MLSS

Business Context and Reporting Period

Company: Milestone Scientific Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Milestone Scientific develops and markets computer-controlled local anesthesia delivery (C-CLAD) systems, primarily the STA Single Tooth Anesthesia System® and CompuDent®/The Wand® instruments. The company focuses on expanding global distribution, particularly in China, and exploring new medical applications for its CompuFlo® technology.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net product sales increased by 36% ($1.54 million) year-over-year. This growth was driven almost entirely by international sales, which rose 145% to $3.32 million, primarily due to shipments of 12,000 STA instruments to a distributor in China.
• Profitability Turnaround: The company reported a net income of $264,282 for the six months ended June 30, 2010, compared to a net loss of $1.22 million in the same period in 2009. This shift was due to increased sales volume, improved gross margins (64% vs. 58%), and reduced interest expenses following the conversion of a line of credit to equity in late 2009.
• Expense Management: Selling, general, and administrative (SG&A) expenses decreased by 4.7% ($162,156) despite revenue growth. This was achieved by cutting domestic marketing and sales force costs, offset by increases in international sales commissions and royalties.
• Balance Sheet: Current assets increased by $1.86 million, largely due to higher accounts receivable ($740k), inventory ($460k), and advances to contract manufacturers ($839k) to fulfill the China order. Cash decreased by $209,540 due to operating and investing outflows.

Outlook, Risks, and Management Commentary

• Strategic Focus: Management is prioritizing the expansion of the global distribution network, specifically in China, and reducing domestic marketing spend to improve efficiency. They are also pursuing strategic collaborations for new medical products using CompuFlo® technology.
• Liquidity and Going Concern: Despite reporting net income, the company continues to generate negative cash flow from operations ($129,532). Management states that historical losses raise "substantial doubt about its ability to continue as a going concern." The company may need to raise additional capital to fund operations and fulfill large purchase orders.
• Key Risks:
  • Customer Concentration: Three customers accounted for 71% of revenue in the first six months of 2010, with one Chinese distributor representing 32% of total sales.
  • Supply Chain Dependence: The company relies on contract manufacturers (e.g., Tricor Systems) for production. Termination of these relationships could materially adversely affect operations.
  • Capital Needs: There is no assurance that the company can achieve sustainable positive operating cash flows or raise capital on satisfactory terms if required.
• Unusual Items: The company recorded $61,916 in other income from the sale of tax credits under the New Jersey Technology Tax Certificate Program. Additionally, $229,312 in commissions were paid to a previous international distributor as part of a transition agreement.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of operations given the negative operating cash flow despite net income.
• China Order Fulfillment: Confirm the status of the 12,000-unit purchase order with the Chinese distributor and the associated advances to contract manufacturers ($937k recorded).
• Customer Concentration: Assess the risk associated with 71% of revenue coming from just three distributors.
• Debt Obligations: Review the terms of the $450,000 shareholder note (due June 30, 2012) and accrued interest obligations.
• Going Concern Status: Evaluate the company's plan to secure additional capital if operating cash flows do not turn positive.