SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 001-14053
MILESTONE SCIENTIFIC INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3545623
State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
220 South Orange Avenue, Livingston, New Jersey 07039
(Address of principal executive office) (Zip Code)
(973) 535-2717
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) or the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of August 17, 2003, the Registrant had a total of 12,633,370 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 the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in the Company's reports and registration statements files with the Securities
and Exchange Commission (the "Commission"). The Company disclaims any intent or
obligation to update such forward-looking statements.
2
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
I N D E X
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 4
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002
(Unaudited) 5
Condensed Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 2003 and 2002
(Unaudited) 6-7
Notes to Condensed Consolidated Financial Statements 8-13
ITEM 2. Management's Discussion and Analysis or Plan of
Operations 14-19
ITEM 3 Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS
EXHIBITS
3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
June 30, 2003 December 31, 2002
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 28,467 $ 9,683
Accounts receivable, net of allowance for doubtful accounts at June 30,
2003 and December 31, 2002 of $40,220 and $46,152, respectively 608,953 239,435
Inventories 157,383 119,291
Advances to contract manufacturer 284,052 300,000
Deferred debt financing costs, net 11,275 159,877
Prepaid expenses 21,397 64,952
------------ ------------
Total current assets 1,111,527 893,238
EQUIPMENT, net 212,835 227,207
ADVANCES TO CONTRACT MANUFACTURER -- Long term -- 87,935
DEFERRED DEBT FINANCING-Long term 2,385 --
OTHER ASSETS 32,333 32,333
------------ ------------
Totals $ 1,359,080 $ 1,240,713
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Account payable, including $11,594 and $32,000 to related parties
at June 30, 2003 and December 31, 2002, respectively $ 1,540,330 $ 1,269,523
Accrued expenses 97,888 86,492
Accrued interest 313,543 169,519
Note payable 4,976,666 4,581,708
Notes payable-officer/stockholder 326,215 --
------------ ------------
Total current liabilities 7,254,642 6,107,242
Accrued interest 117,139 139,323
Deferred compensation payable to officer/stockholder 480,000 320,000
Notes payable 725,622 480,091
Notes payable -- officer/stockholder 32,000 300,000
------------ ------------
Total liabilities 8,609,403 7,346,656
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.001; authorized,
25,000,000 shares; 12,733,370 shares issued 12,733 12,733
Additional paid-in capital 36,614,029 36,599,607
Accumulated deficit (42,945,569) (41,786,767)
Unearned compensation (20,000) (20,000)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
------------ ------------
Total stockholders' deficiency (7,250,323) (6,105,943)
------------ ------------
Totals $ 1,359,080 $ 1,240,713
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 1,008,965 $ 1,160,129 $ 2,134,690 $ 2,181,717
Cost of sales 499,337 515,756 1,048,421 981,771
------------ ------------ ------------ ------------
Gross Profit 509,628 644,373 1,086,269 1,199,946
------------ ------------ ------------ ------------
Selling, general and administrative expenses 841,435 937,932 1,600,415 1,835,208
Charge in connection with the closing of the
Deerfield, IL facility 13,150 -- 65,873 --
Research and development expenses 51,091 15,084 83,092 45,379
------------ ------------ ------------ ------------
Totals 905,676 953,016 1,749,380 1,880,587
------------ ------------ ------------ ------------
Loss from operations (396,048) (308,643) (663,111) (680,641)
Other income -- 24,000 -- 48,000
Interest, net (254,510) (217,567) (495,691) (389,780)
------------ ------------ ------------ ------------
Net loss $ (650,558) $ (502,210) $ (1,158,802) $ (1,022,421)
============ ============ ============ ============
Loss per share - basic and diluted $ (.05) $ (.04) $ (.09) $ (.08)
============ ============ ============ ============
Weighted average shares outstanding - basic
and diluted 12,633,370 12,245,870 12,633,370 12,171,450
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,158,802) $(1,022,421)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 18,074 28,419
Amortization of debt discount and deferred financing costs 213,640 129,999
Loss on disposal of fixed assets 11,248 --
Amortization of advertising costs -- 17,616
Changes in operating assets and liabilities:
Increase in accounts receivable (369,518) (38,735)
(Increase) decrease in inventories (38,092) 46,652
Decrease in advances to contract manufacturer 103,883 113,490
(Increase) decrease in prepaid expenses 43,555 (9,987)
Increase in other assets -- (19,971)
Increase in accounts payable 270,807 126,978
Increase in accrued interest 282,049 259,781
Increase (decrease) in accrued expenses 11,396 (8,033)
Increase in deferred compensation 160,000 160,000
----------- -----------
Net cash used in operating activities (451,760) (216,212)
----------- -----------
Cash flows from investing activities-payment for capital expenditures (14,950) (21,440)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable - officer/stockholder 130,537 (114,960)
Payments to note payable - officer/stockholder (72,322) --
Proceeds from issuance of notes payable 450,000 400,000
Payments for deferred financing costs (22,721) (40,538)
----------- -----------
Net cash provided by financing activities 485,494 244,502
----------- -----------
NET INCREASE IN CASH 18,784 6,850
Cash, beginning of period 9,683 15,742
----------- -----------
Cash, end of period $ 28,467 $ 22,592
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Supplemental schedule of noncash financing activities:
In June 2003, the Company granted warrants to purchase 160,256 shares of common
stock (with an estimated fair value of $14,423) in connection with a $50,000
credit facility provided by a major existing investor. This resulted in an
initial increase to debt discount and to additional paid-in capital.
