Milestone Scientific Inc. — 2016 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016. Milestone develops computer-controlled injection systems and disposable handpieces for dental and medical applications. Dental products generated substantially all reported product sales; the company had not yet sold medical instruments in the United States. Its financial statements consolidate Wand Dental, Milestone Medical and Milestone Education, among other entities.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Product sales, net | $10.48 million | $9.49 million |
| Gross profit / margin | $6.31 million / 60% | $6.44 million / 68% |
| Operating loss | $6.51 million | $3.06 million |
| Net loss attributable to Milestone Scientific | $5.95 million | $5.47 million |
| Net loss per share, basic and diluted | $0.22 | $0.26 |
| Cash used in operating activities | $5.40 million | $2.95 million |
At year-end, cash and cash equivalents were $3.60 million, current assets $12.71 million, current liabilities $5.01 million, and working capital approximately $7.7 million. Total assets were $13.55 million and total equity $8.54 million. The filing reports no material off-balance-sheet arrangements; it does not identify material interest-bearing debt. The company had $7 million of Series A convertible preferred stock outstanding, with conversion terms described in the filing.
Material changes versus the prior comparable period
- Sales increased 10%, principally from higher instrument and handpiece shipments to China. International sales rose to $7.38 million from $5.99 million, while domestic sales declined to $3.10 million from $3.51 million.
- Gross margin fell eight percentage points. Operating expenses rose to $12.82 million from $9.50 million, including research and development expense of $1.27 million versus $0.10 million as presented.
- Operating cash outflow increased to $5.40 million. Cash declined by $0.59 million during 2016, compared with a $6.17 million decline in 2015.
- Comparisons are affected by consolidation changes: Milestone Medical was consolidated beginning at year-end 2015 and Milestone Education from January 2016. The company provides unaudited pro forma 2015 results on a consolidated-comparable basis, including a $5.47 million loss attributable to Milestone Scientific.
- The company raised gross proceeds of $2.0 million in a June private placement, $250,000 in a July registered offering, and approximately $3.0 million in a December public offering. A January 2017 partial over-allotment added approximately $186,000 gross proceeds.
Outlook, commentary and risks
Management expected the exclusive U.S. and Canadian dental distribution arrangement with Henry Schein to support higher 2017 dental sales. The company said its 25 trained sales specialists were in the field; Henry Schein made no instrument or handpiece purchases in the fourth quarter of 2016 while selling down inventory. Management projected available cash, receivables and anticipated dental revenue would fund operations for at least 12 months from the filing date, while acknowledging a possible need for additional capital before sustainable positive operating cash flow.
Management expected FDA clearance for the epidural instrument could occur by the end of the second quarter of 2017, but gave no assurance. The FDA advised that the intra-articular application did not adequately establish the required equivalence; additional data and potentially a human-factors study were planned, at an estimated incremental cost of about $100,000. Medical product commercialization depends on regulatory clearance and market acceptance. The company also cited persistent losses, substantial operating cash use, competition, reliance on a limited number of manufacturers and distributors, and risk of further capital needs.
Customer and related-party concentration is significant: two distributors accounted for approximately 58% of 2016 product sales, and receivables from two major customers represented approximately 85% of gross receivables. Milestone China is an equity-method affiliate; its losses and the timing of its resale of shipped inventory affect reported results. The filing also describes a $2.7 million year-end amount due from Milestone China and reports that $1.7 million was collected after year-end.
Important facts for investors to verify
- Whether Henry Schein’s distribution arrangement produces sustained orders and sales, including after distributor inventory sell-down.
- Cash burn, liquidity runway and the assumptions underlying management’s 12-month funding assessment; confirm whether further financing is required.
- FDA status, timing, cost and commercialization prospects for the epidural and intra-articular systems.
- Collectability of Milestone China receivables, related-party sales and the reconciliation of differing related-party revenue figures in the filing.
- Gross-margin trends, customer concentration, manufacturing continuity and potential dilution from preferred stock, warrants, options and deferred share issuances.