Milestone Scientific Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Milestone Scientific develops and sells computer-controlled injection devices, primarily for dental use, and is seeking to commercialize medical applications, including its FDA-cleared CompuFlo Epidural System.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $9.62 million | $11.28 million |
| Gross profit / margin | $4.43 million / 46% | $6.97 million / 62% |
| Operating loss | $8.00 million | $5.23 million |
| Net loss attributable to Milestone Scientific | $7.43 million | $5.19 million |
| Net loss per share | $0.21 | $0.16 |
| Cash used in operating activities | $1.63 million | $1.23 million |
| Cash and cash equivalents at year-end | $743,429 | $2.64 million |
- Dental sales fell 15.8% to $9.50 million, chiefly due to lower shipments to Milestone China and reduced device and handpiece sales in the United States and Canada. Medical sales rose to $119,800 from $2,000, but remained immaterial to total revenue.
- Gross margin declined as a result of inventory and deferred-cost reserves, including approximately $1.2 million associated with Milestone China, approximately $309,000 for slow-moving or damaged dental handpieces, and $234,350 for slow-moving intra-articular devices. The company also incurred approximately $165,000 related to instrument discoloration and damaged handpieces.
- Selling, general and administrative expense decreased 10.8% to $10.65 million, primarily from lower corporate consulting costs. This reduction did not offset lower gross profit and the $1.54 million impairment charge.
- Year-end current assets were $5.86 million and current liabilities $4.87 million, implying working capital of approximately $984,000; management describes working capital as approximately $1.0–$1.1 million. Total liabilities were $4.87 million and stockholders’ equity $1.53 million. The balance sheet reports no conventional interest-bearing debt; it does include $7 million liquidation preference of Series A convertible preferred stock.
- Operating cash outflow increased year over year. Cash fell substantially, and the company reported an accumulated deficit of approximately $86 million. The auditor’s report includes a going-concern emphasis, citing recurring losses and negative operating cash flows.
Material changes and unusual items
- Revenue declined 14.7%; gross profit fell 36.4%, while the operating loss widened approximately 52.8%.
- A $1.54 million impairment was recorded on APAD patents acquired in 2017. Management determined the patents would not be developed into marketable instruments before the estimated useful life expired.
- Milestone China’s payment arrangement was in default: the company collected $900,000 against the arrangement during 2018, halted shipments, adjusted related-party receivables and deferred revenue for expected realization, and recorded a $1.25 million reserve against related deferred costs. The company reported $1.918 million owed by Milestone China at year-end.
- The prior-year sale of the company’s 40% Milestone China interest was unwound after the purchaser defaulted. Milestone repaid $250,000, recovered the shares, and cancelled the note; it derecognized the remaining $1.15 million note receivable and $1.4 million deferred gain without recognizing a gain or loss.
- In February 2019, after year-end, the company raised approximately $2.45 million in gross proceeds through public and private offerings, with additional shares and warrants issued. Management stated that available cash and this financing were not sufficient to fund operating requirements for at least the next 12 months from the filing date.
Outlook, risks and contingencies
- Management aims to expand the dental business, establish U.S. and international distribution for the CompuFlo Epidural System, and pursue regulatory clearance for the cosmetic device and intra-articular product. No quantified revenue, earnings or cash-flow guidance is provided.
- Management expected epidural development costs to decline in 2019, while selling costs were expected to increase significantly. It said additional financing would be needed to support commercialization and other operations; financing on acceptable terms, or at all, is not assured.
- The CompuFlo Epidural System received U.S. FDA clearance in June 2017, but medical sales remained minimal. The intra-articular 510(k) application was not cleared; the company said it would submit a new application in 2019. The cosmetic device also required financing for regulatory work and commercialization.
- NYSE American notified the company of noncompliance with continued listing standards. The Exchange accepted a compliance plan targeting May 20, 2020, but the company remained noncompliant at the filing date; failure to progress under the plan or regain compliance could lead to delisting.
- Key risks include dependence on two principal manufacturers, customer and distributor concentration, Milestone China’s liquidity and collections, ongoing losses and financing needs, regulatory and market-acceptance uncertainty, potential product liability, and competition. Two distributors accounted for approximately 53% of 2018 Wand Dental net product sales, according to the filing.
- The company reported no material litigation. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not express an opinion on internal controls.
Important facts for investors to verify
- Current cash runway, financing needs, and progress toward positive operating cash flow, given the going-concern warning and the stated insufficiency of the February 2019 financing.
- Recoverability and collection timing of Milestone China-related receivables, deferred costs and other related-party balances, and the impact of any further customer defaults.
- Whether dental sales and margins stabilize, and whether Henry Schein’s distribution activity translates into sustained end-customer demand.
- Commercial adoption, distributor orders and recurring disposable sales for the CompuFlo Epidural System; regulatory progress for intra-articular and cosmetic devices.
- Progress under the NYSE American compliance plan and the risk of delisting, alongside potential dilution from share and warrant issuance.
- Terms and conversion outcome of the $7 million Series A preferred stock, which was scheduled for mandatory conversion on May 14, 2019, subject to the filing’s stated conversion terms and adjustments.