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 June 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 August 5, 2004, the Registrant had a total of 9,665,012 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
I N D E X
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited): 4 - 12
Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2004 and 2003 5
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) Six Months Ended June 30, 2004 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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. Changes in Securities and Small Business Issuer Purchases of
Equity Securities 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS Exhibits 21-24
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003*
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,234,639 $ 3,277
Accounts receivable, net of allowance for doubtful accounts at June 30, 2004
and December 31, 2003 of $31,910 and $28,814, respectively 508,519 388,900
Inventories 536,348 426,711
Advances to contract manufacturer 115,500 228,497
Deferred debt financing costs, net 702 33,522
Prepaid expenses 120,479 117,184
------------ ------------
Total current assets 6,516,187 1,198,091
Deferred registration costs -- 248,815
Equipment, net 549,870 242,243
Other assets 27,483 27,341
------------ ------------
Totals $ 7,093,540 $ 1,716,490
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Account payable $ 633,418 $ 1,689,591
Accrued expenses 314,623 59,540
Accrued interest 3,292 231,296
Deferred compensation payable to officer/stockholder 75,000 640,000
Notes payable, net of debt discount at June 30, 2004 and December 31, 2003
of $4,006 and $13,220, respectively 45,994 1,141,186
Notes payable-officer/stockholder -- 358,215
------------ ------------
Total current liabilities 1,072,327 4,119,828
Notes payable, less current maturities -- 41,333
------------ ------------
Total liabilities 1,072,327 4,161,161
------------ ------------
Commitments and Contingencies
Stockholder's 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; 9,698,345 shares
issued and 6,146,011 shares issued at June 30, 2004 and December 31, 2003,
respectively 9,698 6,146
Additional paid-in capital 52,573,783 42,660,349
Accumulated deficit (45,546,147) (44,199,675)
Unearned compensation (104,630) --
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity (deficiency) 6,021,213 (2,444,671)
------------ ------------
Totals $ 7,093,540 $ 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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 1,188,022 $ 1,008,965 $ 2,282,245 $ 2,134,690
Cost of sales 769,383 499,337 1,315,683 1,048,421
----------- ----------- ----------- -----------
Gross profit 418,639 509,628 966,562 1,086,269
----------- ----------- ----------- -----------
Selling, general and administrative expenses 1,211,917 841,435 2,196,785 1,600,415
Charge in connection with the closing of the
Deerfield, IL facility -- 13,150 -- 65,873
Research and development expenses 52,409 51,091 93,621 83,092
----------- ----------- ----------- -----------
1,264,326 905,676 2,290,406 1,749,380
----------- ----------- ----------- -----------
Loss from operations (845,687) (396,048) (1,323,844) (663,111)
Other income (expense)
Interest income 28,876 -- 41,010 --
Interest expense (10,867) (254,510) (63,638) (495,691)
----------- ----------- ----------- -----------
18,009 (254,510) (22,628) (495,691)
----------- ----------- ----------- -----------
Net loss $ (827,678) $ (650,558) $(1,346,472) $(1,158,802)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (.09) (.15) $ (.16) $ (.28)
=========== =========== =========== ===========
Weighted average shares outstanding -basic
and diluted 9,690,365 4,211,123 $ 8,591,279 4,211,123
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Six Months Ended June 30, 2004
(Unaudited)
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in Accumulated Unearned Treasury
Shares Amount Shares Amount Capital Deficit Compensation 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
Common stock and warrants
issued for payment of
accounts payable 61,350 61 199,939 200,000
Common stock and warrants
issued for payment of
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 106,178 (104,630) 1,548
Net loss (1,346,472) (1,346,472)
-------------------------------------------------------------------------------------------------------
Balance June 30, 2004 25,365 25 9,698,345 $9,698 $52,573,783 $ (45,546,147) $ (104,630) $ (911,516) $ 6,021,213
=======================================================================================================
See notes to Condensed Consolidated Financial Statements.
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(1,346,472) $(1,158,802)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 17,140 18,074
Amortization of debt discount and deferred financing costs 46,294 213,640
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 (119,619) (369,518)
Increase in inventories (109,637) (38,092)
Decrease in advances to contract manufacturer 112,997 103,883
(Increase) decrease in prepaid expenses (3,295) 43,555
Increase in other assets (142) --
(Decrease) increase in accounts payable (604,858) 270,807
(Decrease) increase in accrued interest (82,015) 282,049
Increase in accrued expenses 255,084 11,396
(Decrease) increase in deferred compensation (181,000) 160,000
----------- -----------
Net cash used in operating activities (2,013,975) (451,760)
----------- -----------
Cash flows from investing activities:
Payment for capital expenditures (324,767) (14,950)
----------- -----------
Cash flows from financing activities:
Proceeds from equity financing, net 7,620,104 --
Proceeds from note payable - officer/stockholder -- 130,537
Payments of note payable - officer/stockholder (50,000) (72,322)
Proceeds from issuance of notes payable -- 450,000
Payments for deferred financing activities -- (22,721)
----------- -----------
Net cash provided by financing activities 7,570,104 485,494
----------- -----------
Net INCREASE in cash AND CASH EQUIVALENTS 5,231,362 18,784
Cash and cash equivalents beginning of period 3,277 9,683
----------- -----------
Cash and cash equivalents end of period $ 5,234,639 $ 28,467
=========== ===========
Supplemental disclosures 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
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Supplemental schedule of noncash financing activities:
During May 2004, the Company issued 43,335 options to various consultants for
current and future services valued at $106,078 of which $1,548 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 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.
