Milestone Scientific Inc.: Form 10-Q for the period ended Sep 30, 2022

The following discussions of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements contained in this report and in connection with management's discussion and analysis and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission, or SEC on March 31, 2022. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements.

OVERVIEW

Milestone Scientific is a biomedical technology research and development company that patents, designs, develops and commercializes innovative diagnostic and therapeutic injection technologies and devices for medical, dental and cosmetic use. Since our inception, we have engaged in pioneering proprietary, innovative, computer-controlled injection technologies, and solutions for the medical and dental markets. We believe our technologies are proven and well established. Our common stock was initially listed on the NYSE American on June 1, 2015, and trades under the symbol “MLSS”.

We have focused our resources on redefining the worldwide standard of care for injection techniques by making the experience more comfortable for the patient by reducing the anxiety and stress of receiving injections from the healthcare provider. Our computer-controlled injection devices make injections precise, efficient, and virtually painless.

Milestone Scientific has developed a proprietary, computer-controlled anesthetic delivery device, using The Wand®, a single use disposable handpiece. The device is marketed in dentistry under the trademark CompuDent®, and STA Single Tooth Anesthesia System® and is suitable for all dental procedures that require local anesthetic. Our proprietary DPS Dynamic Pressure Sensing technology® is our technology platform that advances the development of next-generation devices. It regulates flow rate and monitoring pressure from the tip of the needle, through platform extensions for local anesthesia for subcutaneous drug delivery, used in various dental and medical injections. It has specific medical applications for cosmetic botulinum toxin injections, epidural space identification in regional anesthesia procedures and intra-articular joint injections.

Milestone Scientific remains focused on advancing efforts to achieve the following three primary objectives:

• Establishing Milestone’s DPS Dynamic Pressure Sensing technology platform as the standard-of-care in painless and precise drug delivery, providing for the first time, objective visual and audible in-tissue pressure feedback, and continuing to expand platform applications;
• Following obtaining successful FDA clearance of our first medical device, Milestone Scientific is transitioning from a research and development organization to a commercially focused medical device company; and
• Expanding our global footprint of our CompuFlo Epidural and CathCheck System by utilizing a direct field sales force and partnering with distribution companies worldwide.

Because of combining the ability to regulate the flow rate and monitor pressure at the tip of the needle, Milestone Scientific developed the industry’s first solution for painlessly administering an intra-ligamentary injection, i.e., “single-tooth anesthesia” which could be used as the only injection necessary for achieving dental anesthesia, foregoing the need to administer traditional injections such as a nerve branch block. In addition to single-tooth anesthesia, the STA System can effectively perform all the traditional injections that dentists routinely give but can provide them virtually pain free and with numerous clinical advantages. This device, which also utilizes a disposable handpiece, is currently marketed by Milestone Scientific as the Wand STA® System.

Milestone Scientific believes its dental devices have set a new standard of care for dental injections. Our dental devices have been used to administer tens of millions of injections worldwide. Each of our devices has a related single use disposable handpiece, leading to a continuing revenue stream following sale of the device. At present, we sell disposable handpieces unique to our legacy product (the Wand and CompuDent) to users who have not upgraded to our current dental product, the Wand STA System.

Building on the success of our proprietary, core technology platform for dental injections, and desiring to pursue other growth opportunities, we have recently begun to expand the uses and applications of our proprietary, patented technologies to achieve greater operational efficiencies, enhanced patient safety and therapeutic adherence, patient satisfaction, and improved quality of care across a broad range of medical specialties. In June 2017, we received FDA regulatory clearance to sell the CompuFlo Epidural Computer Controlled Anesthesia System in the United States for certain medical applications. We intend to continue to expand the uses and applications of our DPS Dynamic Pressure Sensing technology.

We believe that we and our technology solutions are widely recognized by key opinion leaders (i.e., academics, anesthesiologists and practicing dentists whose opinions are widely respected), industry experts and medical and dental practitioners as a leader in the emerging, computer-controlled injection industry.

Wand STA Dental Market

Since its market introduction in early 2007, the Wand STA System and prior C-CLAD devices have been used to deliver over 80 million safe, effective, and comfortable injections. The instrument has also been favorably evaluated in numerous peer-reviewed, published clinical studies and associated articles. Moreover, there appears to be a growing consensus among users that the STA Instrument is proving to be a valuable and beneficial instrument that is positively impacting the practice of dentistry worldwide.

