Milestone Scientific Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018; filed November 14, 2018. The company develops and sells computer-controlled injection systems and related products for dental and medical uses. Dental products generated nearly all reported sales; medical sales were limited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Product sales | $1.62 million | $2.85 million | $5.86 million | $9.07 million |
| Gross profit (loss) | ($120,205) | $1.81 million | $2.53 million | $5.75 million |
| Gross margin | (7%) | 63% | 43% | 63% |
| Operating loss | ($4.55 million) | ($1.41 million) | ($7.97 million) | ($3.49 million) |
| Net loss attributable to Milestone Scientific | ($4.39 million) | ($1.41 million) | ($7.61 million) | ($3.40 million) |
| Loss per share, basic and diluted | ($0.12) | ($0.04) | ($0.22) | ($0.10) |
- Sales fell 43% in Q3 and 35% for the first nine months year over year. Management attributed the Q3 decline principally to a delayed Henry Schein restocking order, which was shipped in October for approximately $773,000; nine-month sales also reflected lower China sales.
- Gross margin weakened sharply. The company cited inventory reserves, a roughly $273,000 reserve for certain dental handpieces, and an approximately $790,000 allowance related to handpieces and devices sold to Milestone China. The company said it sought reimbursement for the handpiece issue.
- SG&A was $2.89 million in Q3, down from $3.21 million, and $8.75 million year to date, down from $9.00 million. R&D was $1,500 in Q3 and $216,000 year to date; management said cosmetic-injection-device development was delayed.
- A $1.54 million impairment charge was recorded for acquired APAD patents, which management said would not be developed for commercial launch before their estimated useful life expired, citing a lack of financial resources.
Cash, liquidity and balance sheet
- At September 30, 2018, cash was $414,829, current assets were $7.06 million, and current liabilities were $6.58 million, leaving working capital of approximately $476,000. Total assets were $7.63 million and stockholders’ equity was $1.05 million.
- Operating cash use was $1.96 million for the first nine months, compared with $1.56 million in 2017. Investing activities used $14,525; financing activities used $250,000. Cash declined by $2.22 million from year-end 2017.
- The balance sheet reports no conventional borrowings. The filing does, however, describe payables, purchase commitments and other obligations.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance. It said operations depend on improving cash flow and obtaining additional capital or strategic financing; there is no assurance funding will be available on acceptable terms or at all.
Material developments, outlook and risks
- Milestone China: The company does not consolidate this 40%-owned affiliate and accounts for it under the equity method. Milestone China missed a scheduled $200,000 payment; a further balloon payment of approximately $1.425 million was scheduled for December 2018. The company cited China’s liquidity constraints, reserved approximately $1.26 million of related-party receivables and approximately $790,000 of associated deferred costs, and continues to defer certain sales until payment is received. The affiliate reported current liabilities exceeding current assets and negative equity.
- Financing transaction: A purchaser defaulted on a note related to the 2017 sale of the company’s China shares. In April 2018, the company repaid the purchaser’s $250,000 payment, recovered the shares and cancelled the note; it reported no gain or loss.
- Commercial outlook: The CompuFlo Epidural System had FDA clearance for epidural injections, but sales in the U.S. and Europe remained minimal. The company was pursuing distributors and reported signing its first U.S. stocking-distributor agreement in October 2018. It was also responding to FDA questions on a June 2018 intra-articular 510(k) application. No quantified revenue or earnings guidance was provided.
- Sales and supply concentration: One customer/distributor accounted for approximately 35% of Q3 sales and 48% of nine-month sales. The filing also warns that reliance on third-party manufacturers without long-term supply contracts could disrupt production if a relationship ends.
- Other matters: The company purchased the remaining 50% of Milestone Education in September, bringing ownership to 100%. It reported no material litigation and stated disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Milestone China made the missed scheduled payments and the December 2018 balloon payment, and whether related-party receivables and deferred costs require further reserves.
- Whether the October Henry Schein restocking shipment and the new U.S. medical-device distributor produce sustained sales and cash collections.
- The company’s financing plans, cash runway and progress toward resolving the disclosed going-concern uncertainty.
- The basis and potential recovery, if any, for the handpiece reserve and the China-related allowances; also monitor inventory valuation and the impaired APAD patents.
- Progress on FDA review of the intra-articular application, medical-device commercialization, and the impact of outstanding options, warrants and shares to be issued on dilution.