Milestone Scientific Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Milestone develops computer-controlled injection devices for dental and medical applications. Its CompuFlo Epidural System received FDA clearance in June 2017, and the company is working to commercialize it. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.806 million | $3.689 million | Down 51.1% |
| Gross profit / margin | $1.243 million / 68.8% | $2.287 million / 62.0% | Gross profit down 45.7%; margin improved |
| Operating expenses | $3.245 million | $2.813 million | Up 15.4% |
| Operating loss | $(2.002) million | $(526,000) | Loss widened |
| Net loss | $(1.975) million | $(578,000) | Loss widened |
| Net loss attributable to Milestone | $(1.874) million | $(505,000) | Loss widened |
| Loss per share, basic and diluted | $(0.06) | $(0.02) | |
| Cash used in operating activities | $(541,000) | $(874,000) | Cash use decreased |
Dental revenue was $1.769 million, down 52.0%; medical revenue was $36,500, versus none in Q1 2017. Gross margin improved mainly because Q1 2018 had no China sales, which carried lower margins. Operating expenses included approximately $237,000 of patent amortization, versus approximately $18,000 a year earlier; R&D expense rose to $226,000 from $105,000, partly due to development of a cosmetic injection device.
Balance sheet and liquidity
- At March 31, 2018, cash and cash equivalents were $2.094 million, down from $2.637 million at year-end. Current assets were $11.007 million and current liabilities were $7.001 million, implying working capital of approximately $4.007 million.
- Total assets were $14.352 million, total liabilities $8.401 million, and stockholders’ equity $5.952 million. The balance sheet reports no conventional borrowings; it includes a $1.4 million deferred gain related to the China financing transaction, which was reversed in April as described below.
- Operating cash outflow was $541,000; investing outflow was $1,000, with no financing cash flow in the quarter. The company has incurred recurring operating losses and negative operating cash flows since inception.
- Management stated it believes available cash, receivables, and expected dental revenue will fund operations for at least 12 months from the filing date, but said additional capital will likely be needed before sustainable positive operating cash flow and may be needed to launch the epidural device.
Material changes and business developments
- Revenue fell by $1.883 million. Management attributed approximately $1.0 million of the decline to lower China shipments as the distributor worked through prior-year inventory and changed its strategy, and approximately $900,000 to lower U.S. and Canadian sales. Henry Schein had bought inventory in Q4 2017 ahead of a price increase.
- SG&A increased $311,000, primarily from higher corporate costs; management cited approximately $220,000 of additional amortization associated with patents acquired in 2017. The larger revenue decline and higher expenses drove the wider operating loss.
- Medical-device commercialization remained early-stage, with minimal epidural sales in the United States and Europe. The company hired global and U.S. sales executives in February and March and was pursuing distributors and market development.
- The company planned to file a new 510(k) application for its intra-articular device in 2018 after the FDA had found its prior submission insufficient to establish equivalence. Management said the application process was expected to begin in Q2.
Risks, contingencies, and unusual items
- China financing transaction: The $1.15 million note receivable was in default as of March 2, 2018. In April, the company repaid the purchaser’s $250,000 payment, received the return of 1.4 million Milestone China shares, and canceled the note. It derecognized the $1.15 million note and related $1.4 million deferred gain, recording no gain or loss.
- Customer concentration: Approximately 54% of Q1 sales were to one customer/distributor. Major distributors represented approximately 76% of accounts receivable at quarter-end.
- Manufacturing concentration: The company relies on a related-party manufacturer for handpieces under purchase orders without a long-term contract or minimum commitment. Disruption could materially affect supply. Purchase commitments included $186,965 remaining on an earlier order and $1.397 million on a January 2018 order; $984,408 of advances on contracts was recorded.
- Related parties and obligations: The company owed its related-party manufacturer $1.075 million at quarter-end. A $175,000 settlement with its former CEO was agreed in February; $80,555 was paid in March, with the remainder payable over nine months. A May consulting agreement provided for options to purchase up to 1 million newly issued shares at $1.00 each, subject to specified share purchases and other conditions.
- The company reported no material litigation. Deferred tax assets had a full valuation allowance; use of net operating losses may be limited by ownership-change rules.
Outlook and investor verification points
Management’s stated priorities were expanding dental sales, launching the FDA-cleared epidural system through distributors, and advancing the cosmetic injection device. The filing provides no quantified revenue or earnings guidance. Management’s liquidity assessment is qualified by its expectation that additional capital may be required.
- Verify the post-quarter China note cancellation, share return, and resulting accounting treatment.
- Track cash burn, working capital, and any financing needs against management’s stated 12-month liquidity expectation.
- Assess whether dental sales recover from the distributor inventory timing effects and China’s reduced purchases, and monitor dependence on the major distributor.
- Monitor epidural-device commercial traction, distributor arrangements, and the timing and regulatory progress of the intra-articular application.
- Review the effect of patent amortization, operating expenses, manufacturing commitments, and potential share issuance on future results and dilution.