Milestone Scientific Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed March 30, 2020. This annual filing does not provide a clear standalone fourth-quarter results breakdown. The company develops and sells computer-controlled injection devices; dental products remain its principal business, while the FDA-cleared CompuFlo epidural system is at an early commercialization stage.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $8.37 million | $9.62 million |
| Gross profit / margin | $5.72 million / 68% | $4.43 million / 46% |
| Operating loss | $4.00 million | $8.00 million |
| Net loss attributable to Milestone Scientific | $7.52 million | $7.43 million |
| Basic and diluted loss per share | $0.16 | $0.21 |
| Cash used in operating activities | $1.78 million | $1.63 million |
- Sales declined 13% year over year. Dental sales were $8.34 million, down 12%; medical sales were $37,600, down 69%.
- Gross margin rose to 68% from 46%, reflecting higher selling prices, lower inventory reserves and a $151,000 credit for defective handpieces previously reserved in 2018.
- Cash and cash equivalents were $1.52 million at year-end, versus $743,000 in 2018. Working capital was approximately $1.2 million, compared with $1.0 million.
- Total liabilities were $4.93 million, largely current payables and accrued expenses. The balance sheet does not present a separate interest-bearing debt balance.
- The company reported a $3.64 million non-cash expense from changes in fair value of derivative liabilities. Those liabilities arose while authorized shares were insufficient to cover certain outstanding securities; shareholders increased authorized shares in December 2019, and the liabilities were reclassified to equity.
Changes, business performance and outlook
- Dental remained the revenue base, but lower China shipments—associated with the distributor’s cash constraints and strategy changes—accounted for approximately $741,000 of the dental sales decline. U.S. and Canada device and handpiece sales also fell.
- The dental segment generated $2.78 million of operating income. The medical segment recorded a $2.35 million operating loss; corporate costs were $4.42 million.
- Operating loss improved by about $4.0 million, mainly due to higher gross profit, lower SG&A and the absence of the $1.54 million patent impairment recorded in 2018. The 2019 net loss was slightly higher, primarily because of the non-cash derivative charge.
- Management planned to expand U.S. and international commercialization of the CompuFlo epidural system, including building a U.S. sales force. Medical sales remained minimal, and management expected commercialization selling costs to rise.
- Funding constraints delayed a new FDA 510(k) application for the intra-articular device and prevented progress toward regulatory clearance and launch of the cosmetic device. Management said further development and commercialization depend on obtaining additional capital.
Risks, contingencies and unusual items
- Going concern: The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. Management said available cash was insufficient for at least the next 12 months from the filing date and that continued operations depend on revenue growth, expense reductions and/or additional financing. No assurance was given that financing would be available on acceptable terms, or at all.
- COVID-19: The filing anticipated materially adverse effects on second-quarter and possibly third-quarter 2020 revenue because of dental-office closures and reduced hours; the full-year effect and impact on epidural commercialization were uncertain.
- Exchange listing: The company was not in compliance with NYSE American stockholders’ equity listing standards. Its compliance plan was accepted, with a May 20, 2020 deadline to regain compliance; failure could lead to delisting.
- Concentration and supply: One U.S. distributor accounted for approximately 53% of 2019 product sales, and major distributors represented approximately 77% of year-end gross receivables. Handpieces came from a related-party manufacturer in China, and device manufacturing arrangements were largely purchase-order based, without long-term supply or price commitments.
- Related-party and other commitments: The company owed its principal handpiece manufacturer approximately $943,000 at year-end. Contractual obligations totaled about $2.23 million, including $1.59 million of purchase obligations due within one year. The filing reports no material litigation.
- Capital and dilution: February 2019 public and private offerings generated gross proceeds of approximately $2.25 million, and warrant exercises provided additional proceeds. The offerings and other equity issuances increased shares outstanding; further equity financing could dilute existing holders.
Important facts for investors to verify
- Near-term cash needs, financing availability and the assumptions underlying the going-concern assessment.
- Whether revenue and collections from the dental business can offset commercialization spending, and how COVID-19 affected subsequent-period results.
- Evidence of sustained adoption and sales growth for the CompuFlo epidural system, beyond clinical-study results and limited early sales.
- Progress in regaining NYSE American stockholders’ equity compliance and the consequences if compliance is not restored.
- Distributor receivable collectability, China-related exposure, and continuity and terms of related-party manufacturing supply.
- The timing and funding required for the intra-articular and cosmetic regulatory programs, and the potential dilution from outstanding warrants, deferred share issuances and future financing.