UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2006
OR
[__] TRANSITION REPORT UNDER 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.
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(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3545623
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State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
220 South Orange Avenue, Livingston, New Jersey 07039
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(Address of principal executive office) (Zip Code)
(973) 535-2717
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(Issuer's telephone number, including area code)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
---- ----
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the
Exchange Act). Yes No X
---- ----
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of November 11, 2006, the Issuer had a
total of 11,868,576 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.
I N D E X
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Balance Sheets
September 30, 2006 (Unaudited) and December 31, 2005 4
Condensed Statements of Operations
Three and Nine Months Ended September 30, 2006 and
2005 (Unaudited) 5
Condensed Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2006 (Unaudited) 6
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
(Unaudited) 7
Notes to Condensed Financial Statements 8
ITEM 2. Management's Discussion and Analysis or Plan of
Operation 13
ITEM 3 Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits 20
SIGNATURES 21
CERTIFICATIONS 22
3
MILESTONE SCIENTIFIC INC.
CONDENSED BALANCE SHEETS
September 30, 2006
(Unaudited) December 31, 2005*
------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,424,767 $ 2,892,679
Accounts receivable , net of allowance for doubtful accounts of $27,365
in 2006 and $27,117 in 2005 314,751 347,065
Royalty receivable -- 185,702
Inventories 1,455,928 1,371,354
Advances to contract manufacturer 1,031,196 1,019,663
Prepaid expenses 57,498 109,691
------------ ------------
Total current assets 4,284,140 5,926,154
Investment in distributor, at cost 76,319 76,319
Equipment, net of accumulated depreciation of $378,018 as of September 30, 2006
and $307,000 as of December 31, 2005 473,327 536,295
Patents, net of accumulated amortization of $36,226 as of September 30, 2006
and $19,090 as of December 31, 2005 497,597 486,635
Other assets 16,655 24,197
------------ ------------
Total assets $ 5,348,038 $ 7,049,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 694,821 $ 508,044
Accrued expenses 219,990 223,350
Deferred compensation payable to officers 110,831
------------ ------------
Total current liabilities 1,025,642 731,394
------------ ------------
Stockholders' Equity
Common stock, par value $.001; authorized 50,000,000 shares; 11,660,850
shares issued, 207,726 shares to be issued, and 11,627,517 shares
outstanding in 2006; 11,550,479 shares issued, 207,726 shares to be
issued, and 11,517,146 shares outstanding in 2005 11,869 11,758
Additional paid-in capital 57,437,646 57,172,915
Accumulated deficit (52,215,603) (49,954,951)
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 4,322,396 6,318,206
------------ ------------
Total liabilities and stockholders' equity $ 5,348,038 $ 7,049,600
============ ============
See Notes to Condensed Financial Statements
* Derived from the audited financial statements as of December 31, 2005
4
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Product sales, net $ 1,189,988 $ 1,567,382 $ 4,176,728 $ 4,482,016
Royalty income 31,335 252,842 217,645 472,052
------------ ------------ ------------ ------------
Total revenue 1,221,323 1,820,224 4,394,373 4,954,068
------------ ------------ ------------ ------------
Cost of products sold 519,284 643,426 1,958,571 1,896,736
Royalty expense 3,760 30,341 25,818 56,646
------------ ------------ ------------ ------------
Total cost of revenue 523,044 673,767 1,984,389 1,953,382
------------ ------------ ------------ ------------
Gross profit 698,279 1,146,457 2,409,984 3,000,686
Selling, general and administrative expenses 1,132,776 1,738,286 3,981,988 5,194,541
Research and development expenses 206,057 53,678 760,239 155,067
------------ ------------ ------------ ------------
Total operating expenses 1,338,833 1,791,964 4,742,227 5,349,608
------------ ------------ ------------ ------------
Loss from operations (640,554) (645,507) (2,332,243) (2,348,922)
Other income --
Interest income 19,497 33,132 71,591 67,814
------------ ------------ ------------ ------------
Total other income 19,497 33,132 71,591 67,814
------------ ------------ ------------ ------------
Net loss (621,057) (612,375) (2,260,652) (2,281,108)
Dividends applicable to preferred stock -- (507) -- (1,522)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (621,057) $ (612,882) $ (2,260,652) $ (2,282,630)
============ ============ ============ ============
