SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-14053
MILESTONE SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3545623
State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
220 South Orange Avenue, Livingston, New Jersey 07039
(Address of principal executive office) (Zip Code)
(973) 535-2717
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of May 13, 2005, the Registrant had a total of 10,928,850 shares of Common
Stock, $.001 par value, outstanding.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-QSB, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect Milestone's future plans of operations, business strategy, results of
operations and financial condition. Milestone 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 Milestone's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). Milestone 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)
Condensed Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004 4
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004 (Unaudited) 5
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficiency) Three Months Ended March 31, 2005 6
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis or Plan of Operation 12
ITEM 3. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
ITEM 5. Other Information 18
ITEM 6. Exhibits 18
SIGNATURES 20
CERTIFICATIONS 21
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004*
(Unaudited)
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,895,902 $ 3,041,306
Accounts receivable, net of allowance for doubtful accounts of $28,305
in 2005 and $24,903 in 2004 522,989 421,339
Stock subscriptions receivable 1,133,041
Inventories 935,607 936,221
Advances to contract manufacturer 62,034 62,034
Prepaid expenses 107,239 104,562
------------ ------------
Total current assets 6,656,812 4,565,462
Investment in distributor, at cost 69,956 69,956
Equipment, net 588,937 612,263
Patents, net 313,711 101,242
Other assets 18,839 20,408
------------ ------------
Total assets $ 7,648,255 $ 5,369,331
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 495,831 $ 474,075
Accrued expenses 352,593 224,549
------------ ------------
Total current liabilities 848,424 698,624
Deferred compensation payable to officer 187,500 150,000
------------ ------------
Total liabilities 1,035,924 848,624
------------ ------------
Stockholders' Equity
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; 10,961,598
shares issued and 10,928,265 shares outstanding in 2005, and 9,824,287
shares issued and 9,790,954 shares outstanding in 2004 10,962 9,824
Additional paid-in capital 55,588,342 52,618,913
Accumulated deficit (48,075,482) (47,196,539)
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 6,612,331 4,520,707
------------ ------------
Total liabilities and stockholders' equity $ 7,648,255 $ 5,369,331
============ ============
See Notes to Condensed Consolidated Financial Statements
* Derived from the audited financial statements as of December 31, 2004
4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
March 31, 2005 March 31, 2004
-------------- --------------
Net sales $1,457,903 $1,094,223
Cost of sales 714,706 546,300
---------- ----------
Gross profit 743,197 547,923
Selling, general and administrative expenses 1,601,693 984,868
Research and development expenses 31,545 41,211
---------- ----------
1,633,238 1,026,079
---------- ----------
Loss from operations (890,041) (478,156)
Other income (expense)
Interest income 11,098 12,134
Interest expense -- (52,771)
---------- ----------
Other income (expense), net 11,098 (40,637)
---------- ----------
Net loss (878,943) (518,793)
Dividends applicable to preferred stock (507) --
---------- ----------
Net loss applicable to common stockholders $ (879,450) $ (518,793)
========== ==========
Loss per share applicable to common stockholders - basic and diluted $ (0.09) $ (0.07)
========== ==========
Weighted average shares outstanding - basic
and diluted 9,882,041 7,566,255
========== ==========
See Notes to Condensed Consolidated Financial Statements
5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
THREE MONTHS ENDED MARCH 31, 2005
(Unaudited)
Preferred Stock Common Stock Additional
---------------- --------------------- Paid-in Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
------ ------ ---------- --------- ----------- ------------ --------- ----------
Balance, January 1, 2005 25,365 $25 9,824,287 $ 9,824 $52,618,913 $(47,196,539) $(911,516) $4,520,707
Common stock issued for payment of
patent rights acquired 43,424 44 69,956 70,000
Common stock issued for payment of
vendor services 38,730 39 99,961 100,000
Common stock issued for payment of
consulting services 28,691 29 36,971 37,000
