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 September 30, 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 001-14053
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 November 11, 2003, the Registrant had a total of 18,271,022 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
September 30, 2003 (Unaudited) and December 31, 2002 4
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2003 and
2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
(Unaudited) 6-7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8-16
ITEM 2. Management's Discussion and Analysis or Plan of
Operations 17-25
ITEM 3 Controls and Procedures 26
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 27
CERTIFICATIONS 37
EXHIBITS __
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
September 30, 2003 December 31, 2002
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 95,870 $ 9,683
Accounts receivable, net 611,602 239,435
Inventories 255,288 119,291
Advances to contract manufacturer 250,360 300,000
Deferred debt financing costs, net -- 159,877
Prepaid expenses 61,611 64,952
------------ ------------
1,274,731 893,238
Total current assets 205,158 227,207
EQUIPMENT, net -- 87,935
ADVANCES TO CONTRACT MANUFACTURER -- Long term 1,964 --
DEFERRED DEBT FINANCING-Long term 32,333 32,333
OTHER ASSETS ------------ ------------
Totals $ 1,514,186 $ 1,240,713
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Account payable, including $32,000 to related parties $ 1,177,061 $ 1,269,523
Accrued expenses 57,080 86,492
Accrued interest 197,585 169,519
Notes payable, net of debt discount 915,485 4,581,708
Notes payable-officer/stockholder 376,215 --
------------ ------------
Total current liabilities 2,723,426 6,107,242
Accounts payable, including $160,000 to related parties 492,193 --
Accrued interest 1,042 139,323
Deferred compensation payable to officer/stockholder 560,000 320,000
Notes payable, net of debt discount 582,514 480,091
Notes payable -- officer/stockholder 32,000 300,000
------------ ------------
Total liabilities 4,391,175 7,346,656
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, par value $.001 authorized 5,000,000 shares -- --
8% Cumulative convertible preferred par value $.001; authorized and
issued 25,365 shares; 25 --
Common stock, par value $.001; authorized,
50,000,000 shares; 17,672,626 shares and 12,733,370 shares issued,
at September 30, 2003 and December 31, 2002, respectively 17,673 12,733
Additional paid-in capital 41,610,978 36,599,607
Accumulated deficit (43,574,149) (41,786,767)
Unearned compensation (20,000) (20,000)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
------------ ------------
Total stockholders' deficiency (2,876,989) (6,105,943)
------------ ------------
Totals $ 1,514,186 $ 1,240,713
============ ============
See Notes to Condensed Consolidated Financial Statements
4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 966,591 $ 1,034,190 $ 3,101,281 $ 3,215,907
Cost of sales 511,867 517,292 1,560,288 1,499,063
------------ ------------ ------------ ------------
Gross Profit 454,724 516,898 1,540,993 1,716,844
------------ ------------ ------------ ------------
Selling, general and administrative expenses 891,322 877,441 2,491,737 2,712,649
Charge in connection with the closing of the
Deerfield, IL facility 13,150 -- 79,023 --
Research and development expenses 29,066 18,549 112,158 63,928
------------ ------------ ------------ ------------
Totals 933,538 895,990 2,682,918 2,776,577
------------ ------------ ------------ ------------
Loss from operations (478,814) (379,092) (1,141,925) (1,059,733)
Other income -- 24,000 -- 72,000
Interest, net (149,766) (226,739) (645,457) (616,519)
------------ ------------ ------------ ------------
Net loss $ (628,580) $ (581,831) $ (1,787,382) $ (1,604,252)
============ ============ ============ ============
Loss per share - basic and diluted $ (.05) $ (.05) $ (.14) $ (.13)
============ ============ ============ ============
Weighted average shares outstanding -basic
and diluted 12,687,331 12,412,618 12,651,556 12,253,022
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,787,382) $(1,604,252)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 26,618 41,672
Amortization of debt discount and deferred financing costs 242,628 234,837
Loss on disposal of fixed assets 11,248 --
Amortization of advertising cost -- 24,803
Stock options issued for services -- 2,500
Changes in operating assets and liabilities:
Increase in accounts receivable (372,167) (153,015)
(Increase) decrease in inventories (135,997) 80,614
Decrease in advances to contract manufacturer 137,575 174,449
(Increase) decrease in prepaid expenses 3,341 (10,378)
Increase in other assets -- (19,971)
Increase in accounts payable 399,731 169,465
Increase in accrued interest 402,827 381,682
Increase (decrease) in accrued expenses (29,412) 19,829
Increase in deferred compensation 240,000 240,000
----------- -----------
Net cash used in operating activities (860,990) (417,765)
----------- -----------
Cash flows from investing activities-payment for capital expenditures (15,817) (69,691)
----------- -----------
Cash flows from financing activities:
Expenses relating to registering shares (22,500) --
Proceeds from note payable - officer/stockholder 180,537 --
Payments of note payable - officer/stockholder (72,322) --
Proceeds from issuance of notes payable 900,000 525,000
Payments for deferred financing costs (22,721) (40,538)
----------- -----------
Net cash provided by financing activities 962,994 484,462
----------- -----------
Net INCREASE (DECREASE) in cash 86,187 (2,994)
Cash, beginning of period 9,683 15,742
----------- -----------
Cash, end of period $ 95,870 $ 12,748
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Supplemental schedule of noncash financing activities:
In September 2003, the Company granted warrants to purchase 15,000 shares of
common stock (with an estimated fair value of $10,400) in connection with a
$50,000 credit facility provided by an existing investor. This resulted in an
initial increase to debt discount and to additional paid-in capital.
During the nine months ended September 30, 2003, pursuant to the 6%/12%
promissory note agreements, the Company converted $206,989 of accrued interest
into additional principal.
