SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-26284
MILESTONE SCIENTIFIC INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3545623
State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
220 South Orange Avenue, Livingston, New Jersey 07039
(Address of principal executive office) (Zip Code)
(973) 535-2717
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of May 20, 2003, the Registrant had a total of 12,633,370 shares of Common
Stock, $.001 par value, outstanding.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-QSB, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in the Company's reports and registration statements files with the Securities
and Exchange Commission (the "Commission"). The Company disclaims any intent or
obligation to update such forward-looking statements.
2
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 4
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 (Unaudited) 6-7
Notes to Condensed Consolidated Financial Statements 8-12
ITEM 2. Management's Discussion and Analysis or Plan of Operations 13-17
ITEM 3 Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21-22
EXHIBITS
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
March 31, 2003 December 31, 2002
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 534 $ 9,683
Accounts receivable, net of allowance for doubtful accounts at March 31, 614,415 239,435
2003 and December 31, 2002 of $49,120 and $46,152, respectively
Inventories 107,497 119,291
Advances to contract manufacturer 300,000 300,000
Deferred debt financing costs, net 80,527 159,877
Prepaid expenses 38,522 64,952
------------ ------------
Total current assets 1,141,495 893,238
EQUIPMENT, net 213,128 227,207
ADVANCES TO CONTRACT MANUFACTURER-- Long term 61,854 87,935
OTHER ASSETS 32,333 32,333
------------ ------------
Total $ 1,448,810 $ 1,240,713
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Account payable, including $35,150 and $32,000 to related parties at
March 31, 2003 and December 31, 2002, respectively $ 1,451,813 $ 1,269,523
Accrued expenses 145,498 86,492
Accrued interest 207,579 169,519
Note payable 4,877,561 4,581,708
Notes payable-officer/stockholder 1,215 --
------------ ------------
Total current liabilities 6,683,666 6,107,242
Accrued interest 162,264 139,323
Deferred compensation payable to officer/stockholder 400,000 320,000
Notes payable 485,068 480,091
Notes payable -- officer/stockholder 332,000 300,000
------------ ------------
Total liabilities 8,062,998 7,346,656
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.001; authorized,
25,000,000 shares; 12,733,370 shares issued 12,733 12,733
Additional paid-in capital 36,599,607 36,599,607
Accumulated deficit (42,295,012) (41,786,767)
Unearned compensation (20,000) (20,000)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
------------ ------------
Total stockholders' deficiency (6,614,188) (6,105,943)
------------ ------------
Total $ 1,448,810 $ 1,240,713
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Three Months Ended
March 31, 2003 March 31, 2002
Net sales $ 1,125,725 $ 1,021,588
Cost of sales 549,084 466,015
------------ ------------
Gross profit 576,641 555,573
------------ ------------
Selling, general and administrative expenses 758,981 897,276
Charge in connection with the closing of
Deerfield, IL facility 52,723 --
Research and development expenses 32,001 30,295
------------ ------------
Totals 843,705 927,571
------------ ------------
Loss from operations (267,064) (371,998)
Other income -- 24,000
Interest, net (241,181) (172,213)
------------ ------------
Net loss $ (508,245) $ (520,211)
============ ============
Loss per share - basic and diluted $ (.04) $ (.04)
============ ============
Weighted average shares outstanding-basic and diluted 12,633,370 12,096,204
============ ============
See Notes to Condensed Consolidated Financial Statements.