Loss per share applicable to common stockholders -
basic and diluted $ (0.05) $ (0.05) $ (0.19) $ (0.21)
============ ============ ============ ============
Weighted average shares outstanding and to be issued -
basic and diluted 11,790,251 11,366,617 11,767,101 10,738,396
============ ============ ============ ============
5
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2006
(Unaudited)
Common Stock Additional
-------------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
----------- ----------- ------------ ----------- ----------- ----------
Balance, January 1, 2006 11,758,205 $ 11,758 $ 57,172,915 $(49,954,951) $ (911,516) $ 6,318,206
Common stock and options issued for
payment of consulting services 8,491 9 120,582 120,591
Common stock issued for payment of
vendor services 53,070 53 57,197 57,250
Common stock and options issued for
payment of employee compensation 48,810 49 86,952 87,001
Net loss (2,260,652) (2,260,652)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2006 11,868,576 $ 11,869 $ 57,437,646 $(52,215,603) $ (911,516) $ 4,322,396
============ ============ ============ ============ ============ ============
See Notes to Condensed Financial Statements
6
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)
2006 2005
Cash flows from operating activities:
Net loss $(2,260,652) $(2,281,108)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 73,245 74,457
Amortization of patents 17,136 13,468
Common stock and options issued for compensation, consulting,
and vendor services 213,862 428,433
Loss on disposal 2,634 6,817
Bad debt (recovery) expense 10,432 --
Changes in operating assets and liabilities:
Accounts receivable 21,882 (218,513)
Royalty receivable 185,702 (252,842)
Inventories (84,574) (373,719)
Advances to contract manufacturer (11,533) (258,182)
Prepaid expenses 52,193 1,807
Other assets 7,542 (6,303)
Accounts payable 186,776 76,666
Accrued expenses (3,360) 31,636
Deferred compensation 162,081 112,500
----------- -----------
Net cash used in operating activities (1,426,634) (2,644,883)
----------- -----------
Cash flows from investing activities:
Payment for capital expenditures (13,180) (21,552)
Payment for patent rights (28,098) (244,602)
Investment in distributor -- (6,363)
----------- -----------
Net cash used in investing activities (41,278) (272,517)
----------- -----------
Cash flows from financing activities:
Proceeds from equity financing, net -- 3,527,288
Proceeds from exercise of option 749
Net cash provided by financing activities -- --
----------- -----------
-- 3,528,037
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,467,912) 610,637
Cash and cash equivalents at beginning of period 2,892,679 3,041,306
----------- -----------
Cash and cash equivalents at end of period $ 1,424,767 $ 3,651,943
=========== ===========
Supplemental disclosure of cash flow information:
=========== ===========
Stock issued for deferred compensation $ 51,250 $ --
=========== ===========
See Notes to Condensed Financial Statements
7
MILESTONE SCIENTIFIC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of accounting policies
The unaudited financial statements of Milestone Scientific Inc. (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 financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December
31, 2005 included in Milestone's Annual Report on Form 10-KSB. The
accounting policies used in preparing these unaudited financial
statements are the same as those described in the December 31, 2005
financial statements.
In the opinion of Milestone, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
entries) necessary to fairly present Milestone's financial position as
of September 30, 2006 and the results of its operations for the three
and nine months ended September 30, 2006 and 2005.
The results reported for the three and nine months ended September 30,
2006 are not necessarily indicative of the results of operations which
may be expected for a full year.
Note 2 - Private placement
The company completed private placements in April and September of 2005
which resulted in aggregate net proceeds of approximately $3.5 million.
There have been no further placements beyond September, 2005.
Note 3 - Royalty receivable
Royalty receivable represents the royalty due from United Systems Inc,
the licensee of Milestone's proprietary consumer dental whitening
product, which is sold under Milestone's distributor's trademark of
Ionic White(TM).
Note 4 - Inventories
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Note 5 - Advances to contract manufacturer
Advances to contract manufacturer represent deposits to the Company's
contract manufacturer to fund future inventory purchases.
8
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 and to be issued 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 and preferred stock were issued during the period.
