Milestone Scientific Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are to the same periods in 2014. The company sells computerized local-anesthesia delivery products and is pursuing medical applications of its CompuFlo technology. It uplisted to NYSE MKT in June 2015.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.46 million | $2.54 million | $7.00 million | $7.66 million |
| Gross profit / margin | $1.67 million / 67.7% | $1.71 million / 67.3% | $4.70 million / 67.1% | $5.04 million / 65.7% |
| Operating income (loss) | $(0.84) million | $(0.16) million | $(2.32) million | $0.21 million |
| Net loss attributable to Milestone | $(1.57) million | $(0.36) million | $(4.06) million | $(0.33) million |
| Operating cash flow | — | $(3.76) million | $(0.003) million |
Q3 basic and diluted loss per share was $0.07, versus $0.02; nine-month loss per share was $0.19, versus a reported $0.00. Nine-month SG&A rose to $6.97 million from $4.75 million, exceeding revenue for the period. The company attributed increased costs mainly to compensation and travel, legal expenses, a consultant commission connected with a Polish grant, and expanded sales and marketing activity. Equity-method losses from Milestone Medical were $1.57 million for the nine months, versus $0.57 million; Milestone China also recorded a loss.
Liquidity and financial position
At September 30, cash and equivalents were $4.39 million, working capital was $11.14 million, total assets were $14.06 million, and current liabilities were $2.13 million. Cash declined $5.98 million from year-end 2014. The filing reports no conventional debt balance; it does report a $2.0 million note receivable from Milestone Medical. The related-party credit line was increased to $2.5 million in September 2015, and the note bears 3.25% interest. The company received a $0.5 million capital contribution from a noncontrolling interest during the period.
Changes, outlook, and risks
- Nine-month revenue fell 9%, mainly due to lower domestic handpiece sales following price increases and distributor inventory sell-through. International revenue increased, including instrument shipments, but foreign-exchange effects and handpiece declines weighed on sales.
- Management said cash reserves, receivable collections, and expected repayment of the Medical note should cover anticipated obligations for the next 12 months. It expected the $2.0 million note to be repaid in Q4 2015 or Q1 2016 through a planned Polish capital raise; repayment is not assured by the filing.
- A consortium led by the company’s Polish subsidiary was awarded a $4.2 million Polish government grant, of which the subsidiary is expected to receive approximately $1.5 million. The filing describes a commission expense related to obtaining the grant.
- The U.S. healthcare distribution partnership for CompuFlo epidural applications ended in June 2015 after delays in FDA clearance. Medical instrument development continued; the filing reports CE certification and new Polish and Italian distribution agreements, with shipments beginning in September.
- Key risks include recurring operating losses and cash use, reliance on a small number of distributors and customers, related-party transactions and receivables, and dependence on contract manufacturers. The filing cautions that replacing a manufacturer could cause expense and delay. Two customers represented 40% of nine-month sales; three customers represented 69% of period-end receivables.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceedings at quarter-end, although MD&A discusses distributor litigation settled during 2015.
Important facts for investors to verify
- Whether Milestone Medical repaid the $2.0 million note and whether the anticipated Polish financing and grant proceeds were received.
- Subsequent revenue, handpiece demand, pricing effects, foreign-exchange exposure, and customer/distributor concentration.
- Progress on FDA clearance, medical product commercialization, and the economics and timing of the new distribution agreements.
- Cash burn and expense trends, including the sustainability of SG&A and grant-related costs; the cash flow statement reports operating cash use of $3.76 million, while a note contains an inconsistent, unclear figure.
- Terms and potential dilution from the 7,000 outstanding Series A preferred shares, convertible at stated prices and subject to a 2019 conversion provision.