5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $(508,245) $(520,211)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 9,331 12,203
Amortization of debt discount and deferred financing costs 101,701 26,614
Loss on disposal of fixed assets 11,248 --
Changes in operating assets and liabilities:
Increase in accounts receivable (374,980) (5,963)
Decrease in inventories 11,794 39,195
Decrease in advances to contract manufacturer 26,081 52,308
(Increase) decrease in prepaid expenses 26,430 (18,980)
Decrease in other assets -- (596)
Increase (decrease) in accounts payable 182,290 (9,690)
Increase in accrued interest 139,480 145,599
Increase in accrued expenses 59,006 63,467
Increase in deferred compensation 80,000 80,000
--------- ---------
Net cash used in operating activities (235,864) (136,054)
--------- ---------
Cash flows from investing activities-payment for capital expenditures (6,500) (1,184)
--------- ---------
Cash flows from financing activities:
Proceeds from note payable - officer/stockholder 95,537 --
Payments to note payable - officer/stockholder (62,322) --
Proceeds from line of credit -- 150,000
Proceeds from issuance of notes payable 200,000 --
--------- ---------
Net cash provided by financing activities 233,215 150,000
--------- ---------
NET INCREASE (DECREASE) IN CASH (9,149) 12,762
Cash, beginning of period 9,683 15,742
--------- ---------
Cash, end of period $ 534 $ 28,504
========= =========
See Notes to Condensed Consolidated Financial Statements.
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Supplemental schedule of noncash financing activities:
In March 2003, pursuant to the 6%/12% promissory note agreements, the Company
converted $78,479 of accrued interest into additional principal.
In January 2002, the Company issued 33,840 units consisting of one share of
common stock and one warrant to purchase an additional share of common stock in
exchange for payment of accrued interest totaling $27,072.
In January 2002, in consideration for payment of $491,346 in deferred
compensation, the Company issued 614,183 units (consisting of one share of
common stock and one warrant to purchase an additional share of common
stock).The warrants are exercisable at $.80 per share through January 31, 2003;
at $1.00 per share through January 31, 2004 and thereafter at $2.00 per share
through January 31, 2007.
In January 2002, pursuant to the 20% promissory note agreements, the Company
converted $63,377 of accrued interest into additional principal.
7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of accounting policies:
The unaudited condensed consolidated financial statements of
Milestone Scientific Inc. and Subsidiaries (the "Company") have been
prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements.
These unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 2002 included in
the Company's Annual Report on Form 10-KSB. The accounting policies
used in preparing these unaudited condensed consolidated financial
statements are the same as those described in the December 31, 2002
consolidated financial statements.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments
(consisting of normal recurring entries) necessary to present fairly
the financial position as of March 31, 2003 and the results of
operations for the three months ended March 31, 2003 and 2002.
The results reported for the three months ended March 31, 2003 and
2002 are not necessarily indicative of the results of operations
which may be expected for a full year.
Note 2 - Basis of presentation:
The accompanying condensed consolidated financial statements have
been prepared assuming the Company will continue as a going concern.
However, as shown in the accompanying condensed consolidated
financial statements, the Company incurred net losses of
approximately $508,000 and $520,000 and negative cash flows from
operating activities of approximately $236,000 and $136,000 during
the three months ended March 31, 2003 and 2002, respectively. As a
result, the Company had a cash balance of approximately $500, a
working capital deficiency of approximately $5,542,000 and a
stockholders' deficiency of approximately $6,614,000 as of March 31,
2003. These matters initially raised substantial doubt about the
Company's ability to continue as a going concern. Management
believes that its initial concerns about the Company's ability to
continue as a going concern have been alleviated by recent actions
taken by the Company as well as management's plans which are
discussed below.
Further, management believes that, in the absence of a substantial
increase in revenue, it is probable that the Company will continue
to incur losses and negative cash flows from operating activities
through at least March 31, 2004 and that the Company will need to
obtain additional equity or debt financing, as well as to continue
its ability to defer its obligations, to sustain its operations
until it can expand its customer base and achieve profitability, if
ever.