On September 30, 2003, in consideration for payment of $5,014,267 of aggregate
debt and interest, the Company issued 4,939,256 shares of common stock and
$25,365 face amount of 8% cumulative convertible preferred stock.
In June 2003, the Company granted warrants to purchase 160,256 shares of common
stock (with an estimated fair value of $14,423) in connection with a $50,000
credit facility provided by an existing investor. This resulted in an initial
increase to debt discount and to additional paid-in capital.
In September 2002, pursuant to the 6%/12% promissory note agreements, the
Company converted $41,512 of accrued interest into additional principal.
In August 2002, the Company issued 200,000 shares of common stock in exchange
for payment of $90,000 of outstanding legal fees.
In July 2002, the Company issued 187,500 units consisting of one share of common
stock and one warrant to purchase an additional share of common stock to a
vendor as consideration for services rendered in accordance with the agreement
valued at $150,000.
In April 2002, pursuant to the debt restructuring, the Company recorded a
deferred financing charge of $329,572. This resulted in an increase to notes
payable of $140,203 and accrued interest of $189,369.
In April 2002, pursuant to the 20% promissory note agreements, the Company
converted $65,168 of accrued interest into additional principal.
In January 2002, pursuant to the 20% promissory note agreements, the Company
converted $63,377 of accrued interest into additional principal.
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, 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.
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" or "Milestone") 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 September 30, 2003 and the results of operations for the
three and nine months ended September 30, 2003 and 2002.
The results reported for the three and nine months ended September 30,
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 Milestone will continue as a going concern. However, as
shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $1,787,000 and $1,604,000
and negative cash flows from operating activities of $860,990 and $417,765
during the nine months ended September 30, 2003 and 2002, respectively. As
a result, Milestone had a cash balance of approximately $96,000, a working
capital deficiency of approximately $1,449,000 and a stockholders'
deficiency of approximately $2,877,000 as of September 30, 2003. These
matters had raise substantial doubt about Milestone'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 were alleviated
through its continuing efforts to reduce operating overhead, its
subsequent satisfaction of a substantial portion of its outstanding
obligations, the utilization of its equity facility and the introduction
of new products.
Nevertheless, management believes that it is probable that Milestone will
continue to incur losses and negative cash flows from operating activities
through at least September 30, 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.
8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reduction of operating overhead:
To date, the Company has taken certain steps in order to reduce its
operating overhead 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,
are now outsourced to an independent warehouse located in
Pennsylvania.
Restructuring Liabilities and Proforma Impact:
On September 30, 2003, the Company satisfied approximately $5,014,000 of
secured debt including interest, through the issuance of 4,939,256 shares
of Common Stock and $25,365 face amount of 8% cumulative convertible
preferred stock. In addition, during October and November 2003, the
Company took the following additional steps to restructure its liabilities
and raise equity.
o On October 31, 2003, the Company issued 306,585 shares of
common stock to certain of its principal vendors having a fair
value of approximately $502,800, in satisfaction of trade
payables and future services in the aggregate amount of
$502,800.
o The Company has agreed to issue 282,982 shares of common stock
having a fair value of $329,572 in satisfaction of $329,572 of
deferred financing costs incurred in extending certain of its
outstanding loans.
o The Company issued 101,829 shares of common stock upon the
receipt of approximately $189,000 upon exercising its rights
to draw upon a private equity put facility.
o The Company issued 7,000 shares of its common stock upon the
exercise of options by an employee and the receipt of $7,750.
o Additionally, the Company reached agreements with a major
investor and the Company's chairman and chief executive
officer to satisfy in the aggregate, an approximate $1,961,000
of debt, accrued interest and deferred compensation through
the issuance of securities at fair value at the later of (i)
the effective date of a public offering or (ii) January 2,
2004.
These transactions have had or will have a significant impact on the
Company's net worth. Presented below on a proforma basis is selected
financial data, which gives effect to the aforementioned transactions as
if they occurred on September 30, 2003.
9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
------------------
Actual Proforma
------ --------
(in thousands)
Total current assets 1,275 1,643
Total current liabilities 2,724 1,301
Working capital (deficiency) (1,449) 342
Total liabilities 4,391 1,768
Total stockholders equity (deficiency) (2,877) 114
Additional Resources:
In April 2003, the Company received an additional $900,000 8% line of
credit from a major investor which is scheduled to mature on January 1,
2005. As of September 30, 2003, $600,000 was outstanding on the
aforementioned line of credit.
Equity Put Facility:
During October 2003 and through November 4, 2003, Milestone exercised its
right to draw upon a private equity facility. In exchange of net proceeds
of $189,440 the Company issued 101,829 shares of common stock. The put
facility was arranged in January 2001 under the terms of a three-year
private equity line agreement with Hillgreen Investments Limited
("Hillgreen"), a British Virgin Islands corporation. Hillgreen is
obligated to purchase, subject to the fulfillment of specified conditions,
up to 2,100,000 shares of Milestone's common stock. Hillgreen has
allocated $20,000,000 to fund its purchase obligations. The transaction
was arranged by Jesup & Lamont Securities Corporation, a New York based
investment banking firm. Milestone's right to draw upon this facility is
subject to a number of limitations and conditions, including a limitation
on the amounts sold to Hillgreen within specified periods. Subject to
these and other conditions and limitations, Milestone will have full
control over the timing of any financing under the equity line and is
under no obligation to sell any shares to Hillgreen. All shares that are
sold are priced at 87.5% of the volume weighted average market price of
Milestone common stock during a fixed period prior to the sale. Milestone
has discretion to establish a floor price below which shares will not be
sold by Milestone to Hillgreen.
