10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2010 |
or
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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)
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Delaware
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13-3545623 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
45 Knightsbridge Road, Piscataway, New Jersey 08854
(Address of principal executive offices)
(973) 535-2717
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of May 12, 2010, the Issuer had a total of 14,818,194 shares of Common Stock, $.001 par
value outstanding.
MILESTONE SCIENTIFIC INC
INDEX
2
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, the words may, will, should, expect,
believe, anticipate, continue, estimate, project, intend and similar expressions are
intended to identify forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act regarding events, conditions and financial trends that may
affect Milestones future plans of operations, business strategy, results of operations and
financial condition. Milestone wishes to ensure that such statements are accompanied by meaningful
cautionary statements pursuant to the safe harbor established in the Private Securities Litigation
Reform Act of 1995. Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and the actual results
may differ materially from those included within the forward-looking statements as a result of
various factors. Such forward-looking statements should, therefore, be considered in light of
various important factors, including those set forth herein and others set forth from time to time
in Milestones reports and registration statements filed with the Securities and Exchange
Commission (the Commission). Milestone disclaims any intent or obligation to update such
forward-looking statements.
3
MILESTONE SCIENTIFIC INC.
CONDENSED BALANCE SHEETS
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March 31, 2010 |
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December 31, 2009 |
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(Unaudited) |
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ASSETS
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,218,027 |
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$ |
1,029,129 |
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Accounts receivable, net of allowance for doubtful accounts of $5,000 |
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931,218 |
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1,063,742 |
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Inventories |
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965,341 |
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804,736 |
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Advances to contract manufacturer, current |
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733,183 |
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151,995 |
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Prepaid expenses and other current assets |
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496,240 |
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254,501 |
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Total current assets |
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4,344,009 |
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3,304,103 |
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Advances to contract manufacturer, non current |
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326,020 |
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311,230 |
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Investment in distributor, at cost |
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76,319 |
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76,319 |
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Furniture, Fixtures & Equipment net of accumulated depreciation of $414,280
as of March 31, 2010 and $395,630 as of December 31, 2009 |
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78,546 |
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77,353 |
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Patents, net of accumulated amortization of $231,950 as of March 31, 2010
and $211,539 as of December 31, 2009 |
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966,600 |
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947,315 |
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Other assets |
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116,309 |
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133,674 |
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Total assets |
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$ |
5,907,803 |
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$ |
4,849,994 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities: |
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Accounts payable |
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$ |
1,951,678 |
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$ |
1,154,013 |
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Accrued interest 6% note, current |
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92,000 |
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$ |
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Accrued expenses and other payable |
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363,338 |
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524,017 |
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Total current liabilities |
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2,407,016 |
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1,678,030 |
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Long-term Liabilities: |
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Accrued Interest 6% note, non current |
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61,573 |
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92,000 |
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Accrued Interest 12% note, non current |
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76,431 |
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Notes Payable-net of discount of $10,458 and $11,157, respectively |
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439,542 |
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438,843 |
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Total long-term liabilities |
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577,546 |
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530,843 |
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Commitments and Contingencies |
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Stockholders Equity |
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Common stock, par value $.001; authorized 50,000,000 shares; 14,811,807 shares issued
692,498 shares to be issued and 14,778,474 shares outstanding as of March 31, 2010;
14,781,296 shares issued, 692,498 shares to be issued, and 14,747,962 shares outstanding
as of December 31, 2009 |
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15,502 |
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15,472 |
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Additional paid-in capital |
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62,498,787 |
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62,300,619 |
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Accumulated deficit |
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(58,679,532 |
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(58,763,454 |
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Treasury stock, at cost, 33,333 shares |
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(911,516 |
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(911,516 |
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Total stockholders equity |
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2,923,241 |
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2,641,121 |
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Total liabilities and stockholders equity |
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$ |
5,907,803 |
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$ |
4,849,994 |
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See Notes to Condensed Financial Statements
4
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, |
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2010 |
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2009 |
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Product sales, net |
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$ |
2,562,578 |
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$ |
2,204,819 |
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Cost of products sold |
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900,712 |
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916,550 |
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Gross profit |
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1,661,866 |
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1,288,269 |
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Selling, general and administrative expenses |
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1,541,702 |
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1,728,815 |
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Research and development expenses |
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88,464 |
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67,622 |
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Total operating expenses |
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1,630,166 |
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1,796,437 |
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Income (loss) from operations |
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31,700 |
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(508,168 |
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Other income (expense) |
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Other income |
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61,916 |
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Interest expense |
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(9,343 |
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(47,403 |
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Amortization of debt issuance |
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(699 |
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(7,875 |
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Interest income |
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348 |
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1,804 |
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Total other income (expenses) |
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52,222 |
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(53,474 |
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Net income (loss) applicable to common stockholders |
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$ |
83,922 |
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$ |
(561,642 |
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Net income (loss) per share applicable to common stockholders |
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Basic |
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$ |
0.01 |
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$ |
(0.05 |
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Diluted |
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$ |
0.01 |
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$ |
(0.05 |
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Weighted average shares outstanding and to be issued |
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Basic |
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13,875,278 |
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12,458,115 |
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Diluted |
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14,320,821 |
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12,458,115 |
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See Notes to Condensed Financial Statements
5
MILESTONE
SCIENTIFIC INC.