During the six months ended June 30, 2003, pursuant to the 6%/12% promissory
note agreements, the Company converted $160,211 of accrued interest into
additional principal.
In January 2002, the Company issued 33,840 units consisting of one share of
common stock and one warrant to purchase an additional share of common stock in
exchange for payment of accrued interest totaling $27,072.
In January 2002, in consideration for payment of $491,346 in deferred
compensation, the Company issued 614,183 units (consisting of one share of
common stock and one warrant to purchase an additional share of common
stock).The warrants are exercisable at $.80 per share through January 31, 2003;
at $1.00 per share through January 31, 2004 and thereafter at $2.00 per share
through January 31, 2007.
In January 2002, pursuant to the 20% promissory note agreements, the Company
converted $63,377 of accrued interest into additional principal.
In April 2002, pursuant to the 20% promissory note agreements, the Company
converted $65,168 of accrued interest into additional principal.
In April 2002, pursuant to the debt restructuring, the Company recorded a
deferred financing charge of $329,572. This resulted in an increase to notes
payable of $140,203 and accrued interest of $189,369.
7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of accounting policies:
The unaudited condensed consolidated financial statements of Milestone
Scientific Inc. and Subsidiaries (the "Company" or "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 condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 2002 included in the Company's
Annual Report on Form 10-KSB. The accounting policies used in preparing
these unaudited condensed consolidated financial statements are the same
as those described in the December 31, 2002 consolidated financial
statements.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring entries) necessary to present fairly the financial
position as of June 30, 2003 and the results of operations for the three
and six months ended June 30, 2003 and 2002.
The results reported for the three and six months ended June 30, 2003 and
2002 are not necessarily indicative of the results of operations which may
be expected for a full year.
Note 2 - Basis of presentation:
The accompanying condensed consolidated financial statements have been
prepared assuming Milestone will continue as a going concern. However, as
shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $1,159,000 and $1,022,000
and negative cash flows from operating activities of approximately
$452,000 and $216,000 during the six months ended June 30, 2003 and 2002,
respectively. As a result, Milestone had a cash balance of only
approximately $28,000, a working capital deficiency of approximately
$6,143,000 and a stockholders' deficiency of approximately $7,250,000 as
of June 30, 2003. These matters raise substantial doubt about Milestone's
ability to continue as a going concern. Management believes that its
initial concerns about the Company's ability to continue as a going
concern have been alleviated by recent actions taken by Milestone as well
as management's plans which are discussed below.
Further, management believes that, in the absence of a substantial
increase in revenue, it is probable that Milestone will continue to incur
losses and negative cash flows from operating activities through at least
June 30, 2004 and that the Company will need to obtain additional equity
or debt financing, as well as to continue its ability to defer its
obligations, to sustain its operations until it can expand its customer
base and achieve profitability, if ever.
The Company has taken certain steps in order to reduce its operating
expenses and utilization of cash. These steps include, amongst others, the
following:
o Commencing in 2001 and continuing through 2003, the Company
reconfigured its sales force. The Company went from maintaining a
large internal sales force to utilizing independent sales
representatives and distributors.
o The Company reduced administrative personnel and telemarketers by
approximately ten people.
8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
o On January 31, 2003, the Company completed the closing of the
Deerfield, IL facility. The customer support, service and other
back-office functions previously conducted, in whole or in part, at
this location were consolidated into the Company's New Jersey
location. The receiving, shipping and storage functions, which were
also previously done at this location, are now outsourced to an
independent warehouse located in Pennsylvania.
o Obtained an agreement from its Chief Executive Officer/Stockholder
to defer 2002 and 2003 compensation, aggregating $640,000 until
January 2005.
o Restructured and extended the maturity dates of its debt
obligations. Further, as part of the debt restructuring, the Company
obtained agreements from certain of its noteholders enabling it to
convert debt and related interest aggregating approximately
$5,239,000 at June 30, 2003 into shares of common stock. On July 1,
2003, the Company received the necessary approval from convertible
debt holders to extend the maturity date of certain obligations
until September 20, 2003. It is the Company's intention to have this
conversion completed sometime during the third quarter of 2003.
