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, 2004
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 November 4, 2004, the Registrant had a total of 9,701,343 shares of Common
Stock, $.001 par value, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
1
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 filed 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 (unaudited): 4-12
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Operations
Three and Nine months Ended September 30, 2004 and 2003 5
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) - Nine months Ended September 30, 2004 6
Condensed Consolidated Statements of Cash Flows
Nine months Ended September 30, 2004 and 2003 7-8
Notes to Condensed Consolidated Financial Statements 9-12
ITEM 2. Management's Discussion and Analysis or Plan of Operation 13-17
ITEM 3 Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
ITEM 5. Other Information 19
ITEM 6. Exhibits 19
SIGNATURES 20
CERTIFICATIONS Exhibits 21-24
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2004 December 31,
(Unaudited) 2003 *
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,022,117 $ 3,277
Accounts receivable , net of allowance for doubtful accounts at September 30, 2004
and December 31, 2003 of $19,778 and $28,814, respectively 482,781 388,900
Inventories 768,693 426,711
Advances to contract manufacturer 867 228,497
Deferred debt financing costs, net 281 33,522
Prepaid expenses 109,982 117,184
------------ ------------
Total current assets 5,384,721 1,198,091
Deferred registration costs -- 248,815
Equipment, net 568,650 242,243
Other assets 21,977 27,341
------------ ------------
Totals $ 5,975,348 $ 1,716,490
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 492,222 $ 1,689,591
Accrued expenses 309,739 59,540
Accrued interest 4,042 231,296
Deferred compensation payable to officer 112,500 640,000
Notes payable, net of debt discount at September 30, 2004 and December 31, 2003
of $1,603 and $17,481, respectively 48,397 1,141,186
Notes payable to officer -- 358,215
------------ ------------
Total current liabilities 966,900 4,119,828
Notes payable, less current maturities -- 41,333
------------ ------------
Total liabilities 966,900 4,161,161
------------ ------------
Commitments and contingencies
Stockholders' Equity (Deficiency):
Preferred stock, par value $.001; authorized 5,000,000 shares -- --
8% Cumulative convertible preferred stock, par value $.001; authorized,
issued and outstanding, 25,365 shares 25 25
Common stock, par value $.001; authorized 50,000,000 shares; 9,734,676 shares
issued and 6,146,011 shares issued at September 30, 2004 and December 31, 2003,
respectively 9,735 6,146
Additional paid-in capital 52,539,527 42,660,349
Accumulated deficit (46,629,323) (44,199,675)
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity (deficiency) 5,008,448 (2,444,671)
------------ ------------
Totals $ 5,975,348 $ 1,716,490
============ ============
* Derived from the Company's audited consolidated balance sheet at December
31, 2003.
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, 2004 AND 2003
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $ 1,110,043 $ 966,591 $ 3,392,288 $ 3,101,281
Cost of sales 563,730 511,867 1,879,414 1,560,288
----------- ----------- ----------- -----------
Gross profit 546,313 454,724 1,512,874 1,540,993
Selling, general and administrative expenses 1,608,176 891,322 3,804,961 2,491,737
Charge in connection with the closing of the
Deerfield, IL facility -- 13,150 -- 79,023
Research and development expenses 41,679 29,066 135,300 112,158
----------- ----------- ----------- -----------
1,649,855 933,538 3,940,261 2,682,918
----------- ----------- ----------- -----------
Loss from operations (1,103,542) (478,814) (2,427,387) (1,141,925)
Other income (expense)
Interest income 23,942 -- 64,952 --
Interest expense (3,576) (149,766) (67,213) (645,457)
----------- ----------- ----------- -----------
Other income (expense) net 20,366 (149,766) (2,261) (645,457)
----------- ----------- ----------- -----------
Net loss (1,083,176) (628,580) (2,429,648) (1,787,382)
Dividends applicable to preferred stock (1,544) (1,544)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $(1,084,720) $ (628,580) $(2,431,192) $(1,787,382)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.11) $ (0.15) $ (0.27) $ (0.42)
