Milestone Scientific Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; this is an annual report, not a standalone fourth-quarter report. The company develops and sells computer-controlled injection systems and disposable handpieces for dental and medical applications. In December 2015, it began consolidating Milestone Medical, a 49.98%-owned subsidiary, as a variable interest entity (VIE).
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $9.49 million | $10.33 million | Down 8.1% |
| Gross profit / margin | $6.44 million / 68% | $6.70 million / 65% | Profit down about $259,000; margin up 3 percentage points |
| Operating expenses | $9.50 million | $7.49 million | Up about $2.01 million |
| Operating loss | $(3.06) million | $(0.79) million | Loss widened |
| Net loss attributable to Milestone Scientific | $(5.47) million | $(1.70) million | Loss widened |
| Operating cash flow | $(2.95) million | $0.38 million | Turned negative |
| Cash and cash equivalents at year-end | $4.19 million | $10.37 million | Down $6.17 million |
- Year-end current assets were $11.82 million and current liabilities $3.64 million; management reported working capital of approximately $8.2 million, down about $4.9 million from 2014.
- Total assets were $12.81 million and total equity was $9.17 million at year-end. The balance sheet reports current liabilities but no separate long-term debt balance; the filing does not provide a clear figure for interest-bearing debt.
- Cash used in investing activities was $3.73 million, including $3.65 million of investment in Milestone Medical before consolidation. Financing provided $0.50 million, from a noncontrolling-interest contribution. No material off-balance-sheet arrangements were reported.
- Product gross margin improved mainly due to pricing, but lower sales meant gross-profit dollars declined. Revenue remained insufficient to cover overhead, product development, and research costs.
Material changes versus FY2014
- Domestic product sales fell to $3.51 million from $4.66 million, largely because U.S. handpiece sales declined. International sales rose to $5.99 million from $5.68 million, with growth attributed primarily to China.
- SG&A increased to $9.40 million from $7.40 million. The company cited additional management hires and approximately $1.5 million of higher professional fees, including legal, distributor-consulting, grant-related, and investor-relations costs.
- The company consolidated Milestone Medical at December 31, 2015 after determining it lacked sufficient capital to fund operations without support. Its operating results were not consolidated in the reported 2015 income statement; the company instead recorded a $2.02 million equity loss. The filing provides unaudited pro forma combined results, including a $7.56 million net loss for 2015, but cautions that these are not indicative of actual results.
- The former exclusive U.S. and Canadian STA distributor agreement became non-exclusive at year-end. Henry Schein became an additional non-exclusive distributor effective January 1, 2016.
Outlook, risks, and unusual items
- Management projected improved dental revenue over the following 12 months, citing the Henry Schein arrangement and anticipated growth through Milestone China. It stated that cash would be sufficient for anticipated obligations for at least 12 months, conditional on higher dental revenue and controlling spending on FDA clearance efforts. This is management’s forecast, not a guarantee.
- Management expected U.S. FDA clearance for Milestone Medical’s epidural and intra-articular instruments in 2016, described elsewhere as expected around mid-year. The filing notes regulatory approval is uncertain; a prior U.S. hospital-sector distribution relationship was terminated in 2015 amid clearance delays.
- The company has a history of operating losses and negative operating cash flow, except in 2013, and reported an accumulated deficit of approximately $67.4 million on the balance sheet. The risk-factor discussion separately states approximately $78.6 million, an inconsistency to verify.
- Other significant risks include market adoption and distribution execution, dependence on a small number of manufacturers and distributors, customer and supplier concentration, product-liability exposure, regulatory requirements, and potential dilution from options and convertible preferred stock.
- At year-end, two distributors accounted for about 33% of sales and 45% of gross receivables. One related-party handpiece supplier accounted for 72% of purchases. The filing reports no material litigation and no expected dividends in the foreseeable future.
- The independent auditor issued an unqualified opinion on the financial statements. Management stated that disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal controls.
Important facts for investors to verify
- Whether Henry Schein and other distributors deliver the revenue growth assumed in management’s 12-month cash forecast, and the actual cash runway if sales do not improve.
- The timing, cost, and status of FDA clearance for the medical instruments, and Milestone Medical’s financing needs and the extent of any further parent-company support.
- The reason for the differing accumulated-deficit figures in the balance sheet and risk-factor discussion, and the distinction between reported FY2015 results and VIE pro forma results.
- Inventory recoverability and purchase commitments, particularly given year-end inventory of $4.26 million and advances on contracts of $1.22 million.
- Potential dilution and control implications of the $7 million Series A preferred stock, convertible at $2.545 per share subject to stated adjustment terms, and outstanding options.