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common stock.
o During February 2003, the Company received a $200,000 note payable
from an existing investor which was scheduled to mature on August 1,
2003. The note is convertible into shares of common stock, at the
Company's option, which it plans to do during the third quarter of
2003. On July 1, 2003, the noteholder agreed to extend the note
payable to September 20, 2003.
o In April 2003, the Company received an additional $900,000 8% line
of credit from the same investor, which is scheduled to mature on
January 1, 2005, unless extended. $200,000 was drawn down from the
line during April 2003. Subsequent drawn down were $25,000 and
$75,000 in July and August, respectively.
o On June 2, 2003, the Company received an additional $50,000 6% note
payable with warrants attached from a stockholder. The note is
scheduled to mature in November 2004 and is convertible to stock at
the Company's option.
The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classifications of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note 3 - Loss per share:
Basic loss per common share is computed using the weighted average number
of common shares outstanding.
Options and warrants to purchase 3,265,814 and 4,415,855 shares of common
stock were outstanding as of June 30, 2003 and 2002, respectively, but
were not included in the computation of diluted loss per share because the
effect would have been anti-dilutive.
9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Significant Customer:
The Company had one foreign customer who accounted for approximately 22%
of its net sales for the three and six months ended June 30, 2003 and
approximately 16% and 17%, respectively, for the three and six months
ended June 30, 2002. At June 30, 2003, receivables from this customer were
approximately 68% of the Company's total accounts receivable.
Note 5 - Notes payable to officer/stockholder:
Notes payable to officer/stockholder represent six obligations payable to
the Company's Chief Executive Officer ("CEO"), consisting of (i) $200,000
note payable, with interest payable at 9% per annum and having an original
due date of January 2, 2003, (ii) a $100,000 line of credit with interest
payable at 6% per annum having an original due date of April 2, 2003, and
(iii) a $33,215 note payable on demand with interest payable at 6% per
annum. On April 1, 2003, the $200,000 and $100,000 notes were extended to
April 1, 2004. On April 15, 2003, $32,000 of the $33,215 notes payable was
extended to January 2, 2005.
On January 17, 2003, the Company's CEO provided the Company with a $57,322
short term loan for the express purpose of purchasing Wand(R) handpieces
from the Company's supplier. The Company repaid the loan in full by
February 7, 2003. On February 12, 2003, the CEO provided the Company with
a $38,215 loan for the same purposes as above and $23,215 remains
outstanding as of August 15, 2003.
Note 6- Notes payable:
6%/12% Promissory Notes
(A) The 6%/12% Promissory Notes consist of the following issuances:
(i) On June 16, 2001, the Company restructured its obligations to the
holders of its 10% Senior Secured Promissory Notes. Under the terms
of the agreement, each of the noteholders agreed to exchange their
10% Notes for a new, zero coupon note (the "Zero Coupon Note").
As a result of the Company initially restructuring its obligations,
the unamortized portion of the debt discount and deferred financing
costs were amortized through June 30, 2002. The significant terms of
the Restructuring Debt were (i) modification of the interest rate
(ii) granting the company the option to pay the debt with shares of
common stock and (iii) repricing the warrants which were previously
issued to the shareholders back to the initial exercise price of
$1.75 per share.
Subsequently, on April 15, 2002, the holders additionally agreed to
extend the promissory notes to July 1, 2003 and to lower the
interest rate to 6% if paid in cash or to 12% if paid in common
stock. In connection with the extension, the Company recorded
$16,215 in deferred financing charges relating to professional fees
and $140,203 of deferred financing costs relating to consideration
to the noteholders valued at $120 per share of the Company's common
stock for each $1,000 face amount outstanding at maturity which
increased the aggregate carry value of the notes by $140,203. The
Company is accruing interest expense at 12%. These deferred
financing costs are being amortized through July 1, 2003.
Further, on July 1, 2003, the holders additionally agreed to extend
the promissory notes to September 20, 2003.
10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(ii) In August 2000, the Company borrowed $1,000,000 which consists of
two loans from two funds managed by Cumberland Associates LLC, and
bear interest at 20% per year and payable in cash or through the
issuance of additional 20% notes on which both interest and
principal are payable. The loans are secured by substantially all
assets of the Company and are subordinated to the 6%/12% senior
secured promissory notes that were amended April 15, 2002. The
Company can prepay the loans in cash at any time. The Company can
prepay the notes and accrued interest with common stock at its
option. Stock issued in lieu of payment of the debt will be valued
at 85% of the then market price.