=========== =========== =========== ===========
Weighted average shares outstanding - basic
and diluted 9,667,381 4,229,110 8,952,598 4,217,185
----------- ----------- ----------- -----------
See notes to Condensed Consolidated Financial Statements
5
Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Nine Months Ended September 30, 2004
(Unaudited)
Preferred Stock Common Stock Additional
--------------- -------------------- Paid-in Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
------ ------ --------- ------- ------------ ------------ --------- ----------
Balance January 1, 2004 25,365 $ 25 6,146,011 $ 6,146 $ 42,660,349 $(44,199,675) $(911,516) $(2,444,671)
Proceeds from equity financing,
net 2,880,000 2,880 7,617,224 7,620,104
Common stock and warrants
issued for payment of:
Outstanding debt and
related interest 492,087 492 1,603,712 1,604,204
Accounts payable 97,681 98 270,313 270,411
Deferred compensation 117,791 118 383,882 384,000
Common stock issued for payment
of professional services
rendered 1,106 1 2,499 2,500
Issuance of options for
consulting services 1,548 1,548
Net loss (2,429,648) (2,429,648)
------ ---- --------- ------- ------------ ------------ --------- ----------
Balance September 30, 2004 25,365 $ 25 9,734,676 $ 9,735 $ 52,539,527 $(46,629,323) $(911,516) $5,008,448
====== ==== ========= ======= ============ ============ ========= ==========
See notes to Condensed Consolidated Financial Statements
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(2,429,648) $(1,787,382)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 28,481 26,618
Amortization of debt discount and deferred financing costs 49,119 242,628
Amortization of stock options issued to consultants 1,548 --
Loss on disposal of fixed assets -- 11,248
Changes in operating assets and liabilities:
Increase in accounts receivable (93,881) (372,167)
Increase in inventories (341,982) (135,997)
Decrease in advances to contract manufacturer 227,630 137,575
Decrease in prepaid expenses 7,202 3,341
Decrease in other assets 5,364 --
(Decrease) increase in accounts payable (675,643) 399,731
(Decrease) increase in accrued interest (81,265) 402,827
Increase (decrease) in accrued expenses 250,199 (29,412)
(Decrease) increase in deferred compensation (143,500) 240,000
----------- -----------
Net cash used in operating activities (3,196,376) (860,990)
----------- -----------
Cash flows from investing activities:
----------- -----------
Payment for capital expenditures (354,888) (15,817)
----------- -----------
Cash flows from financing activities:
Expenses relating to registering shares -- (22,500)
Proceeds from equity financing, net 7,620,104 --
Proceeds from note payable - officer/stockholder -- 180,537
Payments of note payable - officer/stockholder (50,000) (72,322)
Proceeds from issuance of notes payable -- 900,000
Payments for deferred financing activities -- (22,721)
----------- -----------
Net cash provided by financing activities 7,570,104 962,994
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,018,840 86,187
Cash and cash equivalents beginning of period 3,277 9,683
----------- -----------
Cash and cash equivalents end of period $ 4,022,117 $ 95,870
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 99,359 $ --
=========== ===========
See Notes to Condensed Consolidated Financial Statements
7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Supplemental schedule of noncash financing activities:
In September 2004, in consideration for payment of $70,411 of accounts payable,
the Company issued 36,331 shares of common stock.
During May 2004, the Company issued 1,133 options for consulting services valued
at $1,548 which was recognized as expense during the period.
In April 2004, pursuant to an agreement to purchase media placement services,
the Company issued 1,106 shares of common stock valued at $2,500.
As part of its payment for services in connection with the February 2004 public
offering, the Company issued to its outside general counsel 5-year options to
purchase 160,000 shares of Common Stock at an exercise price of $3.26 per share
and warrants to purchase 80,000 shares of Common Stock at an exercise price of
$4.89.
