Milestone Scientific Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Financial statements are unaudited. Milestone develops and sells dental anesthesia instruments and handpieces and is pursuing medical products using its CompuFlo technology.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Q1 2012 / December 31, 2012 |
|---|---|---|
| Product sales | $2.490 million | $1.921 million |
| Gross profit / margin | $1.677 million / 67% | $1.258 million / 65% |
| Operating income (loss) | $167,761 | $(233,151) |
| Net income (loss) | $150,746; $0.01 per share | $(355,181); $(0.02) per share |
| Operating cash flow | $(83,667) | $(123,188) |
| Cash and cash equivalents | $121,604 | $165,249 at year-end 2012 |
| Working capital | $(300,116) | $(775,742) at year-end 2012 |
| Total liabilities | $3.412 million | $3.725 million at year-end 2012 |
Revenue increased 30% year over year, principally from higher handpiece sales. Domestic sales rose to $1.301 million from $870,490; international sales were $1.189 million versus $1.051 million. Gross margin improved by 2 percentage points. SG&A declined 4.4% to $1.388 million, while R&D increased 210% to $121,837, primarily for STA instrument software enhancements. The prior-year period included a $78,095 loss related to the Medical Joint Venture; no such expense was recorded in Q1 2013.
Cash declined $43,645 during the quarter. Investing cash outflow was $59,978, including a $50,000 investment in Milestone Education LLC; financing provided $100,000, including $50,000 from common-stock sales and a $50,000 related-party loan. The company reported $450,000 of long-term notes payable. The shareholder loan bears 12% interest, with principal and interest due at maturity, and was extended to January 5, 2015. Accrued interest on notes payable was $380,982 at quarter-end.
Business developments, outlook, and risks
- Management is focused on expanding STA instrument and handpiece sales, including through a U.S. and Canada exclusive distributor, and developing medical instruments with its China joint venture partner.
- China-related sales have been delayed by regulatory approval requirements. The filing says STA System approval was received in October 2012 but also says appropriate Chinese registration approval had not been received as of March 31, 2013; approval for Wand handpieces was expected in 2013. The delay has affected sales and the timing of the company’s inventory and contract advances.
- Management stated that cash reserves were insufficient to cover all anticipated obligations for the next 12 months and that additional capital may be needed. The company warned that failure to generate positive operating cash flow or raise capital could require reduced development or marketing activity, or other cost reductions. Recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern; the financial statements include no adjustments for that uncertainty.
- Customer and credit exposure is concentrated: three distributors generated approximately 49% of Q1 2013 sales, and four customers represented 61% of gross accounts receivable at quarter-end. A $252,362 reserve was recorded against receivables from the China distributor.
- Milestone depends on contract manufacturers; interruption or termination of manufacturing relationships could disrupt supply. It had approximately $2.788 million in advances for future STA inventory purchases at quarter-end. A related-party supplier accounted for $663,420 of Q1 purchases, and the company owed it $864,326 at March 31.
- There is no quantified financial guidance. Management described plans to increase revenue and control expenses but cautioned that results and R&D spending may vary. Legal proceedings: none reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Chinese registration approvals were obtained as anticipated and whether delayed distributor orders convert into collected revenue.
- Cash runway, near-term obligations, and the company’s ability to generate operating cash flow or obtain additional financing.
- Collectability and payment timing of the China distributor receivable, including the adequacy of the reserve.
- Progress and funding responsibilities for the Medical Joint Venture, and the terms and repayment of the CEO’s $50,000 loan.
- Customer and supplier concentration, contract-manufacturer performance, and the effect of outstanding inventory advances and purchase commitments.
- Potential share dilution: the company issued 218,420 shares during the quarter for services, compensation, and cash proceeds, and reported 16,806,971 common shares outstanding as of May 6, 2013.