Since Milestone had net losses for the three and nine months ended
September 30, 2006 and 2005, the assumed effects of the exercise of
outstanding stock options and warrants and the conversion of preferred
stock into common stock were not included in the calculation as their
effect would have been anti-dilutive. Such outstanding options,
warrants and preferred stock totaled 3,380,087 and 3,517,809 at
September 30, 2006 and 2005, respectively.
Note 7 - Significant Customer
Milestone had one foreign customer who accounted for approximately 6.0%
and 19.0% of its net sales for the three months ended September 30,
2006 and 2005, respectively. At September 30, 2006, receivables from
this customer were approximately 62% of Milestone's total accounts
receivable.
Note 8 - Employee Stock Option Plan
Milestone adopted SFAS No. 123R, "Share-Based Payment, an Amendment of
FASB Statement No. 123", under the modified-prospective transition
method on January 1, 2006. SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to
be recognized in the income statements over the service period, as an
operating expense, based on the grant-date fair values. Pro-forma
disclosure is no longer an alternative. As a result of adopting SFAS
123R, the Company recognizes as compensation expense in its financial
statements the unvested portion of existing options granted prior to
the effective date and the cost of stock options granted to employees
after the effective date based on the fair value of the stock options
at grant date. Prior to the adoption of SFAS No. 123R, the Company
accounted for its stock option plans using the intrinsic value method
of accounting prescribed by APB Opinion No. 25.
As of September 30, 2006, there were 171,834 outstanding options
granted under the Milestone 1997 Stock Option Plan and 171,000
outstanding options granted under the Milestone 2004 Stock Option Plan.
As a result of adopting SFAS No. 123R, the Company recognized $27,417
in share-based compensation expense and a corresponding increase in net
loss for the nine months ended September 30, 2006. This share-based
compensation expense had minimal impact on the Company's basic and
diluted earnings per share.
The following table illustrates net loss and loss per share applicable
to common stockholders for the nine months ended September 30, 2005, if
Milestone had applied SFAS No. 123.
9
Nine Months Ended
September 30,
-------------------------
2005
--------------
Net loss, as reported (2,282,630)
Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards 228,803
----------
Net loss, pro forma (2,511,433)
==========
Loss per share applicable to common stock holders:
Basic and diluted
As reported (0.21)
==========
Pro forma (0.23)
==========
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 nine months ended September 30,
2005: dividend yield of 0%; expected volatility of 119.42%; risk free
interest rate of 3.87%; and expected lives of 5 years.
Expected volatilities are based on historical volatility of the
company's common stock. The company uses historical data to estimate
option exercise and employee termination within the valuation model.
The expected term of the option granted is estimated based on
historical behavior of employees and represents the period of time that
options granted are expected to be outstanding. A summary of option
activity under the plan as of September 30, 2006, and changes during
the nine months then ended is presented below:
Weighted
Weighted Average
Number Average Remaining Aggregate
of Exercise Contractual Intrinsic
Options Options Price Life (Years) Value
============================================== =============== ============= ============= =============
Outstanding, January 1, 2006 453,167 2.63 3.60 --
Granted 58,000 1.50 5.00 --
Exercised -- -- -- --
Forfeited or expired 168,333 3.31 2.75 --
Outstanding, September 30, 2006 342,834 2.10 2.71 --
Exercisable, September 30, 2006 241,167 2.24 3.30 --
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
=============== =============
Vested Options
Outstanding at beginning of period 366,166 $2.39
Exercised 0 $0.00
Vested Options 13,112 $4.07
Expired (138,111) $4.07
Outstanding at end of period 241,167 $2.24
NONVESTED OPTIONS
Nonvested at beginning of period 87,001 $3.60
Granted 58,000 $1.50
Vested (13,112) $4.07
Forfeited (30,222) $5.52
Nonvested at end of period 101,667 $1.77
Options to purchase 58,000 shares were granted on September 26, 2006.
The fair value of these options was estimated on the date of the grant
using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 247.6%; risk
free interest rate of 4.69%; and expected lives of 4 years.
As of September 30, 2006, there was $90,691 of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the plan. That cost is expected to be
recognized over a weighted average period of one and a half years.
10
Note 9 - Agreements to Issue Common Stock and Stock Options
On March 18, 2005, Milestone issued to Ionic White, Inc., its
distributor for a consumer tooth whitening product, 3-year options to
purchase 100,000 shares of Milestone common stock at $4.89 per share.
