Milestone Scientific Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited; balance-sheet comparisons are to December 31, 2010.
Business context and results
Milestone develops and sells computer-controlled local anesthesia delivery products, including the STA system and related handpieces, and is pursuing medical applications of its CompuFlo technology. Its stated priorities were expanding dental-market sales and developing medical products through strategic collaborations.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net product sales | $1.746 million | $1.927 million | $6.636 million | $7.708 million |
| Gross profit / margin | $1.148 million / 66% | $1.201 million / 62% | $4.291 million / 65% | $4.920 million / 64% |
| Operating loss | $540,157 | $564,335 | $923,579 | $333,742 |
| Net loss | $637,338 | $583,526 | $1.077 million | $319,244 |
| Net loss per share, basic and diluted | $(0.04) | $(0.04) | $(0.07) | $(0.02) |
For the nine-month period, domestic sales rose 6% to $3.528 million, while international sales fell 29% to $3.108 million. The international decline primarily reflected the absence of significant 2010 China distributor sales. Excluding those sales, management reported revenue growth of $781,315 overall. Two distributors accounted for approximately 43% of nine-month 2011 sales.
Cash, liquidity and debt
- Cash and cash equivalents were $370,669 at September 30, 2011, down from $627,082 at year-end 2010. Working capital was negative $475,764.
- Nine-month operating cash outflow was $301,735, versus $724,698 in 2010. Investing cash outflow was $33,679; financing provided $79,000. Cash declined by $256,413.
- Current liabilities were $3.588 million and long-term liabilities were $1.323 million. These included $2.704 million of short-term accounts payable, $877,298 of long-term accounts payable, and a $445,403 note payable net of discount.
- The $450,000 shareholder loan bears 12% interest, compounded quarterly, and was extended to July 2013. Accrued interest on the loan was $249,287 at September 30, 2011. The filing also reports $68,082 of accrued interest on the previously converted $1.3 million credit line, with the remaining interest payable in 2012.
- Advances to the contract manufacturer totaled $3.335 million, including $2.607 million classified as noncurrent. The company also reported $1.873 million payable to that manufacturer.
Changes, outlook and key risks
- Nine-month sales decreased 14% year over year; gross profit dollars fell 13%. Management attributed the decline mainly to the absence of 2010 China shipments. Gross margin improved modestly, which management attributed to lower STA instrument manufacturing costs.
- Nine-month net loss increased to $1.077 million from $319,244. SG&A rose $97,040; the filing cites a $300,000 CEO bonus associated with finalizing a joint venture, increased sales and salary costs, and offsets including lower general and administrative expenses and bad-debt recoveries. The 2010 comparison included $61,916 from the sale of tax credits.
- China regulatory approval had delayed shipments under a distributor order and remained pending at quarter-end. Management expected approval by the first quarter of 2012, but this was a forward-looking expectation, not a guarantee. The delay contributed to increased manufacturer advances and supplier payables and left a $257,160 long-term net receivable from the distributor; the company had reserved $552,000 of total receivables from that distributor.
- A 50%-owned joint venture was established to develop two medical delivery instruments. The partner’s initial $500,000 contribution was made to a U.S. research and development corporation; Milestone contributed rights to CompuFlo technology. Milestone recorded a $60,027 share of joint-venture losses for the nine months. The joint venture reimbursed approximately $105,000 of prior R&D costs, reducing reported R&D expense.
- Management said it believed cash reserves were sufficient for anticipated obligations over the next 12 months, while warning that additional capital might be needed if operating cash flows do not improve or greater sales and marketing investment is required. The filing states recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Failure to obtain capital could require reduced development, marketing, or other costs.
- Other risks include dependence on a small number of distributors, a significant supplier relationship involving a 5% shareholder who also participates in the PRC joint venture, and potential disruption if contract-manufacturing relationships end. The company reported no legal proceedings and no subsequent events requiring disclosure.
Important facts for investors to verify
- Whether and when Chinese regulatory approval is obtained, and whether the distributor resumes orders and pays outstanding receivables.
- Cash runway, working-capital needs, and the company’s ability to fund operations without raising additional capital.
- Collection and recoverability of distributor receivables and the substantial advances to the contract manufacturer.
- Joint-venture funding, development milestones, commercialization prospects, and related-party governance and transactions.
- Whether sales growth can offset operating costs, given customer concentration and the company’s history of losses and operating cash outflows.