In February 2004, in consideration for payment of $2,188,204 of aggregate
accounts payable, deferred compensation, accrued interest and notes payable, the
Company issued 335,614 units. Each unit consisted of 2 shares of the Company's
Common stock (671,228 shares of common stock) and a warrant.
In September 2003, the Company granted warrants to purchase 5,000 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 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 1,646,419 shares of common stock and
$25,365 face amount of 8% cumulative convertible preferred stock.
In June 2003, the Company granted warrants to purchase 53,419 shares of common
stock (with an estimated fair value of $14,423) in connection with a $50,000 6%
note payable provided by an existing investor. This resulted in an initial
increase to debt discount and to additional paid-in capital.
See Notes to Condensed Consolidated Financial Statements.
8
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, 2003 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, 2003 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 Company's
financial position as of September 30, 2004 and the results of its
operations for the three and nine months ended September 30, 2004 and
2003.
The results reported for the three and nine months ended September 30,
2004 are not necessarily indicative of the results of operations which may
be expected for a full year.
On January 6, 2004 the Company filed an amendment to its Certificate of
Incorporation effecting a 1 for 3 reverse split of its common stock.
Accordingly, all shares and per share information in these consolidated
financial statements have been retroactively adjusted to reflect the
1-for-3 reverse stock split.
Note 2 - Public Offering:
On February 17, 2004, the Company completed a $9.4 million Public Offering
(proceeds of $7.6 million after underwriters' discount, underwriters' non
accountable expense allowance and other expenses). The Public Offering
consisted of the sale of 1,440,000 units at a price of $6.52 per unit.
Each unit consisted of two shares of common stock (2,880,000 shares of
common stock) and one warrant. The warrants included in the units are
exercisable at any time after they became separately tradable on March 19,
2004 and until their expiration on February 20, 2009, five years after the
date of the closing of the Public Offering, at an exercise price equal to
$4.89 (150% of the closing market price of our common stock on the pricing
date of the Offering). Some or all of the warrants may be redeemed by us
at a price of $0.25 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 after the effective date of the Offering and once the
closing price for the Company's common stock on the principal exchange on
which it trades (AMEX) has equaled or exceeded 200% of the price of the
Company's common stock on the effective date of the Offering for any five
consecutive trading days. The common stock included in the units and the
warrants traded only as a unit until March 18, 2004, 30 days following the
closing date of the Public Offering.
9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Public Offering (concluded):
A portion of the net proceeds of approximately $7.6 million of the Public
Offering were used to pay down promissory notes, credit facilities,
interest and deferred compensation. The remainder of the approximately
$7.6 million net proceeds will be used primarily to expand and support
sales and marketing efforts for CompuDent in the United States, including
the development of a domestic sales force. New marketing and advertising
campaigns will 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.
Upon the closing of the Public Offering (February 23, 2004) the Company
satisfied $2,341,000 of obligations due to the Company's CEO and a major
investor as required by an October 2003 agreement. These obligations
consisted of promissory notes, accrued interest and deferred compensation.
The Company satisfied these obligations by issuing to the major investor
and the Company's CEO 304,939 units including 609,878 shares of common
stock at a price of $6.52 per unit and approximately $353,000 in cash.
These units were issued with the same terms and price as those in the
Public Offering.
In February 2004, the Company issued to its outside general counsel 30,675
units at a price of $6.52 per unit for payment of accounts payable for
legal fees of $200,000. Furthermore as part of its payment for services in
connection with the February 2004 public offering, the Company issued to
its outside general counsel 5-year options to purchase 160,000 shares of
Common Stock at an exercise price of $3.26 per share and warrants to
purchase 80,000 shares of Common Stock at an exercise price of $4.89.
In May of 2004 the Company awarded to Dr. Mark Hochman, its Director of
Clinical Affairs, a one-time bonus of $200,000 in recognition of his
contributions to the February 2004 public offering.
