SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
MARK ONE
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 001-14053
MILESTONE SCIENTIFIC INC.
(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)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED
BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES |_| NO |X|
AS OF MAY 15, 2006, THE ISSUER HAD A TOTAL OF 11,561,214 SHARES OF COMMON STOCK,
$.001 PAR VALUE, OUTSTANDING.
1
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-QSB, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect Milestone's future plans of operations, business strategy, results of
operations and financial condition. Milestone wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in Milestone's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). Milestone disclaims any intent or
obligation to update such forward-looking statements.
2
MILESTONE SCIENTIFIC INC.
I N D E X
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Balance Sheets
March 31, 2006 (Unaudited) and December 31, 2005 4
Condensed Statements of Operations
Three Months Ended March 31, 2006 and 2005 (Unaudited) 5
Condensed Statements of Changes in Stockholders' Equity (Deficiency)
Three Months Ended March 31, 2006 (Unaudited) 6
Condensed Statements of Cash Flows
Three Months Ended March 31, 2006 and 2005 (Unaudited) 7
Notes to Condensed Financial Statements 9
ITEM 2. Management's Discussion and Analysis or Plan of Operation 13
ITEM 3 Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
ITEM 6. Exhibits 20
SIGNATURES 21
CERTIFICATIONS 22
3
MILESTONE SCIENTIFIC INC.
CONDENSED BALANCE SHEETS
March 31, 2006 December 31, 2005*
(Unaudited)
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,444,810 $ 2,892,679
Accounts receivable , net of allowance for doubtful accounts of $34,830
in 2006 and $27,117 in 2005 497,973 347,065
Royalty receivable 136,838 185,702
Inventories 1,345,698 1,371,354
Advances to contract manufacturer 1,163,520 1,019,663
Prepaid expenses 98,651 109,691
------------ ------------
Total current assets 5,687,490 5,926,154
Investment in distributor, at cost 76,319 76,319
Equipment, net of accumulated depreciation of $331,127 in 2006 and $307,000 in 2005 510,077 536,295
Patents, net of accumulated amortization of $24,802 in 2006 and $19,090 in 2005 483,728 486,635
Other assets 21,683 24,197
------------ ------------
Total assets $ 6,779,297 $ 7,049,600
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 630,659 $ 508,044
Accrued expenses 381,620 223,350
Deferred compensation payable to officers 43,333 --
------------ ------------
Total current liabilities 1,055,612 731,394
------------ ------------
Stockholders' Equity
Common stock, par value $.001; authorized 50,000,000 shares; 11,594,547
shares issued, 207,726 shares to be issued, and 11,561,214 shares
outstanding in 2006; 11,550,479 shares issued, 207,726 shares to be
issued, and 11,517,146 shares outstanding in 2005 11,803 11,758
Additional paid-in capital 57,263,928 57,172,915
Accumulated deficit (50,640,530) (49,954,951)
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 5,723,685 6,318,206
------------ ------------
Total liabilities and stockholders' equity $ 6,779,297 $ 7,049,600
============ ============
See Notes to Condensed Financial Statements
* Derived from the audited financial statements as of December 31, 2005
4
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
March 31, 2006 March 31, 2005
-------------- --------------
Product sales, net $ 1,560,919 $ 1,457,903
Royalty income 136,837
------------ ------------
Total revenue 1,697,756 $ 1,457,903
------------ ------------
Cost of products sold 751,162 714,706
Royalty expense 16,421
------------ ------------
Total cost of revenue 767,583 714,706
------------ ------------
Gross profit 930,173 743,197
Selling, general and administrative expenses 1,479,714 1,601,693
Research and development expenses 163,442 31,545
------------ ------------
Total operating expenses 1,643,156 1,633,238
------------ ------------
Loss from operations (712,983) (890,041)
Other income
Interest income 27,404 11,098
------------ ------------
Total other income 27,404 11,098
------------ ------------
Net loss (685,579) (878,943)
Dividends applicable to preferred stock - (507)
------------ ------------
Net loss applicable to common stockholders $ (685,579) $ (879,450)
============ ============
Loss per share applicable to common stockholders -
basic and diluted $ (0.06) $ (0.09)
============ ============
Weighted average shares outstanding and to be issued -
basic and diluted 11,741,578 9,882,041
============ ============
See Notes to Condensed Financial Statements
5
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
THREE MONTHS ENDED MARCH 31, 2006
(Unaudited)
Common Stock Additional