For the six months June 30, 2003 and 2002, the Company converted
into principal, accrued interest of $160,211 and $128,545,
respectively.
On April 12, 2002, Cumberland Associates LLC agreed to extend the
maturity date of these loans through July 1, 2003 and to lower the
interest rate from 20% to 6%, if paid in cash, or 12% if paid in
common stock. The Company recorded $16,215 of deferred financing
charges relating to professional fees and $189,369 relating to
consideration issued to the noteholders valued at $120 per share of
the Company's common stock for each $1,000 face amount outstanding
at maturity. The Company is currently accruing interest expense at
12%. Accordingly, the deferred financing costs and the unamortized
financing charges are being amortized through July 1, 2003.
It is currently the Company's intention to satisfy these obligations
with shares of common stock upon their maturity.
(B) 8% Promissory Notes
The 8% promissory notes consist of the following:
On July 31, 2000, the Company established a $1,000,000 credit
facility with a major existing investor. Initially, $500,000 was
borrowed under the line, which was due on June 30, 2003. In December
2000, and January 2001, the Company borrowed under the credit
facility an additional $400,000 and $100,000, respectively, due on
December 31, 2003. In connection with the initial $500,000, the
investor received five-year warrants to purchase 70,000 shares of
the Company's common stock, exercisable at $3.00 per share. In
connection with the $400,000, the investor received five-year
warrants to purchase 80,000 shares of the Company's common stock
exercisable at $1.25 per share. In connection with the $100,000, the
investor received five-year warrants to purchase 20,000 shares of
the Company's common stock at $1.25 per share. On April 12, 2002,
the investor agreed to extend the maturity date of the $500,000 to
August 1, 2003. At the option of the Company, this $500,000 can be
convertible into common stock. Accordingly, in connection with the
extension, the unamortized debt discount is being amortized to
August 1, 2003. On April 15, 2003, the investor agreed to extend the
maturity date of the $500,000 and interest originally due December
31, 2003 to January 2, 2005. Accordingly, only $500,000 of loans
have been recorded as long term debt in the accompanying
consolidated financial statements. On July 1, 2003, the investor
agreed to extend the maturity date of notes due August 1, 2003 until
September 20, 2003.
During 2002, the Company issued a total of $1,185,000 promissory
notes to an existing investor. The notes bear interest at 8% if paid
in cash and 10% if paid in stock and mature on September 30, 2003.
At the option of the Company, the principal and interest are payable
on the maturity date in common stock. Additionally, the note will
automatically convert into the Company's common stock if the Company
issues 1,000,000 shares or raises at least $1,000,000 from the sale
of equities prior to August 1, 2003, at the market price in that
transaction but not less than $.50 per common share, or more than
$2.00 per share. The Company is accruing interest at 10%.
11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(C) 6% Convertible Promissory Notes
During June 2003, the Company issued a $50,000 promissory note to an
existing investor. The note bears interest at 6% and matures on
November 27, 2004. At the option of the Company, the principal and
interest are payable on the maturity date in common stock at a rate
of one share of the Company's common stock for every $.312 of
indebtedness. Additionally, Milestone granted the investor warrants
to purchase 160,256 of the Company's common stock at a per share
price of $.52 with an estimate fair value of $14,423 at any time or
from time to time during the period commencing of June 4, 2003 and
ending June 3, 2005. This resulted in an initial increase to debt
discount and to additional paid-in capital.
Note 7- Legal proceedings
On June 10, 2002, a former distributor, Henry Schein, Inc., sued
Milestone in the Supreme Court of the State of New York for $110,851
claimed to be due them for returned merchandise. Milestone denies
any liability. The parties are currently engaged in discovery.
Milestone believes it has meritorious defense to this complaint
based, in part, on its position that the plaintiff had no right to
return the goods.
On May 9, 2003, Milestone was served with a Breach of Contract
Complaint. In the complaint, the plaintiff, Korman/Lender Management
(landlord of the facility in Deerfield, IL) seeks damages of $17,755
plus costs, including attorney's fees, interest and continuing
rental obligation. The Company is in the process of preparing a
response.
