Milestone Scientific Inc. — Q2 2014 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Milestone sells computerized anesthesia delivery instruments and disposable handpieces, and is developing medical products through joint ventures. Management focused on growing global distribution and placing more STA instruments to support recurring handpiece sales.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $2.507 million, up 10.0% from $2.278 million | $5.128 million, up 7.6% from $4.768 million |
| Gross profit / margin | $1.595 million / 64%, versus $1.534 million / 67% | $3.332 million / 65%, versus $3.212 million / 67% |
| Operating income | $47,507, down from $151,113 | $376,754, up from $318,874 |
| Net income (loss) | $(169,457), versus $74,009 income | $25,377, versus $224,754 income |
| Operating cash flow | Not separately reported for the quarter | $171,628, versus $8,239 |
Quarterly sales growth was driven mainly by handpieces: domestic and international handpiece revenue increased 19% and 20%, respectively. Six-month international sales rose, while domestic sales were nearly flat. Cost of sales grew faster than revenue, reducing gross margin in both comparisons. Six-month R&D expense fell to $44,885 from $164,722; SG&A increased to $2.911 million from $2.728 million.
Financial position and liquidity
- At June 30, 2014, cash and cash equivalents were $1.122 million and Treasury bills were $9.498 million, totaling $10.620 million. Working capital was $13.697 million, up from $2.344 million at December 31, 2013.
- Total assets were $17.262 million; current liabilities were $1.948 million. No note payable was reported at quarter-end; the former shareholder note had been converted to common stock in August 2013.
- Operating cash flow was positive $171,628. Investing cash outflow was $9.700 million, primarily reflecting the Treasury-bill purchase; financing cash inflow was $9.503 million, principally from the May placement.
- The May 2014 financing raised $10 million gross, with $9.450 million net proceeds: $7 million through Series A convertible preferred stock and $3 million through common stock.
Material changes, outlook, and risks
- The Q2 net loss chiefly reflected a $213,193 equity-method loss from the Medical Joint Venture, compared with $47,093 a year earlier. The six-month Medical Joint Venture loss was $343,716. The prior-year comparison also benefited from a bad-debt reserve reversal that did not recur.
- Management said available cash was sufficient for anticipated obligations for at least 12 months and described efforts to grow revenue through contracts and distribution while controlling expenses. No quantified revenue or earnings guidance was provided.
- Milestone agreed to invest $1 million for 40% of a Hong Kong-based distribution company, with its contribution consisting of 772 STA instruments over two years. The entity began operations in July 2014; 300 instruments were shipped that month and were to be recorded in Q3.
- Key exposures include reliance on a small number of distributors and customers, significant supplier and contract-manufacturer dependence, and advances for future inventory. Two customers represented 54% of gross receivables at quarter-end. The filing warns that disruption of manufacturing relationships could materially affect production and sales.
- The Series A preferred shares carry a $1,000 stated value, a $2.545 conversion price, and a liquidation preference. Conversion could add approximately 2.75 million common shares, subject to the terms described in the filing. The CEO also received a five-year pension-related benefit commitment of $203,111 annually; the first installment was paid in July 2014.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting. The filing reported no legal proceedings. It did not provide the risk-factor disclosures because the company was a smaller reporting company.
Important facts for investors to verify
- Whether revenue growth and instrument placements translate into sustained recurring handpiece sales, while margins recover from the temporary distributor pricing strategy.
- The Medical Joint Venture’s development, regulatory progress, future funding needs, and the effect of continuing equity-method losses.
- Customer and distributor concentration, collectability of receivables, and delivery of the remaining 4,554 STA instruments under the purchase order.
- The preferred-stock conversion, voting and liquidation terms, and resulting potential dilution; reconcile the filing’s share counts with the reported outstanding shares.
- The timing and accounting for the Milestone China investment and shipments, and the cash implications of the CEO benefit commitment.