Milestone Scientific Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops computer-controlled anesthetic delivery systems; sales were primarily dental products. Medical revenue was not material. Figures are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.85m | $3.19m | $9.07m | $8.97m |
| Gross profit / margin | $1.81m / 63% | $1.67m / 52% | $5.75m / 63% | $5.30m / 59% |
| Operating expenses | $3.22m | $3.24m | $9.24m | $9.98m |
| Operating loss | $1.41m | $1.57m | $3.49m | $4.68m |
| Net loss attributable to Milestone | $1.41m | $1.70m | $3.40m | $4.21m |
| Loss per share, basic and diluted | $0.04 | $0.06 | $0.10 | $0.16 |
- Cash flow: Nine-month operating cash use was $1.56m, versus $4.12m in 2016. Investing used $0.20m; financing provided $0.46m. Cash declined by $1.29m to $2.31m.
- Liquidity: At September 30, cash was $2.31m, current assets $11.59m, current liabilities $5.05m, and working capital approximately $6.54m. Total liabilities were $6.45m; the filing reports no conventional borrowing balance. A $1.40m deferred financing transaction liability accompanies the China-share transaction.
- Other balance-sheet items: Inventory was $4.17m; accounts receivable, including $0.71m from a related party, totaled approximately $2.71m. Notes receivable under the China transaction totaled $1.15m, split between current and long-term portions.
Changes and operating developments
- Q3 revenue declined about 10%, as lower international shipments—particularly to Milestone China—more than offset higher U.S. sales. Nine-month revenue increased about 1%; domestic sales rose while international sales fell.
- Gross margin improved in both comparison periods, which management attributed to a greater U.S. sales mix, partly offset by special China pricing. SG&A increased in Q3 but declined for the nine-month period; R&D also fell, mainly because epidural and intra-articular clinical studies had been completed.
- Milestone received FDA 510(k) clearance in June 2017 for its CompuFlo epidural system and was beginning U.S. and foreign distributor outreach. The intra-articular 510(k) application had not been cleared; the company said it intended to submit additional data, potentially including a human-factors study.
- In July, the company acquired certain APAD patent and intellectual property rights for 1,646,358 shares valued at $2.486m, plus approximately $153,000 of seller legal fees. The acquired assets were capitalized and are to be amortized over five years. A further-share adjustment liability of approximately $167,000 was recorded.
- The company transferred its 40% Milestone China interest for stated consideration of $1.4m, including $125,000 cash and a $1.275m secured, non-interest-bearing note payable in quarterly installments. It retains a 10-year repurchase option. The transaction was accounted for as secured financing, not a completed sale; the China relationship remains under equity-method accounting.
- Share count increased: 32,989,724 common shares were outstanding at September 30, compared with 30,423,891 at December 31, 2016. In addition to acquisition and service-related issuances, the company reported stock options and warrants that could add dilution; these were excluded from diluted loss per share as anti-dilutive.
Outlook, risks, and unusual items
- Management said cash, receivables, and anticipated dental revenue were expected to fund operations for at least 12 months from the filing date. However, the company has a history of operating losses and negative operating cash flow and said it would likely need additional capital before achieving sustainable positive cash flow, potentially also to launch the medical business.
- Commercialization of the newly cleared epidural system depends on distributor development and market uptake. The filing gives no quantified revenue or earnings guidance.
- Customer and distributor concentration is significant: two customers accounted for approximately 67% of Q3 sales and 72% of nine-month sales; one was related-party Milestone China. The filing cites China’s inventory and liquidity conditions and defers revenue and costs on shipments there until resale to third parties.
- Milestone China reported a nine-month net loss of $2.39m and negative stockholders’ equity of $0.34m. The company reported $0.71m due from China’s agent and $0.66m of deferred China profit at quarter-end.
- After quarter-end, CEO Daniel Goldberger resigned effective October 2, 2017; Chairman Leslie Bernhard became interim CEO. Goldberger asserted entitlement to salary, benefits, and option vesting; the company disputed the claim and said it would contest it. The filing does not quantify any final resolution.
- The company reported no legal proceedings and stated that disclosure controls were effective. Management’s forward-looking statements are subject to risks and are not guarantees of performance.
Important facts for investors to verify
- Whether operating cash use continues to decline and whether additional financing is required.
- Whether the Henry Schein channel and new medical distributors generate sustained sales, and the timing of any medical revenue.
- Milestone China’s ability to pay receivables and note installments, sell existing inventory, and support continued related-party sales.
- The accounting, repayment terms, and repurchase-option economics of the $1.4m China financing transaction.
- The final APAD purchase-price adjustment, related dilution, and the Goldberger employment-contract dispute.