Equity Offering:
On November 10, 2003, the Company filed with the Securities Exchange
Commission a registration statement on Form S-2 (the "Registration
Statement"). The Registration Statement covers the sale of units of common
stock and warrants for an aggregate firm commitment gross offering price
of $8,000,000 to $10,000,000. The warrants included in the units are
exercisable at any time after they become separately tradable until their
expiration date, five years after the date of the closing of the offering
of an exercise price equal to 150% of the closing market price of our
common stock on the pricing date of this offering. Some or all of the
warrants may be redeemed by us at a price of $0.01 per warrant, by giving
not less than 30 days notice to the holders of the warrants, which the
Company may do at any time, beginning 6 months from the effective date of
this offering after the closing price for the Company's common stock on
the principal exchange on which it trades (i.e. AMEX) has equaled or
exceeded 200% of the price of the Company's common stock on the effective
date of this offering. The common stock included in the units and the
warrants will trade only as a unit for 30 days following the closing date
of the offering, unless the underwriter determines that separate trading
should occur earlier.
10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
After that date, the common stock included in the units and the warrants
will trade separately. The size of the offering, the number of units to be
sold, the price per unit, the securities included in the units and the
exercise price of the warrants are all subject to change.
As currently contemplated, the gross proceeds of an $8,000,000 offering
are expected to yield net proceeds, of $6,500,000 after taking into
account underwriting discounts and commissions and estimated offering
expenses. As set forth in the Registration Statement the net proceeds of
the offering will be used primarily to expand and support sales and
marketing efforts for CompuDent in the United States, including new
marketing and advertising campaigns, support the launch of the recently
announced SafetyWand product line, expand international sales efforts and
develop commercial models of products using other new subcutaneous
injection technology. We will retain broad discretion in the allocation of
the net proceeds within the categories set forth above. The amounts
actually expended within these categories may vary significantly and will
depend on a number of factors, including our rate of revenue growth, cash
generated by operations, evolving business needs and other factors. There
are no assurances that the Company will be successful in raising the
aforementioned amount of capital or any other amount.
The accompanying unaudited 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:
The rights of the Company's preferred and common stockholders are
substantially equivalent. The Company has included the 25,365 outstanding
preferred shares from the date of issuance in the weighted average number
of shares outstanding in the computation of basic loss per share for the
three and nine months ended September 30, 2002 and 2003, in accordance
with the "two class" method of computing earnings (loss) per share.
Options and warrants to purchase 3,300,814 and 4,753,355 shares of common
stock were outstanding as of September 30, 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 - Significant Customer:
The Company had one foreign customer who accounted for approximately 22.6%
and 25.3%, respectively, of its net sales for the three and nine months
ended September 30, 2003 and approximately 19.8% and 17.9%, respectively,
for the three and nine months ended September 30, 2002. At September 30,
2003, receivables from this customer were approximately 70% of the
Company's total accounts receivable.
Note 5 - Notes payable to officer/stockholder:
Notes payable to officer/stockholder represent 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) $100,000 line of credit with interest
payable at 6% per annum having an original due date of April 2, 2003, and
(iii) $108,215 of notes payable on demand with interest payable at 6% per
annum.
The $108,215 arose when the Company's CEO provided the Company with a
$57,322 short term loan on January 17, 2003 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, April 7
and September 30, 2003, the Company's CEO provided additional demand loans
of $38,215, $35,000 and $50,000, respectively. The loans for $38,215 and
$35,000 were provided to fund operations. The loan for $50,000 was
provided for the
11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
purpose of covering expenses relating to the further exploration of equity
financing alternatives. As of September 30, 2003 and November 4, 2003,
$108,215 remains outstanding.
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 remaining $108,215 of notes
payable was extended to January 2, 2005.
Note 6- Notes payable:
On September 30, 2003, the Company satisfied $5,014,014 of secured debt
obligations including interest through the issuance of 4,939,256 shares of
its Common stock and 25,365 of its Preferred Stock. These obligations
consisted of the following:
o 6%/12% Promissory Notes with an aggregate value of $2,822,959
o 8% Promissory Notes with an aggregate value of $1,604,315
o $500,000 line of credit and $86,740 of accrued interest
As of September 30, 2003, short term notes payable, net of a $9,955 debt
discount,consist of the following:
$329,572 of additional consideration given to the original noteholder of
the 6%/12% of promissory notes when they agreed to extend the obligations
on April 15, 2002 until July 1, 2003. The $329,572 of the additional
consideration was subsequently satisfied through the issuance of 282,982
shares of the Company's Common stock during October and November 2003
valued at $1.16 per share, the fair value.
o $500,000 borrowed under the $1,000,000 6% credit facility.
o $600,000 borrowed under the $900,000 8% credit facility.
Agreements reached in October 2003 provide for the satisfaction of the
obligations through the issuance of equity securities by January 2004.
(See Note 2)
Long term notes payables consist of $100,000 in 6% promissory notes and
$500,000 of the 8% promissory note.
Descriptions of the above obligations follow.
(A) The 6%/12% Promissory Notes consist of the following issuances:
(i) On September 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 September 30,
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
12
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
professional fees and $140,203 of deferred financing costs
relating to consideration to the noteholders valued at $120 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 was accruing
interest expense at 12%. These deferred financing costs were
amortized through July 1, 2003. These obligations were
satisfied as described above through the issuance of 1,171,121
shares of common stock and 25,365 of convertible preferred
stock. To date and subsequent to September 30, 2003, the
Company issued 120,785 shares of the common stock in
satisfaction of the $140,212 of deferred financing costs.
(ii) In August 2000, the Company borrowed $1,000,000 which
consisted 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 nine months ended September 30, 2003 and 2002, the Company
converted into principal, accrued interest of $206,989 and $171,785,
respectively.