Common stock issued for payment of
employee compensation 16,026 16 33,317 33,333
Proceeds from equity financing, net 1,010,440 1,010 2,729,224 2,730,234
Net loss (878,943) (878,943)
------ --- ---------- ------- ----------- ------------ --------- ----------
Balance, March 31, 2005 25,365 $25 10,961,598 $10,962 $55,588,342 $(48,075,482) $(911,516) $6,612,331
====== === ========== ======= =========== ============ ========= ==========
See Notes to Condensed Consolidated Financial Statements
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
2005 2004
---------- -----------
Cash flows from operating activities:
Net loss $ (878,943) $ (518,793)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 24,876 9,192
Amortization of debt discount and deferred financing costs -- 36,660
Amortization of patents 2,531
Stock issued for compensation and consulting services 170,333 --
Bad debt expense 3,402
Changes in operating assets and liabilities:
(Increase) in accounts receivable (105,052) (94,172)
Decrease (increase) in inventories 614 (4,006)
(Increase) in advances to contract manufacturer -- (18,186)
(Increase) decrease in prepaid expenses (2,677) 40,704
Decrease in other assets 1,569 1,568
Increase (decrease) in accounts payable 21,756 (578,544)
(Decrease) in accrued interest -- (81,215)
(Decrease) increase in accrued expenses (56,956) 28,556
Increase (decrease) in deferred compensation 37,500 (218,500)
---------- -----------
Net cash used in operating activities (781,047) (1,396,736)
---------- -----------
Cash flows from investing activities:
Payment for capital expenditures (1,550) (93,189)
---------- -----------
Net cash used in investing activities (1,550) (93,189)
---------- -----------
Cash flows from financing activities:
Proceeds from equity financing, net 1,637,193 7,820,104
---------- -----------
Net cash provided by financing activities 1,637,193 7,820,104
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 854,596 6,330,179
Cash and cash equivalents at beginning of period 3,041,306 3,277
---------- -----------
Cash and cash equivalents at end of period $3,895,902 $ 6,333,456
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ -- $ 97,326
========== ===========
See Notes to Condensed Consolidated Financial Statements
7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
Supplemental schedule of noncash investing and financing activities:
On January 27, 2005 we issued 43,424 shares valued at $70,000 and recorded
a $145,000 liability payable to our outside director of clinical affairs in
satisfaction of a technology agreement to provide Milestone with patent rights.
On February 11, 2005 we issued 3,084 shares valued at $7,000 to ValueRich
Inc. in satisfaction of an agreement to provide Milestone with exhibition
facilities.
On March 8, 2005 we issued 7,408 shares valued at $20,000 (of which $1,667
was expensed in the three months ended March 31, 2005) to Dynamic Decisions,
S.r.l. in satisfaction of consulting services to be provided under contract for
a 12 month period ending in March, 2006. We also issued 1,852 shares valued at
$5,000 to Investment Connections in satisfaction of professional services
rendered.
On March 8, 2005 we issued 9,965 shares valued at $ 23,333 to a former
employee as part of a severance agreement.
On March 22, 2005 we issued 8,811 shares to a consultant for professional
business development services valued at $20,000 to be provided over the next 18
months (of which $3,333 was expensed in the three months ended March 31, 2005).
We also issued 6,061 shares valued at $10,000 to an employee for payment of
bonus.
On March 23, 2005 we issued 38,730 shares to Design Center Inc, in
satisfaction of $100,000 of payables owed in connection with warehousing and
fulfillment services rendered.
On March 31, 2005 we issued 7,536 shares to a consultant for professional
services rendered during March valued at $20,000.
In March 2005, Milestone entered into binding Subscription Agreements for a
$2,999,996 private placement of 101,044 units. Each unit consists of 10 shares
of common stock and two warrants. At March 31, 2005, Milestone had remaining
subscriptions receivable of $1,133,041. Proceeds from the private placements
were recorded net of a 7% Placement Agent Fee of $209,978 and other offering
expenses totaling $59,784 of which $40,000 was accrued at March 31, 2005.
In February 2004, Milestone issued 335,614 units in consideration for notes
payable and accrued interest due to an officer and a shareholder of $1,604,204,
accounts payable due to outside legal counsel of $200,000 and deferred
compensation to an officer of $384,000. Each unit consisted of 2 shares of
Milestone's common stock (671,228 shares of common stock) and a warrant.
