Milestone Scientific Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The interim financial statements are unaudited. Milestone develops and sells dental anesthesia instruments and disposable handpieces, and is pursuing medical applications of its CompuFlo technology.
Financial performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Net product sales | $2.327 million | $4.248 million | $2.464 million; $4.890 million |
| Gross profit / margin | $1.473 million / 63% | $2.731 million / 64% | $1.596 million / 65%; $3.142 million / 64% |
| Operating loss | $53,607 | $286,757 | $261,848; $383,423 |
| Net loss | $164,541 | $519,722 | $298,066; $439,711 |
| Net loss per share, basic and diluted | $0.01 | $0.03 | $0.02; $0.03 |
| Cash used in operating activities | Not separately presented | $108,952 | $524,978 |
At June 30, cash and cash equivalents were $121,802, total assets $6.261 million, and working capital was negative $963,952. Current liabilities were $3.919 million. Long-term notes payable were $450,000; the note carries 12% annual interest. Accounts payable totaled $3.086 million, including $1.199 million owed to the contract manufacturer. The filing reports accrued interest on the shareholder note of $311,823.
Six-month cash flow included $15,570 used in investing activities and $150,000 provided by financing activities from a common-stock offering. Cash increased by $25,478 from year-end 2011. The company issued 107,143 shares at $1.40 per share for gross proceeds of $150,000.
Changes versus the prior comparable periods
- Q2 sales declined 6% year over year; six-month sales declined 13%. Six-month domestic sales fell 28.5%, while international sales rose 5.5%.
- For the first half, instrument sales declined to $1.128 million from $1.965 million, while handpiece sales increased to $3.039 million from $2.860 million. Management attributed weaker domestic instrument sales mainly to a longer group-practice sales cycle and lower advertising; international instrument sales also weakened.
- Six-month gross profit declined by $411,061, while gross margin remained 64%. Selling, general and administrative expenses fell $486,598, and research and development expenses fell $21,129.
- Q2 net loss improved by $133,525 year over year, largely reflecting lower operating expenses. Six-month net loss increased by $80,011, principally due to lower gross-profit dollars, higher interest expense, and a $124,179 share of Medical Joint Venture losses.
- Operating cash use improved from $524,978 to $108,952, aided by working-capital changes. Cash nevertheless remained very limited.
Outlook, risks and notable items
- Management stated that cash reserves were insufficient to meet all anticipated obligations for the next 12 months and that recurring losses and negative operating cash flows raised substantial doubt about the company’s ability to continue as a going concern. Additional capital may be required; the filing gives no assurance it can be obtained on acceptable terms. Without it, Milestone may need to curtail development, reduce marketing, or take other cost-saving measures.
- Management is seeking sustainable positive operating cash flow through revenue growth and expense reductions. Its U.S. and Canadian sales approach shifts toward local dental hygienists training and educating dentists. No quantified revenue, earnings, or cash-flow guidance is provided.
- Chinese regulatory approval had delayed shipments under a 12,000-instrument purchase order; management expected approval by year-end 2012. The associated distributor receivable was partly classified long-term, with a $437,904 reserve. Two distributors accounted for approximately 34% of first-half sales.
- Milestone’s 50%-owned Medical Joint Venture with Beijing 3H is developing two medical instruments. The company recorded $124,179 of its share of losses and reduced its investment to zero; approximately $89,000 of additional JV loss was not recorded because Milestone had no obligation to fund losses beyond its investment.
- A supplier needle recall and manufacturing delays led to $53,342 of first-half airfreight costs. Management said the expense was not expected to be as significant in the next quarter. The filing also identifies dependence on contract manufacturers, customer concentration, and a related-party supplier relationship as risks.
- The $450,000 shareholder note’s maturity date is inconsistent within the filing: the basis-of-presentation and MD&A sections state it was extended to January 3, 2014, while Note 8 gives July 13, 2013. The stated due date should be verified.
Important facts for investors to verify
- Whether Milestone secured sufficient financing or achieved positive operating cash flow after the reporting date, given its going-concern warning and $121,802 cash balance.
- Timing and outcome of Chinese regulatory approval, shipments, and collection of the distributor receivable.
- Sales trends by geography and product, including the recovery of domestic instrument sales and the sustainability of handpiece growth.
- The shareholder note’s actual maturity date and the company’s ability to manage supplier payables and accrued interest.
- Medical Joint Venture development progress, future funding obligations, and any impact on reported results.