Milestone Scientific Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; compared with the same 2018 periods. The company develops computer-controlled anesthetic delivery systems and disposable handpieces for dental and medical markets.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.258 million | $2.428 million | $4.174 million | $4.234 million |
| Gross profit | $1.506 million | $1.407 million | $2.803 million | $2.650 million |
| Gross margin | 67% | 58% | 67% | 63% |
| Operating loss | $1.108 million | $1.425 million | $1.926 million | $3.426 million |
| Net loss attributable to Milestone | $1.041 million | $1.343 million | $1.824 million | $3.217 million |
- Q2 revenue declined 7.0% year over year; six-month revenue declined 1.4%. Management attributed the Q2 decrease principally to a non-recurring 2018 order of about $400,000 from a Mexican distributor. Six-month dental sales were essentially flat; medical sales remained very small.
- Gross margin improved year over year, partly because 2019 had no comparable inventory write-down/reserve of approximately $290,000 recorded in Q2 2018.
- For the first half, operating expenses fell by about $1.35 million: SG&A decreased $1.21 million and R&D decreased $134,000. Management cited lower bonuses, patent amortization after the 2018 APAD patent impairment, and reduced professional fees; marketing and European regulatory-quality costs increased.
- Cash and cash equivalents were $2.338 million at June 30, up from $743,000 at year-end. First-half operating cash use was $622,000; investing cash use was $8,000. Financing provided $2.225 million, largely from February public and private offerings.
- Working capital was approximately $345,000, down from about $983,000 at December 31, 2018. Current liabilities were $5.951 million, including a $1.419 million derivative liability. Total liabilities were $5.951 million and stockholders’ equity was $837,000. The balance sheet reports no borrowings; it does report operating lease liabilities of $93,000.
Business developments, outlook and risks
- The dental business remained the principal revenue and gross-profit generator. One customer/distributor represented approximately 52% of dental sales in Q2 2019. Two distributors accounted for 82% of gross accounts receivable at quarter-end.
- The medical business had FDA clearance for the CompuFlo epidural system, but commercialization was early: the filing reports five U.S. medical systems sold to date and limited international sales. A CompuFlo training instrument was first sold in May 2019; it is for training only, not clinical use.
- Management said medical commercialization and selling costs were expected to rise. It was pursuing additional financing; without funding, the company might delay, scale back or eliminate some medical commercialization or development plans. The filing states that current liquidity was insufficient for at least the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. Management gave no assurance that financing or other strategic plans would be available on acceptable terms or at all.
- A new intra-articular FDA 510(k) application was intended for 2019, subject to funding. The filing describes prior application delays and FDA questions. The medical device’s slow-moving inventory reserve was approximately $452,000, primarily related to delayed commercialization of that product.
- Milestone China, a related-party distributor, owed $1.818 million at June 30; the company had reserved the receivable and associated deferred costs after payment-plan default and the distributor’s liquidity constraints. The company reported $50,000 of Q2 sales to China and $100,000 for the first half.
- The company remained out of compliance with NYSE American continued-listing standards, although the exchange had accepted a compliance plan with a May 20, 2020 deadline. Failure to regain compliance or make plan-consistent progress could lead to delisting procedures.
- February 2019 offerings raised approximately $2.25 million net in total. The company also disclosed that it lacked authorized common shares to cover approximately 4.85 million outstanding equity instruments; certain warrants and shares to be issued were therefore liability-classified and remeasured. Management planned to seek shareholder approval to increase authorized shares. Preferred stock mandatorily converted into 5,982,906 common shares in May.
- The filing reports no material litigation. It identifies manufacturing dependence, customer concentration, financing needs, commercialization and regulatory execution as material business risks. No formal revenue or earnings guidance is provided.
Investor verification priorities
- Confirm available liquidity, cash burn, financing plans and progress toward resolving the going-concern uncertainty.
- Track dental sales and distributor concentration, including receivable collections from Milestone China and other major distributors.
- Verify medical product sales, distribution progress, commercialization spending, and the status and funding of the intra-articular 510(k) process.
- Check shareholder approval and effects of increasing authorized shares, including potential dilution and changes in warrant/share liability valuations.
- Monitor NYSE American listing compliance against the plan deadline and the company’s ability to maintain its listing.