---------------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------------------ ------------------- ------------------ -------------------
Balance, January 1, 2006 11,758,205 $ 11,758 $ 57,172,915 $(49,954,951)
Common stock and options issued for
payment of consulting services 8,491 9 45,810
Common stock issued for payment of
vendor services 35,577 36 36,964
Common stock and options issued for
payment of employee compensation 8,239
Net loss (685,579)
------------------------------------------------------------------------------------
Balance, March 31, 2006 11,802,273 $ 11,803 $ 57,263,928 $(50,640,530)
====================================================================================
Treasury
Stock Total
------------------ -------------------
Balance, January 1, 2006 $ (911,516) $ 6,318,206
Common stock and options issued for
payment of consulting services 45,819
Common stock issued for payment of
vendor services 37,000
Common stock and options issued for
payment of employee compensation 8,239
Net loss (685,579)
---------------------------------------
Balance, March 31, 2006 $ (911,516) $ 5,723,685
=======================================
See Notes to Condensed Financial Statements
6
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
2006 2005
------------------- ----------------
Cash flows from operating activities:
Net loss $ (685,579) $ (878,943)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 24,300 24,876
Amortization of patents 5,712 2,531
Common stock and options issued for compensation, consulting,
and vendor services 91,058 170,333
Other 1,918
Bad debt expense 7,743 3,402
Changes in operating assets and liabilities:
(Increase) in accounts receivable (158,651) (105,052)
Decrease in royalty receivable 48,864 --
Decrease in inventories 25,656 614
(Increase) in advances to contract manufacturer (143,857) --
Decrease (increase) in prepaid expenses 11,040 (2,677)
Decrease in other assets 2,514 1,569
Increase in accounts payable 122,615 21,756
Increase (decrease) in accrued expenses 158,270 (56,956)
Increase in deferred compensation 43,333 37,500
----------- -----------
Net cash used in operating activities (445,064) (781,047)
----------- -----------
Cash flows from investing activities:
Payment for capital expenditures -- (1,550)
Payment for patent rights (2,805) --
----------- -----------
Net cash used in investing activities (2,805) (1,550)
----------- -----------
Cash flows from financing activities:
Proceeds from equity financing, net -- 1,637,193
----------- -----------
Net cash provided by financing activities -- 1,637,193
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (447,869) 854,596
Cash and cash equivalents at beginning of period 2,892,679 3,041,306
----------- -----------
Cash and cash equivalents at end of period $ 2,444,810 $ 3,895,902
=========== ===========
See Notes to Condensed Financial Statements
7
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
Supplemental schedule of noncash investing and financing activities:
On January 27, 2005, Milestone issued 43,424 shares valued at $70,000
to the Company's outside director of clinical affairs, pursuant to a technology
agreement to provide Milestone with patent rights.
See Notes to Condensed Financial Statements
8
MILESTONE SCIENTIFIC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Summary of accounting policies
The unaudited financial statements of Milestone Scientific Inc. (the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December
31, 2005 included in Milestone's Annual Report on Form 10-KSB. The
accounting policies used in preparing these unaudited financial
statements are the same as those described in the December 31, 2005
financial statements.
In the opinion of Milestone, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
entries) necessary to fairly present Milestone's financial position as
of March 31, 2006 and the results of its operations for the three
months ended March 31, 2006 and 2005.
The results reported for the three months ended March 31, 2006 are not
necessarily indicative of the results of operations which may be
expected for a full year.
Note 2 - Private placement
On April 4, 2005 Milestone completed a $2,999,996 private placement of
101,044 units to accredited investors. Each unit consisted of 10 shares
of Common Stock and two Warrants. Each Warrant entitles the holder to
purchase a share of Common Stock at $4.89 per share through the close
of business on February 16, 2009. I-Bankers Securities, Inc. acted as
Placement Agent for Milestone in this transaction and received a fee of
$209,978 and 101,044 Warrants identical in terms to those issued to the
investors. The units, which are restricted securities and bear a
restrictive legend, are subject to stop transfer restrictions. Net
proceeds to Milestone after commissions and other expenses were
$2,655,659.