CONDENSED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
THREE
MONTHS ENDED MARCH 31, 2010
(Unaudited)
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Additional |
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Common Stock |
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Paid-in |
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Accumulated |
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Treasury |
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Shares |
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Amount |
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Capital |
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Deficit |
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Stock |
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Total |
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Balance, January 1, 2010 |
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15,473,794 |
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$ |
15,472 |
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$ |
62,300,619 |
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$ |
(58,763,454 |
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$ |
(911,516 |
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$ |
2,641,121 |
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Options issued to employees and consultants |
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147,698 |
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147,698 |
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Common stock issued for payment of
consulting services to settle accounts payable |
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26,457 |
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26 |
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42,974 |
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43,000 |
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Common stock issued for payment of
employee compensation |
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4,054 |
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4 |
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7,496 |
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7,500 |
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Net income |
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83,922 |
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83,922 |
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Balance, March 31, 2010 |
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15,504,305 |
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$ |
15,502 |
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$ |
62,498,787 |
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$ |
(58,679,532 |
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$ |
(911,516 |
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$ |
2,923,241 |
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See Notes to Condensed Financial Statements
6
MILESTONE
SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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THREE MONTHS ENDED MARCH 31, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
83,922 |
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$ |
(561,642 |
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Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
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Depreciation expense |
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18,651 |
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15,503 |
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Amortization of patents |
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20,410 |
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18,281 |
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Amortization of debt discount |
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699 |
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7,875 |
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Common stock and options issued for compensation, consulting
and vendor services |
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124,718 |
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220,992 |
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Changes in operating assets and liabilities: |
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Decrease (Increase) in accounts receivable |
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132,524 |
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(172,787 |
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(Increase) Decrease in inventories |
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(160,605 |
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72,226 |
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(Increase) Decrease to advances to contract manufacturer |
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(595,978 |
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125,160 |
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(Increase) to prepaid expenses and other current assets |
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(168,259 |
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(10,920 |
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Decrease in other assets |
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17,365 |
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Increase in accounts payable |
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797,665 |
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248,622 |
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(Decrease) in accrued expenses |
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(22,675 |
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(163,567 |
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Net cash provided by (used in) operating activities |
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248,437 |
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(200,257 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(19,844 |
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(30,131 |
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Payment for patents rights |
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(39,695 |
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(12,609 |
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Net cash used in investing activities |
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(59,539 |
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(42,740 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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188,898 |
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(242,997 |
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Cash and cash equivalents at beginning of period |
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1,029,129 |
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743,665 |
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Cash and cash equivalents at end of period |
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$ |
1,218,027 |
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$ |
500,668 |
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Supplemental disclosure of cash flow information: |
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Income taxes paid |
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$ |
4,146 |
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$ |
3,597 |
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Interest paid |
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$ |
24,000 |
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$ |
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Shares issued to employees in lieu of cash compensation |
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$ |
7,500 |
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$ |
125,324 |
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Shares issued to settle accounts payable |
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$ |
43,000 |
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$ |
42,000 |
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See Notes to Condensed Financial Statements
7
MILESTONE SCIENTIFIC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Milestone Scientific Inc. (Milestone or the Company) was incorporated in the State of
Delaware in August 1989. The Company leased additional office space in June 2009 and moved its
headquarters to 45 Knightsbridge Road in Piscataway, New Jersey.
The unaudited financial statements of Milestone have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
These unaudited financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended December 31, 2009 included in Milestones Annual Report on
Form 10-K.
In the opinion of Milestone, the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring entries) necessary to fairly present Milestones
financial position as of March 31, 2010 and December 31, 2009 and the results of its operations for
the three months ended March 31, 2010 and 2009.
The results reported for the three months ended March 31, 2010 are not necessarily indicative of
the results of operations which may be expected for a full year.
The Company had positive cash flows from operating activities at March 31, 2010 of $248,437 and a
negative cash flow from operating activities at March 31, 2009 of $200,257. At March 31, 2010, the
Company had cash and cash equivalents and working capital of $1,218,027 and $1,936,993,
respectively. The Company borrowed $450,000 in 2008 from a shareholder, with a due date of January
2009. This additional borrowing was refinanced at December 31, 2008 and the due date was extended
to June 30, 2012. The Company is continuing the pursuit of positive cash flows from operating
activities through an increase in revenue based upon managements assessment of present contracts
and current negotiations and reductions in operating expenses. The Company may require the need for
a higher level of marketing and sales efforts that at present it cannot fund. If the Company is
unable to continue positive cash flows from its operating activities it will need to raise
additional capital. There is no assurance that the Company will be able to achieve positive
operating cash flows or that traditional capital can be raised on terms and conditions satisfactory
to the Company, if at all. If positive cash flow cannot continue to be achieved or if additional
capital is required and it cannot be raised, then the Company would be forced to curtail its
development activities, reduce marketing expenses for existing dental products or adopt other cost
saving measures, any of which might negatively affect the Companys operating results.
The Companys historical losses raises substantial doubt about its ability to continue as a going
concern. The accompanying financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE 1 SUMMARY OF ACCOUNTING POLICIES
Cash and Cash Equivalents
Milestone considers all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
8
Inventories
Inventories principally consist of finished goods and component parts stated at the lower of cost
(first-in, first-out method) or market. Inventory quantities on hand are reviewed on a quarterly
basis and a provision for excess and obsolete inventory is recorded, if required, based on past and
expected future sales.
Patents
Patents are recorded at actual cost to prepare and file the applicable documents with the United
States Patent Office, or internationally with the applicable governmental office in the respective
country. Although certain patents have not yet been approved, the costs related to these patents
are being amortized using the straight-line method over the estimated useful life of the patent. If
the applicable patent application is ultimately rejected, the remaining unamortized balance will be
expensed in the period in which the Company receives a notice of such rejection. Patent
applications filed and patents obtained in foreign countries are subject to the laws and procedures
that differ from those in the United States. Patent protection in foreign countries may be
different from patent protection under United States laws and may not be favorable to the Company.
The Company also attempts to protect our proprietary information through the use of confidentiality
agreements and by limiting access to our facilities. There can be no assurance that our program of
patents, confidentiality agreements and restricted access to our facilities will be sufficient to
protect our proprietary technology.
Revenue Recognition
Revenue from product sales is recognized net of discounts and allowances to our domestic
distributors on the date of arrival of the goods at the customers location as shipments are FOB
destination. Shipments to our international distributors are FOB our warehouse and revenue is
therefore recognized on shipment. In both cases, the price to the buyer is fixed and the
collectability is reasonably assured. Further, we have no obligation on these sales for any post
sale installation, set-up or maintenance, these being the responsibility of the buyer. Customer
acceptance is considered made at delivery. Our only obligation after sale is the normal commercial
warranty against manufacturing defects if the alleged defective unit is returned within the
warranty period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions in
determining the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to the allowance for doubtful
accounts, inventory valuation, cash flow assumptions regarding evaluation for impairment of
long-lived assets and valuation allowances on deferred tax assets. Actual results could differ from
those estimates.
Fair Value Measurements: We follow the provisions of ASC 820, Fair Value Measurements and
Disclosures related to financial assets and liabilities that are being measured and reported on a
fair value basis. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the principal market
at the measurement date (exit price). We are required to classify fair value measurements in one of
the following categories:
Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that
are observable for the assets or liabilities, either directly or indirectly.
Level 3 inputs are defined as unobservable inputs for the assets or liabilities.
Financial assets and liabilities are classified based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of a particular input
to the fair value measurement requires judgment, and may effect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy levels.
9
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable,
advances to contract manufacturer, accounts payable and accrued expenses approximate fair value
based on the maturity of these instruments.
Recent Accounting Pronouncements
FASB ASC Topic 860 Accounting for Transfers of Financial Assets (SFAS 166) an amendment of
FASB No. 140 was issued in June 2009. The purpose of this Statement was to address practices that
developed subsequent to the issuance of SFAS No. 140, that were not consistent with the intent or
key requirements of that Statement. This Statement must be applied as of the beginning of each
entitys first annual reporting period that begins after November 15, 2009. This Statement does not
currently impact the financial statements of the Company.
In the first quarter of 2010, the FASB issued Accounting Standards Updates (ASU) 2010-09, Fair
Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements (ASU
2010-06). ASU 2010-06 amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, and
requires reporting entities to make new disclosures about recurring or nonrecurring fair-value
measurements. ASU 2010-06 also clarifies existing fair-value measurement disclosure guidance about
the level of disaggregation, inputs and valuation techniques. Except for the detailed Level 3
rollforward disclosures, we adopted the provisions of ASU 2010-06 in the first quarter of 2010.
