UNITED STATES
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 JUNE 30, 2006
OR
[__] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 001-14053
MILESTONE SCIENTIFIC INC.
-------------------------
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 13-3545623
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State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
220 SOUTH ORANGE AVENUE, LIVINGSTON, NEW JERSEY 07039
-----------------------------------------------------
(Address of principal executive office) (Zip Code)
(973) 535-2717
(Issuer's telephone number, including
area code)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES NO X
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON EQUITY,
AS OF THE LATEST PRACTICABLE DATE: AS OF AUGUST 11, 2006, THE ISSUER HAD A TOTAL
OF 11,802,273 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
June 30, 2006 (Unaudited) and December 31, 2005 4
Condensed Statements of Operations
Three and Six Months Ended June 30, 2006 and 2005 (Unaudited) 5
Condensed Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2006 (Unaudited) 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005 (Unaudited) 7
Notes to Condensed Financial Statements 8
ITEM 2. Management's Discussion and Analysis or Plan of Operation 12
ITEM 3 Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 4 Submission of Matters to a vote of Security Holders 19
ITEM 6. Exhibits 20
SIGNATURES 21
CERTIFICATIONS 22
3
MILESTONE SCIENTIFIC INC.
CONDENSED BALANCE SHEETS
June 30, 2006
(Unaudited) December 31, 2005*
------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,999,019 $ 2,892,679
Accounts receivable , net of allowance for doubtful accounts of $17,150
in 2006 and $27,117 in 2005 504,394 347,065
Royalty receivable 49,473 185,702
Inventories 1,285,771 1,371,354
Advances to contract manufacturer 1,116,111 1,019,663
Prepaid expenses 85,917 109,691
------------ ------------
Total current assets 5,040,685 5,926,154
Investment in distributor, at cost 76,319 76,319
Equipment, net of accumulated depreciation of $355,452 in
2006 and $307,000 in 2005 496,432 536,295
Patents, net of accumulated amortization of $30,514 in 2006
and $19,090 in 2005 496,755 486,635
Other assets 19,169 24,197
------------ ------------
Total assets $ 6,129,360 $ 7,049,600
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,031,554 $ 508,044
Accrued expenses 177,849 223,350
Deferred compensation payable to officers 108,332
------------ ------------
Total current liabilities 1,317,735 731,394
------------ ------------
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 57,305,883 57,172,915
Accumulated deficit (51,594,545) (49,954,951)
Treasury stock, at cost, 33,333 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 4,811,625 6,318,206
------------ ------------
Total liabilities and stockholders' equity $ 6,129,360 $ 7,049,600
============ ============
See Notes to Condensed Financial Statements
* Derived from the audited financial statements as of December 31, 2005
4
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Product sales, net $ 1,425,821 $ 1,456,731 $ 2,986,740 $ 2,914,634
Royalty income 49,473 219,210 186,310 219,210
------------ ------------ ------------ ------------
Total revenue 1,475,294 $ 1,675,941 3,173,050 3,133,844
------------ ------------ ------------ ------------
Cost of products sold 688,124 538,604 $ 1,439,286 1,253,310
Royalty expense 5,637 26,305 $ 22,057 26,305
------------ ------------ ------------ ------------
Total cost of revenue 693,761 564,909 1,461,343 1,279,615
------------ ------------ ------------ ------------
Gross profit 781,533 1,111,032 1,711,707 1,854,229
Selling, general and administrative expenses 1,369,497 1,854,562 2,849,212 3,456,255
Research and development expenses 390,741 69,844 554,183 101,389
------------ ------------ ------------ ------------
Total operating expenses 1,760,238 1,924,406 3,403,395 3,557,644
------------ ------------ ------------ ------------
Loss from operations (978,705) (813,374) (1,691,688) (1,703,415)
Other income
Interest income 24,690 23,584 52,094 34,682
------------ ------------ ------------ ------------
Total other income 24,690 23,584 52,094 34,682
------------ ------------ ------------ ------------
Net loss (954,015) (789,790) (1,639,594) (1,668,733)
Dividends applicable to preferred stock -- (507) -- (1,014)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (954,015) $ (790,297) $(1,639,594) $ (1,669,747)
============ ============ ============ ============
Loss per share applicable to common
stockholders -
basic and diluted $ (0.08) $ (0.07) $ (0.14) $ (0.16)
============ ============ ============ ============
Weighted average shares outstanding and to be
issued -
basic and diluted 11,768,940 10,931,052 11,755,335 10,410,451
============ ============ ============ ============
See Notes to Condensed Financial Statements