The Company has taken certain steps in order to reduce its operating
expenses and utilization of cash. These steps include, amongst
others, the following:
o Commencing in 2001 and continuing through 2003, the Company
reconfigured its sales force. The Company went from
maintaining a large internal sales force to utilizing
independent sales representatives and distributors.
o The Company reduced administrative personnel and telemarketers
by approximately ten people.
o On January 31, 2003, the Company completed the closing of the
Deerfield, IL facility. The customer support, service and
other back-office functions previously conducted, in whole or
in part, at this location were consolidated into the Company's
New Jersey location. The receiving,
8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
shipping and storage functions, which were also previously
done at this location, are now outsourced to an independent
warehouse located in Pennsylvania.
o Obtained an agreement from its Chief Executive
Officer/Stockholder to defer 2002 and 2003 compensation,
aggregating $640,000 until January 2005.
o Restructured and extended the maturity dates of its debt
obligations. Further, as part of the debt restructuring, the
Company obtained agreements from certain of its noteholders
enabling it to convert debt and related interest aggregating
$5,008,994 at March 31, 2003 into shares of common stock. It
is the Company's intention to have this conversion completed
sometime during the third quarter of 2003.
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common
stock.
o During February 2003, the Company received a $200,000 note
payable from an existing investor. The note is convertible
into shares of common stock, at the Company's option, which it
plans to do during the third quarter of 2003.
In addition, in April 2003, the Company received an additional
$900,000 line of credit from the same investor, which is scheduled
to mature on January 1, 2005, unless extended. $200,000 was drawn
down from the line during April 2003.
The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Note 3 - Loss per share:
Basic loss per common share is computed using the weighted average
number of common shares outstanding.
Options and warrants to purchase 3,145,458 and 4,415,855 shares of
common stock were outstanding as of March 31, 2003 and 2002,
respectively, but were not included in the computation of diluted
loss per share because the effect would have been anti-dilutive.
Note 4 - Notes payable to officer/stockholder:
Notes payable to officer/stockholder represent three obligations
payable to the Company's Chief Executive Officer ("CEO"), consisting
of (i) $200,000 note payable, with interest payable at 9% per annum
and having an original due date of January 2, 2003, (ii) a $100,000
line of credit with interest payable at 6% per annum having an
original due date of April 2, 2003, and (iii) a $33,215 note payable
on demand with interest payable at 6% per annum. On April 1, 2003,
the $200,000 and $100,000 notes were extended to April 1, 2004. On
April 15, 2003, $32,000 of the $33,215 notes payable was extended to
January 2, 2005.
9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 17, 2003, the Company's CEO provided the Company with a
$57,322 short term loan for the express purpose of purchasing
Wand(R) handpieces from the Company's supplier. The Company repaid
the loan in full by February 7, 2003. On February 12, 2003, the CEO
provided the Company with a $38,215 loan for the same purposes as
above. $33,215 remains outstanding as of March 15, 2003.
Note 5 - Notes payable:
6%/12% Promissory Notes
(A) The 6%/12% Promissory Notes consist of the following issuances:
(i) On March 16, 2001, the Company restructured its obligations to
the holders of its 10% Senior Secured Promissory Notes. Under
the terms of the agreement, each of the noteholders agreed to
exchange their 10% Notes for a new, zero coupon note (the
"Zero Coupon Note").
As a result of the Company initially restructuring its
obligations, the unamortized portion of the debt discount and
deferred financing costs were amortized through March 31,
2002. The significant terms of the Restructuring Debt were (i)
modification of the interest rate (ii) granting the company
the option to pay the debt with shares of common stock and
(iii) repricing the warrants which were previously issued to
the shareholders back to the initial exercise price of $1.75
per share.
Subsequently, on April 15, 2002, the holders additionally
agreed to extend the promissory notes to July 1, 2003 and to
lower the interest rate to 6% if paid in cash or to 12% if
paid in common stock. In connection with the extension, the
Company recorded $16,215 in deferred financing charges
relating to professional fees and $140,203 of deferred
financing costs relating to consideration to the noteholders
valued at $120 per share of the Company's common stock for
each $1,000 face amount outstanding at maturity which
increased the aggregate carry value of the notes by $140,203.
The Company is accruing interest expense at 12%. These
deferred financing costs are being amortized through July 1,
2003.