This adoption did not affect our financial statements. We will adopt the provisions of ASU 2010-06
related to the new Level 3 rollforward disclosures in the first quarter of 2011. This adoption in
2011 will not affect our financial statements.
In the first quarter of 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain
Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends ASC 855, Subsequent
Events, so that SEC filers are no longer required to disclose the date through which subsequent
events have been evaluated in financial statements. We adopted the provisions of ASU 2010-09 in the
first quarter of 2010. This adoption did not affect our financial statements.
NOTE 2 BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Milestone presents basic and fully diluted earnings (loss) per common share applicable to
common stockholders, and, if applicable, diluted earnings (loss) per common share applicable to
common stockholders pursuant to the provisions of FASB ASC Topic 260. Basic earnings (loss) per
common share is calculated by dividing net income or loss applicable to common stockholders 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 and warrants were issued during the period.
Since Milestone had net losses for the three months ended March 31, 2009, the assumed effects of
the exercise of outstanding stock options and warrants were not included in the calculation as
their effect would have been anti-dilutive. Such outstanding options and warrants totaled 1,454,666
at March 31, 2009.
NOTE 3 STOCK OPTION PLANS
FASB ASC Topic 505, Share-Based Payment, requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the statements of operations over
the service period, as an operating expense, based on the grant-date fair values.
10
A summary of option activity for employees under the plans as of March 31, 2010, and changes during
the three months ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
Number |
|
|
Averaged |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
of |
|
|
Exercise |
|
|
Contractual |
|
|
Options |
|
|
|
Options |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
|
Outstanding, January 1, 2010 |
|
|
1,060,142 |
|
|
$ |
1.33 |
|
|
|
3.61 |
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(60,000 |
) |
|
|
3.27 |
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
|
1,000,142 |
|
|
|
1.22 |
|
|
|
3.56 |
|
|
|
582,617 |
|
Exercisable, March 31, 2010 |
|
|
503,582 |
|
|
|
1.23 |
|
|
|
2.66 |
|
|
|
285,824 |
|
Milestone recognizes compensation expense on a straight line basis over the requisite service
period. During the three months ended March 31, 2010, Milestone recognized a $61,484 of total
compensation cost. As of March 31, 2010, there was $297,530 of total unrecognized compensation
cost related to non-vested options which Milestone expects to recognize over a weighted average
period of 2.75 years. A six percent rate of forfeitures is assumed in the calculation of the
compensation cost for the period.
Expected volatilities are based on historical volatility of Milestones common stock over a period
commensurate with anticipated term. Milestone uses historical data to estimate option exercise and
employee termination within the valuation model.
A summary of option activity for non-employees under the plans as of March 31, 2010, and changes
during the three months ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
Number |
|
|
Averaged |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
of |
|
|
Exercise |
|
|
Contractual |
|
|
Options |
|
|
|
Options |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
|
Outstanding, January 1, 2010 |
|
|
414,999 |
|
|
|
1.90 |
|
|
|
2.70 |
|
|
|
|
|
Granted |
|
|
120,000 |
|
|
|
1.75 |
|
|
|
0.94 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2010 |
|
|
534,999 |
|
|
|
1.87 |
|
|
|
1.90 |
|
|
|
255,833 |
|
Exercisable, March 31, 2010 |
|
|
518,887 |
|
|
|
1.89 |
|
|
|
2.04 |
|
|
|
245,193 |
|
During the three months ended March 31, 2010, Milestone recognized $12,734 of expenses related
to non-employee options that vested during the year. The total unrecognized compensation cost
related to non-vested options was $80,918 as of March 31, 2010. A six percent rate of forfeitures
is assumed in the calculation of the compensation cost for the period.
In March of 2010, the Company entered an agreement with a public relations firm to supply services
to the Company over a three year (cancelable) agreement. The first year of the agreement required
120,000 options to be provided with immediate exercisability. The Black Scholes calculation of
approximately $80,000 was recorded as an asset and an addition to additional paid in capital. The
entire $80,000 will be amortized to expense over the twelve month period.
In accordance with the provisions of FASB ASC 505-50-15, all other issuances of common stock, stock
options or other equity instruments to non-employees as consideration for goods or services
received by Milestone are accounted for based on the fair value of the equity instruments issued
(unless the fair value of the consideration received can be more reliably measured). The fair value
of any options or similar equity instruments issued is estimated based on the Black-Scholes
option-pricing model, and the assumption that all of the options or other equity instruments will
ultimately vest. Such fair value is measured as of an appropriate date pursuant to the guidance,
(generally, the earlier of the date the other party becomes committed to provide goods or services
or the date of performance by the other party is complete) and capitalized or expensed as if
Milestone had paid cash for the goods or services.
11
NOTE 4 CONCENTRATION OF CREDIT RISK
Milestones financial instruments that are exposed to concentrations of credit risk consist
primarily of cash, trade accounts receivable, and advances to contract manufacturers. Milestone
places its cash and cash equivalents with large financial institutions. At times, such investments
may be in excess of the Federal Deposit Insurance Corporation insurance limit. Milestone has not
experienced any losses in such accounts and believes it is not exposed to any significant credit
risks. Financial instruments which potentially subject Milestone to credit risk consist principally
of trade accounts receivable, as Milestone does not require collateral or other security to support
customer receivables, and advances to contract manufacturer. Milestone entered into a purchase
agreement in 2004 with a vendor to supply Milestone with 5,000 units of CompuDent. As part of this
agreement, Milestone has a remaining advance of approximately $421,645 with the vendor for purchase
of materials at March 31, 2010. The advance will be credited to Milestone as the goods are
delivered. Milestone does not believe that significant credit risk exists with respect to this
advance to the contract manufacturer at March 31, 2010.
In 2010, the Company entered into a three year agreement to purchase materials for the 12,000 units
of the STA System, for delivery to our China distributor over the same period. As of March 31,
2010, the Company record an increase in advances to contractors of $637,558 for the parts.
Milestone closely monitors the extension of credit to its customers while maintaining allowances,
if necessary, for potential credit losses. On a periodic basis, Milestone evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a history of past
write-offs and collections and current credit conditions. Management does not believe that
significant credit risk exists with respect to accounts receivable at March 31, 2010.
