Milestone Scientific Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are with the year ended December 31, 2016. This filing reports annual results, not standalone fourth-quarter results. The company develops and sells computer-controlled injection devices and disposable handpieces, principally for dental use, and is seeking to commercialize medical applications of its pressure-sensing technology.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $11.28 million | $10.48 million |
| Gross profit / gross margin | $6.97 million / approximately 62% | $6.31 million / approximately 60% |
| Operating expenses | $12.20 million | $12.82 million |
| Operating loss | $(5.23) million | $(6.51) million |
| Net loss | $(5.37) million | $(7.29) million |
| Net loss attributable to Milestone Scientific | $(5.19) million | $(5.95) million |
| Basic and diluted loss per share | $(0.16) | $(0.22) |
| Cash used in operating activities | $(1.23) million | $(5.40) million |
- Dental products accounted for nearly all sales: $11.28 million in 2017, up 7.8%. Medical sales were only $2,000, down from $21,253.
- Dental gross margin rose to approximately 64% from 60%. The company attributed higher gross profit primarily to U.S. sales growth, partly offset by special China pricing.
- Research and development expense fell to $273,000 from $1.27 million, reflecting lower development costs for epidural and intra-articular devices. SG&A increased to $11.93 million from $11.55 million, including higher corporate expenses related to expanding the medical business.
- At year-end, cash and cash equivalents were $2.64 million; current assets were $12.02 million, current liabilities $6.73 million, and working capital approximately $5.29 million. Total assets were $15.63 million and total liabilities $8.13 million.
- The filing does not provide a clear figure for conventional borrowings. Reported liabilities include current payables, accruals and related-party deferred balances, plus a $1.40 million deferred gain associated with the Milestone China financing transaction.
- Financing activities provided $463,000 in 2017, versus $4.80 million in 2016. Cash declined by $965,000 during 2017.
Material changes and business developments
- FDA clearance for the CompuFlo Epidural System was received in June 2017. Despite clearance, epidural sales remained minimal; the company was building U.S. and international distribution and hired global and U.S. sales executives in early 2018.
- U.S. and Canada dental sales increased by about $2.0 million, which management attributed largely to the Henry Schein distribution arrangement and sales-force training. China sales fell by approximately $1.35 million, as the distributor worked through prior inventory and changed its strategy.
- Intra-articular 510(k) clearance was not granted in 2016 because the submission did not establish substantial equivalence. The company planned a new application in 2018; approval and timing are uncertain.
- The company acquired APAD injection-device patent and intellectual-property rights in 2017, issuing 1,646,358 shares valued at approximately $2.49 million and recording a further estimated $295,000 liability for potential share adjustment.
- The sale of the company’s 40% Milestone China interest was accounted for as a secured financing, not a completed sale for accounting purposes. The related note receivable was in default as of March 2, 2018; the company reported no financial benefit from the transaction to date and said enforcement could require returning up to $250,000.
Outlook, risks and unusual items
- Management stated that cash, receivables and expected dental revenue should fund operations for at least 12 months from the filing date. However, the company has a long history of operating losses and negative operating cash flow, and disclosed that it will likely need additional capital before achieving sustainable positive cash flow. Financing may dilute shareholders or constrain operations.
- Management expected lower epidural development costs in 2018, continued benefit from the Henry Schein arrangement, and further medical commercialization efforts. No quantified revenue or earnings guidance was provided.
- Customer and distributor concentration is significant: two customers/distributors represented approximately 70% of 2017 sales, and together accounted for 78% of year-end accounts receivable. One is related-party Milestone China.
- Manufacturing depends on third parties, including a single device manufacturer, under arrangements generally based on purchase orders without minimum supply commitments. The handpiece manufacturer is related to a significant stockholder.
- Other risks include market acceptance and reimbursement for new medical products, regulatory and quality compliance, product liability, competition, intellectual-property protection, international operations, and potential equity dilution. The company reported an accumulated deficit of approximately $78.6 million.
- Unusual items include a $220,000 reserve for slow-moving medical inventory, substantial stock-based compensation, a CEO transition and a $175,000 settlement with the former CEO, payable in installments beginning in March 2018.
- The independent auditor issued an unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the company can convert FDA clearance and new distribution efforts into material, recurring medical-device sales.
- Whether dental growth, particularly through Henry Schein, continues and offsets weaker China shipments and distributor concentration.
- The status, collectability and accounting consequences of the defaulted Milestone China note, including any potential repayment obligation.
- Cash runway, working-capital needs and the timing, terms and dilution risk of any additional financing.
- Progress and regulatory outcome for the planned intra-articular application, and the impact of medical inventory reserves and patent amortization.
- Reliability of supply from third-party manufacturers and the company’s ability to meet purchase commitments without disrupting liquidity.