Note 3 - Royalty receivable
Royalty receivable represents the royalty due from United Systems Inc,
the licensee of Milestone's proprietary consumer dental whitening
product, which is sold under Milestone's distributor's trademark of
Ionic White(TM). The royalty receivable of $136,838 was received on
April 28, 2006.
Note 4 - Inventories
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
9
Note 5 - Advances to contract manufacturer
Advances to contract manufacturer represent deposits to the Company's
contract manufacturer to fund future inventory purchases. The balance
of advances as of March 31, 2006 totaled $1,163,520.
Note 6 - Basic and diluted net loss per common share
Milestone presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). Basic earnings (loss) per common
shares is calculated by dividing net income or loss applicable to
common stock by the weighted average number of common shares
outstanding and to be issued during each period. The calculation of
diluted earnings per common share is similar to that of basic earnings
per common share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, such as those issuable upon
the exercise of stock options, warrants, and the conversion of notes
payable and preferred stock were issued during the period.
Since Milestone had net losses for the three months ended March 31,
2006 and 2005, the assumed effects of the exercise of outstanding stock
options and warrants and the conversion of preferred stock into common
stock were not included in the calculation as their effect would have
been anti-dilutive. Such outstanding options, warrants and preferred
stock totaled 3,605,085 and 3,595,475 at March 31, 2006 and 2005,
respectively.
Note 7 - Significant Customer
Milestone had one foreign customer who accounted for approximately
25.3% and 21.9% of its net sales for the three months ended March 31,
2006 and 2005, respectively. At March 31, 2006, receivables from this
customer were approximately 77% of Milestone's total accounts
receivable.
Note 8 - Employee Stock Option Plan
Milestone adopted SFAS No. 123R, "Share-Based Payment, an Amendment of
FASB Statement No. 123", under the modified-prospective transition
method on January 1, 2006. SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to
be recognized in the income statements over the service period, as an
operating expense, based on the grant-date fair values. Pro-forma
disclosure is no longer an alternative. As a result of adopting SFAS
123R, the Company recognizes as compensation expense in its financial
statements the unvested portion of existing options granted prior to
the effective date and the cost of stock options granted to employees
after the effective date based on the fair value of the stock options
at grant date. Prior to the adoption of SFAS No. 123R, the Company
accounted for its stock option plans using the intrinsic value method
of accounting prescribed by APB Opinion No. 25.
As of March 31, 2006, there were 244,167 outstanding options granted
under the Milestone 1997 Stock Option Plan and 167,000 outstanding
options granted under the Milestone 2004 Stock Option Plan. As a result
of adopting SFAS No. 123R, the Company recognized $3,238 in share-based
compensation expense and a corresponding increase in net loss for the
three months ended March 31, 2006. This share-based compensation
expense had minimal impact on the Company's basic and diluted earnings
per share.
The following table illustrates net loss and loss per share applicable
to common stockholders for the three months ended 2005, if Milestone
had applied SFAS No. 123R. No options were granted during the three
months ended March 31, 2006.
10
Net loss, as reported $ (878,943)
Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards 201,172
-------------
Net loss, pro forma $ (1,080,115)
=============
Loss per share applicable to common stock holders:
Basic and diluted
As reported $ (0.09)
=============
Pro forma $ (0.11)
=============
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used for the grants in the three months ended March 31,
2005: dividend yield of 0%; expected volatility of 119.42%; risk free
interest rate of 3.87%; and expected lives of 5 years.
Expected volatilities are based on historical volatility of the
company's common stock. The company uses historical data to estimate
option exercise and employee termination within the valuation model.
The expected term of the option granted is estimated based on
historical behavior of employees and represents the period of time that
options granted are expected to be outstanding. A summary of option
activity under the plan as of March 31, 2006, and changes during the
three months then ended is presented below:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER EXERCISE CONTRACTUAL INTRINSIC
OPTIONS OUTSTANDING PRICE LIFE (YEARS) VALUE
------- ----------- ---------- ----------- ----------
Outstanding, January 1, 2006 453,167 $2.63 3.6 $ 0
Granted -- -- -- --
Exercised -- -- -- --
Forfeited or expired 42,000 3.16 3.0 0
Outstanding, March 31, 2006 411,167 2.57 3.7 0
Exercisable, March 31, 2006 341,055 2.48 3.7 0
As of March 31, 2006, there was $79,517 of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the plan. That cost is expected to be
recognized over a weighted average period of one year.