Note 8 - Employee Stock Option Plan
As of June 30, 2003, there were 663,344 outstanding options granted
under the Milestone 1997 Stock Option Plan. The Company accounts for
these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost
is reflected in net loss, as all options granted under those plans
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates
the effect on net loss and loss per share if the Company had applied
the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended June 30 Six Months Ended June 30
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $ 650,558 $ 502,211 $ 1,158,802 $ 1,022,421
Deduct: Total stock-based employee
compensation expenses determined under
fair value based method for all awards
56,154 134,566 112,108 257,688
--------- ----------- ------------- -------------
Net loss, pro forma
$ 706,712 $ 636,777 $ 1,270,910 $ 1,280,109
========= =========== ============= =============
Loss per share: Basic and diluted
As reported
Basic-pro forma $ (.05) $ (.04) $ (.09) $ (.08)
========= =========== ============= =============
$ (.06) $ (.05) $ (.10) $ (.08)
========= =========== ============= =============
12
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Closing of Deerfield, IL Facility
In December 2002, Milestone initiated the transition of its customer
service office to its corporate headquarters in Livingston, New
Jersey and its distribution and logistics center to a third party,
Design Centre of York, Pennsylvania. The resulting closing of the
Deerfield location was completed during January 2003. The net book
value of the facility's fixed assets transferred or disposed during
January 2003 was $41,425 and $11,248, respectively.
Note 10 - Subsequent Events
Annual Meeting Results
On July 2, 2003, the Stockholders of Company adopted the Amendment
to Milestone's Certificate of Incorporation, increasing the
authorized shares of Common Stock from 25,000,000 to 50,000,000.
An additional amendment to the Company's Certificate of
Incorporation was approved by Company's stockholders on July 18,
2003. It adds a new class of the 5,000,000 shares of "blank check"
Preferred Stock. Such rights, preferences and privileges are to be
determined by the Board of Directors when designating each issue.
These amendments will serve to facilitate the conversion of the debt
instruments whose maturity had been extended to September 20, 3003.
13
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of
these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including
those related to accounts receivables, inventories, advances to our
contract manufacturer, stock based compensation and contingencies. We base
our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates under different assumptions
or conditions.
New Accounting Pronouncement
In December 2002, SFAS No.148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock -based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effects of the method used on reporting results. Milestone adopted
SFAS No. 148, effective January 1, 2003 and it did not have any material
impact on its consolidated financial statements.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. The
statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified
as equity under previous guidance. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May
31, 2003, and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. We are currently evaluating the
provisions of this statement, and do not believe that it will have an
impact on our consolidated financial statements.
Overview
Milestone's results from operations for the six months ended June 30,
2003, clearly reflects Milestone's reliance on the continued growth in
sales to foreign distributors while Milestone completes its training and
further expansion of Milestone's domestic independent sales force and
finalizes preparations to distribute two newly developed products while
seeking additional financing.
The net loss for the six months ended June 30, 2003 was approximately
$136,000 greater than the loss reported for the six months ended June 30,
2002. A decline in sales volume and gross profit percentages, coupled with
increases in research and development expenses and interest expense were
the primary factors in achieving these results.
14
Statement of Operations
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Net sales for the three months ended June 30, 2003 and 2002 were
$1,008,965 and $1,160,129, respectively. The $151,164 or 13.0% decrease is
primarily related to approximately $86,000 decrease in CompuDent(TM) sales
and a $48,000 decrease in CompuMed(TM) sales. Also, revenue from Wand(R)
handpieces sales decreased by $10,000. The decrease in Wand(R) handpiece
sales is the result of changing the primary vendor of the Wand(R)
handpiece, resulting in inconsistent inventory levels. Subsequently, the
transition issues have been resolved and are resulting in improved supply
chain management.
Cost of sales for the three months ended June 30, 2003 and 2002 were
$499,337 and $515,756 respectively. The $16,419 decrease is attributable
primarily to lower sales volume.
For the three months ended June 30, 2003, Milestone generated a gross
profit of $509,628 or $51% as compared to a gross profit of $644,373 or
56% for the three months ended June 30, 2002. The decrease in gross profit
percentage is primarily attributable to increased sales to foreign
distributors. Sales to foreign distributors are of higher volume but at a
reduced margin.
Selling, general and administrative expenses for the three months ended
June 30, 2003 and 2002 were $841,435 and $937,952 respectively. The
$96,517 decrease is attributable primarily to an approximate $106,000
decrease in expenses associated with the sale and marketing of the
Wand(R).
Milestone incurred costs totaling $13,150 relating to the rent expense for
its closed facility in Deerfield, IL.
Research and development expenses for the three months ended June 30, 2003
and 2002 were $51,091 and $15,084, respectively. These costs are
associated with the development of Milestone's SafetyWand(TM), which
incorporates engineered safety injury sharps protection, mandated by the
Federal Needlestick Safety and Prevention Act of 2000.