As part of its payment for services in connection with the February 2004 public
offering, Milestone issued to its outside general counsel 5-year options to
purchase 160,000 common shares of at an exercise price of $3.26 per share and
warrants to purchase 80,000 common shares of stock at an exercise price of
$4.89.
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, 2004 included in Milestone'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, 2004 consolidated financial statements.
In the opinion of Milestone, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring entries) necessary to present fairly Milestone's financial
position as of March 31, 2005 and the results of its operations for the
three months ended March 31, 2005 and 2004.
The results reported for the three months ended March 31, 2005 are not
necessarily indicative of the results of operations which may be expected
for a full year.
Note 2 - Private Placement:
On April 4, 2005 Milestone completed a $2,999,996 private placement of
101,044 Units to accredited investors. Each Unit consisted of 10 shares of
Common Stock and two Warrants. Each Warrant entitles the holder to purchase
a share of Common Stock at $4.89 per share through the close of business on
February 16, 2009. I-Bankers Securities, Inc. acted as Placement Agent for
Milestone in this transaction and received a fee of $ 209,978 and 101,044
Warrants identical in terms to those issued to the investors. The Units,
which are restricted securities and bear a restrictive legend, are subject
to stop transfer restrictions. Total proceeds to Milestone after
commissions and other expenses were $2,730,234 net of commissions and fees.
Net proceeds from the offering will be used to fund Milestone's operations
including ongoing sales and marketing programs, along with the development
and bringing to market of new products.
Note 3 - Public Offering:
On February 17, 2004, Milestone 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 Milestone may do at any time, beginning 6
months after the effective date of the Offering and once the closing price
for Milestone's common stock on the principal exchange on which it trades
(AMEX) has equaled or exceeded 200% of the price of
9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Milestone'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 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) Milestone
satisfied $2,341,000 of obligations due to Milestone's CEO and a major
investor as required by an October 2003 agreement. These obligations
consisted of promissory notes, accrued interest and deferred compensation.
Milestone satisfied these obligations by issuing to the major investor and
Milestone'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, Milestone 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, Milestone 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 Milestone 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 4 - Stock Subscriptions Receivable:
Stock subscriptions receivable represents the unpaid balance by March 31,
2005 of the stock subscriptions executed in March that were not funded at
the end of the quarter. The full balance was received on April 4, 2005.
Note 5 - Inventories:
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Note 6 - Basic and diluted net loss per common share:
Milestone 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 shares is calculated
by 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. Milestone 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
10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Milestone had net losses for the three months ended March 31, 2005
and 2004, the assumed effects of the exercise of 3,595,475 and 1,309,920
outstanding stock options and warrants, and the conversion of notes payable
and preferred stock into common stock at March 31, 2005 and 2004, were not
included as their effect would have been anti-dilutive.
Note 7 - Significant Customer:
Milestone had one foreign customer who accounted for approximately 21.9%
and 20.9% of its net sales for the three months ended March 31, 2005 and
2004, respectively. At March 31, 2005, receivables from this customer were
approximately 73.3% of Milestone's total accounts receivable.
Note 8 - Employee Stock Option Plan
As of March 31, 2005, there were 317,116 outstanding options granted under
the Milestone 1997 Stock Option Plan and no option grants were made out of
the Milestone 2004 Stock Option Plan. Milestone 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 these 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 Milestone had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended March 31,
----------------------------
2005 2004
----------- ---------
Net loss applicable to common stockholders, as reported $ (879,450) $(518,793)
Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards 201,172 5,531
----------- ---------
Net loss applicable to common stockholders, pro forma $(1,080,622) $(524,324)
=========== =========
Loss per share applicable to common stock holders:
Basic and diluted
As reported $ (0.09) $ (0.07)
=========== =========
Pro forma $ (0.11) $ (0.07)
=========== =========
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 March 31, 2005 and 2004, respectively:
dividend yield of 0%; expected volatility of 119.42 % and 135 %; risk free
interest rate of 3.87 % and 2.5 %; and expected lives of 5 years.
During the three months ended March, 31, 2005, Milestone issued 80,000 stock
options at an exercise price of $3.27.