Under the agreement, the options are not exercisable unless the
distributor purchases at least 2,000,000 starter kits for the
registrant's consumer tooth whitening system during the twelve month
period beginning July 1, 2005. If 2,000,000 starter kits are purchased
during that period, options to purchase 10,000 shares become
exercisable. If 2,500,000 starter kits are purchased during that
period, options to purchase an aggregate of 50,000 shares become
exercisable. If 3,000,000 starter kits are purchased during that
period, options to purchase all 100,000 shares become exercisable. Upon
the options becoming exercisable, Milestone will recognize sales
discounts based on the then fair value of the options. During the 12
month period ended September 30, 2006 the purchases by Ionic White were
below the specified minimums.
Under a previous agreement, Ionic White, Inc., agreed to purchase at
$3.00 per share 500,000 shares of Milestone common stock in quarterly
installments of 125,000 shares within 10 days after the end of each of
the four fiscal quarters commencing April 1, 2005. Milestone is not
required to sell these shares unless Ionic White has purchased at least
625,000 starter kits in the first quarter, at least 1,250,000 starter
kits in the first two quarters and at least 1,875,000 starter kits in
the first three quarters. The agreement further provides that, at
Milestone's option, all shares previously purchased must be returned to
Milestone and all monies paid to Milestone returned to Ionic White if
it has not purchased an aggregate of at least 3,000,000 starter kits
for the twelve-month period ending September 30, 2006.
On September 30, 2005, this agreement was amended to defer, for an
additional quarter, the commencement date for Ionic White's commitment
to purchase stock. On December 21, 2005, the commencement date for
stock purchase was further deferred until January 1, 2006. On June 30,
2006, August 10, 2006, and at November 13, 2006 the commencement date
for stock purchase was further deferred for additional successive
quarters. The periods during which Ionic White may purchase the
required starter kits were similarly extended. At September 30, 2006 no
shares have been purchased by Ionic White.
On August 12, 2005, Milestone engaged a special marketing and sales
consultant to aid in the international sale and distribution of
CoolBlue(TM) Wand dental enhancement system, particularly in its
applications for professional tooth whitening. As part of the
compensation for a two-year consulting service, Milestone issued 40,000
shares of common stock valued at $100,000 to the consultant, $37,500 of
which was expensed in the nine months ended September 30, 2006.
In addition, if as a result of the consultant's efforts, Milestone is
able to establish distribution relationships, on terms and conditions
satisfactory to Milestone, with one of the four top world-wide
distributors of dental products, or other major distributors as are
acceptable to Milestone, and Milestone sells such distributors
$3,000,000 of product within 18 months commencing August 12, 2005,
Milestone will pay the consultant a $20,000 bonus, in shares of
Milestone common stock, valued based on the then current market value.
At September 30, 2006, Milestone has not entered into any distribution
agreement with any of the distributors.
Note 10- New Accounting Pronouncement
In July, 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109" (FIN 48), which
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We do not expect the
adoption of FIN 48 to have a material impact on our financial
reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
11
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
The following discussion of our financial condition and results of
operations should be read 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, 2005.
Most of our revenues continue to be generated through sales of our
CompuDent(R) system and the Wand(R) disposable handpiece used with that system.
Revenues have been earned domestically and internationally through sales in more
than 25 countries. This is an important measure as it validates the investment
made in our domestic sales distribution, particularly as handpiece revenues
increased as a result of the increase in CompuDent users. 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 believe that our ownership of the SafetyWand (TM) technology, in light of
OSHA regulations issued pursuant to 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.
We have been refocusing the efforts of our sales force to enhance the
efficiency and effectiveness of our domestic sales operations. We expect to
release our Single Tooth Anesthetic (STA) delivery system to the market in early
2007. This product, currently in development, will allow dentists to perform a
predictable single tooth anesthetic injection to achieve total tooth anesthesia,
as a primary injection. We expect it to become an invaluable tool as many
consider this type of injection to be the most important injection for the
dentist and preferred by patients.
We also continue development efforts on our CompuFlo(TM) technology,
which is first being targeted for spinal anesthesia, including epidural
anesthesia. Our 510 (k) Premarket Notification was cleared by the FDA in July
2006 and we are now seeking strategic partners to market the product. The
Company has contracted with an outside firm to identify additional clinical
applications for this technology in the all important medical space.
