Milestone Scientific Inc. — Q1 2015 Form 10-Q
Business context and period: The company develops and sells computerized dental anesthesia products and is advancing medical injection devices through joint ventures. This unaudited report covers the three months ended March 31, 2015, compared with the same period in 2014; balance-sheet figures are compared with December 31, 2014.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Product sales | $2.770 million | $2.621 million; up 6% |
| Gross profit / margin | $1.837 million / 66% | $1.738 million / 66% |
| SG&A | $1.898 million | $1.393 million; up $505,000 |
| Research and development | $10,000 | $16,000 |
| Operating income (loss) | $(71,000); approximately (3%) margin | $329,000; approximately 12% margin |
| Net income (loss) attributable to Milestone | $(419,000); $(0.02) per share | $195,000; $0.01 per share |
| Operating cash flow | $(681,000) | $277,000 provided |
| Cash and cash equivalents | $9.331 million at March 31 | Down $1.037 million from year-end |
| Working capital | $13.212 million | $13.147 million at year-end |
| Total assets / total liabilities | $16.654 million / $1.857 million | At March 31, 2015 |
The filing reports no borrowings on the company’s balance sheet. It does disclose a $200,000 interest-bearing loan receivable from Milestone Medical, an affiliate. The company had $14.797 million in total equity, including noncontrolling interest, at quarter-end.
Material changes and operating developments
- Sales increased by $149,000, principally from international growth. International sales rose to $1.903 million from $1.407 million; domestic sales fell to $868,000 from $1.214 million.
- Instrument sales rose to $1.127 million from $841,000, while handpiece sales were $1.647 million versus $1.733 million. Domestic handpiece sales declined 58%; international handpiece sales increased 72%.
- SG&A increased $505,000. Management cited higher payroll and bonus accruals (approximately $436,000), marketing and trade-show costs (approximately $30,000), and legal expenses (approximately $109,000), along with expanded marketing and executive staffing.
- The equity-method loss from Milestone Medical increased to $450,000 from $131,000; the company recorded a $97,000 gain from Milestone China, which began operations in 2014. The company owns 49.98% of Milestone Medical and 40% of Milestone China.
- Investing cash outflows included a $200,000 note to Milestone Medical and $185,000 due from a related party. Financing cash inflow included a $100,000 contribution from noncontrolling interest.
Outlook, risks, and contingencies
- Management believes cash reserves are sufficient for anticipated obligations for at least 12 months from March 31, 2015, while pursuing revenue growth and expense control. It also acknowledges a history of operating losses and generally negative operating cash flows.
- Management plans to expand sales and marketing through existing and new distributors. The CompuFlo hospital distribution arrangement is contingent on FDA clearance. Milestone Medical’s devices remain in development; the filing says the project was nearing completion, notes prior EU CE clearance, and reports a Polish distribution agreement signed in March 2015 with sales beginning in April.
- Two distributors represented approximately 42% of Q1 sales. Two customers accounted for approximately 49% of gross receivables at March 31, 2015.
- Manufacturing relies on third parties; the filing warns that disruption or termination of a manufacturing relationship could adversely affect production and sales and may cause expense and delay.
- The company reports no legal proceedings. Its 2014 private placement included $7 million of Series A convertible preferred stock, convertible at $2.545 per common share, subject to stated terms and potential dilution.
- Management’s forward-looking statements are subject to risks and are not guarantees. The filing states there were no subsequent events requiring disclosure through May 14, 2015.
Important facts for investors to verify
- Whether international sales growth and the sharp domestic handpiece decline continue, and how concentrated sales and receivables remain among major distributors.
- Whether SG&A growth produces sustained sales gains, and whether the reported expense drivers reconcile to the total increase.
- Milestone Medical’s development, FDA clearance prospects, funding needs, and the timing and commercial significance of its distribution arrangements.
- Operating cash use, cash runway, and the collectability and terms of affiliate balances, including the $200,000 note and $185,000 due from Milestone Medical.
- The filing’s controls discussion refers to management’s evaluation “as of September 30, 2014,” despite this being a March 31, 2015 quarterly report; verify the intended evaluation date.