(ii) In August 2000, the Company borrowed $1,000,000 which consists
of two loans from two funds managed by Cumberland Associates
LLC, and bear interest at 20% per year and payable in cash or
through the issuance of additional 20% notes on which both
interest and principal are payable. The loans are secured by
substantially all assets of the Company and are subordinated
to the 6%/12% senior secured promissory notes that were
amended April 15, 2002. The Company can prepay the loans in
cash at any time. The Company can prepay the notes and accrued
interest with common stock at its option. Stock issued in lieu
of payment of the debt will be valued at 85% of the then
market price. For the year ended December 31, 2002, the
Company converted $257,865 of accrued interest into principal.
During 2001, the Company had previously converted $222,417 of
accrued interest into principal. On April 12, 2002, Cumberland
Associates LLC agreed to extend the maturity date of these
loans through July 1, 2003 and to lower the interest rate from
20% to 6%, if paid in cash, or 12% if paid in common stock.
The Company recorded $16,215 of deferred financing charges
relating to professional fees and $189,369 relating to
consideration issued to the noteholders valued at $120 per
share of the Company's common stock for each $1,000 face
amount outstanding at maturity. The Company is currently
accruing interest expense at 12%. Accordingly, the deferred
financing costs and the unamortized financing charges are
being amortized through July 1, 2003.
It is currently the Company's intention to satisfy these
obligations with shares of common stock upon their maturity.
10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(B) 8% Promissory Notes
The 8% promissory notes consist of the following:
On July 31, 2000, the Company established a $1,000,000 credit
facility with a major existing investor. Initially, $500,000 was
borrowed under the line, which was due on June 30, 2003. In December
2000, and January 2001, the Company borrowed under the credit
facility an additional $400,000 and $100,000, respectively, due on
December 31, 2003. In connection with the initial $500,000, the
investor received five-year warrants to purchase 70,000 shares of
the Company's common stock, exercisable at $3.00 per share. In
connection with the $400,000, the investor received five-year
warrants to purchase 80,000 shares of the Company's common stock
exercisable at $1.25 per share. In connection with the $100,000, the
investor received five-year warrants to purchase 20,000 shares of
the Company's common stock at $1.25 per share. On April 12, 2002,
the investor agreed to extend the maturity date of the $500,000 to
August 1, 2003. At the option of the Company, this $500,000 can be
convertible into common stock. Accordingly, in connection with the
extension, the unamortized debt discount is being amortized to
August 1, 2003. On April 15, 2003, the investor agreed to extend the
maturity date of the $500,000 and interest originally due December
31, 2003 to January 2, 2005. Accordingly, only $500,000 of loans
have been recorded as long term debt in the accompanying
consolidated financial statements.
During 2002, the Company issued a total of $1,185,000 promissory
notes to an existing investor. The notes bear interest at 8% if paid
in cash and 10% if paid in stock and mature on August 1, 2003. At
the option of the Company, the principal and interest are payable on
the maturity date in common stock. Additionally, the note will
automatically convert into the Company's common stock if the Company
issues 1,000,000 shares or raises at least $1,000,000 from the sale
of equities prior to August 1, 2003, at the market price in that
transaction but not less than $.50 per common share, or more than
$2.00 per share. The Company is accruing interest at 10%.
Note 6 - Legal proceedings
On June 10, 2002, a former distributor, Henry Schein, Inc., sued
Milestone in the Supreme Court of the State of New York for $110,851
claimed to be due them for returned merchandise. Milestone denies
any liability. The parties are currently engaged in discovery.
Milestone believes it has meritorious defense to this complaint
based, in part, on its position that the plaintiff had no right to
return the goods.
On May 9, 2003, Milestone was served with a Breach of Contract
Complaint. In the complaint, the plaintiff, Korman/Lender Management
(landlord of the facility in Deerfield, IL) seeks damages of $17,755
plus costs, including attorney's fees, interest and continuing
rental obligation. The Company is in the process of preparing a
response.
