Milestone Scientific Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 13, 2014. Milestone develops and sells computer-controlled local anesthesia products, including the STA dental system, and is pursuing medical products through a joint venture.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $2.621 million | $2.490 million; up 5% |
| Gross profit / margin | $1.738 million / 66% | $1.677 million / 67% |
| Operating expenses | $1.409 million | $1.510 million; down 7% |
| Operating income | $329,248 | $167,761; up 96% |
| Net income | $194,834; $0.01 per diluted share | $150,746; $0.01 per diluted share |
| Operating cash flow | $276,968 | $(83,667) |
At March 31, cash was $1.399 million, working capital was $4.163 million, and total current liabilities were $2.208 million. Working capital rose $1.819 million from year-end, partly reflecting reclassification of contract advances to current assets. Total assets were $8.091 million and stockholders’ equity was $5.882 million. The balance sheet reported no note payable; the shareholder loan and related interest had been converted to equity in August 2013. The filing does not report a separate debt balance beyond listed liabilities.
Material changes and operating developments
- International sales increased to $1.407 million from $1.189 million, while domestic sales decreased to $1.214 million from $1.301 million. International instrument sales more than doubled; handpiece sales overall declined.
- Research and development expense fell to $15,720 from $121,837, primarily because the prior-year period included STA software enhancements. Gross margin declined one percentage point.
- Q1 results included $133,939 of equity-method losses from the Medical and Education joint ventures ($130,523 and $3,416, respectively).
- Cash increased $251,649 during the quarter. Operating cash generation included a $507,345 increase in customer advances, partly offset by inventory growth of $423,294 and a reduction in accounts payable of $803,233.
Outlook, risks and unusual items
- Going concern/liquidity: Despite positive Q1 operating cash flow and working capital, management said cash reserves were not expected to cover all anticipated obligations for the next 12 months. The filing states that historical losses and cash-flow deficits raise substantial doubt about the company’s ability to continue as a going concern. Management may need additional capital; there is no assurance it can obtain financing on acceptable terms. Without adequate cash, it may curtail development, reduce marketing, or take other cost-saving measures.
- Supply commitment: Milestone had advanced approximately $1.982 million to its manufacturer for STA inventory. It agreed to accept the remaining 5,633 instruments by November 30, 2014, with the related advances to be applied as goods are delivered. The filing notes that a manufacturing interruption could materially harm operations.
- Concentration: Three distributors generated approximately 57% of Q1 sales. One customer accounted for 51% of gross receivables at March 31. A related-party supplier accounted for $824,574 of Q1 purchases; $671,777 was owed to it at quarter-end.
- Commercial developments: A U.S. distributor held exclusive marketing and distribution rights for STA instruments and handpieces in the United States and Canada. In May 2014, China’s SFDA approved sale of STA handpieces in China. The company provided no quantified revenue or earnings guidance.
- Other items: A March employment-agreement amendment provides for payments of $203,111 annually for five years for the CEO’s benefit; approximately $17,000 was expensed in Q1. In April, officers elected to receive approximately 980,000 previously recorded shares to be issued; the filing says these would be recorded as issued and outstanding at March 31. The company reported no legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether cash generation continues and how the company plans to meet obligations over the next 12 months, given the explicit going-concern warning.
- Delivery, acceptance, and sale of the 5,633 remaining STA instruments, and the recoverability and timing of the approximately $1.982 million supplier advance.
- Whether China approval and international sales growth translate into sustained orders, and the effect of distributor and customer concentration.
- The joint ventures’ development progress, future funding needs, and continuing equity-method losses.
- The accounting and share-count effect of the approximately 980,000 shares elected for by officers after quarter-end, alongside other shares issued or to be issued and outstanding options.