The loss from operations for the three months ended June 30, 2003 and 2002
were $396,048 and $308,643, respectively. The $87,405 increase in loss
from operations is explained above.
Milestone generated $24,000 in other income for the three months ended
June 30, 2002 as a result of a consulting contract which expired in
October 2002.
Interest expense of $254,510 was incurred for the three months ended June
30, 2003 as compared to $217,567 for the three months ended June 30, 2002.
The increase is attributable to higher average borrowings in 2003.
The net loss for the three months ended June 30, 2003 was $650,558 as
compared to a net loss of $502,210 for the three months ended June 30,
2002. The $148,348 increase in net loss is explained above.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net sales for the six months ended June 30, 2003 and 2002 were $2,134,690
and $2,181,717, respectively. The $47,027 or 2.2% decrease is primarily
related to an approximate $69,000 decrease in CompuMed(TM) sales a $35,000
decrease in CompuDent(TM) sales and a $44,000 decrease in domestic sales
of the Wand(R) handpieces. These decreases were partially offset by an
$113,000 increase in foreign sales of the Wand(R) handpiece. The decrease
in Wand(R) handpiece sales is the result of changing the primary vendor of
the
15
Wand(R) handpiece, resulting in inconsistent inventory levels.
Subsequently, the transition issues have been resolved and are resulting
in improved supply chain management.
Cost of sales for the six months ended June 30, 2003 and 2002 were
$1,048,421 and $981,771 respectively. The $66,650 increase is attributable
primarily to higher sales volume to foreign distributors.
For the six months ended June 30, 2003, Milestone generated a gross profit
of $1,086,269 or 50.9% as compared to a gross profit of $1,199,946 or 55%
for the six months ended June 30, 2002. The decrease in gross profit
percentage is primarily attributable to increased sales to foreign
distributors. Sales to foreign distributors are of higher volume but at a
reduced margin.
Selling, general and administrative expenses for the six months ended June
30, 2003 and 2002 were $1,600,415 and $1,835,208 respectively. The
$234,793 decrease is attributable primarily to an approximate $227,000
decrease in expenses associated with the sale and marketing of the Wand(R)
technology.
Milestone incurred costs totaling $65,873 relating to the closure of its
Deerfield, IL facility.
Research and development expenses for the six months ended June 30, 2003
and 2002 were $83,092 and $45,379 respectively. These costs are associated
with the development of Milestone's SafetyWand(TM), device.
The loss from operations for the six months ended June 30, 2003 and 2002
were $663,111 and $680,641 respectively. The $17,530 decrease in loss
from operations is explained above.
Milestone generated $48,000 in income for the six months ended June 30,
2002 as a result of a consulting contract which expired in October 2002.
Interest expense of $495,691 was incurred for the six months ended June
30, 2003 as compared to $389,780 for the six months ended June 30, 2002.
The increase is attributable to higher average borrowings in 2003.
The net loss for the six months ended June 30, 2003 was $1,158,802 as
compared to a net loss of $1,022,421 for the six months ended June 30,
2002. The $136,381 increase in net loss is explained above.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been
prepared assuming Milestone will continue as a going concern. However, as
shown in the accompanying condensed consolidated financial statements,
Milestone incurred net losses of approximately $1,159,000 and $1,022,000
and negative cash flows from operating activities of $452,000 and $216,000
during the six months ended June 30, 2003 and 2002, respectively. As a
result, Milestone had a cash balance of only approximately $28,000, a
working capital deficiency of approximately $6,143,000 and a stockholders'
deficiency of approximately $7,250,000 as of June 30, 2003. These matters
raise substantial doubt about Milestone's ability to continue as a going
concern. Management believes that its initial concerns about the Company's
ability to continue as a going concern have been alleviated by recent
actions taken by Milestone as well as management's plans which are
discussed below.
Further, management believes that, in the absence of a substantial
increase in revenue, it is probable that Milestone will continue to incur
losses and negative cash flows from operating activities through at least
June 30, 2004 and that the Company will need to obtain additional equity
or debt financing, as well as to continue its ability to defer its
obligations, to sustain its operations until it can expand its customer
base and achieve profitability, if ever.