Note 9 - Agreements to Issue Common Stock and Stock Options
On March 18, 2005, Milestone issued to Ionic White, Inc., its marketing
partner for a consumer tooth whitening product, 3-year options to
purchase 100,000 shares of Milestone common stock at $4.89 per share.
The options are not exercisable unless the marketing partner purchases
at least 2,000,000 starter kits for the registrant's consumer tooth
whitening system during the twelve month period beginning July 1, 2005.
If 2,000,000 starter kits are purchased during that period, options to
purchase 10,000 shares become exercisable. If 2,500,000 starter kits
are purchased during that period, options to purchase an aggregate of
50,000 shares become exercisable. If 3,000,000 starter kits are
purchased during that period, options to purchase all 100,000 shares
become exercisable. Upon the options becoming exercisable, Milestone
will recognize sales discounts based on the then fair value of the
options.
11
Under a previous agreement, Ionic White, Inc., agreed to purchase at
$3.00 per share 500,000 shares of Milestone common stock in quarterly
installments of 125,000 shares within 10 days after the end of each of
the four fiscal quarters commencing July 1, 2005. Milestone is not
required to sell these shares unless Ionic White has purchased at least
625,000 starter kits in the first quarter, at least 1,250,000 starter
kits in the first two quarters and at least 1,875,000 starter kits in
the first three quarters. Further, at Milestone's option, all shares
previously purchased must be returned to Milestone and all monies paid
to Milestone returned to Ionic White if it has not purchased an
aggregate of at least 3,000,000 starter kits for the twelve-month
period ending June 30, 2006.
On September 30, 2005, this agreement was amended to defer, for an
additional quarter, the commencement date for Ionic White's commitment
to purchase stock. On December 21, 2005, the commencement date for
stock purchase was further deferred until January 1, 2006. On March 31,
2006, the commencement date for stock purchase was further deferred for
another quarter. At March 31, 2006, no shares have been purchased by
Ionic White.
On August 12, 2005, Milestone engaged a special marketing and sales
consultant to aid in the international sale and distribution of
CoolBlue(TM) Wand dental enhancement system, particularly in its
applications for professional tooth whitening. As part of the
compensation for a two-year consulting service, Milestone issued 40,000
shares of common stock valued at $100,000 to the consultant.
In addition, if as a result of the consultant's efforts, Milestone is
able to establish distribution relationships, on terms and conditions
satisfactory to Milestone, with one of the four top world-wide
distributors of dental products, or other major distributors as are
acceptable to Milestone, and Milestone sells such distributors
$3,000,000 of product within 18 months commencing August 12, 2005,
Milestone will pay the consultant a $20,000 bonus, in shares of
Milestone common stock, valued based on the then current market value.
At March 31, 2006, Milestone has not entered into any distribution
agreement with any of the distributors.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this Form 10-QSB. This
discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, such as
those set forth in our Form 10-KSB for the year ended December 31, 2005.
Milestone has succeeded in improving its liquidity by acquiring the
capital necessary to grow our business and seize the market opportunity that our
proprietary products have created. During 2005 and continuing in the first
quarter of 2006, we have grown our revenue base both with our existing product
lines and the introduction of new products, as evidenced by the eighth
consecutive quarter of total revenue growth when compared to the same period in
the previous year.
Most of our revenues continue to be generated through sales of our
CompuDent system and the Wand disposable handpiece used with that system.
Revenues have been earned domestically and internationally through sales in more
than 25 countries. While we are growing our revenues throughout the world,
domestic CompuDent and handpiece sales have provided a growing portion of our
revenues relative to international sales. This is an important measure as it
validates the investment made in our domestic sales distribution, particularly
as handpiece revenues increased as a result of the increase in CompuDent users.