Beginning January 1, 2016, Milestone Scientific entered into a non-exclusive distribution agreement with Henry Schein, Inc. (“Henry Schein”) for distribution of The Wand® STA® Computer Assisted Anesthesia System, including its disposable, single-use handpiece, and certain related products (the “Wand STA System”), in the United States and Canada. In June 2016, that agreement was replaced with an exclusive distribution arrangement for our Wand STA system for the United States and Canada with Henry Schein. In December 2020, Henry Schein’s exclusive distribution arrangement with respect to the Wand STA System became a non-exclusive distribution arrangement for the United States and Canada. On December 31, 2022, such non-exclusive distribution arrangement will terminate, subject to certain post-termination rights and obligations of the parties, all in accordance with such agreement.

In January 2021, the Company began a process of signing non-exclusive dental distribution arrangements with dental distributors in specific geographical locations in the United States and Canada. To date there are twelve new non-exclusive dental distributors engaged in the United States and Canada. The goal is to add not only additional non-exclusive distributors in the United States, but as well as exploring other co-operation opportunities with Dental Service Organization, education institutions, dental schools and entities in specific dental market segments. To date there are two of such channel partners in the United States.

The goal of changing our marketing plan from a sole exclusive distributor in the USA and Canada, to a large number of non-exclusive distributors, is to increase placement of our Wand STA System and thus the expansion of our dental disposables usage.

On the global front, we have granted exclusive marketing and distribution rights for the Wand STA System to select dental suppliers in various international regions in Asia, Africa, South America, and Europe. They include FM Produkty Dla Stomatologii in Poland and Unident AB in the countries of Denmark, Sweden, Norway, and Iceland. Additionally, the Company is in the process of evaluating current international distributors and adding new distributors globally as required based on the economics of the region.

Sanctions imposed by the United States and other western democracies, because of the Ukrainian-Russian conflict, and any expansion thereof, is likely to have unpredictable and wide-ranging effects on the domestic and global economy and financial markets, which could have an adverse effect on our business and results of operations. Already the conflict has caused market volatility, a sharp increase in certain commodity prices, such as wheat and oil, and an increasing number and frequency of cybersecurity threats. So far, we have experienced a decrease in international sales to Ukraine and halted all sales to Russia, a direct impact from the conflict. We will continue to monitor the situation carefully and, if necessary, take action to protect our business, operations, and financial condition.

Medical Market

During 2016, Milestone Scientific filed for 510(k) marketing clearance with the U.S. Food and Drug Administration (FDA) for both intra-articular and epidural injections with the CompuFlo Epidural System. In June 2017, the FDA approved the CompuFlo Epidural System for epidural injections.

In December 2016, we received notification from the FDA that based upon the 510(k)-application submitted for intra-articular injections, we did not adequately document that the device met the equivalency standard required for 510(k) clearances. Following consultation with the FDA Office of Device Evaluation, we intended to file a new 510(k) application for the device in 2019. However, due to financing constraints, a new 510(k) application was not filed in 2019. The Company has decided not to proceed with securing FDA approval for the intra-articular instrument at the present time.

In April 2020, Milestone Scientific, announced that it has validated and integrated the new CathCheck ® feature into the CompuFlo® Epidural System. Using CathCheck, physicians and nurses can now monitor the placement of a catheter to determine the presence or absence of a pulsatile waveform (heartbeat), providing new information that can be used to determine if the catheter is in place or has become dislodged from the epidural space. This can be performed within seconds by measuring the pulsatile waveform within the epidural space.

In March 2022, the Company was notified by a territory manager that Epidural Disposable Kit, Part # 6100-01, lot HC 51 potentially had an issue. The Company opened an investigation and decided to initiate a voluntary market withdrawal for the Epidural Disposable Kit, Part # 6100-01, lot HC 51. Management has determined that there are no potential impacts to patients or users.

On April 11, 2022, the Company announced that it has commenced sales of its CompuFlo Epidural and CathCheck Verification System disposables to a leading northeast medical center in the U.S. This approval follows an extensive trial and evaluation, which validates the safety and efficacy of the technology. As a teaching hospital, the Company's tools provide residents, fellows, and seasoned physicians greater accuracy through real-time verification of epidural needle placement, as well as subsequent monitoring of catheter placement.