Note 3 - Inventories:
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Note 4 - Basic and diluted net loss per common share:
The Company presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Basic earnings (loss) per common stock is calculated
by the dividing net income or loss applicable to common stock by the
weighted average number of common shares outstanding during each period.
The calculation of diluted earnings per common share is similar to that of
basic earnings per common share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, such as those
issuable upon the exercise of stock options, warrants, and the conversion
of notes payable were issued during the period. The Company has not
included the common shares issuable upon conversion of the outstanding
25,365 preferred shares in the weighted average number of shares
outstanding in the computation of basic loss per share because their
effect would have been anti-dilutive. This treatment is in accordance with
the "two class" method of computing earnings (loss) per share set forth in
SFAS 128.
Since the Company had net losses for the nine months ended September 30,
2004 and 2003, the assumed effects of the exercise of 3,249,692 and
1,088,605 outstanding stock options and warrants, and the conversion of
notes payable and preferred stock into common stock at September 30, 2004
and 2003, were not included as their effect would have been anti-dilutive.
10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Significant Customer:
The Company had one foreign customer who accounted for approximately 24%
and 22% of its net sales for the three and nine months ended September 30,
2004, respectively, and approximately 23% and 25% for the three and nine
months ended September 30, 2003, respectively. At September 30, 2004,
receivables from this customer were approximately 78% of the Company's
total accounts receivable.
Note 6 - Notes Payable
Short term notes payable at September 30, 2004 consists of a $50,000 6%
promissory note issued during June 2003 to an existing investor. The note
bears interest at 6% and matures on November 27, 2004. At the Company's
option, the principal and interest is payable on the maturity date in
common stock at a rate of one share of our common stock for every $.936 of
indebtedness. Additionally, the Company granted the investor warrants with
an estimated fair value of $14.423 to purchase 53,419 shares of our common
stock at a per share price of $1.56 at any time or from time to time
during the period commencing on June 4, 2003 and ending June 3, 2005. This
resulted in an initial increase to debt discount and to additional paid-in
capital of $14,423. As of September 30, 2004, the unamortized portion of
the debt discount was $1,603.
During September 2003, the Company issued a $50,000 promissory note to an
existing investor. The note bears interest at 6% and was to mature on
March 24, 2005. Additionally, Milestone granted the investor warrants with
an estimated fair value of $10,400 to purchase 5,000 shares of common
stock at a per share price of $6.00 at any time or from time to time
during the period commencing from June 4, 2003 through June 5, 2005. This
resulted in an initial increase to debt discount and to additional paid-in
capital of $10,400. This note and accrued interest of $2,033 was paid in
full on May 24, 2004.
Note 7 - 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. The Company answered the Complaint
denying the material allegations. The action lay dormant until late 2003
when the Company and Schein entered into a settlement in principle whereby
the case was dismissed with prejudice and the Company would provide Schein
with certain inventory. In April 2004, the settlement was paid in full.
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 formerly used by Milestone in Deerfield, IL) sought damages of
$17,755 plus costs, including attorney's fees, interest and continuing
rental obligation. In March 2004, the parties reached an out of court
settlement for $43,500 and exchanged mutual releases.
Note 8 - Employee Stock Option Plan
As of September 30, 2004, there were 249,780 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 dates of grant. The
following table illustrates 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)
Note 8 - Employee Stock Option Plan (concluded):
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used for the grants in the quarters ended September 30, 2004
and 2003, respectively: dividend yield of 0%; expected volatility of 90%
and 135%; risk free interest rate of 2.5% and 3.75%; and expected lives of
3 years.