16
To date, the Company has taken certain steps in order to reduce its
operating expenses and utilization of cash. These steps include, amongst
others, the following:
o Commencing in 2001 and continuing through 2003, the Company
reconfigured its sales force. The Company went from
maintaining a large internal sales force to utilizing
independent sales representatives and distributors.
o The Company reduced administrative personnel and telemarketers
by approximately ten people.
o On January 31, 2003, the Company completed the closing of the
Deerfield, IL facility. The customer support, service and
other back-office functions previously conducted, in whole or
in part, at this location were consolidated into the Company's
New Jersey location. The receiving, shipping and storage
functions, which were also previously done at this location,
are now outsourced to an independent warehouse located in
Pennsylvania.
o Obtained an agreement from its Chief Executive
Officer/Stockholder to defer 2002 and 2003 compensation,
aggregating $640,000 until January 2005.
o Restructured and extended the maturity dates of its debt
obligations. Further, as part of the debt restructuring, the
Company obtained agreements from certain of its noteholders
enabling it to convert debt and related interest aggregating
approximately $5,239,000 at June 30, 2003 into shares of
common stock. On July 1, 2003, the Company received the
necessary approval from convertible debt holders to extend the
maturity date of certain obligations until September 20, 2003.
It is the Company's intention to have this conversion
completed sometime during the third quarter of 2003.
o Obtained an agreement from one of its attorneys to convert an
additional $160,000 of the amount owed into shares of common
stock.
o During February 2003, the Company received a $200,000 note
payable from an existing investor which was scheduled to
mature on August 1, 2003. The note is convertible into shares
of common stock, at the Company's option, which it plans to do
during the third quarter of 2003. On July 1, 2003, the
noteholder agreed to extend the note payable to September 20,
2003.
o In April 2003, the Company received an additional $900,000 8%
line of credit from the same investor, which is scheduled to
mature on January 1, 2005, unless extended. $200,000 was drawn
down from the line during April 2003. Subsequent drawn down
were $25,000 and $75,000 in July and August, respectively.
o On June 2, 2003, the Company received an additional $50,000
note payable with warrants attached from a stockholder. The
note is scheduled to mature in November 2004 and is
convertible to stock at the Company's option.
For the six months ended June 30, 2003, the Company's net cash used in
operating activities was $451,760 This was attributable primarily to a net
loss of $1,158,802 adjusted for noncash items of $242,962 (of which
$213,640 was for amortization of debt discount and deferred financing
costs); a $369,518 increase in accounts receivable; an $38,092 increase in
inventories; a $103,883 decrease in advances to contract manufacturer; a
$43,555 decrease in prepaid expenses; an increase in accounts payable of
$270,807; a $282,051 increase in accrued interest; a $11,396 increase in
accrued expenses; and an $160,000 increase in deferred compensation.
For the six months ended June 30, 2003, the Company used $14,950 in
investing activities for capital expenditures.
For the six months ended June 30, 2003, the Company generated $485,494
from financing activities as it issued promissory notes to existing
investors totaling $450,000, incurred $58,215 of net borrowings from its
Chief Executive Officer, and recorded $22,721 in deferred financing
costs.
17
At June 30, 2003, the Company had one foreign customer which accounted for
approximately 22% of sales for the three and six months ended June 30,
2003 and approximately 16% and 17%, respectively, for the three and six
months ended June 30, 2002. At June 30, 2003, receivables from this
customer were approximately 68% of our total outstanding receivables.
OPERATIONS
Milestone believes that CompuDent(TM), CompuMed(TM) and The Wand(R)
technology represents a major advance in the delivery of local anesthesia
and that the potential applications of this technology extends beyond
dentistry. Based on scientific and anecdotal support, the Company contends
that CompuMed(TM) could enhance the practices of the estimated 90,000 U.S.
based physicians included in such non-dental disciplines as Podiatry, Hair
Restoration Surgery, Plastic Surgery, Dermatology, colorectal surgery and
procedures in Orthopedics, OB-GYN and Ophthalmology.
Despite limited resources, Milestone has continued its efforts to realize
the market potential of The Wand(R) and become profitable. These steps
include (i) relaunching of The Wand Plus(TM) drive unit domestically,
under the name CompuDent(TM), (ii) distribution of CompuDent(TM) through a
host of channels (i.e. independent sales representatives, an inside sales
group and a major dental distributor), (iii) launching The Wand Plus(TM)
drive unit for medical purposes and marketing it as CompuMed(TM), (iv)
increasing presence at medical trade shows, (v) advertising to increase
the awareness of the product, (vi) implementing cost reduction programs,
and (vii) restructuring certain outstanding obligations. Management
believes that these steps are critical to the realization of Milestone's
long-term business strategy.
NEW PRODUCTS
In June 2003, Milestone Scientific received approval to sell two new
products - the SafetyWand(TM) and the Wand(R) handpiece with Needle in the
European Community and to apply the CE Mark to those products.
SafetyWand addresses the need to incorporate engineered safety injury
protection (ESIP) into medical devices required under the federal
Needlestick Safety and Prevention Act. This Act also requires employers to
identify, evaluate and implement products with ESIP on an annual basis.