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 related to the extension of
the maturity date, 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
were amortized through July 1, 2003.
These obligations were satisfied as described above through the
issuance of 1,598,773 shares of Common stock. To date and subsequent
to September 30, 2003, the Company issued 162,197 shares of the
Common stock in satisfaction of the $189,360 of deferred financing
costs.
(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 September 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. 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. On July 1, 2003, the investor agreed to extend the
maturity date of notes due August 1, 2003 until September 20, 2003.
At the option of the Company, this $500,000 can be convertible into
common stock. On September 30, 2003, the Company satisfied $500,000
of the obligation and $120,644 of related interest through the
issuance of 614,499 shares of the Company Common stock.
13
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During 2002 and through February 2003, the Company issued a total of
$1,385,000 promissory notes to an existing investor maturing on
September 30, 2003. At the option of the company, the notes, bear
interest at 8% if paid in cash and 10% if paid in stock
During the nine months ended September 30, 2003, the Company
borrowed $600,000 under an $800,000, 8% credit facility from an
existing investor. In October 2003, agreements were reached
providing for the issuance of equity securities in satisfaction of
these obligations and related interest.
On September 30, 2003, the Company issued 973,932 shares of its
common stock in consideration for payment of these promissory notes
including interest.
(C) $500,000 Line of Credit
On March 9, 2001 the Company obtained from a major existing
investor, a 10% $500,000 line of credit, which was to mature on
August 31, 2002. Additionally, the Company pays a 2% facility fee on
the line outstanding balance.
In connection with obtaining the line of credit, the lender received
warrants to purchase 100,000 shares of common stock at an exercise
price of $1.10. The estimated fair value of the warrants, which
amounted to $40,000 was recorded as a debt discount. In addition,
the Company incurred deferred financing fees of $28,384 which was
being amortized to August 31, 2002. On April 12, 2002 the investor
agreed to extend the line of credit and payment for interest to
August 1, 2003. Furthermore in July 2003, the investor agreed to
extend the line of credit and payment for interest until September
30, 2003. In connection with each extension, amortization of
unamortized debt discount and deferred financing costs were also
extended. These obligations were satisfied as described above
through the issuance of 580,931 shares of Common Stock.
(D) 6% Convertible Promissory Notes
During each of June 2003 and September 2003, the Company issued a
$50,000 promissory note to existing investors. The June note bears
interest at 6% and matures on November 27, 2004. At the option of
the Company, the principal and interest are payable on the maturity
date in common stock at a rate of one share of common stock for
every $.312 of indebtedness. Additionally, Milestone granted the
investor warrants to purchase 160,256 of common stock at a per share
price of $.52 exercisable at any time or from time to time during
the period June 4, 2003 through June 3, 2005. This resulted in an
initial increase to debt discount and to additional paid-in capital
of $14,423 equal to the estimated fair market value of the warrants.
The note dated September 25, 2003 bears interest at 6% and matures
on March 24, 2005. At the option of the Company, the principal and
interest are payable on the maturity date in common stock at a rate
of one share of common stock for every $1.10 of indebtedness.
Additionally, Milestone granted the investor warrants to purchase
15,000 of common stock at a per share price of $2.00 with an
estimate fair value of $14,423 at any time or from time to time
during the period of June 4, 2003 through June 5, 2005. This
resulted in an initial increase to debt discount and to additional
paid-in capital.
Note 7- Accounts Payable - long term
In addition to the $160,000 of trade payables which had been
previously extended to January 2005, the Company on October 3, 2003,
reached agreements to satisfy $502,800 of trade payables including
$187,000 of services not yet completed or billed through the
issuance of 306,855 shares of Common stock valued at $1.64 per
share.
14
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8- Legal proceedings
On September 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
proceedings. 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 scheduled
to appear at an arbitration hearing in late November 2003.
Note 9 - Employee Stock Option Plan
As of September 30, 2003, there were 663,344 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.
Three Months Ended Nine Months Ended
September 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $ (628,580) $ (581,831) $ (1,787,382) $ (1,604,252)
Deduct: Total stock-based employee
compensation expenses determined under
fair value based method for all awards
(56,154) (123,121) (168,462) (369,365)
------------- ------------- ------------- -------------
Net loss, pro forma
$ (684,734) $ (704,952) $ (1,955,844) $ (1,973,617)
============= ============= ============= =============
Loss per share: Basic and diluted
As reported
Basic-pro forma $ (.05) $ (.05) $ (.14) $ (.13)
============= ============= ============= =============
$ (.05) $ (.06) $ (.15) $ (.16)
============= ============= ============= =============
Note 10 - 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.
15
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Subsequent Events
Potential Reverse Stock Split
The Board of Directors adapted a resolution, subject to
shareholders' approval, of an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of its common
stock. The ratio would be no greater than one-for-ten, at the sole
discretion of the Company's board of directors, in connection with
an underwritten public offering by the Company. The principal
purpose of the reverse stock split is to facilitate the public
offering, which, we believe, is necessary to maintain our listing on
the American Stock Exchange. In order to maintain the listing, we
must, among other requirements, maintain stockholders' equity of at
least $6 million.
16
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Overview
We have generated most of our revenues during the nine months ended
September 30, 2002 and 2003 through sales of our CompuDent(TM) system and
The Wand(R) disposable handpiece used with that system. During this
period, handpiece sales have reflected a growing base of new customers for
our systems internationally and more intensive use of their systems by a
relatively stagnant base of customers domestically. Though we have
continued to sell new systems domestically, a large part of our domestic
sales during this period represented the sale of up-graded units or
additional units to our existing customer base. Our limited domestic sale
of new systems reflects our limited sales and marketing efforts as a
result of cash constraints. The following table shows a breakdown of our
revenues, domestically and internationally, by product category, and the
percentage of total revenue by each product category.