During the nine months ended September 30, 2004, the Company issued 51,333
stock options at an exercise price of $4.92.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2004 2003 2004 2003
----------- --------- ----------- -----------
Net loss, as reported $(1,083,176) $(628,580) $(2,429,648) $(1,787,382)
Total stock-based employee compensation
expenses determined under the fair value
based method for all awards 12,687 56,154 38,060 168,462
----------- --------- ----------- -----------
Net loss, pro forma $(1,095,863) $(684,734) $(2,467,708) $(1,955,844)
=========== ========= =========== ===========
Loss per share: Basic and diluted
As reported (0.11) (0.15) (0.27) (0.42)
===============================================================
Pro forma (0.11) (0.16) (0.28) (0.46)
===============================================================
12
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
During the past two years we have operated under significant cash
constraints and as a result have not been able to adequately support sales and
marketing efforts at the levels required to maintain and increase revenues.
These cash constraints were eliminated on February 23, 2004 with the raise of
approximately $9.4 million of gross proceeds (approximately $7.6 million after
underwriter's discount, underwriter's expense allowance and other offering
related expenses) in an underwritten public offering.
During our last two fiscal years we have generated most of our revenues
through sales of our CompuDent system and The Wand disposable handpiece used
with that system. Revenues have been earned domestically and internationally
through sales in more than 25 countries. During this period handpiece sales have
provided a growing portion of our revenues, reflecting 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 upgraded 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. We
expect to use a portion of the proceeds of the recently completed offering to
increase sales and marketing expense and believe these increases should generate
additional revenue. 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 Nine Months Ended
-------------------------------------------------- --------------------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
----------------------- ----------------------- ----------------------- -----------------------
Domestic
CompuDent $ 155,959 20.1% $ 157,660 23.3% $ 431,712 18.6% $ 524,566 25.4%
Handpieces 587,840 75.5% 478,519 70.9% 1,744,609 75.3% 1,395,380 67.6%
Other 34,016 4.4% 39,432 5.8% 140,494 6.1% 144,384 7.0%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Domestic $ 777,815 100.0% $ 675,611 100.0% $2,316,815 100.0% $2,064,330 100.0%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
International
CompuDent $ 202,029 60.8% $ 163,000 56.0% $ 527,278 49.0% $ 574,225 55.4%
Handpieces 116,177 35.0% 127,980 44.0% 508,823 47.3% 460,152 44.4%
Other 14,022 4.2% -- 0.0% 39,372 3.7% 2,574 0.2%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total International $ 332,228 100.0% $ 290,980 100.0% $1,075,473 100.0% $1,036,951 100.0%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Summary:
Domestic $ 777,815 70.1% $ 675,611 69.9% $2,316,815 68.3% $2,064,330 66.6%
International 332,228 29.9% 290,980 30.1% 1,075,473 31.7% 1,036,951 33.4%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals $1,110,043 100.0% $ 966,591 100.0% $3,392,288 100.0% $3,101,281 100.0%
========== ========== ========== ========== ========== ========== ========== ==========
13
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally
accepted in the Untied 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 receivable collectibility, inventory valuation,
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.
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
We review 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 reasonably assured.
Results of Operations
The consolidated results of operations for the nine months ended September
30, 2004 reflects Milestone's initiation of its strategic plan for a sales and
marketing component in the United States. This includes three (3) sales managers
(2 field, 1 internal), sixteen (16) market specific independent representatives,
twelve (12) inside sales representatives, and five (5) sales support
representatives who make appointments for field representatives and initiate
customer contact to improve sales of disposables. Expenses associated with this
expansion contribute to the increased selling, general, and administrative
expenses compared to previous periods.
Net loss for the nine months ended September 30, 2004 primarily reflects
Milestone's increased spending on its infrastructure in the areas of sales,
marketing, and customer service. The increased loss over the same period of the
prior year was also the result of a lower gross margin primarily relating to a
physical inventory adjustment of $101,608 for inventory obsolescence and
valuation.
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.
14
Milestone Scientifc, Inc.