In March 2005 Ionic White was launched, through widely broadcast
infomercials. We license Ionic White technology and receive a royalty for each
unit sold. The product also appeared in retail outlets in September 2005,
including Walgreen's, Target and Linens and Things. The consumer tooth whitening
market is one of the fastest growing dental market places. We believe it
provides significant additional revenue opportunities. However, we have been
advised by the Ionic White distributor that significant retail sales are
dependent on our obtaining U.S. patent protection for the Ionic White product.
Patent application has been filed in the United States and is pending. However,
no assurance can be given that such patent will be issued. Towards the end of
2005, Milestone Scientific began a controlled market launch of its CoolBlue
Professional Tooth Whitening System, which targets the $1 billion global
professional teeth whitening market. As with other Milestone products, the
CoolBlue system is designed to maximize long-term revenues from disposable
per-patient kits that are utilized in the whitening treatment process. While
revenues from the CoolBlue system in the third quarter 2006 were not
significant, we believe the product will allow a higher degree of market
penetration, which will also provide additional selling opportunities for our
CompuDent system.
12
Selling, general and administrative expenses for the third quarter
decreased substantially from last year, reflecting stabilization of the hiring
and related costs for the domestic sales organization as well as other cost
containment programs. Related research and development expenses for STA and
CompuFlo (TM) totaled $206,057 for the third quarter of 2006. While this total
represented 16% of the total operating expenses, the continued investment in
these development programs is crucial for our future success.
The following table shows a breakdown of our product sales (net),
domestically and internationally, by product category, and the percentage of
product sales (net) by each product category:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ---------------------------------------------
2006 2005 2006 2005
-------------------- --------------------- --------------------- ---------------------
DOMESTIC
CompuDent $ 223,698 21.7% $ 365,306 31.6% $ 675,560 21.9% $1,070,070 32.6%
Handpieces 773,673 75.0% 749,800 65.0% 2,250,810 73.0% 2,053,295 62.5%
Other 33,682 3.3% 39,624 3.4% 157,200 5.1% 162,433 4.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Domestic $1,031,053 100.0% $1,154,730 100.0% $3,083,570 100.0% $3,285,798 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
INTERNATIONAL
CompuDent $ 45,590 28.7% $ 100,103 24.3% $ 336,876 30.8% $ 392,311 32.8%
Handpieces 100,162 63.0% 273,353 66.2% 655,236 60.0% 706,519 59.1%
Other 13,183 8.3% 39,196 9.5% 101,046 9.2% 97,388 8.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total International $ 158,935 100.0% $ 412,652 100.0% $1,093,158 100.0% $1,196,218 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
DOMESTIC/INTERNATIONAL
ANALYSIS
Domestic $1,031,053 86.6% $1,154,730 73.7% $3,083,570 73.8% $3,285,798 73.3%
International 158,935 13.4% 412,652 26.3% 1,093,158 26.2% 1,196,218 26.7%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Product Sales $1,189,988 100.0% $1,567,382 100.0% $4,176,728 100.0% $4,482,016 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these 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.
13
Revenue Recognition
Sales 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. Royalty revenue is recognized based upon
royalty reports from the licensee.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123". Prior to
January 2006, the Company accounted for stock-based compensation by
using the intrinsic value method under APB Opinion No. 25. As required
by SFAS No. 123R, the Company recognizes in the statement of operations
the grant-date fair value of stock options issued to employees and
non-employees.
Results of Operations
The following table sets forth, for the periods presented, statement of
operations data as a percentage of revenue. The trends suggested by this table
may not be indicative of future operating results.
