Milestone Scientific Inc. — Q2 2016 Form 10-Q
Business and period. Unaudited results for the quarter and six months ended June 30, 2016. Milestone develops computer-controlled anesthetic delivery instruments and disposable handpieces, sold through distributors in the U.S. and more than 47 countries. The company manufactures through third parties.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2016 / 2015 | $2.372m / $1.767m | $5.836m / $4.537m |
| Gross profit, 2016 / 2015 | $1.582m / $1.196m | $3.678m / $3.033m |
| Gross margin, 2016 / 2015 | 67% / 68% | 63% / 67% |
| Operating loss, 2016 / 2015 | $2.018m / $1.414m | $3.067m / $1.485m |
| Net loss attributable to Milestone Scientific, 2016 / 2015 | $1.587m / $2.073m | $2.379m / $2.492m |
| Basic and diluted loss per share | $0.06 / $0.09 | $0.10 / $0.11 |
- Six-month operating cash flow was a use of $3.023m, versus $2.410m in 2015. Cash declined from $4.194m at year-end 2015 to $3.184m at June 30, 2016. Financing included $2.0m from a private placement.
- At June 30, current assets were $11.694m, current liabilities $3.991m, and working capital approximately $7.703m. Total assets were $12.602m. The balance sheet lists no interest-bearing debt.
- Management said cash and anticipated dental-business revenue should fund anticipated obligations for at least 12 months, while funding for Milestone Medical would be limited during 2016.
Material changes and notable items
- Revenue increased 34% in Q2 and 29% in the first half year over year. Q2 growth reflected higher instrument and handpiece sales, including an STA instrument shipment to China. First-half domestic sales rose approximately $931,000; international sales rose approximately $368,000, although international handpiece sales declined.
- Gross margin declined, which management attributed to special instrument price reductions to a distributor intended to stimulate sales. SG&A and R&D increased substantially in the reported statements, in part because Milestone Medical and Milestone Education were consolidated in 2016. Management said pro forma consolidated comparisons show a smaller increase in SG&A.
- Milestone Scientific consolidated Milestone Medical, now approximately 86% owned, and Milestone Education as variable interest entities. The changed consolidation scope affects year-over-year comparability. The company’s share exchange for Milestone Medical shares resulted in 4.498m Milestone Scientific shares issued or to be issued through June 30.
- In June, the company raised $2.0m by selling 1.0m restricted common shares at $2.00 each. In July, it raised a further $250,000 by selling 104,200 shares at $2.40. As of August 11, 27,293,039 common shares were outstanding.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management expects the exclusive U.S. and Canadian dental distribution arrangement with Henry Schein, established in June 2016, to support domestic sales growth in the third and fourth quarters. This is a management expectation, not a guarantee.
- Management expects continued operating losses and negative operating cash flow unless revenue grows and costs are managed. It described cash sufficiency for the next 12 months as dependent in part on anticipated dental revenue and limiting Milestone Medical spending.
- Milestone filed for FDA 510(k) clearance for Milestone Medical’s epidural instrument in July 2016; clearance is required for U.S. commercialization. Medical-product clearance and commercialization timing remain uncertain.
- Key risks include sustained losses and cash burn; reliance on a small number of distributors and customers; an informal, purchase-order-based manufacturing structure and dependence on key suppliers; and funding needs at Milestone Medical. Three customers accounted for approximately 38%, 22% and 12% of first-half net product sales. A related-party supplier provided handpieces; first-half purchases were $1.121m and $687,522 was payable at June 30.
- Milestone China owed Wand Dental $1.156m for 2016 shipments, included in receivables. The filing reports a $127,663 deferred gross profit related to inventory not yet sold onward by China. The company also disclosed suspended China-investment losses of $363,833.
- The company reported no legal proceedings. It disclosed a headquarters lease through January 2020 and obligations under a CEO benefit arrangement and technology royalty agreement.
Investor verification priorities
- Verify the cash runway and operating cash burn, including the filing’s differing cash-flow descriptions: the cash-flow statement reports $3.023m used in operations, while MD&A describes approximately $2.8m.
- Track Henry Schein sell-through and whether the new distribution arrangement produces the anticipated domestic growth.
- Confirm the timing and outcome of FDA review and the funding requirements for Milestone Medical.
- Assess collection of the $1.156m Milestone China receivable, customer and distributor concentration, and the related inventory/profit eliminations.
- Separate operating trends from the effects of consolidating Milestone Medical and Milestone Education when comparing periods, and monitor dilution from share issuances and equity compensation.