Results of Operations
Three Months Ended Nine Months Ended
---------------------------------------------------- -------------------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
----------------------- ------------------------ ----------------------- ----------------------
Net sales $ 1,110,043 100.0% $ 966,591 100.0% $ 3,392,288 100.0% $ 3,101,281 100.0%
Cost of Sales 563,730 50.8% 511,867 53.0% 1,879,414 55.4% 1,560,288 50.3%
Gross Profit 546,313 49.2% 454,724 47.0% 1,512,874 44.6% 1,540,993 49.7%
Selling, general and
admin expenses 1,608,176 144.9% 891,322 92.2% 3,804,961 112.2% 2,491,737 80.3%
Closing of Deerfield
facility -- 0.0% 13,150 1.4% -- 0.0% 79,023 2.5%
Research &
development 41,679 3.8% 29,066 3.0% 135,300 4.0% 112,158 3.6%
Loss from operations (1,103,542) -99.4% (478,814) -49.5% (2,427,387) -71.6% (1,141,925) -36.8%
Three months ended September 30, 2004 compared to the three months ended
September 30, 2003
Net sales for the three months ended September 30, 2004 and 2003 were
$1,110,043 and $966,591, respectively. Total revenues increased by 14.8%.
Contributing to this increase was a 15.1% increase in domestic revenues and
14.2% increase in international sales. Domestic sales growth was led by a 22.8%
increase in handpiece revenues.
Gross profit for the three months ended September 30, 2004 and 2003 was
$546,313 and $454,724, respectively. The 20% or $91,589 increase in gross profit
was largely due to the $109,321 increase in domestic handpiece revenues,
combined with a 14.8% increase in international revenues.
Selling, general and administrative expenses for the three months ended
September 30, 2004 and 2003 were $1,608,176 and $891,322 respectively. The 80%
increase or $716,854 is primarily related to costs associated with building our
domestic sales organization. Legal and professional fees increased by $163,581
primarily related to patent filings associated with new product development,
marketing and advertising expenses. The increase in these expenses was
anticipated and is consistent with management's stated strategy of investing in
revenue generating areas of the business.
Research and development expenses for the three months ended September 30,
2004 and 2003 were $41,679 and $29,066, respectively. These costs are associated
with the development of Milestone's CompuFlo, SafetyWand, and CoolBlue projects.
Interest income of $23,942 was earned for the three months ended September
30, 2004 compared to no interest income for the same period of the prior year.
This difference was due to the change in cash balances related to the February
equity placement.
Interest expense of $3,576 was incurred for the three months ended
September 30, 2004 as compared to $149,766 for the three months ended September
30, 2003. The decrease is mainly attributable to a $5 million debt-to-equity
conversion on September 30, 2003 and a $1.5 million retirement of debt in the
first quarter of 2004.
Net loss for the three months ended September 30, 2004 was $1,083,176 as
compared to net loss of $628,580 for the three months ended September 30, 2003.
The majority of the $454,596 increase was due to the increases in selling,
general and administrative expenses that were anticipated as discussed above.
15
Nine months ended September 30, 2004 compared to the nine months ended September
30, 2003
Net sales for the nine months ended September 30, 2004 and 2003 were
$3,392,288 and $3,101,281, respectively. Total revenues increased by 9.4%.
Contributing to this increase was a 12.2% increase in domestic revenues and a
3.7% increase in international sales. Domestic sales growth was led by a 25%
growth in handpiece revenues.
Gross profit for the nine months ended September 30, 2004 and 2003 was
$1,512,874 and $1,540,993 respectively. The 1.8%, $28,119 decline in gross
profit was due principally to a $101,608 inventory obsolescence and valuation
adjustment during the second quarter of 2004. Also contributing to the lower
gross margin was a higher mix of CompuDent sales to existing customers and sales
which have lower margins, combined with sales concessions on handpieces on
initial orders.
Selling, general and administrative expenses for the nine months ended
September 30, 2004 and 2003 were $3,804,961 and $2,491,737 respectively. The
increase in these expenses was anticipated and is consistent with management's
stated strategy of investing in revenue generating areas of the business.
