Milestone Scientific Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. The company sells computerized local-anesthesia delivery products, including instruments and disposable handpieces, and is developing medical applications of its CompuFlo technology.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Product sales | $2.444 million | $2.129 million | $7.212 million | $6.378 million |
| Gross profit (margin) | $1.766 million (72%) | $1.504 million (71%) | $4.978 million (69%) | $4.235 million (66%) |
| Operating income (loss) | $436,272 | $51,647 | $755,145 | $(235,110) |
| Net income (loss) | $218,523 | $15,150 | $443,277 | $(504,571) |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $442,079 | $52,792 |
- Q3 sales increased 15% year over year; nine-month sales increased 13%. Domestic sales rose 20% for the nine-month period, while international sales rose about 6%.
- Handpieces generated $5.329 million, or about 74%, of nine-month sales. The company attributed growth to distributor activity, including increased U.S. and Canadian sales.
- Operating expenses for the nine months were $4.223 million, down from $4.470 million. SG&A declined to $4.045 million from $4.331 million, while R&D increased to $177,419 from $139,176.
- Reported nine-month results included a $259,291 loss from the medical joint venture, compared with $124,179 in 2012. Q3 included a $212,199 joint-venture loss. Nine-month results also included $17,543 of income from selling New Jersey tax credits.
- Cash was $401,836 at September 30, 2013, up from $165,249 at year-end 2012. Working capital was positive $1.044 million, versus negative $775,742 at December 31, 2012.
- Cash flow for the first nine months included $442,079 from operations, $330,092 used in investing and $124,600 from financing. Investing included $259,291 related to the medical joint venture and $50,000 for Milestone Education LLC.
- Total liabilities were $2.554 million, all classified as current; the balance sheet reported no notes payable at September 30. A $450,000 shareholder note and related accrued interest, along with $76,174 of accrued interest on a previously converted credit line, were converted into 614,344 shares in August. Accounts payable was $1.806 million.
Changes, outlook and risks
- Management said higher sales and gross margins, lower SG&A and lower interest costs drove the improvement in results. The 2013 nine-month profit compares with a loss in 2012.
- The company stated it did not expect to have sufficient cash reserves to meet all anticipated obligations for the next 12 months. It warned that failure to sustain positive operating cash flow or raise acceptable additional capital could require cuts to product development or marketing and other cost reductions. Management cited recurring losses as raising substantial doubt about the company’s ability to continue as a going concern.
- There is no quantified earnings, revenue or cash-flow guidance. Management’s stated aims include expanding distribution and sales, controlling expenses and pursuing positive operating cash flow.
- In July 2013, the company entered a three-year exclusive U.S. hospital-sector distribution partnership for CompuFlo epidural applications. It also reported an exclusive CompuDent handpiece distribution agreement for the U.S. and Canada beginning October 1, 2013.
- Chinese regulatory approval for the Wand handpieces remained delayed, despite prior approval of the STA system; management expected the outstanding approval in 2013. Delays have affected sales and the use of inventory-related contract advances.
- Sales and receivables are concentrated: four distributors accounted for about 52% of nine-month 2013 sales, and two customers represented 54% of gross receivables at quarter-end. The company also depends on contract manufacturers and had $2.554 million of advances for future inventory purchases.
- Related-party matters include purchases from a supplier associated with a company shareholder, a $50,000 CEO loan used to fund an education joint venture, and a three-year financial and strategic services agreement with a shareholder for $100,000 annually.
- After quarter-end, Milestone Medical Inc. signed agreements for a proposed $3 million private placement, subject to closing conditions; funds were in escrow as of the report date. If completed, Milestone Scientific expected its ownership to fall to approximately 45% from 50%.
Key investor verification points
- Confirm cash needs, cash-flow sustainability, and available financing in light of management’s going-concern warning.
- Track collections, particularly the large distributor balances, and assess customer concentration and the allowance for doubtful accounts.
- Verify Chinese regulatory approval and whether contract advances translate into delivered inventory and sales.
- Assess the medical joint venture’s development costs, funding obligations, commercial progress and the effect of the proposed placement on ownership and results.
- Review related-party supplier purchases, service arrangements, and the conversion of shareholder debt into equity; consider ongoing share dilution and outstanding options.
- Note that the filing’s discussion contains inconsistent working-capital comparisons in different passages; the balance-sheet figures imply approximately $1.044 million at September 30, 2013 and negative $775,742 at December 31, 2012.