Also, we enjoy significantly higher margins on domestic sales compared to the
lower per unit revenues we receive from our wholesale based international
distribution network. We anticipate that our growing base of new customers will
generate increased future sales of our disposable handpiece products. We believe
that our ownership of the SafetyWand technology, in light of OSHA regulations
issued pursuant to recent federal and state government legislation, mandating
needle stick safety standards, positions us to become a leading provider for
dentists and other health care professionals in the administration of local
anesthesia, thereby providing further revenue growth opportunities.
During the first quarter, we took steps to enhance the efficiency and
effectiveness of our domestic sales operation. We reduced the total headcount by
one national sales manager, one sales trainer and several under-performing
inside sales representatives. Our goal is to become, at minimum, cash neutral
from our domestic sales of CompuDent units and CoolBlue Whitening Kits. In March
2006, this goal was accomplished.
In March 2005 we launched, through widely broadcast infomercials, our
consumer tooth whitening product. The product also appeared in retail outlets in
September 2005, including Walgreen's, Target and Linens and Things. The consumer
tooth whitening market is one of the fastest growing dental market places. We
believe it provides significant additional revenue opportunities. Towards the
end of 2005, Milestone Scientific began a controlled market launch of its
CoolBlue Professional Tooth Whitening System, which targets the $1 billion
global professional teeth whitening market. As with other Milestone products,
the CoolBlue system is designed to maximize long-term revenues from disposable
per-patient kits that are utilized in the whitening treatment process. While
revenues in the first quarter were not significant, we believe the product will
allow a higher degree of market penetration, which will also provide additional
selling opportunities for our CompuDent system.
We continue development work on two important technologies. The Single
Tooth Anesthetic (STA) delivery system, currently in development, will allow
dentists to perform a predictable single tooth anesthetic injection to achieve
total tooth anesthesia, as a primary injection. This will become an invaluable
tool as many consider this type of injection to be the most important injection
for the dentist and preferred by patients. The expected market introduction for
the STA device is early 2007.
13
We also continue development efforts on our CompuFlo technology, which
is first being targeted for spinal anesthesia, including for epidural
anesthesia. The Company has contracted with an outside firm to identify
additional clinical applications for this technology in the all important
medical space.
Selling, general and administrative expenses for the first quarter
decreased, reflecting stabilization of the hiring and related costs for the
domestic sales organization as well as other cost containment programs. Related
research and development expenses for STA and CompuFlo totaled $163,442 for the
period. While this total represented 10% of the total operating expenses, the
continued investment in these development programs is crucial for our future
success.
The following table shows a breakdown of our product sales (net),
domestically and internationally, by product category, and the percentage of
product sales (net) by each product category:
Three Months Ended March 31,
----------------------------------------------------------------------------
2006 2005
--------------------------- -------------------------------
DOMESTIC
CompuDent $ 221,794 21.4% $ 327,688 32.5%
Handpieces 741,654 71.6% 664,391 65.8%
Other 72,547 7.0% 17,096 1.7%
---------- ----- ---------- -----
Total Domestic $1,035,995 100.0% $1,009,175 100.0%
---------- ----- ---------- -----
INTERNATIONAL
CompuDent $ 231,908 44.2% $ 173,067 38.6%
Handpieces 239,146 45.5% 268,581 59.8%
Other 53,870 10.3% 7,080 1.6%
---------- ----- ---------- -----
Total International $ 524,924 100.0% $ 448,728 100.0%
---------- ----- ---------- -----
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic $1,035,995 66.4% $1,009,175 69.2%
International 524,924 33.6% 448,728 30.8%
---------- ----- ---------- -----
Totals $1,560,919 100.0% $1,457,903 100.0%
========== ===== ========== =====
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to accounts receivable, inventories, stock-based compensation, and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from those estimates under different
assumptions or conditions.
14
Inventory
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recovered.
Revenue Recognition
Sales revenue is recognized when title passes at the time of shipment
and collectibility based on a sales arrangement and the agreed upon
price is reasonably assured. Royalty revenue is recognized based upon
royalty reports from the licensee.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123". Prior to
January 2006, the Company accounted for stock-based compensation by
using the intrinsic value method under APB Opinion No. 25. As required
by SFAS No. 123R, the Company recognizes in the statement of operations
the grant-date fair value of stock options issued to employees and
non-employees.
