Milestone Scientific Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; interim financial statements are unaudited. Milestone develops computer-controlled anesthetic delivery systems for dental and medical markets. Dental products generated nearly all quarterly sales.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $1.916 million | $1.806 million; up 6.1% |
| Gross profit / margin | $1.297 million / approximately 68% | $1.243 million / approximately 69% |
| Operating expenses | $2.115 million | $3.245 million |
| Operating loss | $818,000 | $2.002 million |
| Net loss | $793,000 | $1.975 million |
| Net loss attributable to Milestone | $783,000; $0.02 per share | $1.874 million; $0.06 per share |
| Operating cash flow | $(220,000) | $(541,000) |
| Cash and cash equivalents | $2.740 million at March 31 | $743,000 at December 31, 2018 |
| Working capital | Approximately $2.1 million | Approximately $1.0 million at December 31, 2018 |
Dental sales increased 8.2% to $1.916 million; medical sales fell to $400 from $36,500. Dental operating income was approximately $492,000, while medical and corporate operating losses were approximately $492,000 and $818,000, respectively. No interest-bearing borrowings are identified in the presented balance sheet; total liabilities were $5.235 million, principally current payables and accruals. The company also reported $130,000 of operating lease liabilities.
Cash increased primarily because of $2.225 million in net proceeds from February public and private stock offerings. The company used $8,000 in investing activities.
Changes, outlook, and key risks
- Sales rose modestly, while gross margin declined by about one percentage point. Operating expenses fell by $1.129 million, reflecting lower SG&A and research and development costs. Management attributed SG&A reductions in part to fewer personnel, lower pension expense, lower professional fees, and reduced incentive compensation; R&D declined as development spending on epidural and intra-articular devices fell.
- Going concern: Management states that cash and current liquidity are insufficient for operating requirements for at least 12 months from the filing date, raising substantial doubt about the company’s ability to continue as a going concern. Management is pursuing financing, strategic plans, revenue growth, and expense reductions, but provides no assurance that funding will be available on acceptable terms or at all. Without additional funding, medical commercialization or development plans may be delayed, reduced, or eliminated.
- Commercialization: The CompuFlo epidural system received U.S. FDA clearance in 2017, but sales remain limited. Management expects selling costs to increase as it pursues U.S. and international distribution. The company intended to restart the intra-articular 510(k) process in 2019 after FDA questions and a delay required a new application. No quantified revenue or earnings guidance is provided.
- Customer and related-party exposure: Milestone China defaulted on a payment arrangement; shipments were halted. It owed $1.868 million at March 31, 2019, with prior reserves against related receivables and deferred costs. Two distributors represented about 79% of gross receivables. One customer/distributor represented approximately 52% of Wand Dental product sales in Q1.
- Listing and capital structure: NYSE American accepted the company’s compliance plan, but the company remained below listing standards; the plan targets compliance by May 20, 2020. The February offerings issued common stock and five-year warrants exercisable at $0.50. A shortfall in authorized common shares resulted in liability classification and recurring fair-value remeasurement for certain warrants and shares; the quarter included a $40,000 gain from the derivative liability’s fair-value change. The company planned to seek shareholder approval to increase authorized shares. Series A preferred stock has a $7 million liquidation preference and was scheduled for mandatory conversion on May 14, 2019; the filing estimated approximately 5.98 million conversion shares at the then-current adjusted conversion price, subject to further adjustment.
- Other items: The company adopted lease accounting in January 2019, recognizing right-of-use assets and lease liabilities; management reported no material effect on operations or cash flows. No material litigation was reported. The company filed a new $30 million shelf registration statement on May 2, 2019.
Important facts for investors to verify
- Whether the company secured sufficient financing after the filing and how long available cash supports operations.
- Progress toward NYSE American listing compliance by May 20, 2020, and any shareholder vote or authorization increase affecting dilution.
- Collection prospects for Milestone China and other concentrated receivables, and the adequacy of recorded reserves.
- Evidence of sustained dental growth and commercial adoption of the epidural system, including actual distributor orders and sales.
- The effects of preferred-stock conversion, outstanding warrants, and liability remeasurement on share count and future results.
- The filing’s controls discussion refers to an evaluation as of September 30, 2018 despite covering the quarter ended March 31, 2019; clarify the stated assessment date.