Milestone Scientific Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; standalone fourth-quarter results are not provided in the supplied filing text. The company develops and sells computer-controlled injection systems and disposable handpieces for dental and medical uses.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $10.33 million | $10.01 million |
| Gross profit / margin | $6.70 million / 65% | $6.81 million / 68% |
| Operating expenses | $7.49 million | $5.73 million |
| Operating income (loss) | ($790,176) | $1.09 million |
| Net income (loss) | ($1.71 million) | $1.46 million |
| Operating cash flow | $376,943 provided | $1.26 million provided |
- Revenue increased 3.2%. International sales rose 20.5% to $5.68 million, while domestic sales fell 12.2% to $4.66 million. Handpieces were the largest product category, contributing $7.63 million.
- Gross margin declined three percentage points. Management attributed the reduction principally to improved STA instrument voice chips and lower instrument selling prices.
- SG&A rose 34% to $7.40 million, including increased consulting, marketing, investor-relations and capital-markets advisory costs, stock-based compensation, and CEO pension expense. R&D fell to $88,243 from $191,345.
- 2014 results included $891,500 of equity-method losses from Milestone Medical, versus $924,363 in 2013. The prior-year result also included a $1.36 million non-cash gain from dilution of the company’s stake in that joint venture; no comparable gain occurred in 2014.
Liquidity, financing and obligations
- At year-end, the filing reports cash and cash equivalents of $10.37 million and working capital of $13.15 million. MD&A separately cites $5.50 million of Treasury bills, but the balance-sheet excerpt supplied does not show that amount as a separate asset; verify the presentation and whether it is included in cash equivalents.
- The May 2014 private placement raised $10 million gross, approximately $9.45 million net: $3 million from common stock and $7 million from Series A convertible preferred stock. The preferred stock has stated conversion terms subject to conditions and anti-dilution adjustments; verify the applicable conversion price and potential dilution.
- The company reported positive operating cash flow, but it was down from 2013. Cash increased by $9.22 million, largely reflecting financing proceeds. Investing activities used $1.30 million and financing activities provided $10.15 million.
- No outstanding borrowing is shown on the year-end balance sheet. A line of credit permits up to $2 million of advances to the 49.98%-owned Milestone Medical through April 15, 2016, at 3.25%. No funds had been advanced at year-end; the filing says $200,000 was borrowed by the joint venture in February 2015.
- Contractual obligations totaled approximately $1.72 million, including $508,486 of lease obligations and $1.22 million of purchase obligations. Management said available cash was sufficient for anticipated obligations for at least the next 12 months.
Material changes, outlook and risks
- Management said the 2014 domestic instrument price-reduction strategy did not succeed and would not continue. For 2015, it planned to support sales through distributors, practitioner training, targeted advertising and expansion of international distribution. No quantified revenue or earnings guidance was provided.
- Milestone transferred its dental business and related assets to wholly owned Wand Dental in 2014. It also invested in Milestone China, a 40%-owned distributor, and increased its Milestone Medical ownership to approximately 50%.
- Milestone Medical received CE clearance in September 2014. The company said the medical instruments were nearing completion; a Polish distributor agreement for the epidural instrument was signed in March 2015, with distribution expected to start in April.
- Key risks include a history of losses (2013 was an exception), uncertain product adoption and distribution execution, dependence on a small number of manufacturers, customer and supplier concentration, regulatory approval requirements, product-liability exposure, and competition from larger companies. Two distributors represented approximately 45% of 2014 sales; one handpiece supplier accounted for 74% of purchases and is related to a significant shareholder.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The auditor expressed an unqualified opinion on the financial statements but was not engaged to audit internal controls. The company reported no material litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the $5.50 million Treasury-bill disclosure with the balance-sheet presentation and reported liquidity.
- Confirm preferred-stock conversion provisions, potential share issuance, and dilution alongside outstanding options and shares to be issued.
- Assess whether international growth and the planned distributor initiatives can offset domestic weakness and support recurring handpiece sales.
- Review the increase in SG&A, the concentration of sales and purchases, and the company’s reliance on contract manufacturers.
- Track the medical instruments’ commercialization, regulatory progress, joint-venture funding needs, and the related-party line of credit.
- Note that the filing gives differing net-loss figures depending on whether it refers to consolidated results ($1.71 million) or loss attributable to Milestone Scientific shareholders ($1.70 million).