Note 7 - Employee Stock Option Plan
As of March 31, 2003, there were 698,344 outstanding options granted
under the Milestone 1997 Stock Option Plan. The Company accounts for
these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost
is reflected in net loss, as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates
the effect on net loss and loss per share if the Company had applied
the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March
2003 2002
----------- -----------
Net loss, as reported $ (508,245) $ (520,211)
Deduct: Total stock-based employee compensation
expenses determined under fair value based method
for all awards 56,154 123,121
----------- -----------
Net loss, pro forma $ (564,399) $ (643,332)
=========== ===========
Loss per share:
Basic-as reported $ (.04) $ (.04)
=========== ===========
Basic-pro forma $ (.04) $ (.04)
=========== ===========
Diluted-as reported $ (.04) $ (.04)
=========== ===========
Diluted-pro forma $ (.04) $ (.04)
=========== ===========
Note 8 - Closing of Deerfield, IL Facility
In December 2002, Milestone initiated the transition of its customer
service office to its corporate headquarters in Livingston, New
Jersey and its distribution and logistics center to a third party,
Design Centre of York, Pennsylvania. The resulting closing of the
Deerfield location was completed during January 2003. The net book
value of the facility's fixed assets transferred or disposed during
January 2003 was $41,425 and $11,248, respectively.
12
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of
these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including
those related to accounts receivables, inventories, advances to our
contract manufacturer, stock based compensation and contingencies. We base
our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates under different assumptions
or conditions.
Overview
Milestone achieved a 28% reduction in its loss from operations for the
three months ended March 31, 2003 when compared to the same period in
2003. The results include approximately $50,000 in expenses relating to
the Company's shutdown of its facility and reflect Milestone's
concentrated effort to drastically reduce its overhead while slowly
growing its user base in the dental market and introducing the Wand(R)
technology in a variety of medical disciplines.
The net loss for the three months ended March 31, 2003 was relatively
equivalent to the loss reported for the three months ended March 31, 2002
as the strides achieved in operations were primarily offset by higher
interest expenses, the majority payable in stock.
Statement of Operations
Three months ended March 31, 2003 compared to Three months ended March 31, 2002
Net sales for the three months ended March 31, 2003 and 2002 were
$1,125,725 and $1,021,588, respectively. The $104,137 or 10.2% increase is
primarily related to a $76,900 increase in domestic revenue and a $27,200
increase in sales to foreign distribution. The increase in domestic
revenue include a 28% or $49,000 increase in CompuDent(TM) sales and a 13%
or $54,000 increase in domestic sales of the Wand(R) handpieces. The
domestic sales increase was partially offset by an approximate $19,300
decrease in CompuMed(TM) sales.
Cost of sales for the three months ended March 31, 2003 and 2002 were
$549,084 and $466,015, respectively. The $83,069 increase is attributable
primarily to higher sales volume.
For the three months ended March 31, 2003, the Company generated a gross
profit of $576,641 or 51.2% as compared to a gross profit of $555,573 or
54.4% for the three months ended March 31, 2002. The decrease in gross
profit percentage is primarily attributable to increased sales to foreign
distributors. Sales to foreign distributors are of higher volume but at a
reduced margin.
Selling, general and administrative expenses for the three months ended
March 31, 2003 and 2002 were $758,981 and $897,276, respectively. The
$138,295 decrease is attributable primarily to an approximate $116,000
decrease in expenses associated with the sale and marketing of the Wand(R)
technology and a $25,400 decrease in professional and consulting fees.
13
The Company incurred costs totaling $52,723 relating to the closure of its
Deerfield, IL facility and the transporting of its fixed assets to the
Company's corporate office and its logistic company. The loss from the
disposal of fixed assets at this location and included in the shutdown
cost was $11,248.
Research and development expenses for the three months ended March 31,
2003 and 2002 were $32,001 and $30,295, respectively. These cost are
associated with the development of the Company's safety needle.
The loss from operations for the three months ended March 31, 2003 and
2002 were $267,064 and $371,998, respectively. The $104,934 decrease in
loss from operations is explained above. The Company generated $24,000 in
other income for the three months ended March 31, 2002 as a result of a
consulting contract which expired in October 2002.
The Company incurred interest expense of $241,181 for the three months
ended March 31, 2003 as compared to $172,213 for the three months ended
March 31, 2002. The increase is attributable to higher average borrowings
in 2003.