On May 27, 2022, the Company announced on that it has commenced sales of its CompuFlo Epidural instrument disposables at a leading veterinary and academic institution following a successful research study and evaluation. The veterinary institution has initially begun using the CompuFlo Epidural instrument for maxillary nerve block procedures in horses with plans to expand into epidural procedures. The CompuFlo Epidural instrument can provide fellow veterinarians and students greater accuracy through real-time verification of needle location when performing a maxillary nerve block.

In addition, the recent receipt of chronology-Specific CPT Code for the Company's technology by American Medical Association marks an important milestone, that could increase the potential number of anesthesia pain management clinics adopting the CompuFlo instrument. A CPT code expands the potential for reimbursement of epidural procedures in pain management utilizing the CompuFlo Epidural System., thereby helping accelerate the commercial roll-out of CompuFlo in the U.S.

The following table shows a breakdown of Milestone Scientific’s product sales (net), domestically and internationally, by business segment product category:

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Current Product Platform

See Note 1, “Organization and Business”.

Results of Operations

The following table sets forth the consolidated results of for the three and nine months ended September 30, 2022, and 2021, respectively. The trends suggested by this table may not be indicative of future operating results:

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Three months ended September 30, 2022, compared to three months ended September 30, 2021

Net sales for 2022 and 2021 were as follows:

Consolidated revenue for the three months ended September 30, 2022 and 2021 were approximately $2.2 million and $2.1 million, respectively. Dental revenue increased approximately $130,000 for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. For the three months ended September 30, 2022, dental domestic revenue increased approximately $88,000, and dental international revenue increased approximately $403,000 compared to September 30, 2021. The increase in domestic and international is related to the Company expanding its parentship with new distributors. For the three months ended September 30, 2022, the Company recorded no revenue from China as compared to approximately $360,000 for the three months ended September 30, 2021. The reduction in shipments to Milestone China is due to Milestone China continuing cash flow issues. Medical revenue decreased approximately $23,000 for the three months ended September 30, 2022, as compared to the three months ending September 30, 2021.

Gross Profit for 2022 and 2021 were as follows:

Consolidated gross profit for the three months ended September 30, 2022 increased approximately $92,000 or 7%, from the three months ended September 30, 2021. The increased is related to higher cost of parts, and freight expenses on the disposables.

Selling, general and administrative expenses 2022 and 2021 were as follows:

Consolidated selling, general and administrative expenses for the three months ended September 30, 2022 and 2021, were approximately $3.3 million, and $3.0 million respectively. The increase of approximately $315,000 reflects changes in several areas. During the three months ended September 30, 2022, warehousing and also expenses associated with quality assurance in connection with ISO certification and digitizing parts of our quality control process increased approximately $125,000, and professional fees increased approximately $370,000 due to certain 510(k) work for a new indication for our product, upgrades to automate our quality control procedures and additional digitizing of parts of our quality control process. Other selling, general and administrative and royalties' expenses increased approximately $122,000 for three months ended September 30, 2022. The Company included in other selling general and administrative $100,000 relating to an allowance taken against the accounts receivable related party during the three months ended September 30, 2022.Employee salaries and benefits expenses decreased approximately $191,000 during the three months ended September 30, 2022 compared to the same period in 2021. Such reduction was due, in part, to reduced directors’ fees, accrued bonus, employee recruiting fees, and medical insurance for the three months ended September 30, 2022. The Company reduced employee travel and marketing expense for three months ended September 30, 2022 by approximately $111,000.

Research and Development for 2022 and 2021 were as follows:

Consolidated research and development expenses for the three months ended September 30, 2022 and 2021, were approximately $166,000 and $356,000, respectively. The decrease of approximately $190,000 is related to the Company delaying enhancements to the STA Single Tooth Anesthesia System product line.

Profit (Loss) from Operations for 2022 and 2021 were as follows:

The loss from operations for each of the three months ended September 30, 2022, and 2021 was approximately $2.0 million, respectively. As noted above, higher cost for parts, and freight expense, along with additional professional fees for quality control impacted the loss for operations. The Company is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue from its dental business worldwide, the generation of revenue from its medical devices and disposables business in the United States and worldwide, and a reduction in operating expenses.