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
----------------------- --------------------- ------------------------ --------------------
Domestic
CompuDent $ 157,660 23.2% $ 229,770 29.1% $ 524,566 25.4% $ 799,671 32.8%
Handpieces 481,486 71.0% 500,370 63.3% 1,398,347 67.6% 1,461,607 59.9%
Other 39,432 5.8% 59,743 7.6% 144,384 7.0% 176,923 7.3%
---------- --------- ---------- -------- ---------- ---------- ---------- --------
Total Domestic $ 678,578 100.0% $ 789,883 100.0% $2,067,297 100.0% $2,438,201 100.0%
========== ========= ========== ======== ========== ========== ========== ========
International
CompuDent $ 163,000 56.0% $ 123,640 50.6% $ 574,225 55.4% $ 436,228 56.1%
Handpieces 127,980 44.0% 118,983 48.7% 460,152 44.4% 337,714 43.4%
Other 0 0.0% 1,684 0.7% 2,574 0.2% 3,764 0.5%
---------- --------- ---------- -------- ---------- ---------- ---------- --------
Total International $ 290,980 100.0% $ 244,307 100.0% $1,036,951 100.0% $ 777,706 100.0%
========== ========= ========== ======== ========== ========== ========== ========
Domestic/International
Analysis
Domestic $ 678,578 70.0% $ 789,883 76.4 $2,067,297 66.6 $2,438,201 75.8
International 290,980 30.0% 244,307 23.6 1,036,951 33.4 777,706 24.2
---------- --------- ---------- -------- ---------- ---------- ---------- --------
$ 969,558 100.0% $1,034,190 100.0% $3,104,248 100.0% $3,215,907 100.0%
========== ========= ========== ======== ========== ========== ========== ========
We have earned relatively high gross profits on our revenues, 50% and 47%
during the three months ended September 30, 2002 and 2003, respectively
and 53% and 50% during the nine-month periods ended September 30, 2002 and
2003, respectively. However, revenue levels have been too low to support
our overhead, research and development expense and interest on our debt.
Thus substantial, though declining, losses have been reported for each of
those periods. To address this problem we have taken steps to cut our
overhead, increase sales and reduce our interest expense by issuing equity
securities in payment of a substantial part of our debt.
First, we took the following steps to reduce our operating overhead and
improve our utilization of cash:
o We reconfigured our sales force, commencing in 2001 and
continuing through 2003, from a large internal force to
independent sales representatives and distributors;
o We closed our Deerfield, Illinois facility on January 31,
2003, resulting in a reduction of ten employees. Customer
support, technical service and other back-office functions
previously conducted at this location were consolidated into
our New Jersey location;
o We outsourced to an independent warehouse located in
Pennsylvania receiving, shipping and storage functions
previously conducted at Deerfield; and
17
o We cut marketing expense and limited our participation in
trade shows, even though this had a further negative effect on
sales.
Next, we took steps to reduce our debt burden. We cut the interest rate on
our Senior Secured and Secured Notes (after negotiation with our note
holders) from 20% to 12% (6% if we paid interest in cash) and extended the
previously extended maturity date until July and August 2003. In September
2003, we satisfied $5,014,014 of debt by issuing 4,939,256 shares of
common stock and 25,365 shares of convertible preferred stock. On October
31, 2003, we agreed with vendors to satisfy approximately $503,000 of
trade payable by issuing 306,585 shares of common stock. In October we
also reached agreement to satisfy, on the later of January 2, 2004 or the
effective date of the proposed public offering, an additional $1,960,996
of debt, accrued interest and accrued compensation through issuance of
equity securities.
Finally, at the beginning of 2003, we began to take steps to increase our
revenues. In early 2003 we completed development and in September 2003 we
received FDA approval for a patented disposable handpiece, the SafetyWand,
that incorporates safety engineered sharps protection features to aid in
the prevention of inadvertent needlesticks. The SafetyWand is one of the
first safety engineered injection devices that is fully compliant with
OSHA regulations under the federal Needlestick Safety Act while also
meeting the clinical needs of dentists. To date, these regulations have
generally not been enforced against dentists due to lack of commercially
available products that meet the special needs of dentistry. Milestone
believes that the commercial availability of the SafetyWand will enable
OSHA to begin stricter enforcement of the Needlestick Safety Act against
dentists. Since the SafetyWand can only be used with the CompuDent system,
enforcement by OSHA could promote increased handpiece sales to current
CompuDent users, while also providing impetus for the purchase of these
systems by new users. In October 2003 the SafetyWand was launched at the
American Dental Association Annual Meeting in California and will be
commercially available before the end of 2003.
In early 2003, we adopted a new marketing approach and began building a
national sales force of highly trained independent representatives
providing sales coverage in urban areas in 12 states. To increase its
ability to retain this sales force, to enhance its performance, Milestone:
o increased its base price to new customers to provide
sufficient gross profit to recruit and adequately compensate
its sales force;
o established a sales support staff to generate leads, set
appointments, provide technical support and customer service
and foster increased usage handpiece use; and
o began distributing a new product used in repairing and
whitening teeth, the CoolBlue Wand, which also helps us gain
access to dental offices.
With a growing new sales force and the acquisition of rights to new
products to facilitate access to dental offices, Milestone intends to
direct its marketing efforts to capturing new customers, particularly from
specialty practitioners, including periodontists, pedodontists,
endodontists and cosmetic/restorative dentists
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
18
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.
Inventory
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever
circumstances and situations change such that there is an indication that
the carrying amounts may not be recovered.
Revenue Recognition
Revenue is recognized when title passes at the time of shipment and
collectibility is deemed probable.