The net loss for the three months ended March 31, 2003 was $508,245 as
compared to a net loss of $520,211 for the three months ended March 31,
2002. The $11,966 decrease in net loss is explained above.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. However,
as shown in the accompanying condensed consolidated financial statements,
the Company incurred net losses of approximately $508,000 and $520,000 and
negative cash flows from operating activities of approximately $236,000
and $136,000 during the three months ended March 31, 2003 and 2002,
respectively. As a result, the Company had a cash balance of approximately
$500, a working capital deficiency of approximately $5,542,000 and a
stockholders' deficiency of approximately $6,614,000 as of March 31, 2003.
These matters initially raised substantial doubt about the Company's
ability to continue as a going concern. Management believes that its
initial concerns about the Company's ability to continue as a going
concern have been alleviated by recent actions taken by the Company as
well as management's plans which are discussed below.
Further, management believes that, in the absence of a substantial
increase in revenue, it is probable that the Company will continue to
incur losses and negative cash flows from operating activities through at
least March 31, 2004 and that the Company will need to obtain additional
equity or debt financing, as well as to continue its ability to defer its
obligations, to sustain its operations until it can expand its customer
base and achieve profitability, if ever.
To date, the Company has taken certain steps in order to reduce its
operating expenses and utilization of cash. These steps include, amongst
others, the following:
o Commencing in 2001 and continuing through 2003, the Company
reconfigured its sales force. The Company went from maintaining a
large internal sales force to utilizing independent sales
representatives and distributors.
o The Company reduced administrative personnel and telemarketers by
approximately ten people.
o On January 31, 2003, the Company completed the closing of the
Deerfield, IL facility. The customer support, service and other
back-office functions previously conducted, in whole or in part, at
this location were consolidated into the Company's New Jersey
location. The receiving, shipping and storage functions, which were
also previously done at this location, will be outsourced at an
independent warehouse located in Pennsylvania. The closure of the
Illinois facility will result in reductions in overhead and other
costs, while improving operational efficiencies.
o Obtained an agreement from its Chief Executive Officer/Stockholder
to defer 2002 and 2003 compensation, aggregating $640,000 until
January 2005.
o Restructured and extended the maturity dates of its debt
obligations. Further, as part of the debt restructuring, the Company
obtained agreements from certain of its noteholders enabling it to
convert debt and related interest aggregating $5,008,994 at March
31, 2003 into shares of
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common stock. It is the Company's intention to have this conversion
completed sometime during the third quarter 2003.
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common stock.
o During February 2003, the Company received a $200,000 note payable
from an existing investor. The note is convertible into shares of
common stock, at the Company's option, which it plans to do during
the third quarter of 2003.
In addition, April 2003, the Company received an additional $900,000 line
of credit from the same investor, which is scheduled to mature on January
1, 2005, unless extended. $200,000 was drawn down from the line during
April 2003.
For the three months ended March 31, 2003, the Company's net cash used in
operating activities was $235,864. This was attributable primarily to a
net loss of $508,245 adjusted for noncash items of $122,280 (of which
$101,701 was for amortization of debt discount and deferred financing
costs); a $374,980 increase in accounts receivable; an $11,794 decrease in
inventories; a $26,081 decrease in advances to contract manufacturer; a
$26,430 decrease in prepaid expenses; an increase in accrued expenses of
$59,006; a $139,480 increase in accrued interest; a $182,290 increase in
accounts payable; and an $80,000 increase in deferred compensation.
For the three months ended March 31, 2003, the Company used $6,500 in
investing activities for capital expenditures.
For the three months ended March 31, 2003, the Company generated $233,215
from financing activities as it issued promissory notes to an existing
investor totaling $200,000, and incurred $33,215 of net borrowings from
its Chief Executive Officer.