11
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
You should read the following discussions of our financial condition and
results of operations in conjunction with the financial statements and the notes
to those statements included elsewhere in this Form 10-QSB. This discussion may
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, such as those set
forth in our Form 10-KSB for the year ended December 31, 2004.
Milestone has succeeded in improving its liquidity by acquiring the capital
necessary to grow our business and seize the market opportunity that our
proprietary products have created. During 2004 and continuing in the first
quarter of 2005, we have grown our revenue base both with our existing product
line and the introduction of new products.
Most of our revenues continue to be generated 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. While we are growing our revenues throughout the world,
domestic CompuDent and handpiece sales have provided a growing portion of our
revenues relative to international sales. This is an important metric as it
validates the investment made in our domestic sales distribution. Also, we enjoy
significantly higher margins on domestic sales compared to the lower per unit
revenues we receive from our wholesale based international distribution network.
We anticipate that this growing base of new customers will generate increased
future sales of our disposable handpiece products. We believe that our ownership
of the SafetyWand technology in the light of OSHA regulations issued pursuant to
recent federal and state government legislation mandating needle stick safety
standards positions us to become a leading provider for dentists and other
health care professionals in the administration of local anesthesia thereby
providing further revenue growth opportunities. In mid to late March we
launched, through widely broadcast infomercials, our consumer tooth whitening
product. The consumer tooth whitening market is one of the fastest growing
dental market places. Our consumer tooth whitening product and the professional
tooth whitening product which we expect to launch within the next 90 days,
complement our existing product line. We believe they provide significant
additional revenue opportunities. Revenues for the first quarter did not reflect
sales of our consumer tooth whitening product since we are still building our
productive capacity and have not yet begun shipping product to meet expected
demand. We are also aggressively pursuing entrance into the medical arena with
our epidural product. During the first quarter we have invested in business
development efforts to further our progress in the medical equipment market
space.
Selling, general and administrative expenses for the first quarter sharply
increased, reflecting the continued planned enhancement of our domestic dental
sales capability and increased marketing and promotional efforts, including
trade show appearances, for our dental products. The increase also reflects our
continuing efforts to complete development of, and find marketing partners for,
medical devices using our advanced technology, particularly our Compuflo(TM)
epidural injection device.
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:
12
Three Months Ended March 31,
----------------------------------------
2005 2004 (1)
------------------ ------------------
DOMESTIC
CompuDent $ 327,688 32.5% $ 133,620 18.1%
Handpieces 664,391 65.8% 549,169 74.2%
Other 17,096 1.7% 56,689 7.7%
---------- ----- ---------- -----
Total Domestic $1,009,175 100.0% $ 739,478 100.0%
---------- ----- ---------- -----
INTERNATIONAL
CompuDent $ 173,067 38.6% $ 164,340 46.3%
Handpieces 268,581 59.8% 176,310 49.7%
Other 7,080 1.6% 14,095 4.0%
---------- ----- ---------- -----
Total International $ 448,728 100.0% $ 354,745 100.0%
---------- ----- ---------- -----
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic $1,009,175 69.2% $ 739,478 67.6%
International 448,728 30.8% 354,745 32.4%
---------- ----- ---------- -----
Totals $1,457,903 100.0% $1,094,223 100.0%
========== ===== ========== =====
(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 United States of America. The preparation of these consolidated
financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to accounts
receivable, inventories, 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 based on a sales arrangement and the agreed upon price is
reasonably assured.
Results of Operations
The consolidated results of operations for the three months ended March 31,
2005 reflect growth of our user base and the initial additional expenditures
necessary to further expand our customer base both domestically and abroad. The
net loss for the three months ended March 31, 2005, represents a 69.6%
additional loss from the same period in 2004.
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.
