Milestone Scientific Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 12, 2011. Milestone develops and sells computer-controlled local anesthesia products, including the STA dental system, and is pursuing medical applications for its CompuFlo technology.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Product sales | $2.464 million | $3.219 million | $4.890 million | $5.781 million |
| Gross profit / margin | $1.596 million / 65% | $2.057 million / 64% | $3.142 million / 64% | $3.719 million / 64% |
| Operating income (loss) | ($262,000) | $199,000 | ($383,000) | $231,000 |
| Net income (loss) | ($298,000) | $180,000 | ($440,000) | $264,000 |
| Net cash used in operations | Not provided for quarter | Not provided for quarter | ($525,000) | ($130,000) |
Six-month SG&A rose 3.2% to $3.426 million; R&D declined to $100,000 from $168,000. Q2 SG&A included a $300,000 CEO bonus tied to closing a medical-device joint venture arrangement. Cash and cash equivalents were $98,592 at June 30, down from $627,082 at year-end 2010. Working capital was negative $568,813. Total assets were $7.382 million and stockholders’ equity was $2.110 million.
Current liabilities totaled $3.960 million. Long-term liabilities were $1.313 million, including a $443,871 net note payable. A $450,000 shareholder loan bears 12% interest, compounded quarterly, and was extended to July 2013; accrued interest related to the borrowing was $229,592. The filing also reports $868,806 in long-term accounts payable.
Material changes and management explanation
- Revenue fell 23.4% in Q2 and 15% for the first half. Management attributed most of the decline to the absence of substantial 2010 China distributor shipments. Excluding those shipments, management said first-half sales increased $898,860 year over year.
- Domestic first-half revenue increased 9%; international revenue declined 33%, largely reflecting China. Gross margin was broadly stable for the first half, while gross-profit dollars fell with sales volume.
- Management cited its shift to a domestic sales model centered on dental hygienists training dentists and sales to dental group practices. It also described continued international-market expansion, though China shipments remained suspended pending regulatory approval.
- Operating cash use increased year over year. The company attributed working-capital pressure to delayed China shipments, increased contract-manufacturer advances and payables, and receivables from the distributor.
Outlook, risks, contingencies and unusual items
- Management expected Chinese regulatory approval by the end of 2011, but shipments were suspended pending approval. A significant 2010 distributor receivable remained outstanding; the company recorded a $600,000 reserve, with $257,160 reported as long-term net receivables.
- The company stated it believed available cash would cover anticipated obligations for the next 12 months, but warned it may need additional capital if operating cash flow does not improve or greater sales and marketing investment is needed. Recurring losses and negative operating cash flows raise substantial doubt about its ability to continue as a going concern; the financial statements contain no adjustments for that uncertainty.
- After quarter-end, the company entered a definitive 50/50 joint venture arrangement with Beijing 3H for epidural and intra-articular instruments. Beijing 3H was to contribute up to $1.5 million; the filing reports that a $500,000 first tranche was funded after June 30. The company had terminated a prior China joint venture agreement effective July 13, 2011.
- Manufacturing depends on outside suppliers; interruption or termination could materially affect production. The company had advanced $3.375 million to its contract manufacturer and had related payables, while a 12,000-instrument purchase commitment was delayed.
- Customer and supplier concentration are notable: two distributors accounted for approximately 43% of first-half 2011 sales, and three customers represented 58% of gross receivables. A 5% shareholder is also a major supplier; the company owed that supplier $943,313 at June 30.
- There was no material change in internal control over financial reporting reported, and management concluded disclosure controls were effective. The filing reported no legal proceedings.
Important facts for investors to verify
- Whether China regulatory approval is obtained and the delayed distributor order resumes; confirm collections and the adequacy of the $600,000 receivables reserve.
- Cash runway, access to additional capital, and progress toward positive operating cash flow given the low cash balance and negative working capital.
- Whether the joint venture funding and development milestones proceed as planned, and the terms and execution of the definitive agreement.
- Contract-manufacturer advances, related payables, and the timing and economics of fulfilling the 12,000-instrument commitment.
- Customer and supplier concentration, including related-party exposure, and potential dilution from outstanding equity awards and the approved 2011 stock option plan.