Milestone Scientific Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The filing was dated November 16, 2020. Milestone Scientific develops and sells computer-controlled anesthetic delivery devices and related disposable products, primarily for dental applications, and is seeking to commercialize its CompuFlo epidural system in the medical market.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net product sales | $1.25 million | $1.90 million | $3.23 million | $6.07 million |
| Gross profit / margin | $836,000 / 67% | $1.38 million / 72% | $2.20 million / 68% | $4.18 million / 69% |
| Operating loss | $1.48 million | $947,000 | $6.26 million | $2.87 million |
| Net loss attributable to Milestone | $1.49 million | $2.84 million | $6.26 million | $4.66 million |
| Loss per share, basic and diluted | $0.02 | $0.06 | $0.11 | $0.11 |
Dental generated $1.24 million of Q3 sales and $3.21 million year to date; medical sales were only $6,000 and $15,800, respectively. Q3 revenue fell 34% year over year, and nine-month revenue fell 47%. Q3 operating loss widened despite lower SG&A, as lower sales and gross profit outweighed expense reductions. The lower Q3 net loss versus 2019 primarily reflects the absence of the prior-year derivative-liability remeasurement loss; year-to-date net loss increased.
For the nine months, SG&A increased 18% to $8.22 million, including higher employee compensation and bonuses, D&O insurance, office relocation costs and a $370,260 charge tied to the United Systems receivable transaction. R&D rose to $237,000, mainly for CompuFlo software and disposable enhancements.
Cash, liquidity and capital
- Cash and cash equivalents were $14.45 million at September 30, 2020, versus $1.52 million at December 31, 2019. Working capital was approximately $15.4 million, versus $1.2 million at year-end 2019.
- Operating cash use was $6.35 million for the nine months, compared with $1.28 million in the prior-year period. Investing cash use was $21,000. Financing provided $19.30 million, including $18.04 million net proceeds from two 2020 public offerings and $986,000 from warrant exercises.
- Total liabilities were $4.10 million, including a $276,000 PPP loan and lease liabilities. The PPP loan bears 1% interest, matures in April 2022 if not forgiven, and forgiveness is not assured.
- Management stated the 2020 offerings provide liquidity sufficient to support operations for at least one year after issuance of the financial statements. The company continued to incur operating losses and negative operating cash flow.
Material changes, outlook and risks
- Management attributed the sales decline principally to COVID-19 disruptions, including reduced hours and closures at dental offices. It reported a slow improvement in dental instrument and disposable sell-through in Q3, but said the effect on Q4 revenue and anticipated medical commercialization was uncertain. Management expected revenue to remain materially adversely affected in Q4 and possibly Q1 2021. No specific revenue or earnings guidance was provided.
- Medical commercialization remains early-stage: the CompuFlo epidural system received FDA clearance in 2017, but medical sales remained minimal. The intra-articular clearance effort was suspended because of the pandemic, with management indicating it would revisit the project in 2021.
- A Premier group purchasing agreement for CompuFlo and CathCheck became effective November 1, 2020 and runs through February 28, 2022. It makes negotiated terms available to Premier members but does not disclose guaranteed purchases or revenue.
- The company relies on third-party manufacturers under informal arrangements without long-term contracts or minimum purchase commitments. A disruption or termination could delay production and adversely affect results. One related-party manufacturer, United Systems, is a principal handpiece supplier.
- Customer concentration is significant: two distributors accounted for approximately 74% of gross receivables at quarter-end. The exclusive domestic dental distributor accounted for approximately 40% of Q3 sales and 45% of nine-month sales.
- The China distributor relationship and planned merger involving Milestone China and Anhui remained unresolved; regulatory documentation was delayed, and financial information for the China entities was unavailable. No China sales were reported in the 2020 periods.
- 2020 offerings and warrant activity increased share count materially. The company reported 63.6 million common shares issued at September 30 and 63.7 million shares outstanding as of November 16; warrants and shares to be issued create additional potential dilution.
- Other notable items: Milestone acquired the remaining 50% interest in Advanced Cosmetic Systems through forgiveness of a previously fully reserved $900,000 receivable, subject to a one-year repurchase option. The filing reported no material litigation and no material change in internal controls.
Investor verification priorities
- Track quarterly dental sell-through, distributor orders and receivable collections to distinguish COVID-related timing effects from sustained demand weakness.
- Monitor operating cash burn against the stated liquidity runway and assess whether losses or commercialization spending require further financing.
- Verify actual CompuFlo/CathCheck adoption, orders and revenue under the Premier agreement; confirm the status of the intra-articular regulatory program.
- Review PPP loan forgiveness, manufacturing continuity and related-party supplier terms, as well as concentration and collectability of distributor receivables.
- Assess fully diluted share count and warrant exercises, and follow the China merger and Advanced Cosmetic Systems repurchase option.