NOTE 5 LINE OF CREDIT AND NOTE PAYABLE
On June 28, 2007 the Company secured a $1 million line of credit from a stockholder. This borrowing
was amended to $1,300,000 as of September 30, 2008 under the same terms and conditions as the
original. Three year warrants exercisable at $5.00 per share, in an amount determined by dividing
50% of the amount borrowed by $5.00 will be issued on each drawdown. There is no facility fee on
the line. The warrants have been valued as of each draw down using the Black-Scholes model and are
reflected as a discount against the debt incurred under this line of credit. The $1.3 million Line
of Credit was converted into shares of Milestones common stock in December 2009 at a conversion
rate of $1.58 per share. A total of 822,785 shares were issued and the debt liquidated at that
date. Interest on the Line of Credit of aggregated $153,573 was accrued as of March 31, 2010. This
interest will be paid in equal quarterly payments of $23,000 over the next two years. The Company
borrowed an additional $450,000 from the same shareholder in 2008. The borrowing was originally on
short term loan with a maturity date of January 19, 2009. In December 2008, this borrowing was
refinanced with the shareholder with a due date of June 30, 2012. The borrowing includes a twelve
percent interest rate, interest compounded quarterly, with interest and principal due at the
maturity. Further, the note has warrants exercisable for five years at the price of $0.32 per share
for 45,000 shares of stock. The warrants were valued using the Black-Scholes model and are
reflected as a discount against the debt. At March 31, 2010, the discount was $10,458.
Interest expense on this Line of Credit for the three months ended March 31, 2010 and 2009 is
$9,343 and $47,403, respectively. Accrued interest related to this line of credit was $230,005 and
$175,467 at March 31, 2010 and March 31, 2009, respectively. The charge for amortization of Debt
Discount related to this Line of Credit is $699 and $7,875 for the three months ended March 31,
2010 and March 31, 2009, respectively.
NOTE 6 STOCK ISSUANCE
During the three months ended March 31, 2010, the Company issued 26,457 shares of common stock
valued at $43,000 to three parties owed in connection with public relations and consulting
expenses. Additionally, 4,054 shares of common stock valued at $7,500 were issued for payment of
employee compensation.
12
NOTE 7 SIGNIFICANT CUSTOMERS
Milestone had net product sales to three customers (distributors) which in the aggregate
accounted for approximately 63% and 70% of revenue for three months ended March 31, 2010 and 2009,
respectively. Milestone had sales to one of these major customers (a worldwide distributor of
Milestones products based in China) of $494,108 (19%) for the three months
ended March 31, 2009. Accounts receivable from these three customers amounted to $458,839 and
$780,667, representing 49% and 71% of gross accounts receivable as of March 31, 2010 and March 31,
2009, respectively.
Milestones sales by product and by geographical region are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Instruments |
|
$ |
599,888 |
|
|
$ |
791,952 |
|
Handpieces |
|
|
1,936,303 |
|
|
|
1,395,212 |
|
Other |
|
|
26,387 |
|
|
|
17,655 |
|
|
|
|
|
|
|
|
|
|
$ |
2,562,578 |
|
|
$ |
2,204,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,204,972 |
|
|
$ |
1,478,495 |
|
Canada |
|
|
182,270 |
|
|
|
141,279 |
|
Other Foreign |
|
|
1,175,336 |
|
|
|
585,045 |
|
|
|
|
|
|
|
|
|
|
$ |
2,562,578 |
|
|
$ |
2,204,819 |
|
|
|
|
|
|
|
|
In June 2008, Milestone implemented a change to its domestic distribution strategy and
signed Henry Schein, Inc. as a non-exclusive distributor of STA and CompuDent systems (and
ancillary products) in North America. That same month, the Company also signed Patterson Dental
Supply as an additional non-exclusive partner to promote sales of the Companys products in North
America. Early in the third quarter of 2008, the Company added four more non-exclusive
distributors to its domestic sales network, including Benco Dental, Burkhard Dental, Goetze Dental
and Atlanta Dental. Milestone continued to expand its domestic distribution network in 2009,
welcoming Cedar Dental, Darby Dental Supply, Dental Health Products, Iowa Dental and Nashville
Dental. To expand and enhance its reach to the dental community in Canada, the Company also signed
non-exclusive distribution and marketing agreements with Dental 2000, Mediclub, and Specialty
Dental.
Milestone has also focused on expanding its global distribution network, granting exclusive rights
to market, distribute and sell its products in certain key geographic markets around the world. In
June 2008, the Company named Istrodent Pty Ltd AB as exclusive distributor of the STA System (and
ancillary products) in South Africa, and Unident AB as its exclusive distributor in Denmark,
Sweden, Norway and Iceland. In April 2009, Milestone awarded exclusive distribution and marketing
rights to China National Medicines Corporation, d/b/a Sinopharm, for the STA System (and ancillary
products).
As of July 1, 2009, Milestone established a direct path to its international distributors
networks. Effectively, Milestone will sell directly to existing and new international distributors,
rather than through its previous worldwide distributor in South Africa. As part of the change,
Milestone agreed to pay a commission to the previous distributor, based on actual international
sales, over the next six years. The commission is structured at two levels: Level One is based on
historical sales volume, and Level Two is determined for incremental sales volume over the Level
One plateau. The Company evaluated this event in September 2009 and continues to monitor the
agreement through the date that the financial statements are issued. The commission to the previous
distributor was $138,000 for the quarter ending March 31, 2010.
13
NOTE 8 COMMITMENTS AND OTHER
Contract Manufacturing Arrangement
Milestone has informal arrangements for the manufacture of its products. CompuDent, STA and
CompuMed units are manufactured for Milestone by Tricor Systems, Inc. pursuant to specific purchase
orders. The Wand disposable handpiece without a needle is manufactured for Milestone in Mexico
pursuant to scheduled production requirements. The Wand handpiece (with and without needles) is
supplied to Milestone by a product broker that arranges for its manufacture by manufacturers in
China.
The termination of the manufacturing relationship with any of the above manufacturers could have a
material adverse effect on Milestones ability to produce and sell its products. Although alternate
sources of supply exist and new manufacturing relationships could be established, Milestone would
need to recover its existing tools or have new tools produced. Establishment of new manufacturing
relationships could involve significant expense and delay. Any
curtailment or interruption of the supply, whether or not as a result of termination of such a
relationship, would adversely affect Milestone.
In January 2010, the Company issued a purchase order to Tricor Systems for the purchase of 12,000
STA Systems to be delivered over the next three years. The purchase order is for $5,261,640. The
Company will be required to make periodic payments over the next eighteen months to purchase the
parts necessary to complete this production.
Prepaid expenses and other current assets at March 31, 2010 includes $163,705 of advanced
commission payments to our previous worldwide distributor in South Africa.
14
|
|
|
ITEM 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussions 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-Q. Certain statements in this discussion and elsewhere in this report constitute
forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve
risks and uncertainties. Our actual results may differ materially from those anticipated in these
forward-looking statements. Factors that could cause actual results to differ materially from
those expressed or implied by forward-looking statements include, but are not limited to, the
factors set forth under the headings Business, and Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2009 as filed with the United States Securities and Exchange
Commission (Commission). See also Risk Factors on Part II. ITEM 1A of this Form 10-Q.