OPERATIONS
The Company believes that CompuDent(TM), CompuMed(TM) and The Wand(R)
technology represents a major advance in the delivery of local anesthesia
and that the potential applications of this technology extends beyond
dentistry. Based on scientific and anecdotal support, the Company contends
that CompuMed(TM) could enhance the practices of the estimated 90,000 U.S.
based physicians included in such non-dental disciplines as Podiatry, Hair
Restoration Surgery, Plastic Surgery, Dermatology, colorectal surgery and
procedures in Orthopedics, OB-GYN and Ophthalmology.
Despite limited resources, the Company has continued its efforts to
realize the market potential of The Wand(R) and become profitable. These
steps include (i) relaunching of The Wand Plus(TM) drive unit
domestically, under the name CompuDent(TM), (ii) distribution of
CompuDent(TM) through a host of channels (i.e. independent sales
representatives, an inside sales group and a major dental distributor),
(iii) launching The Wand Plus(TM) drive unit for medical purposes and
marketing it as CompuMed(TM), (iv) increasing presence at medical trade
shows, (v) advertising to increase the awareness of the product, (vi)
implementing cost reduction programs, and (vii) restructuring certain
outstanding obligations. Management believes that these steps are critical
to the realization of Milestone's long-term business strategy.
In March 2002, Milestone announced an agreement whereby Medical Hair
Restoration ("MHR") will equip each of its 21 Surgery centers in the U.S.
with CompuMed(TM).
In April 2002, Milestone announced acceptance of an independent clinical
study concluding that use of Milestone's computer controlled local
anesthetic delivery technology in nasal and sinus surgery produced a
"safe, acceptable, tolerable, and cost effective method of sedating
patients creates a sense of security and
15
adds to the ultimate satisfaction associated with nasal surgery." The
study also concluded "Recovery room and expensive hospital costs are
avoided, making nasal surgery more affordable and within reach of a
greater range of potential nose surgery patients." One of the study's
authors, Dr. Pieter Swanepoel, a world-renowned surgeon, presented his
study at the 8th International Symposium of the Academy in New York City
in May 2002. The new technique is an adaptation of similar regional nerve
blocking techniques used by dental surgeons and replaces the need for
costly and invasive general anesthesia. Dr. Swanepoel in conducting his
research using pre-production prototypes of our CompuFlo(TM) system, since
it allowed him to measure flow rate and tissue pressure and determine
parameters for optimal results. The core technology embodied in the
CompuMed(TM) unit may be used to deliver local anesthesia within the
parameters ascertained by Dr. Swanepoel to produce optimal results and
then achieve conscious sedation in nasal surgery.
In May 2002, Milestone signed a dental distribution agreement with Benco
Dental under which Benco Dental will distribute CompuDent(TM) through
their direct sales organization. Benco has the right to become the
exclusive dental distributor in selected states within the United States
if it achieves certain sales objectives. Milestone is providing the
initial sales and product training to the entire Benco sales organization
through September 2002. Following these initial training sessions,
Milestone will support this effort through "Dealer Managers and Technical
Support Specialists."
In August 2002, the United States Patent Office issued a patent on
Milestone's safety engineered needle technology to be issued to Milestone.
When commercialized, this new technology will be used with a plethora of
infusion devices, including the Company's CompuDent(TM) and CompuMed(TM)
computer controlled local anesthetic delivery systems as well as the
CompuFlo(TM), an enabling technology for computer controlled infusion,
perfusion, suffusion and aspiration of fluids. It provides features
previously unavailable to medical and dental practitioners; fully
automated true single-handed activation with needle anti-deflection and
force-reduction capability. In addition, practitioners can re-use this
safety engineered device repeatedly during a single patient session making
it highly functional in a wide variety of medical and dental applications.
LEGAL PROCEEDINGS
On June 10, 2002, a former distributor, Henry Schein, Inc., sued Milestone
in the Supreme Court of the State of New York for $110,851 claimed to be
due them for returned merchandise. Milestone denies any liability. The
parties are currently engaged in discovery. Milestone believes it has
meritorious defense to this complaint based, in part, on its position that
the plaintiff had no right to return the goods.
On May 9, 2003, Milestone was served with a Breach of Contract Complaint.
