Milestone Scientific Inc. — Q3 2012 Form 10-Q
Business context and period: This unaudited quarterly report covers the three and nine months ended September 30, 2012. Milestone develops and sells computer-controlled dental anesthesia instruments and disposable handpieces, and is pursuing medical-product development through a joint venture.
Financial results and position
- Q3 revenue: $2.13 million, up 22% from $1.75 million a year earlier. Domestic sales rose to $1.34 million; international sales were $786,000. Management attributed much of the domestic increase to higher handpiece sales, including distributor purchases ahead of a price increase.
- Q3 profit and margins: Gross profit was $1.50 million, or 71% of sales, versus $1.15 million, or 66%, in Q3 2011. Operating income was $51,647 versus an operating loss of $540,157. Net income was $15,151 versus a net loss of $637,338; reported basic and diluted EPS was $0.00.
- Nine-month results: Revenue was $6.38 million, down about 3.9% from $6.64 million. Gross profit was $4.23 million (66%) versus $4.29 million (65%). Operating loss narrowed to $235,110 from $923,579; net loss narrowed to $504,571 from $1.08 million. EPS was a loss of $0.03 versus a loss of $0.07.
- Expenses and drivers: Nine-month SG&A decreased 15% to $4.33 million, while R&D increased to $139,176 from $92,540. Nine-month interest expense and debt-discount amortization totaled $145,282; the company also recorded a $124,179 share of joint-venture losses.
- Cash flow: Operating activities provided $52,792 in the first nine months, compared with cash use of $301,735 in 2011. Investing activities used $25,590 and financing activities provided $150,000, principally from a stock issuance. Cash increased to $273,526 from $96,324 at year-end 2011.
- Liquidity and debt: Working capital was negative $690,508. Current liabilities were $3.52 million against current assets of $2.83 million. Long-term debt included a $450,000 shareholder note bearing 12% interest, extended to January 3, 2014; accrued interest on the note was $333,876. The filing says the company does not expect to have enough cash reserves for all anticipated obligations over the next 12 months and reports substantial doubt about its ability to continue as a going concern.
Material changes, outlook and risks
- Management attributed the nine-month revenue decline mainly to lower domestic instrument sales, partly offset by higher domestic and international handpiece sales. Lower SG&A helped narrow losses. Q3 included $47,966 of airfreight costs from manufacturing delays, offset in part by recovery of costs related to a needle recall.
- Management is seeking sustainable positive operating cash flow through revenue growth and expense reductions. Its North American sales approach is shifting toward dental hygienists training and educating practitioners. The filing provides no quantified financial guidance.
- Subsequent to quarter-end, the company announced an exclusive U.S. and Canada distribution alliance for the STA System and related disposables, beginning November 15, 2012, with a joint marketing initiative. China approved the STA System in early October; approval for Wand handpieces remained pending, and shipments had been suspended pending regulatory approvals.
- China-distributor receivables remain exposed to collection and regulatory delays: the company reported a $375,707 reserve against that distributor’s receivable and $164,742 of net long-term receivables. Sales and receivables are concentrated among a small number of distributors; two customers accounted for approximately 40% of nine-month sales.
- The company had approximately $3.09 million in advances to its contract manufacturer, linked to future inventory purchases, and cited potential disruption if manufacturing relationships end. A significant supplier is related to a greater-than-5% shareholder. The joint-venture investment was reduced to zero; approximately $191,000 of additional losses was not recognized because the company said it had no obligation to fund losses beyond its contribution.
Investor verification points
- Verify the cash runway, near-term obligations, and any plans or ability to raise additional capital, given negative working capital and the going-concern warning.
- Track collections from the China distributor, the receivable reserve, and regulatory approval and shipment timing for handpieces.
- Assess whether the distribution alliance and revised sales model produce sustained revenue growth rather than temporary distributor pre-buying.
- Review supplier advances, outstanding supplier balances, manufacturing capacity and delivery delays, and the related-party supplier relationship.
- Reconcile the nine-month 2011 revenue comparison: the financial statements report $6,635,983, while the MD&A contains a conflicting $6,653,983 figure.