Milestone Scientific Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 10, 2012. Milestone develops and sells computer-controlled anesthesia delivery instruments and related handpieces for dental applications, and is pursuing medical-device development using its CompuFlo technology.
Financial results
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net product sales | $1.921 million | $2.426 million; down 21% |
| Gross profit / margin | $1.258 million / 65% | $1.546 million / 64% |
| Operating expenses | $1.492 million | $1.668 million; down 11% |
| Operating loss | $233,151 | $121,573 |
| Net loss | $355,181; $0.02 per share | $141,644; $0.01 per share |
| Cash from operations | Used $123,188 | Used $482,401 |
| Cash and cash equivalents | $112,986 at March 31 | $96,324 at December 31, 2011 |
| Working capital | Negative $1.164 million | Negative $1.311 million at December 31, 2011 |
| Long-term note payable | $448,468 net of discount | $446,935 at December 31, 2011 |
Gross margin improved by about one percentage point, but lower sales reduced gross profit dollars. Selling, general and administrative expenses fell 11%; research and development was $39,311. Interest expense and debt-discount amortization totaled $43,935, and the company recorded a $78,095 equity-method loss from its medical joint venture. Financing provided $150,000 from a common-stock sale; cash increased by $16,662 overall.
Material changes and operating developments
- Domestic sales fell to $870,490 from $1.313 million, primarily due to lower instrument sales and handpiece purchases brought forward in 2011 ahead of a price increase. International sales were $1.051 million, down from $1.113 million.
- Management attributed weaker instrument sales partly to a longer domestic group-practice sales cycle and slower international market penetration. Wand handpiece sales were affected by production issues management said were being resolved.
- SG&A savings included lower trade-show, travel and other costs. A partial bad-debt reserve reversal reflected payments from a Chinese distributor.
- The company issued 107,143 shares at $1.40 per share for $150,000 gross proceeds, and issued shares for compensation and services.
Liquidity, outlook and risks
Management states that cash reserves are not sufficient to meet all anticipated obligations over the next 12 months. Recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Milestone is seeking revenue growth and expense reductions, but says additional capital may be needed and is not assured; without funding, it may have to curtail development, reduce marketing or take other cost-saving measures. No quantified financial guidance is provided.
- China: Regulatory approval had delayed sales under a distributor purchase order, with shipments suspended pending approval. Management expected approval in 2012, but that expectation is not a guarantee. A major distributor receivable remained subject to a payment plan and a reserve of approximately $474,000.
- Customer and supplier concentration: Two distributors accounted for approximately 35% of Q1 sales. Three customers represented 53% of gross receivables. The company also relies on contract manufacturers and had about $3.298 million in advances to its contract manufacturer; interruption or a change in manufacturing relationships could disrupt supply.
- Debt and payables: The $450,000 shareholder loan bears 12% annual interest and is due July 2013. Interest also accrues on overdue manufacturer payables. Total accounts payable was $3.407 million at March 31, 2012.
- Medical joint venture: The 50%-owned venture is developing two instruments. Beijing 3H had contributed $1 million by quarter-end; a further $500,000 was received in April 2012. Milestone recorded its share of Q1 venture losses.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reports no legal proceedings.
Important facts for investors to verify
- Whether cash generation, financing, or other measures can address the stated 12-month liquidity shortfall and going-concern uncertainty.
- Progress and timing of Chinese regulatory approval, related shipments, and collection of the distributor receivable.
- Whether sales recover—particularly domestic instrument and handpiece sales—and whether the reported production issues are resolved.
- Contract-manufacturer exposure, inventory advances, overdue payables, and interest obligations.
- Development progress and funding use at the medical joint venture, including the April 2012 contribution.