Business Context and Reporting Period
Milestone Scientific Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company sells dental anesthesia instruments and handpieces and is developing medical products through joint ventures. Its strategy emphasizes wider placement of STA instruments to build recurring handpiece sales and expansion through distribution partners.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Product sales | $2.535 million | $2.444 million | $7.663 million | $7.212 million |
| Gross profit / margin | $1.706 million / 67% | $1.766 million / 72% | $5.038 million / 66% | $4.978 million / 69% |
| Operating income (loss) | $(162,206) | $436,272 | $214,548 | $755,145 |
| Net income (loss) | $(358,490) | $218,523 | $(333,113) | $443,277 |
| Net income (loss) per share, basic and diluted | $(0.02) | $0.01 | $(0.02) | $0.03 |
- At September 30, 2014, cash and cash equivalents were $781,497 and Treasury bills were $9.500 million, or $10.281 million combined. Working capital was $13.610 million, versus $2.344 million at December 31, 2013.
- Nine-month operating cash flow was a use of $3,360, compared with $442,079 provided in 2013. Investing cash use was $9.965 million, primarily the Treasury bill purchase; financing provided $9.602 million, principally from the private placement.
- Total assets were $17.270 million and stockholders’ equity was $15.269 million. Current liabilities were $2.001 million. The filing reports no outstanding note payable; the former shareholder note had been converted to common stock in August 2013.
- No debt balance is reported. The company reported sufficient cash reserves to meet anticipated obligations for at least the next 12 months.
Material Changes Versus Prior Period
- Sales increased 3.6% in Q3 and 6.3% for the nine-month period. International sales rose while domestic sales declined: nine-month international sales were $4.229 million versus $3.304 million, and domestic sales were $3.434 million versus $3.908 million.
- Gross margin fell to 67% in Q3 from 72%, and to 66% for nine months from 69%. Management attributed the decline mainly to temporary lower distributor prices for STA instruments intended to accelerate market placement and support subsequent handpiece sales.
- Q3 SG&A rose $521,000 year over year and nine-month SG&A rose $704,000. The filing cites increased consulting, commissions, business development and investor-relations costs, among other items. Nine-month R&D declined $103,000 to $74,255.
- The May 2014 private placement raised $10 million gross and $9.450 million net: $7 million from 7,000 Series A convertible preferred shares and $3 million from 2 million common shares. The preferred shares have a $1,000 stated value and convert at $2.545 per common share, subject to stated terms.
- Revenue mix shifted further toward international sales, which represented 55.2% of nine-month sales versus 46% in 2013. Two distributors accounted for approximately 44% of nine-month sales and two customers represented 61% of gross receivables at quarter end.
Outlook, Risks, and Unusual Items
- No specific revenue or earnings guidance is provided. Management said it was pursuing higher revenue and lower operating expenses, and expected available cash to cover anticipated obligations for at least 12 months. It cautioned that interim results are not necessarily indicative of full-year results.
- The Medical Joint Venture generated a $567,550 equity-method loss for the nine months, compared with $259,291 in 2013; management described this loss as noncash to Milestone and said the venture is funded independently. The China joint venture generated a $29,428 gain; Milestone held a 40% interest and had contributed instruments valued at cost.
- Milestone committed to contribute 772 STA instruments, valued at approximately $1 million at distributor prices, for its China joint-venture interest. The remaining 3,420 instruments on a supplier purchase order were expected by late 2014. The filing notes that disruption or termination of manufacturing relationships could materially impair production and sales.
- A major supplier is affiliated with a large Milestone shareholder. Purchases from that supplier were $2.070 million for the nine months, and $502,167 was owed at September 30, 2014. Customer and distributor concentration also presents collection and sales-dependence risks.
- The CEO’s amended employment arrangement provides $203,111 annually for five years for an annuity, pension, deferred distribution plan, or investment; $118,481 was charged to expense for the first nine months of 2014, and the first installment was paid in July.
- Effective October 1, 2014, the company acquired an inactive company and merged its dental business into wholly owned Wand Dental Inc., which would hold the dental instrument and handpiece distribution and licensing agreement. This is a subsequent event.
- The filing reports no legal proceedings and states that disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the balance-sheet comparative date: the table heading says December 31, 2014, but the filing’s contents and comparative figures identify December 31, 2013.
- Reconcile working capital: the balance sheet and notes support $13,609,977, while one MD&A passage states $13,609,997.
- Track whether the reduced instrument pricing produces sustained handpiece demand and improves sales and gross margins, particularly in domestic markets.
- Assess the concentration of sales and receivables among a small number of distributors, related-party supplier exposure, and progress on collecting receivables.
- Monitor operating cash generation, SG&A, joint-venture funding and losses, fulfillment of the remaining instrument purchase order, and the terms and potential dilution of the preferred stock.