Results of Operations
Milestone's results from operations for the nine months ended September
30, 2003, reflect continued growth in sales to foreign distributors,
training and further expansion of its domestic independent sales force,
and finalizing preparations to distribute two newly developed products
while seeking additional financing.
The net loss for the nine months ended September 30, 2003 was
approximately $183,000 greater than the loss reported for the nine months
ended September 30, 2002. A decline in sales volume and gross profit
percentages, coupled with increases in research and development expenses
and interest expense were the primary factors of this increase in net
loss.
The following table sets forth for the periods presented, statement of
operations data as a percentage of revenues. The trends suggested by this
table may not be indicative of future operating results.
3 months 9 months 9 months
ended 3 months ended ended ended
9/30/03 9/30/02 9/30/03 9/30/02
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales -53.0% -50.0% -50.3% -46.6%
Gross profit 47.0% 50.0% 49.7% 53.4%
Selling, general and
administrative -91.3% -83.6% -79.50% -83.01%
Depreciation -0.9% -1.3% -0.9% -1.3%
Closing of Deerfield, IL facility -1.4% 0.0% -2.5% 0.0%
Research and development -3.0% -1.8% -3.6% -2.0%
Loss from operations -49.5% -36.7% -36.8% -33.0%
Other income 0.0% 2.3% 0.0% 2.2%
Interest, net -15.5% -21.9% -20.8% -19.2%
Net loss -65.0% -56.3% -57.6% -49.9%
19
Statement of Operations
Three months ended September 30, 2003 compared to three months ended
September 30, 2002
Net sales for the three months ended September 30, 2003 and 2002 were
$966,591 and $1,034,190 respectively. The $67,599 or 6.5% decrease is
primarily related to an approximate $82,000 aggregate decrease in
CompuDent(R) and CompuMed(R)sales domestically. Also, revenue from Wand(R)
handpieces sales in the United States decreased by $19,000. The decrease
in Wand(R) handpiece sales is the result of changing the primary vendor of
the Wand(R) handpiece, resulting in inconsistent inventory levels.
Subsequently, the transition issues have been resolved and are resulting
in improved supply chain management.
Cost of sales for the three months ended September 30, 2003 and 2002 were
$511,867 and $517,292 respectively. The $5,425 decrease is attributable
primarily to lower sales volume.
For the three months ended September 30, 2003, Milestone generated a gross
profit of $454,724 or 47% as compared to a gross profit of $516,898 or 50%
for the three months ended September 30, 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
September 30, 2003 and 2002 were $891,322 and $877,441 respectively. The
$13,881 increase is attributable primarily to an approximate $28,000
increase in professional fees partially offset by a $19,000 decrease in
expenses associated with the sale and marketing of the Wand(R) technology.
An approximate $50,000 expense associated with the independent sales
representative start up costs, was primarily offset by a commensurate
amount of commissions earned during the similar period in the previous
year.
Milestone incurred costs totaling $13,150 relating to the rent expense for
its closed facility in Deerfield, IL.
Research and development expenses for the three months ended September 30,
2003 and 2002 were $29,066 and $18,549, respectively. These costs are
associated with the development of Milestone's SafetyWand(TM), which
incorporates safety engineered injury sharps protection, mandated by the
Federal Needlestick Safety and Prevention Act of 2000.
The loss from operations for the three months ended September 30, 2003 and
2002 were $478,814 and $379,092, respectively. The $99,722 increase in
loss from operations is explained above.
Milestone generated $24,000 in other income for the three months ended
September 30, 2002 as a result of a consulting contract which expired in
October 2002.
Interest expense of $149,766 was incurred for the three months ended
September 30, 2003 as compared to $226,739 for the three months ended
September 30, 2002. The decrease is attributable to an approximate $76,000
decrease in amortization of aggregate debt discount and deferred financing
costs.
The net loss for the three months ended September 30, 2003 was $628,580 as
compared to a net loss of $581,831 for the three months ended September
30, 2002. The $46,749 increase in net loss is explained above.
20
Nine months ended September 30, 2003 compared to nine months ended
September 30, 2002
Net sales for the nine months ended September 30, 2003 and 2002 were
$3,101,281 and $3,215,907, respectively. The $114,626 or 3.6% decrease is
primarily related to an approximate $175,000 aggregate in CompuDent(R) and
CompuMed(R)sales, domestically and a $63,000 decrease in domestic sales of
the Wand(R) handpieces. These decreases were partially offset by a
$122,000 increase in foreign sales of the Wand(R) handpiece. The decrease
in Wand(R) handpiece sales is the result of changing the primary vendor of
the Wand(R) handpiece, resulting in inconsistent inventory levels.
Subsequently, the transition issues have been resolved and are resulting
in improved supply chain management.
Cost of sales for the nine months ended September 30, 2003 and 2002 were
$1,560,288 and $1,499,063 respectively. The $61,225 increase is
attributable primarily to higher sales volume to foreign distributors.
For the nine months ended September 30, 2003, Milestone generated a gross
profit of $1,540,993 or 49.7% as compared to a gross profit of $1,716,844
or 53.4% for the nine months ended September 30, 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 nine months ended
September 30, 2003 and 2002 were $2,491,737 and $2,712,649 respectively.
The $220,912 decrease is attributable primarily to an approximate $241,000
decrease in expenses associated with the sale and marketing of the Wand(R)
technology. An approximate $63,000 expense associated with the independent
sales representative start up costs, was primarily offset by a
commensurate amount of commissions earned during the similar period in the
previous year.
Milestone incurred costs totaling $79,023 relating to the closure of its
Deerfield, IL facility.
Research and development expenses for the nine months ended September 30,
2003 and 2002 were $112,158 and $63,928 respectively. These costs are
associated with the development of Milestone's SafetyWand(TM).