OVERVIEW
In 2010, Milestone will remain focused on advancing efforts to achieve our two primary
objectives; those being:
|
|
|
Optimizing our tactical approach to product sales and marketing in order to
materially increase penetration of the global dental and medical markets with our
proprietary, patented Computer-Controlled Local Anesthesia Delivery (C-CLAD) solution,
the STA Single Tooth Anesthesia System (STA System); and |
|
|
|
Identifying and pursing strategic collaborations with third parties to jointly
develop new products utilizing our patented CompuFlo pressure force technology for novel
new medical applications. |
STA System Awards Industry Recognition
Since its market introduction in the spring of 2007, the STA System has received rave reviews
and awards from the dental industry. In July 2007, noted industry publication Dentistry Today
featured the STA System as one of the Top 100 Products in 2007, helping to promote much broader
recognition of the instrument and validating the STA Systems value proposition for dentists and
patients alike. In April 2008, Medical Device & Diagnostic Industry magazine distinguished the STA
System as a 2008 Medical Design Excellence Award winner in the Dental Instruments, Equipment and
Supplies product category. Of the 33 products to receive this coveted award, the STA System was
one of only two winning products that serve dental practitioners.
In December 2008, the STA System was again recognized as one of the dental industrys best
technological innovations, winning a Townie Choice Award from Dentaltown Magazine in the category
Anesthetics: Technique System. This marked the second consecutive year that Milestone won a
Townie Choice Award; in 2007, we won the same award for our CompuDent/The Wand. Also in December
2008, our STA System was named as a Dental Products Report Top 100 2008 Product of Distinction.
Each year, DPR spotlights the years Top 100 products. Of these 100 products, 50 are the ones most
often inquired about by DPRs readers via an online and Product Information Card reader service
program. The other 50 represent New Classics, which recognize both old and newer products and
categories chosen by DPRs editorial staff for their perceived impact on driving innovation or
helping to establish a new, higher standard of care for patients. The STA System was recognized as
a New Classic in the Technology category.
Second Annual Symposium on C-CLAD
In addition to winning noted acclaim among leading dental publications, our award winning STA
System has also been gaining the support of many of the worlds leading dental practitioners and
key opinion leaders. In February 2008, we hosted the First International C-CLAD Symposium in New
Orleans, welcoming a distinguished panel of dental experts who gathered to discuss advancements in
the scientific and clinical practice communities toward the common goal of advancing the science,
knowledge and art of C-CLAD in dentistry. The forum yielded a number of ideas on how we can
integrate the STA System not only into dental school curricula, but also extends messaging
regarding its many unique benefits to the dental community and patients alike.
15
On May 1 through 3, 2009, we hosted the Second International Annual Symposium on C-CLAD in
Amelia Island, Florida. Stanley Malamed, DDS, Professor of Anesthesia & Medicine at the University
of Southern California, School of Dentistry, again served as Chairman of the invitational event.
The 2009 Symposium covered a broad range of C-CLAD related topics including:
|
|
|
The History of C-CLAD |
|
|
|
|
Treating with Connection |
|
|
|
|
Heart Rate Study |
|
|
|
|
STA Compassionate Care in the 21st Century |
|
|
|
|
Injection Advances and Challenges |
|
|
|
|
Physiologic and Clinical Characteristics of PDL Anesthesia Delivered by a High
Pressure Hand piece and a Computerized Device |
|
|
|
|
The STA for Tots and Teens |
|
|
|
|
Computerized Local Anesthesia in Dentistry: A Review |
|
|
|
|
Todays Technology |
|
|
|
|
Managing a Successful Dental Practice: Why People Keep Coming Back |
|
|
|
|
STA The Dental Schools Perspective |
|
|
|
|
Futuristic Vistas: The Dentist/Hygienist Partnership |
In 2010, we expect to broadly distribute more than 30,000 copies of a comprehensive monograph
reflecting the topics discussed at the 2009 Symposium and a consensus on the attendees attitudes,
ideas and suggestions relating to promoting global industry adoption of C-CLAD technologies as the
new standard of care for administering dental injections.
STA System Growth
Since its market introduction in early 2007, the STA System, a prior computerized controlled
local anesthesia delivery product, has been used to deliver tens of millions of safe, effective and
comfortable injections. The instrument has also been favorably evaluated in numerous peer-reviewed,
published clinical studies and associated articles. Moreover, there appears to be a growing
consensus among users that the STA System is proving to be a valuable and beneficial instrument
that is positively impacting the practice of dentistry worldwide. The utility and value of the STA
System is perhaps best summarized by Dr. Joe Blaes, who wrote in the December 2008 edition of
Dental Economics, I tried the STA System and my patients absolutely love it. This is a no brainer
go get one ASAP!
Global Distribution Network
The STA System and related hand pieces are marketed to the dental industry in the United
States and Canada by many of the nations leading dental supply companies, including Henry Schein,
Inc., Patterson Dental Supply, Atlanta Dental, Benco Dental, Burkhart Dental, Cedar Dental, Darby
Dental Supply, Dental Health Products, Goetze Dental, Iowa Dental and Nashville Dental. In Canada,
our independent distributors include Dental 2000, Mediclub and Specialty Dental.
On the global front, we have granted exclusive marketing and distribution rights for the STA
System to select dental suppliers in various international regions in Asia, Africa and Europe.
In April 2009, we signed an Exclusive Distribution and Marketing Agreement with China National
Medicines Corporation, d/b/a Sinopharm, which is Chinas largest domestic manufacturer, distributor
and marketer of pharmaceuticals and importer of medical devices and the countrys largest domestic
distributor of dental anesthetic carpules to the Chinese dental industry. Prior to the end of 2009,
China National Medicines issued Milestone a blanket purchase order for 12,000 STA units to be
delivered over 36 months, thereby marking the Companys initial penetration into Chinas emerging
dental market.
16
According to a report published by the U.S. Department of Commerce, titled Chinas Emerging
Markets: Opportunities in the Dental and Dental Lab Industry, Chinas dental market lags behind
other healthcare services and has
largely been neglected in the past. In fact, CS Market Research reports that of Chinas 1.3
billion plus population, 50% of the adults and 70% of the children are estimated to have decayed
tooth problems, and over 90% have periodontal disease. However, with increasing affluence of the
Chinese population, as well as increasing attention towards personal care, demand for dental
services has been growing. Market research firm Freedonia agrees, noting that demand for dental
products in China is expected to climb to 21.5 billion RMB (US$3.15 billion) by 2012, due primarily
to escalating personal income levels and government programs promoting awareness of the benefits of
good oral care.
Shortly before the end of the second quarter of 2009, we announced that we were refining our
international marketing strategy to gain greater access to and penetration of the international
dental markets for the STA System, CompuDent and related disposable hand pieces. The new sales
strategy provides for increasing hands-on oversight and support of our existing international
distribution network, while also attracting new distributors throughout Europe, Asia and South
America. To assist in this endeavor, Milestone named Shaul Koren, founder and CEO of Istrodent Pty
Ltd AB and one of our strongest marketing allies outside of the U.S., as our new International
Sales Director. In collaboration with senior management, Mr. Koren will help manage product sales
for us in all markets outside of North America.