Nine months ended September 30, 2022, compared to nine months ended September 30, 2021

Net sales for 2022 and 2021 were as follows:

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Consolidated revenue for the nine months ended, September 30, 2022, and 2021 were approximately $6.6 million and $7.5 million, respectively. Dental revenue decreased approximately $825,000 for the nine months ending September 30, 2022, as compared to the nine-month ended September 30, 2021. For the nine months ended, September 30,2022, dental domestic revenue increased approximately $23,000, and dental international revenue increased approximately $185,000 compared to September 30, 2021. For the nine months ended September 30, 2022, the Company revenue to China decreased approximately $1.0 million compared to September 30, 2021which most significantly caused our overall decrease in revenues. The reduction in shipments to Milestone China is due to Milestone China continuing cash flow issues. Medical revenue decreased approximately $69,000 for the nine months ending September 30, 2022, as compared to the nine months ended September 30, 2021.

Gross Profit for 2022 and 2021 were as follows:

Consolidated gross profit for each of the nine months ended September 30, 2022 and 2021 decreased approximately $716,000 or 16%. The decrease is related less shipments to Milestone China, due to Milestone China continuing cash flow issues, and increased in higher cost of parts, and freight expenses on the disposables. The Company recorded an allowance of approximately $430,000 on slow moving Medical finished goods, and reduction in dental revenue during the nine months ended September 30, 2022.

Selling, general and administrative expenses 2022 and 2021 were as follows:

Consolidated selling, general and administrative expenses for the nine months ended September 30, 2022, and 2021, were approximately $9.7 million, and $9.7 million respectively. The decrease of approximately $48,000 is categorized in several areas. Employee salaries, and benefits expenses decreased approximately $426,000 during the nine months ended September 30, 2022 compared to the same period in 2021. The Company reduced director fees, bonuses, employee recruiting fees, and medical insurance for the nine months ended September 30, 2022.The Company reduced marketing expense for nine months ended September 30, 2022, by approximately $11,000. The Company increased employee travel and for nine months ended September 30, 2022, by approximately $192,000. During the nine months ended September 30, 2022 warehousing, and quality control, increased associated with quality assurance in connection with ISO certification and digitizing parts of our quality control increased approximately $235,000, professional fees, increased approximately $122,000 due to the additional professional services quality control required in the compliance and regulations. Other selling, general and administrative and royalties' expenses decreased approximately $290,000 for nine months ended September 30,2022. The Company included in other selling general and administrative $100,000 relating to an allowance taken against the accounts receivable related party during the nine months ended September 30, 2022.

Research and Development for 2022 and 2021 were as follows:

Consolidated research and development expenses for the nine months ended, September 30, 2022, and 2021, were approximately $897,000 and $588,000, respectively. The increase of approximately $309,000 is related to the Company exploring possible enhancements to the STA Single Tooth Anesthesia System product line.

Profit (Loss) from Operations for 2022 and 2021 were as follows:

The loss from operations was approximately $6.8 million and $5.8 million for the nine months ending September 30, 2022 and 2021, respectively. As noted above, higher cost for parts, and freight expense, along with additional professional fees for quality control impacted the loss for operations. Although, the Company kept the SG&A expenses down, the Company increased research and development by exploring other possible enhancements for STA. The Company reported less shipments to Milestone China, due to Milestone China continuing cash flow issues. The Company is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue from its dental business worldwide, the generation of revenue from its medical devices and disposables business in the United States and worldwide, and a reduction in operating expenses.

Liquidity and Capital Resources

On September 30, 2022, Milestone Scientific had cash and cash equivalents of approximately $9.8 million and working capital of approximately $10.8 million versus working capital of $15.8 million on December 31, 2021. For the nine months ended September 30, 2022 and 2021, we had cash flows used in operating activities of approximately $4.9 million and $3.6 million, respectively. The Company has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued. As of September 30, the Company had an accumulated deficit of $114.4 million and has incurred a net loss of approximately $2 million and $6.7 million for the three and nine months ended September 30, 2022, respectively. Management believes that the Company will have sufficient cash reserves to meet its anticipated obligations for at least the next twelve months from the filing date of this report.

To improve the Company’s cash position, management implemented a cost restructuring program to reduce the cash burn rate. This program included a reduction of the direct medical sales organization by half, and additional cost savings have been identified in other functional areas. The results of this program generated a cash burn rate for the three months ended September 30, 2022 of approximately $1.1million which is lower than burn rate for previously quarters in 2022.

Milestone Scientific is a “smaller reporting company” as defined by Regulation S-K and, as such, is not required to provide the information required by this item.

