Business context and reporting period
Milestone Scientific Inc. filed this Form 10-K for the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter report. The company develops and sells computer-controlled injection systems and disposable handpieces for dental and medical uses, including its STA and CompuDent products and CompuFlo technology. Most reported revenue came from handpieces.
Financial results and key metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $8.648 million | $8.378 million |
| Gross profit / margin | $5.592 million / 65% | $5.361 million / 64% |
| Operating loss | $520,353 | $1.224 million |
| Net loss | $870,306 | $1.482 million |
| Loss per share, basic and diluted | $0.05 | $0.10 |
| Cash used in operating activities | $49,718 | $570,730 |
- Revenue increased about 3%. Handpiece sales rose to $6.344 million from $5.457 million, while instrument sales fell to $2.147 million from $2.824 million.
- Domestic product sales declined to $4.344 million from $4.658 million; international sales increased to $4.304 million from $3.720 million.
- SG&A fell 8% to $5.931 million; R&D rose to $181,979 from $140,053. Management attributed improved operating results mainly to lower operating expenses and higher gross profit.
- At year-end, cash was $165,249, current assets were $2.499 million, current liabilities were $3.275 million, and working capital was negative $775,742. Total assets were $5.661 million.
- Long-term notes payable were $450,000, due January 3, 2014; accrued interest on notes payable was $356,563 and classified as current. Accounts payable was $2.337 million.
- Financing activities provided $150,000 in 2012, from common-stock sales. Cash increased by $68,925 during the year. The filing reports no material off-balance-sheet arrangements.
Changes, outlook, risks, and unusual items
- Management said 2012’s lower operating loss and near-break-even operating cash flow reflected expense control and changes in working capital. Operating cash use improved from $570,730 to $49,718, but the company remained loss-making.
- China’s regulator approved the STA instrument in October 2012 but had not approved the disposable handpieces as of the filing date. Shipments remained suspended; the company expected approval in 2013. The company reserved $308,350 against the Chinese distributor’s receivable and reported net long-term receivables of $119,201.
- Management planned to increase sales and marketing in 2013, support its new exclusive U.S. and Canadian distributor, and expand global distribution. It also sought growth through a medical-products joint venture. The filing gives no quantified revenue or earnings guidance.
- The company said cash reserves were insufficient for anticipated obligations over the next 12 months. Management was pursuing revenue growth and cost reductions and might need additional capital; failure to obtain it could force cuts to development or marketing. The auditor’s report and management disclosures state that recurring losses raise substantial doubt about the company’s ability to continue as a going concern. The financial statements include no adjustments for that uncertainty.
- Contractual obligations were reported at $3.444 million, including $2.869 million of purchase obligations for instruments and handpieces. These commitments should be considered alongside limited cash and negative working capital.
- The company wrote off a $76,319 investment in a German distributor in the fourth quarter and charged $135,535 for CompuDent-related materials. Its 50%-owned medical joint venture was carried at zero at year-end; the company reported $171,016 of its share of 2012 losses and disclosed additional unrecognized losses of approximately $346,000 because it had no obligation to fund them.
- Other significant risks include dependence on a small number of distributors, customers and contract manufacturers; concentration of purchases with a supplier linked to a 5% shareholder; regulatory and product-liability exposure; and potential dilution. At year-end, 1.524 million options and warrants were outstanding and 1.636 million shares were deferred for issuance.
Important facts for investors to verify
- Whether Chinese approval for STA handpieces was obtained and whether it enabled shipments, collections, and realization of related inventory and advances.
- The company’s subsequent cash position, operating cash flow, financing needs, and ability to meet the $450,000 note maturity and other obligations.
- Whether the new North American distribution arrangement generated sustained instrument and recurring handpiece sales, and how customer and distributor concentration evolved.
- The collectability of Chinese distributor receivables, adequacy of the $308,350 reserve, and recoverability of contract-manufacturer advances.
- The filing contains a conflicting MD&A reference to 2012 net loss of $807,306; the audited statement of operations reports $870,306. Confirm the audited figure and any related corrections.
- Potential share dilution from deferred compensation shares, options, and other reserved shares; compare the year-end share counts with the 16,781,726 shares outstanding reported as of March 13, 2013.