Business context and reporting period
Milestone Scientific Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company develops and sells computer-controlled injection systems and related disposable handpieces, primarily for dental applications, while commercializing its CompuFlo epidural system for medical use.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Net sales | $2.43 million | $4.23 million |
| Gross profit / margin | $1.41 million / 58% | $2.65 million / 63% |
| Operating loss | $1.42 million | $3.43 million |
| Net loss attributable to Milestone | $1.34 million | $3.22 million |
| Net loss per share, basic and diluted | $0.04 | $0.09 |
For the six months, cash used in operating activities was $1.52 million, investing activities used $4,531, and financing activities used $250,000. Cash and cash equivalents were $866,000 at June 30, versus $2.64 million at December 31, 2017. Current assets were $10.98 million and current liabilities $8.11 million; management reported working capital of approximately $2.8 million. Total liabilities were $8.11 million; the balance sheet shows no outstanding note receivable or deferred gain from the financing transaction. The filing does not provide a clear figure for interest-bearing debt.
Material changes versus the prior comparable period
- Second-quarter sales declined 3.8% year over year; first-half sales declined 33.1%. First-half dental sales fell 33.1%, while medical sales were $76,100 compared with none reported in the prior-year period.
- First-half net loss attributable to Milestone increased to $3.22 million from $1.98 million. Operating loss increased to $3.43 million from $2.08 million, principally alongside lower sales.
- Second-quarter gross margin fell to 58% from 65%, which management attributed in part to approximately $290,000 of additional slow-moving inventory allowance. First-half gross margin was 63% in both periods, although gross profit dollars fell with sales.
- Cash fell by approximately $1.77 million during the first half. Inventory declined to $2.31 million from $3.38 million, including an increase in the slow-moving inventory allowance to approximately $510,000 from $220,000.
Outlook, management commentary, risks and unusual items
- Management expects available cash, receivable collections and anticipated dental revenue to fund operations for at least 12 months from the filing date. It cautioned that weaker sales, U.S. epidural launch spending, difficulty collecting the China affiliate receivable, or development-program spending could undermine that expectation and force programs to be delayed, reduced or eliminated.
- The CompuFlo Epidural System received U.S. FDA clearance in June 2017, but sales remained minimal. The company was building U.S. and international distribution, including by hiring sales executives in February and March 2018. No quantified revenue or earnings guidance is provided.
- The company submitted a new 510(k) application for its intra-articular device in June 2018; in August 2018, the FDA sent questions, which the company was reviewing. The filing also says cosmetic-device development was delayed in the second quarter.
- China-related exposure is significant. At June 30, related-party accounts receivable and deferred revenue were each approximately $2.8 million, with deferred costs of approximately $1.8 million. The company recognized no related-party revenue from Milestone China and its agents in the first half of 2018, deferring sales until payment because of market conditions and affiliate liquidity concerns. The China affiliate reported a $1.39 million net loss for the first half and a $3.67 million stockholders’ deficit.
- One customer/distributor represented approximately 44% of second-quarter sales and 43% of first-half sales. Major customer/distributor balances, including the China affiliate, accounted for approximately 84% of accounts receivable at June 30.
- A 2017 sale of the company’s 40% Milestone China interest had been treated as secured financing. After the note defaulted, the company repaid the buyer’s $250,000 payment, regained the shares and cancelled the note in April 2018; it derecognized the $1.15 million remaining note receivable and $1.4 million deferred gain without recognizing a gain or loss.
- Manufacturing arrangements generally lack long-term contracts or minimum purchase commitments, creating supply-interruption risk. A new device purchase commitment was approximately $1.40 million, against which $862,000 of advances had been recorded. The company also disclosed continuing operating losses and negative operating cash flows since inception.
Important facts for investors to verify
- Whether the company can collect the approximately $2.8 million China-related receivable and convert deferred shipments into recognized revenue and cash.
- Whether dental sales recover after distributor inventory adjustments and whether customer concentration declines.
- Progress in commercializing the epidural system, including distributor uptake, sales, launch costs and any additional financing.
- Cash burn, working-capital needs, inventory reserves and management’s 12-month liquidity assessment.
- FDA progress on the intra-articular application and timing or funding implications of delayed product development.
- Manufacturing continuity and the terms and execution of the device purchase commitment.