Milestone Scientific Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. Milestone develops and sells computerized local-anesthesia delivery products, including the STA dental system, and is developing CompuFlo medical applications.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Product sales | $2.278 million | $2.327 million | $4.768 million | $4.248 million |
| Gross profit / margin | $1.534 million / 67% | $1.473 million / 63% | $3.212 million / 67% | $2.731 million / 64% |
| Operating income (loss) | $151,113 | ($53,607) | $318,873 | ($286,757) |
| Net income (loss) | $74,009 | ($164,541) | $224,754 | ($519,722) |
| Operating cash flow | Not presented quarterly | $8,239 | ($108,952) |
- Q2 sales declined about 2% year over year; first-half sales rose about 12%. First-half domestic sales increased to $2.381 million from $1.914 million, while international sales were $2.387 million versus $2.334 million.
- First-half operating expenses fell to $2.893 million from $3.018 million; research and development rose to $164,722 from $78,814. Q2 SG&A decreased 10% to $1.340 million.
- At June 30, cash was $171,640; working capital was positive $233,847, compared with negative $775,742 at December 31, 2012. The improvement was principally attributed to lower accounts payable.
- Total liabilities were $2.976 million, including $450,000 of long-term shareholder-note principal. The note accrues interest at 12% and is due January 5, 2015; accrued interest on the balance sheet was $405,202.
- Cash increased by $6,391 during the first half. Investing activities used $116,448 and financing activities provided $114,600.
Changes, outlook and key risks
- Management reported improved gross margins and a return to operating and net income. It attributed performance to higher first-half sales, lower SG&A and better margins. The filing also reports a $17,543 gain from selling New Jersey technology-business tax credits in the first half.
- Management said it did not expect cash reserves to cover all anticipated obligations for the next 12 months. The filing warns that recurring losses and liquidity needs raise substantial doubt about the company’s ability to continue as a going concern. Additional capital may be required; financing is not assured. If cash generation or financing falls short, the company may cut development, marketing or other costs.
- China regulatory approval for the STA system had been received, but approval for the Wand handpieces remained pending as of June 30; management expected the remaining approval in 2013. Delays had affected shipments, collections and production plans.
- Milestone had advanced approximately $2.672 million to its contract manufacturer for future STA inventory, with 7,585 instruments remaining under the 12,000-unit purchase order. Management cited potential disruption from dependence on manufacturers and the cost and delay of changing suppliers.
- Customer and supplier concentration is material: three distributors accounted for approximately 47% of Q2 sales; three customers represented 35% of gross receivables. Purchases from a supplier associated with a Milestone shareholder were $1.445 million in the first half, and the company owed that supplier $698,591 at quarter-end.
- Milestone recorded a $47,093 Q2 and first-half loss from its Medical Joint Venture. Its investment had been reduced to zero; approximately $500,000 of cumulative losses were unrecognized because the company reported no obligation to fund losses beyond its contribution. A separate $50,000 investment was made in Milestone Education LLC.
- After quarter-end, in July 2013, Milestone entered a three-year exclusive U.S. hospital distribution partnership for CompuFlo epidural applications. This is a subsequent event, not Q2 revenue.
- The filing describes a bad-debt reversal in operating cash-flow adjustments of $239,501; management’s discussion cites different recovery amounts in its Q2 and first-half expense explanations. Verify the precise accounting and period attribution.
Most important facts for investors to verify
- Whether cash generation improves enough to meet obligations over the next 12 months, and whether additional capital is needed or available.
- Progress on Chinese handpiece approval, related distributor collections, and conversion of contract advances into delivered inventory and sales.
- Execution, economics and regulatory progress of the July CompuFlo partnership and the Medical Joint Venture products.
- The collectability of receivables, customer concentration, and ongoing reliance on the related-party supplier and contract manufacturer.
- The reconciliation of bad-debt recovery figures and accrued-interest disclosures, including the reported $405,202 balance and the separate $75,795 legacy credit-line accrual described in the notes.