Business context and reporting period
Milestone Scientific Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company develops and sells computer-controlled injection instruments and disposable handpieces, principally for dental use, and is developing medical applications through a joint venture. Its products were sold in the United States and more than 47 other countries.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $10.01 million | $8.65 million |
| Gross profit / margin | $6.81 million / 68% | $5.59 million / 65% |
| Operating income (loss) | $1.09 million | ($520,353) |
| Net income (loss) | $1.46 million | ($870,306) |
| Operating cash flow | $1.26 million provided | $49,718 used |
| Cash and cash equivalents, year-end | $1.15 million | $165,249 |
| Working capital, year-end | $2.34 million | Not clearly stated as a value |
| Debt | No notes payable outstanding at year-end | $450,000 note payable, plus accrued interest |
Revenue was split between domestic sales of $5.30 million (53%) and international sales of $4.71 million (47%). Handpieces accounted for $7.29 million of sales; instruments contributed $2.67 million. The company reported no income tax provision. Investing activities used $561,387 and financing activities provided $284,600 in 2013.
Material changes versus 2012
- Revenue rose 16%, with domestic sales up 22% and international sales up 10%. Management attributed much of the domestic increase to handpiece sales and distributor arrangements.
- Gross margin increased three percentage points. Selling, general and administrative expense fell about 7%, while research and development expense rose slightly to $191,345.
- Net income turned positive, but included a $1.36 million gain from dilution of Milestone’s ownership in Milestone Medical Inc. The filing also records $924,363 of medical joint-venture losses. The dilution gain is not operating revenue and materially affected reported earnings.
- Operating cash flow improved to $1.26 million. Cash increased by $981,949 during the year.
- In August 2013, a shareholder loan and related interest were converted into common stock; the balance sheet reports no notes payable at year-end. The filing’s descriptions of the converted amount and share count are not fully consistent.
- Milestone Medical raised $3.0 million in a private placement, reducing Milestone’s ownership from 50% to 45.5%.
Outlook, risks, contingencies and unusual items
Management described plans to expand distribution, support sales and marketing, and continue developing dental and medical products. It provided no quantified revenue or earnings guidance. A strategic partner received exclusive U.S. hospital-sector distribution rights for CompuFlo epidural applications for three years; Henry Schein was appointed exclusive U.S. and Canadian distributor for CompuDent handpieces.
- Going concern and liquidity: Despite 2013 profitability and positive operating cash flow, management said cash reserves might not cover all anticipated obligations for the next 12 months. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. Management may need additional capital; no assurance is given it can be obtained on acceptable terms.
- China regulatory delay: The STA system had Chinese approval, but the required approval for disposable handpieces remained outstanding, suspending shipments. The timing and receipt of that approval were uncertain.
- Concentration and related parties: Two distributors represented about 42% of 2013 sales, and one customer represented about 48% of gross receivables. A supplier related to a significant shareholder provided about 87% of purchases; year-end amounts payable to it were approximately $1.02 million. A shareholder also entered a consulting agreement at $100,000 annually.
- Supplier and inventory exposure: The company relies on a small number of manufacturers and had $2.31 million in advances to contract manufacturers, including amounts tied to delayed purchase orders. Contractual purchase obligations totaled $2.01 million.
- Joint ventures: Milestone Medical remained a development-stage company with no revenue and reported a $1.02 million net loss in 2013. Milestone’s recorded share of joint-venture losses and the dilution gain are significant to interpreting consolidated results.
- Other risks: The company has a roughly $60.3 million accumulated deficit, a limited workforce, substantial competition, regulatory and product-liability exposure, and dependence on key personnel and intellectual-property protection. No material litigation was reported. Management stated disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the reported 2013 profit and operating cash flow are sustainable without the one-time $1.36 million joint-venture dilution gain and noncash compensation effects.
- Current cash needs, subsequent financing, and management’s basis for its stated 12-month liquidity concern and the auditor’s going-concern emphasis.
- Status and timing of Chinese approval for STA handpieces, and the related delayed shipments and contract-manufacturer advances.
- Whether distributor concentration, customer receivables, and dependence on the related-party handpiece supplier have changed since year-end.
- The terms and accounting for the shareholder debt conversion, consulting agreement, joint-venture financing, and private placement; the filing contains differing descriptions of the debt conversion details.