Segmented Sales Performance
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 March 31, |
|
|
|
2010 |
|
|
2009 |
|
DOMESTIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments |
|
$ |
251,597 |
|
|
|
20.9 |
% |
|
$ |
526,413 |
|
|
|
35.6 |
% |
Handpieces |
|
|
929,984 |
|
|
|
77.2 |
% |
|
|
931,810 |
|
|
|
63.0 |
% |
Other |
|
|
23,391 |
|
|
|
1.9 |
% |
|
|
20,272 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Domestic |
|
$ |
1,204,972 |
|
|
|
100.0 |
% |
|
$ |
1,478,495 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERNATIONAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments |
|
$ |
348,291 |
|
|
|
25.7 |
% |
|
$ |
265,539 |
|
|
|
36.6 |
% |
Handpieces |
|
|
1,006,319 |
|
|
|
74.1 |
% |
|
|
463,402 |
|
|
|
63.8 |
% |
Other |
|
|
2,996 |
|
|
|
0.2 |
% |
|
|
(2,617 |
) |
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International |
|
$ |
1,357,606 |
|
|
|
100.0 |
% |
|
$ |
726,324 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DOMESTIC/INTERNATIONAL ANALYSIS |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
1,204,972 |
|
|
|
47.0 |
% |
|
$ |
1,478,495 |
|
|
|
67.1 |
% |
International |
|
|
1,357,606 |
|
|
|
53.0 |
% |
|
|
726,324 |
|
|
|
32.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales |
|
$ |
2,562,578 |
|
|
|
100.0 |
% |
|
$ |
2,204,819 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company earned gross profits of 65% and 58% in for the three months ended March 31,
2010 and 2009, respectively. However, our revenues and related gross profits have not been
sufficient to support our overhead, new product introduction and research and development expenses.
Although the Company anticipates expending funds for research and development in 2010, these
amounts will vary based on the operating results for each quarter. The Company has incurred
operating losses since its inception. The Company is actively pursuing the generation of
sustainable positive cash flows from operating activities through increases in revenue, assessment
of current contracts and current negotiations and reduction in operating expenses.
17
New Product Development and Commercialization Utilizing CompuFlo Technology
Over the last decade, the drug delivery industry has evolved to become a key area in the
development of value-added pharmaceutical products. According to market research firm Business
Insights, The global market grew from $15 billion to $40 billion during 20002006 as companies
increasingly turned to drug delivery technologies as a means of expanding product
lifecycles,
enhancing drug efficacy and maximizing revenues. Moreover, industry analysts agree that as
patients live longer and are diagnosed with chronic and often debilitating ailments, the result
will be a dramatic increase in self-administration of drug therapies in non-traditional settings
for a number of conditions. This trend is creating an increased interest in routes of
administration that are patient-friendly and cost-effective. It appears that pharma company
decision makers are realizing that new drug product success no longer only depends on the
medication itself, but also on achieving a patient-friendly form of delivery.
CompuFlo is a revolutionary new technology for injections. CompuFlo enables health care
practitioners to monitor and precisely control pressure, rate and volume during all
injections and can be used to inject all liquid medicaments as well as anesthetics. CompuFlo can
also be used to aspirate body fluids.
Negative side effects from the use of traditional hypodermic drug delivery injection systems
are well documented in dental and medical literature and include risk of death, transient or
permanent paralysis, pain, tissue damage and post-operative complications. The pain and tissue
damage are a direct result of uncontrolled flow rates and pressures that are created during the
administration of drug solutions into human tissue. While several technologies have been capable of
controlling flow rate, the ability to accurately and precisely control pressure has been
unobtainable until the development of CompuFlo.
Precisely controlling in-tissue pressure increases patient safety by reducing the risk of
tissue damage and post-treatment pain related to excessive pressure that may occur during certain
injections. Identification of the tissue, in which the needle tip is imbedded, is believed to be
highly important in epidural injections, intra-articular injections and numerous organ,
subcutaneous and intramuscular injections.
CompuFlos pressure sensing technology provides an objective tool that consistently and
accurately identifies the epidural space by correctly detecting the difference in pressure between
the ligamentum flavum and the extraligamentary tissue. In studies utilizing the CompuFlo
technology, the epidural space has been correctly identified 100% of the time. Knowing the precise
location of a needle during an epidural injection procedure provides a measure of safety not
presently available to doctors using conventional syringes, who identify the epidural space by
relying on the subjective perception of loss of resistance to air or saline.
In the absence of curative procedures, arthritis patients are obliged to endure painful
multiple annual injections for a lifetime. Often these injections are not efficacious, because the
doctor using a syringe failed to locate the intra-articular space or did not inject the appropriate
volume of hyaluronic acid or other medicament into that space. The CompuFlo technology
has been successful in administering viscous hyaluronic acid and other medicaments into the
intra-articular space in both small and large joints using its computer-controlled pressure sensing
capabilities in an independent animal study.
There are a number of injectable drugs routinely self-administered in a home or office setting
using spring loaded automatic injection devices by people who suffer from long term chronic
conditions such as Multiple Sclerosis and Rheumatoid Arthritis. The CompuFlo technology, using
pressure sensing capabilities, can serve as a painless subcutaneous injection method for these
self-administered drugs. A significant reduction in pain during delivery will have a positive
impact on compliance, which is a major consideration when physicians are determining which drugs to
prescribe.
The CompuFlo technology is patented and embedded in the STA System that is being sold
worldwide in the dental market. CompuFlo technology has been tried and proven in human and animal
studies, as well as by dentists in most parts of the world who are using the STA System in their
practices.
On December 3, 2009, Milestone announced that it signed an Agreement of Intent with China
National Medicines Corporation, Ltd. and Yichang Humanwell Pharmaceutical Co. Ltd., both
incorporated in the Peoples Republic of China (PRC), to develop orthopedic and epidural drug
delivery instruments utilizing CompuFlo. Milestone and its two PRC joint venture partners will
establish a new joint venture entity for this purpose in 2010. The required initial funding for the
new entity, estimated by the parties at $1.4 million, will be provided by the two PRC companies,
although Milestone will determine the proposed uses of their contribution. The Company believes
that this new joint venture represents a significant step forward in Milestones efforts to have
its innovative computer-controlled drug delivery technology adapted for medical usage worldwide.
18
The agreement noted above has not been finalized as of March 31, 2010.