Three Months Ended March 31,
----------------------------------------
2005 2004
------------------ ------------------
Net sales $1,457,903 100.0% $1,094,223 100.0%
Cost of Sales 714,706 49.0% 546,300 49.9%
Gross Profit 743,197 51.0% 547,923 50.1%
Selling, general and administration expenses 1,601,693 109.9% 984,868 90.0%
Research & development 31,545 2.2% 41,211 3.8%
Loss from operations (890,041) -61.1% (478,156) -43.7%
14
Three Months ended March 31, 2005 compared to three months ended March 31, 2004
Net sales for the three months ended March 31, 2005 and 2004 were
$1,457,903 and $1,094,223, respectively. The $363,680 or 33.2% increase is
primarily related to a 145.2% or $194,068 increase in domestic CompuDent(R)
sales combined with a 5.3% or $8,727 increase in international sales of
CompuDent units. This increase shows the effect of our investment in our
domestic sales force and marketing initiatives while maintaining a strong
presence internationally. Worldwide hand piece sales increased by $207,493 or
28.6%. This growth is generated from our expanding base of CompuDent units in
service and represents a continuing revenue stream since orders for disposable
hand pieces are renewed on a monthly basis.
Cost of sales for the three months ended March 31, 2005 and 2004 were
$714,706 and $546,300, respectively. The $168,406 increase is attributable
primarily to the additional cost of goods sold for the higher revenues
previously discussed.
For the three months ended March 31, 2005, Milestone generated a gross
profit of $743,197 or 51.0% as compared to a gross profit of $547,923 or 50.1%
for the three months ended March 31, 2004. Improvement in gross profit due to
higher domestic sales in 2005 was in part offset by discounts related to
promotional programs during the quarter.
Selling, general and administrative expenses for the three months ended
March 31, 2005 and 2004 were $1,601,693 and $984,868, respectively. The $616,825
or 62.6% increase is attributable primarily to Milestone's continued execution
of its strategy to develop our domestic sales force and distribution capacity.
Sales headcount increased from 1 manager, 3 sales representatives and 8
independent contractors at March 31, 2004 to 3 sales managers, 22 inside sales
representatives and 8 independent contractors at March 31, 2005. Accordingly,
hiring and related employee expenses including sales commissions increased by
$382,294 or 114.7%. Selling, marketing and advertising expenses including,
related travel and tradeshows, increased by $100,824 or 222.6%. Professional
services and consulting expense increased by $46,978 or 50.7%, related to an
investor relations contract commenced in the second quarter 2004 and business
development services during the first quarter 2005 relating to the marketing of
our medical product line. These increases reflect both increased spending in
2005 and the effects of cash constraints Milestone operated under prior to the
February 2004 Public Offering.
Research and development expenses for the three months ended March 31, 2005
and 2004 were $31,545 and $41,211, respectively. These costs are associated with
the development of Milestone's SafetyWand(TM), CoolBlue(TM) Tooth Whitening
System and CompuFlo(TM) products.
The loss from operations for the three months ended March 31, 2005 and 2004
was $890,041 and $478,156, respectively. The $411,885 increase in loss from
operations is the result of planned increases in operating expenses explained
above.
Interest income of $11,098 was earned in the three months ended March 31,
2005 compared to $12,134 earned for the same period of the prior year.
There was no interest expense for the three months ended March 31, 2005
compared to interest expense of $52,771 for the three months ended March 31,
2004. The difference is attributable to the extinguishment of debt related to
the February 2004 equity placement.
The net loss for the three months ended March 31, 2005 was $878,943 as
compared to a net loss of $518,793 for the year ended March 31, 2004. The
$360,150 increase in net loss is explained above.
15
Liquidity and Capital Resources
As shown in the accompanying condensed consolidated financial
statements, Milestone incurred net losses of approximately $879,000 and $519,000
and negative cash flows from operating activities of approximately $781,000 and
$1,397,000 during the three months ended March 31, 2005 and 2004, respectively.
Milestone improved its liquidity position with the private placement of Units
completed in April, 2005, as discussed below. However, although at March 31,
2005 our total stockholders' equity was $6.61 million, we need a net worth of
$6,000,000 at June 30, 2005 to remain in compliance with continued listing
requirements of the American Stock Exchange. We continue to seek new sources of
equity funding, but can give no assurance that we will be able to find new
sources of funding on acceptable terms. The issuance of additional equity
securities may impair the value of our stock. Further, if we fail to satisfy the
American Stock Exchange's listing requirements with respect to stockholder
equity, we could be delisted from the Exchange after June 30, 2005 or earlier if
we fail to make progress consistent with the plan of recovery that we submitted
to the Exchange. Any delisting would, in turn, make it more difficult for us to
raise capital in the public markets. As of May 10, 2005, the American Stock
Exchange has informed us that it has placed us on a "watch list" for companies
that fail to reach listing standards of $6 million of stockholder's equity for
two consecutive quarters.