In the complaint, the plaintiff, Korman/Lender Management (landlord of the
facility in Deerfield, IL) sued for $17,755 plus costs, including
attorney's fees, interest and continuing rental obligation. The Company is
in the process of preparing a response.
OTHER MATTERS - AMERICAN STOCK EXCHANGE
On May 2, 2002, Milestone received a letter from the American Stock
Exchange advising that the Company have fallen below the stockholders'
equity criterion and requesting the submission of a recovery plan
detailing any actions taken, or planned to be taken within the next 18
months to bring the Company into compliance. On June 10, 2002, the Company
submitted a detailed recovery plan to the American Stock Exchange showing
how Milestone expects to achieve stockholder equity of $4,000,000 by
December 31, 2003. In response, the Company received informal advice from
the American Stock Exchange that in view of the expected loss in 2002,
Milestone needed to demonstrate how the Company will achieve $6,000,000 in
stockholders' equity by the end of 2003. On August 14, 2002, a
supplemental plan demonstrating how Milestone expects to meet these
requirements was submitted. On August 23, 2002, the American Stock
Exchange advised the Company that they had determined that the plan makes
a reasonable demonstration
16
of Milestone's ability to regain compliance with the continued listing
standards by the conclusion of the plan period at the end of 2003. The
continued listing of Milestone's securities on the American Stock Exchange
during this period will be subject to periodic reviews by the Exchange.
Failure to show progress consistent with the plan or to regain compliance
by the end of the plan period could still result in the Milestone being
delisted. In the event that Milestone's securities are delisted from the
American Stock Exchange, trading, if any, in the common stock and warrants
would be conducted in the over the counter market in the so-called "pink
sheets" or on the NASD's "OTC Bulletin Board." Consequently the liquidity
of the Company's securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts and new media
coverage of Milestone, and lower prices for Milestone's securities than
might otherwise be obtained.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosures. The Company maintains disclosure controls
and procedures designed to provide reasonable assurance that
information required to be disclosed in the reports filed with the
SEC is recorded, processed, summarized and reported within the time
periods specified in the rules of the SEC. Within 90 days prior to
the filing of this Quarterly Report on Form 10-QSB, an evaluation,
was completed under the supervision and participation of management,
including the Chief Executive Officer and Chief Financial Officer,
of the design and operation of this disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective
in timely alerting them to material information relating to the
company (including the Company's consolidated subsidiaries) required
to be included in the periodic SEC filings.
(b) Changes in internal controls. There were no significant changes in
internal controls or other factors that could significantly affect
the Company's internal controls subsequent to the date of our
evaluation.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.26 - Letter from Leonard Osser, dated April 15, 2003 deferring
payment.
10.27 - Letter from Morse, Zelnick, Rose & Lander LLP deferring
payment.
10.28 - Line of Credit for 900,000 and extension of 500,000 line of
credit, dated April 15, 2003.
99.1 - Certification of Chief Executive Officer, pursuant to 18
W.S.C. Section 1350
99.2 - Certification of Chief Financial Officer, pursuant to 18
W.S.C. Section 1350
(b) Reports on Form 8-K:
On April 16, 2003, the Registrant filed a report on Form 8-K
regarding its issuance of a press release announcing financial
results for the fiscal year ended December 31, 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned
MILESTONE SCIENTIFIC INC.
Registrant
/s/ Leonard Osser
----------------------------------------
Leonard Osser Chairman and
Chief Executive Officer
/s/ Thomas M. Stuckey
----------------------------------------
Thomas M. Stuckey, Vice President and
Chief Financial Officer
Dated: May 20, 2003
20
CERTIFICATION
I, Leonard Osser, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Milestone
Scientific Inc. ("the registrant").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Leonard Osser
--------------------------
Leonard Osser
Chief Executive Officer
21
CERTIFICATION
I, Thomas M. Stuckey, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Milestone
Scientific Inc. ("the registrant").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Thomas M. Stuckey
--------------------------
Thomas M. Stuckey
Chief Financial Officer
22