During the six months ended June 30, 2003 pursuant to the promissory note
agreements, the Company converted $160,211 of accrued interest into additional
principal.
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 June 30, 2004 and the results of its operations
for the three and six months ended June 30, 2004 and 2003.
The results reported for the three and six months ended June 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
($7.6 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 this 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 rights of the
Company's preferred and common stockholders are substantially equivalent.
The Company has included the 25,365 preferred shares from the date of
their issuance in the weighted average number of shares outstanding in the
computation of basic loss per share for the three and six month periods
ended June 30, 2004 and 2003 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 six months ended June 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 into common stock at June 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 23%
and 21%, of its net sales for the three and six months ended June 30,
2004, respectively, and approximately 22% for the three and six months
ended June 30, 2003. At June 30, 2004, receivables from this customer were
approximately 73% of the Company's total accounts receivable.
Note 6 - Notes Payable
Short term notes payable at June 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 June 30, 2004, the unamortized portion of the
debt discount was $4,006.
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 June 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 June 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.
For the six months ended June 30, 2004, the Company issued 51,333 stock
options at an exercise price of $4.92.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $(827,678) $(650,558) $(1,346,472) $(1,158,802)
Total stock-based employee compensation expenses
determined under the fair value based method for
all awards 19,842 56,154 25,373 112,108
--------- --------- ----------- -----------
Net loss, pro forma $(847,520) $(706,712) $(1,371,845) $(1,270,910)
========= ========= =========== ===========
Loss per share: Basic and diluted
As reported $ (.09) $ (.15) $ (.16) $ (.28)
========= ========= =========== ===========
Pro forma $ (.09) $ (.17) $ (.16) $ (.30)
========= ========= =========== ===========
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 Six Months Ended
------------------------------------------------- -------------------------------------------------
June 30, 2004 June 30, 2003 June 30, 2004(1) June 30, 2003
------------- ------------- ---------------- -------------
Domestic
CompuDent $ 142,132 17.8% $ 187,875 25.8% $ 275,753 17.9% $ 366,906 26.4%
Handpieces 607,600 76.0% 485,734 66.7% 1,156,769 75.2% 916,861 66.0%
Other 49,790 6.2% 54,496 7.5% 106,478 6.9% 104,952 7.6%
--------------------------------------------------------------------------------------------------------
Total Domestic $ 799,522 100.0% $ 728,105 100.0% $1,539,000 100.0% $1,388,719 100.0%
--------------------------------------------------------------------------------------------------------
International
CompuDent $ 160,909 41.4% $ 166,800 59.4% $ 325,249 43.8% $ 411,225 55.1%
Handpieces 216,336 55.7% 114,060 40.6% 392,646 52.8% 332,172 44.6%
Other 11,255 2.9% -- 0.0% 25,350 3.4% 2,574 0.3%
--------------------------------------------------------------------------------------------------------
Total International $ 388,500 100.0% $ 280,860 100.0% $ 743,245 100.0% $ 745,971 100.0%
--------------------------------------------------------------------------------------------------------
Summary:
Domestic $ 799,522 67.3% $ 728,105 72.2% $1,539,000 67.4% $1,388,719 65.1%
International 388,500 32.7% 280,860 27.8% 743,245 32.6% 745,971 34.9%
--------------------------------------------------------------------------------------------------------
Totals $1,188,022 100.0% $1,008,965 100.0% $2,282,245 100.0% $2,134,690 100.0%
========================================================================================================
(1) Note: A portion, ($85,560) of sales of CompuDent units previously reported
for the three months ended March 31, 2004 have been reclassified from domestic
to international.
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, inventories, advances to our
contract manufacturer, stock based compensation and contingencies. We base
our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates under different assumptions
or conditions.
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 six months ended June 30,
2004 reflects Milestone's initiation of its strategic plan for a sales and
marketing component in the United States. This will include 3 sales managers (2
field, one internal), twenty-two market specific independent representatives and
twenty tele-sales people managing unassigned territories, appointment making for
representatives and 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 three months ended June 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 Scientific Inc
Results of Operations
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net sales $ 1,188,022 100.0% $ 1,008,965 100.0% $ 2,282,245 100.0% $ 2,134,690 100.0%
Cost of Sales 769,383 64.8% 499,337 49.5% 1,315,683 57.6% 1,048,421 49.1%
Gross Profit 418,639 35.2% 509,628 50.5% 966,562 42.4% 1,086,269 50.9%
Selling, general and
admin expenses 1,211,917 102.0% 841,435 83.4% 2,196,785 96.3% 1,600,415 75.0%
Closing of Deerfield
facility -- 0.0% 13,150 1.3% -- 0.0% 65,873 3.1%
Research &
development 52,409 4.4% 51,091 5.1% 93,621 4.1% 83,092 3.9%
Loss from operations (845,687) (71.2%) (396,048) (39.3%) (1,323,844) (58.0%) (663,111) (31.1%)
Three months ended June 30, 2004 compared to the three months ended June 30,
2003
Net sales for the three months ended June 30, 2004 and 2003 were
$1,188,022 and $1,008,965, respectively. Total revenues increased by 17.7%.