Three Months Ended September 30 Nine Months Ended
--------------------------------------------- ------------------------------------------------------
2006 2005 September 30, 2006 September 30, 2005
---------------------- --------------------- -------------------------- -------------------------
Products sales, net $ 1,189,988 97% $ 1,567,382 86% 4,176,728 95% $ 4,482,016 91%
Royalty income 31,335 3% 252,842 14% 217,645 5% 472,052 10%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Total revenue 1,221,323 100% 1,820,224 100% 4,394,373 100% 4,954,068 100%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Cost of products sold 519,284 43% 643,426 35% 1,958,571 45% 1,896,736 38%
Royalty expense 3,760 -- 30,341 -- 25,818 -- 56,646 --
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Total cost of revenue 523,044 43% 673,767 37% 1,984,389 45% 1,953,382 38%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Gross Profit 698,279 58% 1,146,457 63% 2,409,984 56% 3,000,686 61%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Selling, general and
administrative expenses 1,132,776 93% 1,738,286 96% 3,981,988 91% 5,194,541 105%
Research and
development expenses 206,057 17% 53,678 3% 760,239 17% 155,067 3%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Total operating expenses 1,338,833 110% 1,791,964 98% 4,742,227 109% 5,349,608 108%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Loss from operations (640,554) -52% (645,507) -36% (2,332,243) -52% (2,348,922) -46%
Other income - interest 19,497 2% 33,132 2% 71,591 3% 67,814 2%
----------- ------ ----------- ------ ----------- --------- ----------- ---------
Net loss $ (621,057) -51% $ (612,375) -34% (2,260,652) -50% $(2,281,108) -45%
=========== ====== =========== ====== =========== --------- =========== ---------
Three Months ended September 30, 2006 compared to three months ended September
30, 2005
Total revenues for the three months ended September 30, 2006 and
2005 were $1,221,323 (product sales of $1,189,988 and royalty income of $31,335)
and $1,820,224 (product sales of $1,567,382 and royalty income of $252,842)
respectively. The $377,394 or 24.1 % decrease in net product sales is primarily
related to a domestic decrease of $141,608 or 38.8% in CompuDent sales and an
international decrease in CompuDent sales of $54,513 or 54.5%. In addition,
domestic handpiece sales increased $23,873 or 3.2% while international handpiece
sales declined $173,191 or 64.4%. Royalty income is from granting United Systems
Inc. a license to manufacture, market, and sublicense the Ionic White to the
consumer market. This area decreased $221,507 or 87.6% reflecting increased
retail competition in this increasingly highly competitive market.
14
Cost of products sold for the three months ended September 30, 2006 and
2005 were $519,284 and $643,426, respectively. The $124,142 or 19.3% decrease is
attributable to the decrease in units sold. Royalty expense related to the
royalty income from the sales of the Ionic White tooth whitening system was
$3,760 for the three months ended September 30, 2006, reflecting a decline of
$26,581 or 87.6% due to lower Royalty Income.
For the three months ended September 30, 2006, Milestone generated a
gross profit of $698,279 or 59% as compared to a gross profit of $1,146,457 or
63% for the same period in 2005. Excluding the net royalty income (net of
royalty expense) of $27,575 in 2006 and $222,501 in 2005, which has a gross
profit of 88% both in 2006 and 2005, the gross profit of products sales was
$670,704 or 56% in 2006 and $923,956 or 58.9% in 2005.
Selling, general and administrative expenses for the three months ended
September 30, 2006 and 2005 were $1,132,254 and $1,738,286, respectively. The
$606,032 or 34.9% decrease is pursuant to a plan to decrease salaries,
professional fees, and travel. Salaries declined approximately $140,000,
professional fees were reduced approximately $281,900 and travel was
approximately $48,500 less than third quarter 2005 levels. In addition, media
advertising declined approximately $134,400.
Research and development expenses for the three months ended September
30, 2006 and 2005 were $206,057 and $53,678, respectively. These costs are
primarily associated with the intensified effort into the development of our
Single Tooth Anesthetic (STA) delivery system and continuing efforts on the
CompuFlo(TM) technology.
Interest income of $19,497 was earned in the three months ended
September 30, 2006 compared to $33,132 earned for the same period in 2005. The
decrease of $13,635 or 41% in interest income is the result of lower cash
balances than 2005 levels.
For the reasons explained above, net loss for the three months ended
September 30, 2006 was $621,057 as compared to a net loss of $612,375 for the
same period in 2005.