Private Placement
On April 4, 2005 Milestone completed a $2,999,996 private placement of
101,044 Units to accredited investors. Each Unit consisted of 10 shares of
Common Stock and two Warrants. Each Warrant entitles the holder to purchase a
share of Common Stock at $4.89 per share through the close of business on
February 16, 2009. I-Bankers Securities, Inc. acted as Placement Agent for
Milestone in this transaction and received a fee of $ 209,978 and 101,044
Warrants identical in terms to those issued to the investors. The Units, which
are restricted securities and bear a restrictive legend, are subject to stop
transfer restrictions. Total proceeds to Milestone after commissions and other
expenses were $2,730,734.
Cash flow results
As of March 31, 2005, Milestone had cash and cash equivalents of $3,895,902
and working capital of $5,808,388.
For the three months ended March 31, 2005, Milestone's net cash used in
operating activities was $781,047. This was attributable primarily to a net loss
of $878,943 adjusted for noncash items of $201,142 (of which $24,876 was
depreciation expense and $170,333 was stock and options issued for compensation
and consulting); a $105,052 increase in accounts receivable; a net $35,200
decrease in accounts payable and accrued expenses; and a $37,500 increase in
deferred compensation.
For the three months ended March 31, 2005, Milestone used $1,550 in
investing activities for capital expenditures.
For the three months ended March 31, 2005, Milestone generated $1,637,193
from financing activities.
Management believes that it has sufficient resources to meet its
obligations over the next twelve months.
16
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, Rule 13a-15(e) and 15d-15(e).
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that Milestone's disclosure controls and
procedures were effective, as of the date of their evaluation, for
purposes of recording, processing, summarizing and timely reporting
material information required to be disclosed in reports filed by
Milestone under the Securities Exchange Act of 1934.
b) Changes in Internal Control over Financial Reporting. There were no
changes in our internal controls over financial reporting that
occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, Milestone's
internal control over fiscal reporting.
17
PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On January 27, 2005 we issued 43,424 shares valued at $70,000 to our
outside director of clinical affairs in satisfaction of a technology agreement
to provide Milestone with patent rights.
On February 11, 2005 we issued 3,084 valued at $7,000 to ValueRich Inc. in
satisfaction of an agreement to provide Milestone with exhibition facilities.
On March 8, 2005 we issued 7,408 shares valued at $20,000 to Dynamic
Decisions, S.r.l. in satisfaction of consulting services to be provided under
contract for a 12 month period ending in March, 2006. We also issued 1,852
shares valued at $5,000 to Investment Connections in satisfaction of
professional services rendered.
On March 8, 2005 we issued 9,965 shares valued at $ 23,333 to a former
employee as part of a severance agreement.
On March 22, 2005 we issued 8,811 shares to a consultant for professional
business development services valued at $20,000 to be provided over the next 18
months. We also issued 6,061 shares valued at $10,000 to an employee for payment
of bonus.
On March 23, 2005 we issued 38,730 shares to Design Center Inc, in
satisfaction of $100,000 of payables owed in connection to warehousing and
fulfillment services rendered.
On March 31, 2005 we issued 7,536 shares to a consultant for professional
services rendered during March valued at $20,000.
On April 4, 2005 we completed a private placement of $2,999,996 of Units to
accredited investors. The offering, which was previously reported in Milestone's
annual report of Form 10-KSB filed with the Securities and Exchange Commission
on April 4, 2005, is described in Note 2 to the financial statements above, and
that information is incorporated here by reference.
ITEM 5. OTHER INFORMATION
On March 14, 2005 Milestone announced the March 12th launch of new Ionic
White enhanced technology tooth whitening system.
On March 21, 2005 Milestone announced the receipt of its initial order for
500,000 units of its Ionic White tooth whitening system.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
4.1 Form of Subscription Agreement used in connection with the private
placement of Units, March 2005.
4.2 Form of warrant issued in connection with the private placement of
Units, March 2005.
18
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: May 17, 2005
20