RESULTS OF OPERATIONS
The results of operations for the three months ended March 31, 2006
reflect a stable growth of our user base, well controlled expenditures necessary
to expand our market, and significant investment in new product development. The
net loss for the three months ended March 31, 2006 represents a 22% decrease
from the same period in 2005.
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.
15
Three Months Ended March 31,
---------------------------------------------------------------------------
2006 2005
-------------------------------- -----------------------------
Products sales, net $ 1,560,919 92% $ 1,457,903 100%
Royalty income 136,837 8% -- 0%
----------- ----------- ----------- -----------
Total revenue 1,697,756 100% 1,457,903 100%
----------- ----------- ----------- -----------
Cost of products sold 751,162 44% 714,706 49%
Royalty expense 16,421 1% -- --
----------- ----------- ----------- -----------
Total cost of revenue 767,583 45% 714,706 49%
----------- ----------- ----------- -----------
Gross Profit 930,173 55% 743,197 51%
----------- ----------- ----------- -----------
Selling, general and
administrative expenses 1,479,714 87% 1,601,693 110%
Research and
development expenses 163,442 10% 31,545 2%
----------- ----------- ----------- -----------
Total operating expenses 1,643,156 97% 1,633,238 112%
----------- ----------- ----------- -----------
Loss from operations (712,983) -42% (890,041) -61%
Other income - interest 27,404 2% 11,098 1%
----------- ----------- ----------- -----------
Net loss $ (685,579) -40% $ (878,943) -60%
=========== =========== =========== ===========
Three Months ended March 31, 2006 compared to three months ended March 31, 2005
Total revenues for the three months ended March 31, 2006 and 2005 were
$1,697,756 (product sales of $1,560,919 and royalty income of $136,837) and
$1,457,903, respectively. The $103,016 or 7% increase in net product sales is
primarily related to a $77,263 or 12% increase in domestic handpiece sales and
$55,957 in worldwide whitening product sales, which did not exist in 2005.
Domestic CompuDent sales decreased $105,894 or 32% which was partially off-set
by an increase in international CompuDent sales of $58,841 or 34%. Worldwide
handpiece sales increased $47,828 or 5%. This increase shows the effect of an
expanded base of CompuDent units in service and represents a continuing increase
in the revenue stream from the disposable Wand handpieces. The amount of
$136,837 or 8% of total revenue in 2006 is royalty income from granting United
Systems Inc. a license to manufacture, market, and sublicense the Ionic
White(TM) to the consumer market.
Cost of products sold for the three months ended March 31, 2006 and
2005 were $751,162 and $714,706, respectively. The $36,456 or 5% increase is
primarily attributable to the additional cost of goods sold for the higher
revenues previously discussed. Royalty expense related to the royalty income
from the sales of the Ionic White(TM) tooth whitening system was $16,421 for the
three months ended March 31, 2006. This expense did not exist in the same period
in 2005.
For the three months ended March 31, 2006, Milestone generated a gross
profit of $930,173 or 55% as compared to a gross profit of $743,197 or 51% for
the same period in 2005. Excluding the net royalty income (net of royalty
expense) of $120,416, which has a gross profit of 88%, gross profit of products
sales was $809,757 or 52% in 2006. It is comparable with gross profit in the
same period in 2005.
Selling, general and administrative expenses for the three months ended
March 31, 2006 and 2005 were $1,479,714 and $1,601,693, respectively. The
$121,979 or 8% decrease is attributable primarily to a decrease in salaries,
travel and our outsourced warehousing function which were partially off-set by
increases in commissions, hiring and related employee expenses and advertising
media placement.
16
Research and development expenses for the three months ended March 31,
2006 and 2005 were $163,442 and $31,545, respectively. These costs are primarily
associated with the development of Milestone's Single Tooth Anesthetic (STA)
delivery system and continuing efforts on the CompuFlo(TM) technology.
Loss from operations for the three months ended March 31, 2006 and 2005
was $712,983 and $890,041, respectively. The $177,058 or 20% decrease in loss
from operations is the result of internal cost containment programs related to
our domestic sales operation and controlled expenditures necessary to expand our
market and to carry out our operations.
Interest income of $27,404 was earned in the three months ended March
31, 2006 compared to $11,098 earned for the same period in 2005. The increase of
$16,306 or 147% in interest income is the result of increased average cash
balance and increased interest rate in 2006.
