Milestone Scientific Inc. — Q3 2016 Form 10-Q
Business and period: The company develops computer-controlled injection systems and disposable handpieces for dental and medical use. This unaudited report covers the quarter and nine months ended September 30, 2016. Dental products generated substantially all sales; medical instruments had not yet received U.S. FDA clearance for the epidural and intra-articular markets.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net product sales | $3.19 million | $2.46 million | $8.97 million | $7.00 million |
| Gross profit / margin | $1.67 million / 52% | $1.67 million / 68% | $5.30 million / 59% | $4.70 million / 67% |
| Operating loss | $(1.57) million | $(0.84) million | $(4.68) million | $(2.32) million |
| Net loss attributable to Milestone Scientific | $(1.70) million | $(1.57) million | $(4.21) million | $(4.06) million |
| Basic and diluted loss per share | $(0.05) | $(0.07) | $(0.16) | $(0.19) |
For the nine months, operating cash use was $4.12 million, versus $3.76 million in 2015. Cash and equivalents were $2.32 million at September 30, down from $4.19 million at year-end 2015. Current assets were $10.74 million and current liabilities $4.40 million, implying working capital of approximately $6.34 million. The balance sheet reports no borrowings; interest expense was minimal. Management states it expects available cash and anticipated dental revenue to cover obligations for at least 12 months, while noting that additional capital may be needed before sustainable positive operating cash flow.
Changes, outlook, and risks
- Sales rose 30% in Q3 and 28% year to date, driven mainly by international instrument shipments to China. International sales were 96% of Q3 sales. U.S. sales fell in Q3 as Henry Schein sold down inventory; management expects its new exclusive U.S. and Canada dental distribution arrangement to support sales in Q4 2016 and 2017.
- Gross margin fell, despite higher sales, partly because of a special price reduction to a related-party distributor in a key international market. Q3 gross-profit dollars were essentially flat year over year.
- Operating expenses and losses increased, with comparisons affected by the consolidation of Milestone Medical and Milestone Education. Research and development expense also increased for development of a Botox-related instrument. The company reported a $554,766 equity-method loss from Milestone China for the nine months.
- Milestone Scientific increased its ownership of Milestone Medical to approximately 91% through a share exchange, issuing 5,035,042 company shares in exchange for 9,005,000 Milestone Medical shares. It also raised $2.0 million in June and $250,000 gross in July through share sales. Shares outstanding rose from approximately 21.7 million at year-end to 28.0 million at September 30.
- Management expected FDA clearance for the epidural and intra-articular instruments by the end of Q1 2017; timing depends on FDA review. The filing provides no formal financial guidance. Management also said medical-development spending could be controlled to fit the budget and that further capital may be required.
- Customer and counterparty concentration is significant: two customers represented approximately 70% of nine-month sales, and two customers represented approximately 78% of accounts receivable. Milestone China owed $1.85 million for 2016 shipments; the company had $381,113 of deferred intercompany profit in other liabilities. A related-party manufacturer supplied products, and termination or interruption of manufacturing could adversely affect operations.
- The company wrote off an $78,798 advance to Advanced Ocular Sciences after the anticipated Polish offering was not completed. Management reported effective disclosure controls and no material control changes; no legal proceedings were reported.
Important facts for investors to verify
- Whether Henry Schein’s inventory sell-through translates into sustained end-customer demand and higher domestic orders.
- FDA review progress and actual clearance timing for the epidural and intra-articular products, and the funding needed to commercialize them.
- Cash runway relative to continued operating cash burn, and whether additional financing will be needed.
- Collection of the large China-related receivable, distributor concentration, and the effect of related-party pricing on margins.
- Year-over-year comparability: Milestone Medical and Milestone Education consolidation changed reported expense and loss presentation; 2015 results are not fully comparable on a reported basis.