Technology Rights
The technology underlying our SafetyWand and CompuFlo technology and an improvement to the
controls for CompuDent were developed by our Director of Clinical Affairs and assigned to us. We
purchased this technology pursuant to an agreement dated January 1, 2005 for 43,424 shares of
restricted common stock and $145,000 in cash, paid on April 1, 2005. In addition, our Director of
Clinical Affairs will receive additional contingent payments of 2.5% of our total sales of
CompuDent and Wand Plus units using some of these technologies, and 5% of our total sales of STA
units and hand pieces using some of our other technologies. If products produced by third parties
use any of these technologies,
under a license from Milestone, then he will also receive the corresponding percentage of the
consideration received by us for such sale or license.
Intellectual Property
In August 2009, we were issued a Notice of Allowance by the U.S. Patent and Trademark Office
for its U.S. patent application directed to the use of its disposable hand piece for fluid
administration. Our award-winning hand piece is an instrument currently utilized in conjunction
with the Companys STA, CompuDent and CompuMed systems.
In September 2009, the U.S. Patent and Trademark Office issued a Notice of Allowance for our
U.S. patent application, titled Computer Controlled Drug Delivery System with Dynamic Pressure
Sensing. This intellectual property represents one of the key technological components of our
product development strategy relating to the development of advanced computer-controlled injection
products for specific applications in the medical industry most notably intra-articular
injections and epidurals.
Subsequent to the end of the first quarter of 2010, Milestone was issued a Notice of Allowance
by the U.S. Patent and Trademark Office for its U.S. patent application, titled
Self-Administration Injection System. Milestones innovative computer-controlled drug delivery
platform has been designed to reduce the anxiety and pain of self-administration of medications for
the rapidly expanding home-use market. The computer-controlled self-administration system provides
a less threatening, virtually painless means for patients to safely self-administer in-home a
variety of injections.
To date, we have been awarded a total of 24 U.S. utility and design patents relating to our
Computer-Controlled Local Anesthesia Delivery (C-CLAD) technologies.
Summary of Significant Accounting Policies, Judgments and Estimates
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.
Accounts Receivable
The realization of Accounts Receivable will have a significant impact on the Company.
Consequently, Milestone estimates losses resulting from the inability of its customers to make
payments for amounts billed. The collectability of outstanding amounts is continually assessed.
19
Inventories
Inventory costing, obsolescence and physical control are significantly important to the
on-going operation of the business. Inventories principally consist of finished goods and component
parts stated at the lower of cost (first-in, first-out method) or market. Inventory quantities on
hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is
recorded if required based on past and expected future sales.
Impairment of Long-Lived Assets
The long lived assets of the Company, principally patents and trademarks are the base features
of the business. 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 recoverable. The
carrying value of the asset is evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying assets.
Revenue Recognition
Revenue from product sales is recognized net of discounts and allowances to our domestic
distributors on the date of arrival of the goods at the customers location as shipments are FOB
destination. Shipments to our international distributor are FOB our warehouse and revenue is
therefore recognized on shipment. In both cases the price to the buyer is fixed and the
collectability is reasonably assured. Further, we have no obligation on these sales for any post
installation, set-up or maintenance, these being the responsibility of the buyer. Customer
acceptance is considered made at delivery. Our only obligation after sale is the normal commercial
warranty against manufacturing defects if the alleged defective unit is returned within the
warranty period.
Results of Operations
The consolidated results of operations for the three months ended March 31, 2010 compared to
the same three month period in 2009 reflect our focus and development on the STA System , as well
as continuing efforts on identifying collaborative partners for new product development utilizing
our CompuFlo technology.
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 |
|
|
|
2010 |
|
|
2009 |
|
|
Products sales, net |
|
$ |
2,562,578 |
|
|
|
100 |
% |
|
$ |
2,204,819 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
2,562,578 |
|
|
|
100 |
% |
|
|
2,204,819 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
|
900,712 |
|
|
|
35 |
% |
|
|
916,550 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
1,661,866 |
|
|
|
65 |
% |
|
|
1,288,269 |
|
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
1,541,702 |
|
|
|
60 |
% |
|
|
1,728,815 |
|
|
|
78 |
% |
Research and development expenses |
|
|
88,464 |
|
|
|
3 |
% |
|
|
67,622 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,630,166 |
|
|
|
63 |
% |
|
|
1,796,437 |
|
|
|
81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
31,700 |
|
|
|
1 |
% |
|
|
(508,168 |
) |
|
|
-23 |
% |
Other income (expense) |
|
|
52,222 |
|
|
|
2 |
% |
|
|
(53,474 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
83,922 |
|
|
|
3 |
% |
|
$ |
(561,642 |
) |
|
|
-25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010 compared to three months ended March 31, 2009
Total revenues for the three months ended March 31, 2010 and 2009 were $2,562,578 and
$2,204,819, respectively. The total increase in product sales of $357,759 or 16.2%, in 2010 over
2009 is primarily the result of increased handpiece growth. Domestic STA unit sales decreased
$279,946, in 2010 over 2009. This decrease is due to a lower demand of inventory levels at the
distributor level and lower demand in the domestic market. In the domestic market, handpiece sales
decreased by $1,826 or, (.02%). On the international front, unit sales increased in the first
quarter of 2010 over 2009 by $82,752 or 31.2% principally due to increased market penetration for
the STA System. Internationally, handpieces also increased, rising $542,917, 117.2% due to an
increase in STA handpieces sales to China.
20
Cost of products sold for the three months ended March 31, 2010 and 2009 were $900,712 and
$916,550, respectively.
For the three months ended March 31, 2010, Milestone generated a gross profit of $1,661,866,
or 65%, as compared to a gross profit of $1,288,269, or 58%, for the three months ended March 31,
2009. The increase in gross profit percentage is due to the handpiece sales at a higher margin. The
total increase in gross profit dollars of $373,597 is due to an increase in sales volume and higher
handpiece margins.
Selling, general and administrative expenses for the three months ended March 31, 2010 and
2009 were $1,541,702 and $1,728,815, respectively. The $187,113, or 10.8%, net decrease is
described in the following sections of this report. Although the Company continues to reduce
expenses, the 2010 first quarter decrease was due to a reduction in marketing expenses of $284,000.
Decreases in design cost by $63,000; advertising media by $80,000 and market research study by
$152,000, offset by small increases in other marketing expenses. The sales expense decreased by
$42,000, principally due to decreased salesmen in the field by $28,000 and a decrease in third
party sales representative commission of $14,000 corresponding to a decrease in domestic sales.
Salaries decreased by $89,000 in the first quarter of 2010, principally due to decrease in salesman
salaries of $114,000, offset by an increase in Chairman and CEO salaries of
$10,000. Other variable expenses increased by $227,000. $138,000 of the increase is due to the
accrual of international sales commission, as part of the companys agreement with the
international distributor. Royalty fees increased by $44,000, principally due to increased
handpieces business. Also, stock based compensation expenses increased by $65,000 in the first
quarter of 2010, due to a forfeiting of options in the first quarter of 2009 and an increase in
stock option accruals in 2009 amortized into 2010 and future years.
