Milestone Scientific Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The interim financial statements are unaudited.
Business context and reporting period
Milestone develops computer-controlled anesthetic delivery systems. Its established dental business sells instruments and disposable handpieces; its medical business is commercializing the CompuFlo epidural system and CathCheck. Dental revenue accounted for nearly all sales in the period. The company reported that it was expanding U.S. dental distribution and had increased its medical direct sales force to 11 full-time employees by July 2021.
Financial performance and liquidity
- Q3 revenue: $2.11 million, up 69% from $1.25 million in Q3 2020. Dental sales were $2.08 million; medical sales were $32,000.
- Q3 gross profit and margin: $1.36 million and approximately 65%, versus $836,000 and 67% a year earlier.
- Q3 operating loss and net loss: $1.98 million and $2.06 million, respectively, compared with $1.48 million and $1.50 million in Q3 2020. Net loss attributable to Milestone was $2.04 million, or $0.03 per share, versus $1.49 million, or $0.02 per share.
- Nine-month revenue: $7.46 million, up 131% from $3.23 million. Dental sales were $7.33 million and medical sales were $124,000.
- Nine-month gross profit and margin: $4.53 million and approximately 61%, versus $2.20 million and 68% in 2020. Management attributed the lower margin mainly to lower-margin China sales.
- Nine-month operating loss and net loss: $5.84 million and $5.74 million, respectively, versus $6.26 million and $6.29 million. Net loss attributable to Milestone was $5.70 million, or $0.08 per share, versus $6.26 million, or $0.11 per share. The 2021 net loss includes a $276,000 gain from forgiveness of the PPP loan.
- Cash flow: Operating activities used $3.63 million in the first nine months, compared with $6.35 million in 2020. Investing activities used $19,000. Financing activities provided $3.92 million, primarily from warrant exercises ($3.15 million) and employee option exercises ($771,000).
- Liquidity and liabilities: Cash and equivalents were $14.49 million at September 30, versus $14.22 million at year-end 2020; working capital was approximately $15.7 million. Total assets were $20.08 million and total liabilities $4.05 million. The PPP note was forgiven; remaining reported debt-like obligations were principally lease liabilities, totaling approximately $607,000.
- Share count: 67.61 million shares issued at September 30; 67.85 million shares outstanding as of November 12, 2021. The company also reported 4.36 million outstanding warrants at September 30.
Material changes versus the prior comparable period
- Revenue rebounded as dental offices reopened: nine-month dental sales increased $4.13 million year over year. China contributed $1.39 million of nine-month sales, compared with none in the prior-year period.
- Higher sales did not translate into improved quarterly operating results: Q3 operating loss increased by approximately $504,000, as higher gross profit was more than offset by increased expenses.
- Nine-month SG&A rose $1.58 million to $9.73 million, including higher staffing and commercialization costs, board fees, royalties, quality-control and marketing expenses. R&D increased $351,000 to $588,000, principally related to potential STA development.
- Nine-month operating loss narrowed by $420,000, but the reported net loss also benefited from PPP loan forgiveness. The company raised no proceeds from a public offering in 2021; 2020 financing included approximately $18.0 million of net public-offering proceeds.
Outlook, management commentary, risks and unusual items
- Management stated that available liquidity was sufficient to support operations for more than a year after issuance of the financial statements. The filing provides no quantified revenue or earnings guidance, and cautions that interim results are not necessarily indicative of full-year results.
- Management described dental demand as recovering but uncertain. COVID-19, including potential further disruption, could affect customer demand, staffing, operations and commercialization.
- The company reported supply delays and higher-cost alternative delivery arrangements, particularly involving China. It relies on third-party manufacturers; the handpiece manufacturer is related-party United Systems, with which Milestone signed a 10-year manufacturing agreement in June 2021. Other manufacturing arrangements remain without long-term contracts or minimum purchase commitments.
- China-related risks include an unresolved planned merger, past distributor payment defaults, and a $269,973 allowance recorded in Q3 against related-party receivables and sales. The allowance is subject to quarterly review. The company also deferred approximately $407,000 of profit on sales to Milestone China at quarter-end.
- Medical commercialization remains early: the filing reports limited medical sales and notes that the company had sold 17 medical devices in the United States to date. The company is not currently pursuing FDA clearance for its intra-articular device.
- Unusual and governance-related items include substantial stock-based compensation, stock issued for services, and long-term compensation arrangements with a former interim CEO. Management reported effective disclosure controls and no material litigation.
Important facts for investors to verify
- Whether dental sales growth and gross margins are sustainable, particularly after accounting for China sales and the related-party allowance.
- Collection status of China-related receivables, the adequacy of the $269,973 allowance, and progress and final terms of the proposed China transaction.
- Medical device placements, recurring sales, adoption by hospitals and distributors, and the costs and timing of commercialization.
- Whether COVID-related supply delays, manufacturer dependence and purchase commitments affect product availability, costs or cash needs.
- Cash burn and runway against management’s liquidity assessment, while accounting for operating losses and ongoing equity compensation and potential dilution.