Contributing to this increase was a 9.8% increase in domestic revenues and 38.3%
increase in international sales. Domestic sales growth was led by a 25.1%
increase in handpiece revenues.
Gross profit for the three months ended June 30, 2004 and 2003 was
$418,639 and $509,628, respectively. The 17.9% or $90,989 decline in gross
profit was largely due to a $101,608 inventory obsolescence and valuation
adjustment, offset in part by gross profit on increased sales. Also contributing
to the lower gross margin was a higher mix of CompuDent sales to existing
customers and international sales which both have lower margins.
Selling, General and Administrative expenses for the three months ended
June 30, 2004 and 2003 were $1,211,917 and $841,435 respectively. The 44%
increase or $370,482 is primarily related to costs associated with building our
domestic sales organization. Legal and professional fees increased by $88,757
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 June 30, 2004
and 2003 were $52,409 and $51,091, respectively. These costs are associated with
the development of Milestone's CompuFlo, SafetyWand, and CoolBlue projects.
Interest income of $28,876 was earned for the three months ended June 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 $10,867 was incurred three months ended June 30, 2004
as compared to $254,510 for the three months ended June 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 June 30, 2004 was $827,678 as compared
to net loss of $650,558 for the three months ended June 30, 2003. The majority
of the $177,120 increase was due to the increases in selling, general and
administrative expenses that were anticipated as discussed above.
15
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
Net sales for the six months ended June 30, 2004 and 2003 were $2,282,245
and $2,134,690, respectively. Total revenues increased by 6.9%. Contributing to
this increase was a 10.8% increase in domestic revenues offset by a 0.4%
decrease in international sales. Domestic sales growth was led by a 26.2% growth
in handpiece revenues.
Gross profit for the six months ended June 30, 2004 and 2003 was $966,562
and $1,086,269 respectively. The 11%, $119,707 decline in gross profit was due
principally to the $101,608 inventory obsolescence and valuation adjustment.
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 six months ended June
30, 2004 and 2003 were $2,196,785 and $1,600,415 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 37.3% increase ($596,370), are hiring and employee related expenses
related to the development of the Company's national sales force which will
benefit the Company with additional revenues. Legal and professional fees
increased by $269,478 related to expenditures for patent filings, accounting
fees, marketing and advertising.
For the six months ended June 30, 2003, Milestone incurred costs totaling
$65,873 which relate to the closing of its facility in Deerfield, IL.
Research and development expenses for the six months ended June 30, 2004
and 2003 were $93,621 and $83,092, respectively. These costs are associated with
the development of Milestone's CompuFlo, SafetyWand, and CoolBlue projects.
Interest income of $41,010 was earned for the six months ended June 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 $63,638 was incurred six months ended June 30, 2004 as
compared to $495,691 for the six months ended June 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 six months ended June 30, 2004 was $1,346,472 as compared
to net loss of $1,158,802 for the six months ended June 30, 2003. The $187,670
increase was due 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 offset by the $473,063 decrease in net interest
expense.
Liquidity and Capital Resources
As shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $1,346,000 and $1,159,000 and
negative cash flows from operating activities of approximately $2,014,000 and
$452,000 during the six months ended June 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") ($7.6 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 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 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 June 30, 2004, the Company has cash and cash equivalents of
$5,234,639 and working capital of $5,443,860. For the six months ended June 30,
2004, the Company's net cash used in operating activities was $2,013,975
adjusted for non-cash items. This was principally attributable to the Company's
loss and accounts payable decrease.
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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.
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PART II
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
Recent Sales of Unregistered Securities
On February 23, 2004 we issued 120,994 units to our Chief Executive
Officer, Leonard Osser in satisfaction of $404,877 of debt and interest and
$384,000 of accrued compensation and 183,946 units to K. Tucker Andersen, a
major shareholder, in satisfaction of $1,199,327 of debt and interest. Also, on
February 23, 2004, we issued 30,675 units to a service provider in satisfaction
of $200,000 worth of services rendered. All of the above-mentioned units are
similar to those offered to the public in the February 2004 public offering,
consisting of two shares of common stock and one warrant to purchase one share
of common stock at an exercise price of $4.89 and were valued at $6.52, the
initial price. The units were acquired for investment by accredited investors
and may be issued without registration under the Securities Act of 1933, as
amended, pursuant to the exemptions provided under sections 4(2) and 4(6). The
units, which are restricted securities and bear a restrictive legend, are
subject to stop transfer restrictions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(b) Reports on Form 8-K:
On each of April 12, 2004 and June 16, 2004, the Registrant filed a
report on Form 8-K pursuant to Items 5 and 7 and Items 4 and 7,
respectively.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, 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: August 5, 2004
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