The loss from operations for the nine months ended September 30, 2003 and
2002 were $1,141,925 and $1,059,733 respectively. The $82,192 increase in
loss from operations is explained above.
Milestone generated $72,000 in income for the nine months ended September
30, 2002 as a result of a consulting contract which expired in October
2002.
Interest expense of $645,457 was incurred for the nine months ended
September 30, 2003 as compared to $616,519 for the nine months ended
September 30, 2002. The increase is attributable to higher average
borrowings in 2003.
The net loss for the nine months ended September 30, 2003 was $1,787,382
as compared to a net loss of $1,604,252 for the nine months ended
September 30, 2002. The $183,130 increase in net loss is explained above.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been
prepared assuming Milestone will continue as a going concern. However, as
shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $1,787,000 and $1,604,000
and negative cash flows from operating activities of $861,000 and $418,000
during the nine months ended September 30, 2003 and 2002, respectively. As
a result, Milestone had a cash balance of approximately $96,000, a working
capital deficiency of approximately $1,449,000 and a stockholders'
deficiency of approximately $2,877,000 as of September 30, 2003. These
matters raised substantial doubt about Milestone's ability to continue as
a going
21
concern. Management believes that its initial concerns about the Company's
ability to continue as a going concern were alleviated through the
subsequent satisfaction of a substantial portion of its outstanding
obligations, the introduction of new products and continuing efforts to
reduce operating overhead. Nevertheless, management believes that it is
probable that Milestone will continue to incur losses and negative cash
flows from operating activities through at least September 30, 2004.
Restructuring Liabilities and Proforma Impact:
On September 30, 2003, the Company satisfied approximately $5,014,000 of
secured debt including interest, through the issuance of 4,939,256 shares
of Common Stock and $25,365 face amount of 8% cumulative convertible
preferred stock. In addition, during October and November 2003, the
Company took the following additional steps to restructure its liabilities
and raise equity.
o On October 31, 2003, the Company issued 306,585 shares of
common stock to certain of its principal vendors having a fair
value of approximately $502,800, in satisfaction of trade
payables and future services in the aggregate amount of
$502,800.
o The Company has agreed to issue 282,982 shares of common stock
having a fair value of $329,572 in satisfaction of $329,572 of
deferred financing costs incurred in extending certain of its
outstanding loans.
o The Company issued 101,829 shares of common stock upon the
receipt of approximately $189,000 upon exercising its rights
to draw upon a private equity put facility.
o The Company issued 7,000 shares of its common stock upon the
receipt of $7,750 when an employee exercised his stock
options.
o Additionally, the Company reached agreements with a major
investor and the Company's chairman and chief executive
officer to satisfy in the aggregate, an approximate $1,961,000
of debt, accrued interest compensation through the issuance of
securities at fair value at the later of (i) the effective
date of a public offering or (ii) January 2, 2004.
These transactions had or will have a significant impact on the Company's
net worth. Presented below on a proforma basis is selected financial data,
which gives effect to the aforementioned transactions as if they occurred
on September 30, 2003.
September 30, 2003
------------------
Actual Proforma
------ --------
(in thousands)
Total current assets 1,275 1,643
Total current liabilities 2,724 1,301
Working capital (deficiency) (1,449) 342
Total liabilities 4,391 1,768
Total stockholders equity (deficiency) (2,877) 114
Additional Resources:
In April 2003, the Company received an additional $900,000 8% line of
credit from a major investor which is scheduled to mature on January 1,
2005, unless extended. As of September 30, 2003, $600,000 was outstanding
on the aforementioned line of credit.
22
Equity Put Facility
During October 2003 and through November 4, 2003, Milestone exercised its
right to draw upon a private equity facility. In exchange of net proceeds
of $189,440 the Company issued 101,829 shares of common stock. The put
facility was arranged in January 2001 under the terms of a three-year
private equity line agreement with Hillgreen Investments Limited
("Hillgreen"), a British Virgin Islands corporation. Hillgreen is
obligated to purchase, subject to the fulfillment of specified conditions,
up to 2,100,000 shares of Milestone's common stock. Hillgreen has
allocated $20,000,000 to fund its purchase obligations. The transaction
was arranged by Jesup & Lamont Securities Corporation, a New York based
investment banking firm. Milestone's right to draw upon this facility is
subject to a number of limitations and conditions, including a limitation
on the amounts sold to Hillgreen within specified periods. Subject to
these and other conditions and limitations, Milestone will have full
control over the timing of any financing under the equity line and is
under no obligation to sell any shares to Hillgreen. All shares that are
sold are priced at 87.5% of the volume weighted average market price of
Milestone common stock during a fixed period prior to the sale. Milestone
has discretion to establish a floor price below which shares will not be
sold by Milestone to Hillgreen.
Equity Offering
On November 10, 2003, we filed with the Securities Exchange Commission a
registration statement on Form S-2 (the "Registration Statement"). The
Registration Statement covers the sale of units of common stock and
warrants for an aggregate firm commitment gross offering price of
$8,000,000 to $10,000,000. The warrants included in the units are
exercisable at any time after they become separately tradable until their
expiration date, five years after the date of the closing of the offering
of an exercise price equal to 150% of the closing market price of our
common stock on the pricing date of this offering. Some or all of the
warrants may be redeemed by us at a price of $0.01 per warrant, by giving
not less than 30 days notice to the holders of the warrants, which we may
do at any time, beginning 6 months from the effective date of this
offering after the closing price for our common stock on the principal
exchange on which it trades (i.e. AMEX) has equaled or exceeded 200% of
the price of our common stock on the effective date of this offering. The
common stock included in the units and the warrants will trade only as a
unit for 30 days following the closing date of the offering, unless the
underwriter determines that separate trading should occur earlier.