SafetyWand, which is used in conjunction with the CompuDent computer
controlled local anesthetic delivery system, allows the practitioner to
safely protract and retract a needle into a protective sheath. The
SafetyWand was developed by Dr. Mark Hochman, Milestone's Director of
Research and Development.
The Wand handpiece with bonded needle, addresses three critical issues.
First, in some parts of the world, practitioners re-use the single patient
disposable Wand handpiece. By bonding the needle to the handpiece, this
re-use will be eliminated. The Wand handpiece with needle will be sold at
the current selling price of the Wand handpiece, which will reduce the
practitioners overall cost. Secondly, as the product will be available in
27G 1 1/4", 30G 1" and 30G 1/2" models, the practitioners will purchase
multiple SKU's to address all of their procedures. Finally, the gross
margin on this handpiece will improve by more than 30%.
LEGAL PROCEEDINGS
On June 10, 2002, Inc. a former distributor, Henry Schein, Inc. sued
Milestone in the Supreme Court of the State of New York for $110,851
claimed to be due them for returned merchandise. Milestone denies any
liability. The parties are currently engaged in discovery. Milestone
believes it has meritorious defense to this complaint based, in part, on
its position that the plaintiff had no right to return the goods.
On May 9, 2003, Milestone was served with a Breach of Contract Complaint.
In the complaint, the plaintiff, Korman/Lender Management (landlord of the
facility in Deerfield, IL) sued $17,755 plus costs,
18
including attorney's fees, interest and continuing rental obligation.
Milestone is in the process of preparing a response.
OTHER MATTERS - AMERICAN STOCK EXCHANGE
On May 2, 2002, Milestone received a letter from the American Stock
Exchange advising that the Company have fallen below the stockholders'
equity criterion and requesting the submission of a recovery plan
detailing any actions taken, or planned to be taken within the next 18
months to bring the Company into compliance. On June 10, 2002, the Company
submitted a detailed recovery plan to the American Stock Exchange showing
how Milestone expects to achieve stockholder equity of $4,000,000 by
December 31, 2003. In response, Milestone received informal advice from
the American Stock Exchange that in view of the expected loss in 2002,
Milestone needed to demonstrate how the Company will achieve $6,000,000 in
stockholders' equity by the end of 2003. On August 14, 2002, a
supplemental plan demonstrating how Milestone expects to meet these
requirements was submitted. On August 23, 2002, the American Stock
Exchange advised Milestone that they had determined that the plan makes a
reasonable demonstration of Milestone's ability to regain compliance with
the continued listing standards by the conclusion of the plan period at
the end of 2003. Subsequently, Milestone has discussed with American Stock
Exchange its results from operations and its future expectations as they
relate to the plan submitted in August 2002. The continued listing of
Milestone's securities on the American Stock Exchange during this period
will be subject to periodic reviews by the Exchange. Failure to show
progress consistent with the plan or to regain compliance by the end of
the plan period could still result in the Milestone being delisted. In the
event that Milestone's securities are delisted from the American Stock
Exchange, trading, if any, in the common stock and warrants would be
conducted in the over the counter market on the NASD's "OTC Bulletin
Board." Consequently the liquidity of Milestone securities could be
impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of transactions, reduction in
security analysts and new media coverage of Milestone, and lower prices
for Milestone's securities than might otherwise be obtained.
19
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Milestone's management,
with the participation of the chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of Milestone's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of
the period covered by this quarterly report (the "Evaluation Date"). Based upon
that evaluation, the chief executive officer and the chief financial officer
concluded that, as of the Evaluation Date, Milestone's disclosure controls and
procedures are effective, providing them with material information relating to
Milestone as required to be disclosed in the reports Milestone files or submits
under the Exchange Act on a timely basis.
b) Changes in Internal Control over Financial Reporting. There were no changes
in Milestone's internal controls over financial reporting, known to the chief
executive officer or the chief financial officer, that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, Milestone's internal control over financial
reporting.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.44 Warrant to purchase 160,256 shares dated June 4, 2003.
4.45 Form of consent letter to holders of 6%/12% Senior Secured
Notes, dated June 20, 2003.
4.46 Form of consent letter to holders of 6%/12% Secured Notes,
dated June 20, 2003.
4.47 Form of consent letter to Mr. K. Tucker Andersen, dated July
22, 2003.
10.29 6% Convertible Promissory Note, dated June 4, 2003.
31.1 Chief Executive Officer Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
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/ Thomas M. Stuckey
-------------------------------------
Thomas M. Stuckey, Vice President and
Chief Financial Officer
Dated: August 17, 2003
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