Nine months ended September 30, 2006 compared to the Nine months ended September
30, 2005
Total revenues for the nine months ended September 30, 2006 and 2005 were
$4,394,373 (product sales of $4,176,728 and royalty income of $217,645) and
$4,954,068 (product sales of $4,482,016 and royalty income of $472,052)
respectively. Total revenues decreased by $559,695 or 11.3%. Contributing to
this decrease was primarily a $146,232 or 5.3% increase in worldwide sales of
disposable Wand handpieces offset by a reduction in CompuDent sales of $449,945
or 31%. Royalty income is from granting United Systems Inc. a license to
manufacture, market, and sublicense the Ionic White to the consumer market. This
area decreased $254,407 or 53.9% reflecting increased retail competition in this
increasingly highly competitive market.
Gross profit for the nine months ended September 30, 2006 and 2005 was
$2,409,984 or 55% and $3,000,686 or 61%, respectively. The $590,702 or 20%
decrease in gross profit was due principally to the decrease in CompuDent units
sold.
Selling, general and administrative expenses for the nine months ended
September 30, 2006 and 2005 were $3,981,516 and $5,194,541 respectively. The
decrease of $1,213,025 or 23.4% is pursuant to a plan to decrease salaries,
travel and professional fees. Salaries declined approximately $269,400, travel
was reduced approximately $102,700 and professional fees were approximately
$547,100 less than 2005 levels. Media advertising declined $59,800 from year
earlier levels.
15
Research and development expenses for the nine months ended September
30, 2006 and 2005 were $760,239 and $155,067, respectively. These costs are
primarily associated with the intensified effort into the development of our
Single Tooth Anesthetic (STA) delivery system and continuing efforts on the
CompuFlo(TM) technology.
Interest income of $71,591 was earned for the nine months ended
September 30, 2006 compared to $67,814 for the same period of the prior year.
This difference was due to increasing interest rates in the 2006 period offset
by lower cash balances.
For the reasons explained above, net loss for the nine months ended
September 30, 2006 decreased by $20,406 or 0.9% over the net loss for the nine
month period ended September 30, 2005.
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Liquidity and Capital Resources
Milestone incurred net losses of approximately $2,260,700 and $2,281,100 and
negative cash flows from operating activities of approximately $1,426,600 and
$2,644,900 during the nine months ended September 30, 2006 and 2005,
respectively. On June 16, 2006 we received notice from the American Stock
Exchange ("AMEX") that we were not in compliance with AMEX's listing standards
related to shareholders' equity and losses as specified in Section 1003(a)(iii)
of the AMEX Company Guide, which requires us to have shareholder equity of
$6,000,000. Subsequently, after a hearing before AMEX's Listing Qualification
Panel, our common stock and warrants commenced trading in the over the counter
market on the NASD's over-the-counter bulletin board following suspension of
trading on the AMEX, as previously reported in our report on Form 8-K filed on
September 1, 2006. On October 16, 2006 Amex filed an application with the
Securities and Exchange Commission in accordance with Section 12 of the
Securities Exchange Act of 1934 and the rules promulgated thereunder, to strike
Milestone's common stock and warrants from listing and registration on the AMEX.
At September 30, 2006 our total stockholders' equity was $4.32 million. 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.
Private Placement
The company completed private placements in April and September of 2005
which resulted in aggregate net proceeds of approximately $3.5 million.
There have been no further placements beyond September, 2005.
Cash flow results
As of September 30, 2006, Milestone had cash and cash equivalents of
$1,424,767 and working capital of $3,258,500.
For the nine months ended September 30, 2006, Milestone's net cash used
in operating activities was $1,426,634. This was attributable primarily to a net
loss of $2,260,652 adjusted for noncash items of $366,095 and changes in
operating assets and liabilities of $465,459.
For the nine months ended September 30, 2006 Milestone used $41,278
in investing activities for capital expenditures, $28,098 of which was due to
legal fees related to new patent applications and $13,180 was for the purchase
of equipment.
Management believes that it has sufficient resources to meet its
obligations over the next twelve months.
New Accounting Pronouncement
In July, 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109" (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
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ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Management, with the
participation of our chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of our
"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 report (the "Evaluation
Date"). Based upon that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms. Information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal
financial officers, as appropriate to allow timely reporting decisions
regarding required disclosure.
b) Changes in internal control over financial reporting. There were no
changes in our 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 have materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
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.
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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/David Cohn
------------------------------------
David Cohn
Chief Financial Officer
Dated: November 20, 2006
20