Evaluation of Disclosure Controls and Procedures

Milestone Scientific’s Chief Executive Officer has evaluated the effectiveness of the design and operation of Milestone Scientific’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, Milestone Scientific’s Chief Executive Officer has concluded that the disclosure controls and procedures as of September 30, 2022 are effective to ensure that information required to be disclosed in the reports Milestone Scientific files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Milestone Scientific's management, including the Chief Executive Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in Milestone Scientific’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or that are reasonably likely to materially affect, Milestone Scientific’s internal controls over financial reporting.

The COVID-19 pandemic has and may continue to adversely affect the Company’s business. Additional factors could exacerbate such negative consequences and/or cause other materially adverse effects.

The COVID-19 pandemic did materially adversely affect the Company’s financial results and business operations in the nine months ended September 30, 2022, while economic and health conditions in the United States and across most of the globe have continued to change rapidly due to the Omicron variant since the end of 2021. In the short-term, demand for the Company’s dental products is showing an increase in sell through activity to dental offices. However, the change in demand may or may not continue and/or demand may or may not increase from historical levels depending on the duration and severity of the COVID-19 pandemic, the effectiveness of the ongoing vaccination process, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business and manufacturing disruption, inventory shortages, delivery delays, and reduced sales and operations, any of which could materially affect our business, financial condition, and results of operations.

The ability of the Company’s employees to work may be significantly impacted by the Coronavirus.

The Company’s employees are being affected by the COVID-19 pandemic. From time to time, we have had employees working in the office, depending on the local positivity rate of COVID-19. As a result of the Omicron variant, beginning in December 2021, most of our office and management personnel were working remotely. As of March 15, 2022, the employees returned in full to the office. The health of the Company’s workforce is of primary concern and the Company may need to enact further precautionary measures to help minimize the risk of our employees being exposed to the coronavirus. Further, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire Company, thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. If these conditions worsen, or last for an extended period of time, the Company’s ability to manage its business may be impaired, and operational risks, cybersecurity risks and other risks facing the Company even prior to the pandemic may be elevated

The COVID-19 pandemic is affecting the Company’s customers, suppliers, vendors, and other business partners, but the Company is not able to assess the full extent of the current impact nor predict the ultimate consequences that will result therefrom.

The full effects of the COVID-19 pandemic are highly uncertain and cannot be predicted.

The COVID-19 pandemic affected the Company’s operations during the nine months ended September 30, 2022 and may continue to do so for an indeterminable period thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, manufacturing, distribution, marketing, sales operations, customer, and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three- and nine-month periods ended September 30, 2022, are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the continued impact of the COVID-19 pandemic on the Company’s sales channels, supply chain, manufacturing, and distribution nor to economic conditions generally, including the effects on consumer spending on elective medical procedures. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

Changes in our distribution arrangements exposes us to risks of interruption of marketing efforts.

In January 2021, in connection with the change in our relationship with Henry Schein, with which we had an exclusive distribution arrangement with respect to our dental products in the United States and Canada, the Company began a process of signing non-exclusive dental distribution arrangements with dental distributors in specific geographical locations in the United States and Canada. The goal of changing our marketing plan from a sole exclusive distributor in the USA and Canada, to a large number of non-exclusive distributors, may not be seamless or uninterrupted

Our business and operations would suffer in the event of cybersecurity or other system failures.

Despite the implementation of security measures, our internal computer systems and those of any third parties with which we partner are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any cybersecurity or system failure, accident or breach to date, if an event were to occur, it could result in a material disruption of our operations, substantial costs to rectify or correct the failure, if possible, and potentially violation of HIPAA and other privacy laws applicable to our operations. If any disruption or security breach resulted in a loss of or damage to our data or applications or inappropriate disclosure of confidential or protected information, we could incur liability, further development of our products could be delayed, and our operations could be disrupted, any of which could severely harm our business and financial condition.

Issues with product quality could have a material adverse effect upon our business, subject us to regulatory actions and cause a loss of customer confidence in us or our products.

In general, our success depends upon the quality of our products. Quality management plays an essential role in meeting customer requirements, preventing defects, improving our products and services, and assuring the safety and efficacy of our products. Our future success depends on our ability to maintain and continuously improve our quality management program. A quality or safety issue may result in adverse inspection reports, warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, costly litigation, refusal of a government to grant approvals and licenses, restrictions on operations or withdrawal of existing approvals and licenses. An inability to address a quality or safety issue in an effective and timely manner may also cause negative publicity, a loss of customer confidence in us or our current or future products, which may result in the loss of sales and difficulty in successfully launching new products.