Milestone Scientific Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the same periods in 2014. The company develops and sells computer-controlled local anesthesia delivery systems and related instruments and handpieces. It was listed on NYSE MKT on June 1, 2015.
Financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net product sales | $1.77 million | $2.51 million | $4.54 million | $5.13 million |
| Gross profit / margin | $1.20 million / 68% | $1.59 million / 64% | $3.03 million / 67% | $3.33 million / 65% |
| Operating income (loss) | ($1.41 million) | $47,507 | ($1.48 million) | $376,754 |
| Net income (loss) attributable to Milestone Scientific | ($2.07 million) | ($169,457) | ($2.49 million) | $25,377 |
| Basic and diluted EPS | ($0.09) | ($0.01) | ($0.11) | $0.00 |
Q2 sales fell 30% year over year; first-half sales declined 12%. The company attributed the declines to lower instrument and handpiece demand, delayed recognition of some Milestone China instrument sales, pricing changes, and currency effects. First-half international sales increased about 3%, while domestic sales decreased about 29%. Gross margin improved year over year, but gross-profit dollars declined with sales.
SG&A rose to $2.59 million in Q2 and $4.49 million for the first half, from $1.52 million and $2.91 million, respectively. Management cited added sales and marketing personnel, compensation and travel, legal and regulatory costs, distributor litigation that was settled, investor relations, and $75,000 of NYSE MKT listing-related costs in Q2. First-half R&D expense was $28,938, down from $44,885.
Cash, liquidity, and capital
- At June 30, cash and cash equivalents were $1.45 million, with $5.55 million in Treasury bills, for total cash and Treasury bills of $7.00 million. Total current assets were $14.41 million, current liabilities $1.94 million, and working capital $12.47 million, versus $13.15 million at December 31, 2014.
- First-half operating cash use was $2.41 million, compared with $171,628 provided in the first half of 2014. Investing cash use was $7.02 million, including $5.55 million invested in Treasury bills, a $1.00 million note receivable from Milestone Medical, and $430,629 due from a related party. Financing provided $512,750, including a $500,000 noncontrolling-interest contribution.
- Cash and cash equivalents decreased $8.92 million during the first half; Treasury bills are reported separately from cash equivalents on the balance sheet. The company reported no borrowings among balance-sheet liabilities; current liabilities were accounts payable and accrued expenses.
- Milestone Scientific advanced $1.00 million to Milestone Medical under a line of credit allowing advances up to $2 million. Management expected repayment in Q3 or Q4 2015. The note bears 3.25% annual interest.
Developments, outlook, and risks
- Management said it believed available cash reserves were sufficient for anticipated obligations for at least 12 months from June 30, while pursuing higher revenue and expense reductions. No numerical revenue or earnings guidance was provided.
- Milestone Scientific reported a $4.2 million grant awarded to a consortium led by its Polish subsidiary, of which the subsidiary was expected to receive approximately $1.5 million. The filing does not provide further detail on timing or conditions.
- The strategic partnership for U.S. hospital distribution of CompuFlo epidural technology ended in June 2015, citing delays in FDA clearance at that time. Milestone Medical’s medical-instrument development was described as nearing completion; it had CE certification and new Polish and Italian distribution agreements, with initial Italian distribution expected in Q3 2015.
- Equity-method losses from Milestone Medical were $976,099 for the first half, and Milestone China contributed a $63,979 loss. Milestone Scientific’s recorded investment in Milestone Medical was zero at June 30, 2015.
- Customer concentration is significant: three customers represented 62% of gross receivables at June 30, and the largest three represented 48% of first-half sales. The company also relies on a limited set of manufacturers; it warned that a manufacturing interruption or transition could cause material disruption, expense, or delay.
- Other relevant exposures include related-party manufacturing purchases of $1.35 million in the first half, related-party balances, and a new purchase commitment for 3,000 STA instruments totaling $1.79 million. The company cited a history of operating losses and negative operating cash flows. It reported no legal proceedings in Part II; it disclosed a distributor litigation settlement as a driver of expenses.
Key facts investors should verify
- Whether sales volumes and distributor demand recover after pricing changes, currency pressure, and the delayed Milestone China sales recognition.
- Actual collection and repayment of the $1 million Milestone Medical note and the related-party receivable, and the conditions and timing of the Poland grant funding.
- Progress on FDA clearance, medical-device commercialization, and execution of the new distribution arrangements.
- Cash burn, working-capital trends, and whether management’s stated 12-month liquidity expectation remains supported by operating results.
- Customer and supplier concentration, purchase commitments, and the impact of the discontinued U.S. hospital distribution partnership.