Research and development expenses for the three months ended March 31, 2010 and 2009 were
$88,464 and $67,622, respectively. The increase of $20,842 was attributable to adjusting STA
instruments for the China market.
The income from operations for the three months ended March 31, 2010 was $31,700 and the loss
from operations for the three months ended March 31, 2009 was $508,168. The $539,868, or 106%,
decrease is explained above.
Interest income of $348 was earned for the three months ended March 31, 2010 compared with
$1,804 for the same period in 2009. Interest income declined due to lower cash balances and lower
interest rates.
Interest expense of $9,343 and amortization of debt issuance was $699 relating to the
conversion of the $1.3 million line of credit into common stock in December 2009 was charged for
the three months ended March 31, 2010, compared to $47,403 and $7,875, respectively, for the same
period in 2009.
Other Income includes $61,916 in 2010. This represents the balance of the sale of tax
credits under the New Jersey Technology Business Tax Certificate Program.
For the reasons explained above, net income for the three months ended March 31, 2010 was
$83,922 as compared to a net loss of $561,642 for the three months ended March 31, 2009. The
$645,564, or 115%, decrease in net loss is primarily a result of the increase in sales and gross
margin dollars.
Liquidity and Capital Resources
As of March 31, 2010, we had cash and cash equivalents of $1,218,027 and working capital of
$1,936,993. Milestone incurred net income of $83,922 and a net loss of $561,642 for the three
months ended March 31, 2010 and 2009, respectively. There was a positive cash flow from operating
activities for the three months ended March 31, 2010 of $248,437 and a negative cash flow from
operating activities of $200,257 for the three months ended March 31, 2009.
21
For the three months ended March 31, 2010, our net cash provided by operating activities was
$248,437. This was attributable primarily to a net income of $83,922 adjusted for noncash items of
$164,478 principally common stock and options issued for compensation, consulting and vendor
services and changes in operating assets and liabilities of $37.
The Companys increase in current asset of $1,039,906 is primarily due to a build up of
inventory and advance to contract manufacturer for the 12,000 STA System units purchase order for
China. This increase is anticipated to continue in order to deliver the units on time and complete
per the purchase order.
On a related basis, current liabilities increased by $728,986, of which $501,829 relates to
the advance to contract manufactures. Both the advance and payable to contract manufacturer are
expected to continue to exist until the 12,000 unit order is delivered to the distributor.
For the three months ended March 31, 2010, Milestone used $59,539 in investing activities.
This was primarily attributable to $39,695 of legal fees related to new patent application. Capital
expenditures of $19,844 were primarily for the leasehold improvement.
As of March 31, 2010, Milestone had recorded on the Balance Sheet a long term note payable of
$450,000 from a stockholder.
The Company is actively pursuing the generation of sustainable positive cash flows from
operating activities through an increase in revenue based upon managements assessment of present
contracts and current negotiations and reductions in operating expenses. If the Company is unable
to maintain positive cash flows from its operating activities it
will need to raise additional capital. There is no assurance that the Company will be able to
achieve sustainable positive operating cash flows or that traditional capital can be raised on
terms and conditions satisfactory to the Company. If additional capital is required and cannot be
raised, then the Company would be forced to curtail its development activities, reduce marketing
expenses for existing dental products or adopt other cost saving measures, any of which might
negatively affect the Companys operating results.
The Companys historical losses raises substantial doubt about its ability to continue as a
going concern. The accompanying financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
As a smaller reporting company we are not required to provide the information required by this
Item.
|
|
|
Item 4. |
|
Controls and Procedures |
The Companys management, including the Chief Executive Officer and Chief Financial Officer,
have evaluated the effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, the Companys Chief Executive Officer
and Chief Financial Officer have concluded that the disclosure controls and procedures as of March
31, 2010 are effective to ensure that information required to be disclosed in the reports the
Company files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms and that such information is
accumulated and communicated to the Companys management, including the Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding disclosure.
There were no changes in the Companys internal control over financial reporting identified in
connection with the evaluation that occurred during the Companys last fiscal quarter that have
materially affected, or that are reasonably likely to materially affect, the Companys internal
controls over financial reporting.
22
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
NONE
SMALLER REPORTING COMPANYS ARE NOT REQUIRED TO RESPOND TO THIS ITEM
The following factors may affect the growth and profitability of Milestone and should be
considered by any prospective purchaser or current holder of Milestones securities:
We have a history of losses from operations. Continuing losses could exhaust our capital resources
and force us to discontinue operations.
For the three months ended March 31, 2010 and 2009 our revenues were approximately $2.6
million and $2.2 million, respectively. In addition, we have had income for March 31, 2010 of
$84,000 and a loss of $562,000 for the three months ended March 31, 2010 and 2009, respectively. At
March 31, 2010, the Company had an accumulated deficit of approximately $58.7 million. At March 31,
2010, the Company had cash and cash equivalents $1,218,027 and working capital of $1,936,993. The
Company borrowed $450,000 in 2008 from the same shareholder, with a due date of January 2009. This
borrowing was refinanced at December 31, 2008 and the due date was extended to June 30, 2012.
Additionally, the Company is actively pursuing the generation of positive cash flows from operating
activities through increases in revenues based upon managements assessment of present contracts
and current negotiations and reductions in operating expenses. If the Company is unable to generate
positive cash flows from its operating activities it will need to raise additional capital. There
is no assurance that the Company will be able to achieve positive operating cash flows or that
additional capital can be raised on the terms and conditions satisfactory to the Company, if at
all. If additional capital is required and it cannot be raised, then the Company would be forced to
curtail its development activities, reduce marketing expenses for existing dental products or adopt
other cost savings measures, any of which might negatively affect the Companys operating results.
The Companys recurring historical losses raise substantial doubt about its ability to
continue as a going concern.
There are no other changes to our risk factors from those disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2009.
23
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Recent Sales of Unregistered Securities
In the quarter ended March 31, 2010, Milestone issued total 30,511 shares valued at $50,500 as
follows:
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
$ |
|
Shares issued for Employee Compensation |
|
|
4,054 |
|
|
$ |
7,500 |
|
Shares issued for services |
|
|
26,457 |
|
|
|
43,000 |
|
|
|
|
|
|
|
|
|
|
|
30,511 |
|
|
$ |
50,500 |
|
These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the Act) and a legend restricting the sale, transfer, or other disposition
of these shares other than in compliance with the Act was imprinted on stock certificates
evidencing the shares.
|
|
|
ITEM 3. |
|
DEFAULT UPON SENIOR SECURTIES |
NONE
|
|
|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
NONE
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
NONE
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. |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MILESTONE SCIENTIFIC INC.
|
|
|
|
/s/ Leonard Osser
|
|
|
Leonard Osser |
|
|
Chief Executive Officer |
|
|
|
|
|
/s/ Joseph DAgostino
|
|
|
Joseph DAgostino |
|
|
Chief Financial Officer |
|
Date: May 12, 2010
25