Contributing to the 52.7% increase ($1,313,224) are hiring and employee related
expenses related to the development of the Company's domestic sales force which
will benefit the Company with additional revenues. Legal and professional fees
increased by $379,208 related to expenditures for patent filings and accounting
fees.
For the nine months ended September 30, 2003, Milestone incurred costs
totaling $79,023 which relate to the closing of its facility in Deerfield, IL.
Research and development expenses for the nine months ended September 30,
2004 and 2003 were $135,300 and $112,158, respectively. These costs are
associated with the development of Milestone's CompuFlo, SafetyWand, and
CoolBlue projects.
Interest income of $64,952 was earned for the nine months ended September
30, 2004 compared to no interest income for the same period of the prior year.
This difference was due to the change in cash balances related to the February
equity placement.
Interest expense of $67,213 was incurred nine months ended September 30,
2004 as compared to $645,457 for the nine months ended September 30, 2003. The
decrease is mainly attributable to a $5 million debt to equity conversion on
September 30, 2003 and a $1.5 million retirement of debt in the first quarter of
2004.
Net loss for the nine months ended September 30, 2004 was $2,429,648 as
compared to net loss of $1,787,382 for the nine months ended September 30, 2003.
The $642,266 increase was due principally to the increases in cost of goods
sold, as well as selling, general and administrative expenses that were
anticipated as discussed above. These increases in expenses were partially
offset by the $643,196 decrease in net interest expense.
Liquidity and Capital Resources
As shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $2,430,000 and $1,787,000 and
negative cash flows from operating activities of approximately $3,196,000 and
$861,000 during the nine months ended September 30, 2004 and 2003, respectively.
Management believes that initial concerns about the Company's historical cash
constraints were eliminated at the closing of the public offering on February
23, 2004, as discussed below.
16
Public Offering
On February 23, 2004, the Company closed a $9.4 million Public Offering
(the "Offering") (proceeds of $7.6 million after underwriter discount,
underwriter non accountable expense allowance and other expenses). The Offering
consisted of the sale of 1,440,000 units at a price of $6.52 per unit. Each unit
consisted of two shares of common stock and one warrant. 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, at an exercise price equal to $4.89 (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 $0.25 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 the 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 the Offering for any five
consecutive trading days. The common stock included in the units and the
warrants traded only as a unit until March 18, 2004, 30 days following the
closing date of the Public Offering.
A portion of net proceeds of the Offering were used to pay down promissory
notes, the credit facilities, interest and deferred compensation as discussed
above. The remainder of the proceeds are being 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 SafeyWand product line, expand the international sales effort
and develop commercial models of products using other new subcutaneous injection
technologies.
Upon the closing of the Offering, the Company, in accordance with an
October 2003 agreement, satisfied $2,341,000 of obligations due to the Company's
CEO and a major investor through the issuance of 304,939 units at a price of
$6.52 and approximately $353,000 in cash. These units were issued with the same
terms and price as those in the Offering. The obligations satisfied consisted of
promissory notes, accrued interest and deferred compensation.
In February 2004, the Company issued to its outside general counsel 30,675
units at a price of $6.52 per unit for payment of accounts payable for legal
fees of $200,000. Furthermore as part of its payment for services in connection
with the February 2004 public offering, the Company issued its outside general
counsel 5-year options to purchase 160,000 shares of Common Stock at an exercise
price of $3.26 per share and public warrants to purchase 80,000 shares of Common
Stock at an exercise price of $4.89.
In May of 2004 the Company awarded to Dr. Mark Hochman, its Director of
Clinical Affairs, a one-time bonus of $200,000 in recognition of his
contributions to the February 2004 public offering.
The Company believes that it has sufficient cash to fund operations for
the next 12 months.