As currently contemplated, the gross proceeds of an $8,000,000 offering
are expected to yield net proceeds, of $6,500,000 after taking into
account underwriting discounts and commissions and estimated offering
expenses. As set forth in the Registration Statement the net proceeds of
the offering will be used primarily to expand and support sales and
marketing efforts for CompuDent in the United States, including new
marketing and advertising campaigns, support the launch of the recently
announced SafetyWand product line, expand international sales efforts and
develop commercial models of products using other new subcutaneous
injection technology. We will retain broad discretion in the allocation of
the net proceeds within the categories set forth above. The amounts
actually expended within these categories may vary significantly and will
depend on a number of factors, including our rate of revenue growth, cash
generated by operations, evolving business needs and other factors. There
are no assurances that the Company will be successful in raising the
aforementioned amount of capital or any other amount.
Cash flow results
For the nine months ended September 30, 2003, the Company's net cash used
in operating activities was $860,990. This was attributable primarily to a
net loss of $1,787,382 adjusted for noncash items of $280,494 (of which
$242,628 was for amortization of debt discount and deferred financing
costs); a $372,167 increase in accounts receivable; an $135,997 increase
in inventories; a $137,575 decrease in advances to contract manufacturer;
a $3,341 decrease in prepaid expenses; an increase in accounts payable of
$399,731 a $402,827 increase in accrued interest; a $29,412 decrease in
accrued expenses; and an $240,000 increase in deferred compensation.
For the nine months ended September 30, 2003, the Company used $15,817 in
investing activities for capital expenditures.
23
For the nine months ended September 30, 2003, the Company generated
$962,994 from financing activities as it issued promissory notes to
existing investors totaling $900,000, incurred $108,215 of net borrowings
from its Chief Executive Officer, recorded $22,721 in deferred financing
activities and incurred $22,500 in expenses in registering shares.
RECENT ACCOUNTING PRONOUNCEMENT
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of SFAS No. 132" was
issued. SFAS No. 148 amends SFAS No. 123, to provide alternative methods
of transition for a voluntary change to the fair value method of account
for stock-based employee compensation. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effects
of the method used on reporting results. Milestone adopted SFAS No. 148,
effective January 1, 2003 and it did not have any material impact on its
consolidated financial statements.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. The
statement requires that an issuer classify financial instruments that are
with its scope as a liability. Many of those instruments were classified
as equity under previous guidance. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May
31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. We are currently evaluating the
provisions of the statement, and do not believe that it will have an
impact on our consolidated financial statements.
OTHER MATTERS - AMERICAN STOCK EXCHANGE
On May 2, 2002, Milestone received a letter from the American Stock
Exchange advising that the Company has 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 September10, 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, Milestone 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 Milestone that they had determined that the plan makes a
reasonable demonstration of Milestone's ability to regain compliance with
the continued listing standards by the conclusion of the plan period at
the end of 2003. Subsequently, Milestone has discussed with American Stock
Exchange its results from operations and its future expectations as they
relate to the plan submitted in August 2002. 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 on the NASD's "OTC Bulletin
Board." Consequently the liquidity of Milestone 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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SUBSEQUENT EVENTS
Potential Reverse Stock Split
The Board of Directors adopted a resolution, subject to
shareholders' approval, of an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split of its common
stock. The ratio would be no greater than one-for-ten, at the sole
discretion of the Company's board of directors, in connection with
an underwritten public offering by the Company. The principal
purpose of the reverse stock split is to facilitate the public
offering, which, we believe, is necessary to maintain our listing on
the American Stock Exchange. In order to maintain the listing, we
must, among other requirements, maintain stockholders' equity of at
least $6 million.
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ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Milestone's management,
with the participation of the chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of Milestone's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of
the period covered by this quarterly report (the "Evaluation Date"). Based upon
that evaluation, the chief executive officer and the chief financial officer
concluded that, as of the Evaluation Date, Milestone's disclosure controls and
procedures are effective, providing them with material information relating to
Milestone as required to be disclosed in the reports Milestone files or submits
under the Exchange Act on a timely basis.
b) Changes in Internal Control over Financial Reporting. There were no changes
in Milestone's internal controls over financial reporting, known to the chief
executive officer or the chief financial officer, that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, Milestone's internal control over financial
reporting.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) Milestone held its 2003 annual meeting of Stockholders on July 2, 2003. The
following resolutions were adopted by the Stockholders at the meeting:
(i) Relection of all board members. Present below, are the voters cast for
each director nominee:
WITHHOLD
NAME FOR AUTHORITY ABSTAIN
--- --------- -------
Leonard Osser 11,378,458 105,977
Paul Gregory 11,393,633 90,798
Leonard Schiller 11,395,633 88,798
Leslie Bernhard 11,385,355 89,798
Jeffrey Fuller 11,395,633 88,798
(ii)) Authorization of an amendment to the Certificate of Incorporation to
increase the number of authorized shares of common stock from 25,000,000 to
50,000,000.
The results were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
11,108,736 142,615 12,767
b) The annual meeting of stockholders was reconvened on July 18, 2003. On this
date, the stockholders approved an additional amendment to the Company's
Certificate of Incorporation to add a new class of 5,000,000 shares of "blank
check" Preferred Stock with such rights, preferences and privileges as will be
determined by the Board of Directors when designating each issue.
The results were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
7,250,330 218,161 10,987
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.32 Debt Settlement Agreement with Leonard Osser and K. Tucker
Andersen, dated October 9, 2003.
31.1 Chief Executive Officer Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On July 3rd and July 23rd, 2003, we filed current reports on Form
8-K, under Item 5.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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: November 13, 2003
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