For the reasons explained above, net loss for the three months ended
March 31, 2006 was $685,579 as compared to a net loss of $878,943 for the same
period in 2005. The $193,364 or 22% decrease in net loss is primarily a result
of the increased total revenue and the increased interest income which are
partially offset by the increased operating expenses.
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LIQUIDITY AND CAPITAL RESOURCES
Milestone incurred net losses of approximately $686,000 and $879,000
and negative cash flows from operating activities of approximately $445,000 and
$781,000 during the three months ended March 31, 2006 and 2005, respectively.
Milestone improved its liquidity position with the private placement of Units
completed in April and June 2005, as discussed below.
Private Placement
On April 4, 2005 Milestone completed a $2,999,996 private placement of
101,044 units to accredited investors. Each unit consisted of 10 shares of
Common Stock and two warrants (the "Unit"or "Units"). Each warrant entitles the
holder to purchase a share of Common Stock at $4.89 per share through the close
of business on February 16, 2009 (the "Warrant" or "Warrants"). I-Bankers
Securities, Inc. acted as Placement Agent for Milestone in this transaction and
received a fee of $209,978 and 101,044 Warrants identical in terms to those
issued to the investors. The Units, which are restricted securities and bear a
restrictive legend, are subject to stop transfer restrictions. Net proceeds to
Milestone, after commissions and other expenses, were $2,655,659.
On June 30, 2005 Milestone completed a $847,960 private placement of
34,000 Units. Dynamic Decisions acted as Placement Agent for Milestone in this
transaction and received a fee of $50,878 and 600 Units, which are substantially
the same form as those issued to the investors. Total proceeds from this private
placement, after commissions and other expenses, were $797,054.
CASH FLOW RESULTS
As of March 31, 2006, Milestone had cash and cash equivalents of
$2,444,810 and working capital of $4,631,878.
For the three months ended March 31, 2006, Milestone's net cash used in
operating activities was $445,064. This was attributable primarily to a net loss
of $685,579 adjusted for noncash items of $130,731 (of which $24,300 was
depreciation expense; $5,712 was amortization of patents; $91,058 was stock and
options issued for compensation, consulting, and vendor services; $1,918 was
other; and, $7,743 was bad debt expense); a $158,651 increase in accounts
receivable; a $48,864 decrease in royalty receivable; a $25,656 decrease in
inventories; a $143,857 increase in advances to contract manufacturer; a $11,040
decrease in prepaid expenses; a $2,514 decrease in other assets; a $280,885
increase in accounts payable and accrued expenses; and, a $43,333 increase in
deferred compensation.
For the three months ended March 31, 2006, Milestone used $2,805 in
investing activities. This was due to legal fees related to new patent
applications.
Management believes that it has sufficient resources to meet its
obligations over the next twelve months.
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ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Milestone's
management, with the participation of the Chief Executive Officer
and the Chief Financial Officer, carried out an evaluation of the
effectiveness of Milestone's "disclosure controls and procedures"
(as defined in the Securities Exchange Act, Rule 13a-15(e) and
15d-15(e). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that Milestone's disclosure
controls and procedures were effective, as of the date of their
evaluation, for purposes of recording, processing, summarizing and
timely reporting material information required to be disclosed in
reports filed by Milestone under the Securities Exchange Act of
1934.
b) Changes in Internal Control over Financial Reporting. There were
no changes in our internal controls over financial reporting that
occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially
affect, Milestone's internal control over fiscal reporting.
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PART II
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In the quarter ended March 31, 2006, Milestone issued total 44,068
shares valued at $46,000 to two vendors, one in satisfaction of an agreement to
provide Milestone with exhibition facilities and another for payables owed in
connection with purchased goods.
The shares were sold to accredited investors, bore a restrictive legend
and were exempt from registration pursuant to s.s. 4.2 and 4.6 of the Securities
Act of 1933, as amended.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
31.1 Chief Executive Officer Certification pursuant to section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MILESTONE SCIENTIFIC INC.
-------------------------
Registrant
/s/Leonard Osser
---------------------------------------------
Leonard Osser
Chairman and Chief Executive Officer
/s/Rosaline Shau
---------------------------------------------
Rosaline Shau
Chief Financial Officer
Dated: May 15, 2006
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