Cash flow results
As of September 30, 2004, the Company has cash and cash equivalents of
$4,022,117 and working capital of $4,417,821. For the nine months ended
September 30, 2004, the Company's net cash used in operating activities was
$3,196,376 adjusted for non-cash items. This was principally attributable to the
Company's loss and accounts payable decrease.
For the nine months ended September 30, 2004 the Company used $354,888 in
investing activities for capital expenditures relating to product molds for its
Safety-Wand product.
Cash of $7,570,104 provided by financing activities during the nine months
ended September 30, 2004 consisted of $7,620,104 of net proceeds of the public
offering discussed above, reduced by a $50,000 payment of notes payable.
17
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 15d-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.
PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In April, 2004, the Company issued to Marina Co., a nominee of partners of
Morse, Zelnick, Rose & Lander LLP, the Company's legal counsel, options expiring
April 16, 2009 for the purchase of 160,000 shares of our common stock, at an
exercise price of $3.26 per share, and warrants, expiring April 16, 2009, to
purchase 80,000 shares of our common stock at $4.89 per share, as partial
consideration for services rendered in connection with our February, 2004 public
offering.
On May 10, 2004, the Company's Board of Directors granted options,
expiring May 10, 2009, to purchase 40,000 shares of our common stock at an
exercise price of $2.25 per share, to our investor relations consultant as
consideration for the provision of consulting services. On the same date, the
Board of Directors also granted options, expiring May 10, 2009, for the purchase
of an aggregate number of 59,668 shares of common stock at an exercise price of
$4.92 per share, to certain vendors in payment of services.
On August 31, 2004, we issued 36,331 shares to a vendor, LC Mold, Inc., in
satisfaction of $70,410 of payables owed in connection with the manufacturing of
product molds for our Safety Wand product.
All the above securities were acquired for investment by accredited
investors and were issued without registration under the Securities Act of 1933,
as amended, pursuant to the exemptions provided under sections 4(2) and 4(6).
The securities, or the shares underlying them, are restricted securities, and
contained an appropriate restrictive legend when issued. Subsequently, the
resale by their holders of the shares underlying the options and warrants
described above, and the resale of the warrants issued to Marina Co., were
registered by the Company pursuant to a registration statement on Form S-3 which
became effective on September 29, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) Milestone held its 2004 annual meeting of Stockholders was held on July 22,
2004, and adjourned day-to-day until August 9, 2004 to allow sufficient votes to
be received. The following resolutions were adopted by the Stockholders at the
meeting:
(i) Re-election of Directors. Present below are the voters cast for each
director nominee:
18
WITHHOLD
NAME FOR AUTHORITY
---- --- ---------
Leonard Osser 7,470,574 65,989
Leslie Bernhard 7,473,046 63,517
Jeffery Fuller 7,470,713 65,850
Paul Gregory 7,466,043 70,520
Leonard M. Schiller 7,469,375 67,188
(ii) Approval of the Milestone 2004 Stock Option Plan. The results were as
follows:
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ---------
4,719,226 115,451 9,631 4,820,704
(iii) Confirmation of the appointment of Eisner LLP as Milestone's independent
auditors for the fiscal year ending December 31, 2004. The results were as
follows:
FOR AGAINST ABSTAIN
--- ------- -------
7,504,165 20,213 12,184
ITEM 5. OTHER INFORMATION
On September 14, 2004 the company announced the approval of its patent
application for its CompuFlo pressure/force computer controlled drug delivery
system.
On October 15, 2004 the company announced its exclusive licensing
agreement for its CoolBlue teeth whitening system in the consumer market.
On November 1, 2004 the company announced its successful epidural clinical
study using its CompuFlo pressure/force computer controlled drug delivery
system.
ITEM 6. EXHIBITS
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.
19
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/ Kevin T. Lusardi
------------------------------------
Kevin T. Lusardi, Vice President and
Chief Financial Officer
Dated: November 4, 2004
20