020 or risk delisting proceedings.
- Customer and collection concentration are significant: one distributor accounted for approximately 54% of Q3 and 51% of nine-month Wand Dental sales. Two customers represented approximately 91% of gross receivables. Milestone China, a related party and exclusive distributor, owed approximately $1.82 million; prior payment defaults and liquidity constraints led the company to halt shipments and maintain related reserves.
- Manufacturing arrangements generally lack long-term contracts or minimum purchase commitments. Disruption at key manufacturers could impair production and sales. The company also disclosed substantial related-party payables and transactions.
- No material litigation was reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Availability, timing, and terms of additional financing, and progress toward the company’s stated going-concern needs.
- Shareholder approval of additional authorized shares and the effect of liability-classified warrants and shares on reported earnings and dilution.
- Progress toward NYSE American listing compliance by May 20, 2020.
- Whether dental revenue growth is sustained beyond distributor restocking, and whether medical-device sales and distribution expand.
- Collection of concentrated receivables, particularly the Milestone China balance, and continued exposure to major customers and related parties.