5
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER S' EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 2006
(Unaudited)
Common Stock Additional
---------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------------ --------- ------------ ----------- ----------- -----------
Balance, January1, 2006 11,758,205 $11,758 $57,172,915 $(49,954,951) $ (911,516) $ 6,318,206
Common stock and options issued for
payment of consulting services 8,491 9 60,253 60,262
Common stock issued for payment of
vendor services 35,577 36 36,964 37,000
Common stock and options issued for
payment of employee compensation 35,751
Net loss 35,751 (1,639,594) (1,639,594)
---------- ------- ----------- ------------ ---------- -----------
Balance, June 30, 2006 11,802,273 $11,803 $57,305,883 $(51,594,545) $ (911,516) $ 4,811,625
========== ======= =========== ============ ========== ===========
See Notes to Condensed Financial Statements
6
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
2006 2005
Cash flows from operating activities:
Net loss $(1,639,594) $(1,668,733)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 48,661 49,700
Amortization of patents 11,424 7,053
Common stock and options issued for compensation, consulting,
and vendor services 133,013 263,629
Loss on disposal 1,918 --
Bad debt (recovery) expense (19,957) 11,769
Changes in operating assets and liabilities:
Increase in accounts receivable (137,372) (148,377)
Decrease (increase) in royalty receivable 136,229 (219,210)
Decrease (increase) in inventories 85,583 (114,026)
Increase in advances to contract manufacturer (96,448) (258,182)
Decrease in prepaid expenses 23,774 7,976
Decrease in other assets 5,028 3,138
Increase (decrease) in accounts payable 523,510 (117,179)
(Decrease) increase in accrued expenses (45,501) 215,675
Increase in deferred compensation 108,332 75,000
----------- -----------
Net cash used in operating activities (861,400) (1,891,767)
----------- -----------
Cash flows from investing activities:
Payment for capital expenditures (10,716) (19,462)
Payment for patent rights (21,544) (145,000)
----------- -----------
Net cash used in investing activities (32,260) (164,462)
----------- -----------
Cash flows from financing activities:
Proceeds from equity financing, net -- 3,528,037
----------- -----------
Net cash provided by financing activities -- 3,528,037
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (893,660) 1,471,808
Cash and cash equivalents at beginning of period 2,892,679 3,041,306
----------- -----------
Cash and cash equivalents at end of period $ 1,999,019 $ 4,513,114
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ --
=========== ===========
See Notes to Condensed Financial Statements
7
MILESTONE SCIENTIFIC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Summary of accounting policies
The unaudited financial statements of Milestone Scientific Inc. (the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December
31, 2005 included in Milestone's Annual Report on Form 10-KSB. The
accounting policies used in preparing these unaudited financial
statements are the same as those described in the December 31, 2005
financial statements.
In the opinion of Milestone, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
entries) necessary to fairly present Milestone's financial position as
of June 30, 2006 and the results of its operations for the three and
six months ended June 30, 2006 and 2005.
The results reported for the three and six months ended June 30, 2006
are not necessarily indicative of the results of operations which may
be expected for a full year.
Note 2 - Private placement
The company completed private placements in April and June of 2005
which resulted in aggregate net proceeds of approximately $3.5 million.
There have been no further placements beyond June, 2005.
Note 3 - Royalty receivable
Royalty receivable represents the royalty due from United Systems Inc,
the licensee of Milestone's proprietary consumer dental whitening
product, which is sold under Milestone's distributor's trademark of
Ionic White(TM).
Note 4 - Inventories
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Note 5 - Advances to contract manufacturer
Advances to contract manufacturer represent deposits to the Company's
contract manufacturer to fund future inventory purchases.
8
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
Note 6 - Basic and diluted net loss per common share
Milestone presents "basic" earnings (loss) per common share and, if
applicable, "diluted" earnings per common share pursuant to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). Basic earnings (loss) per common
shares is calculated by dividing net income or loss applicable to
common stock by the weighted average number of common shares
outstanding and to be issued during each period. The calculation of
diluted earnings per common share is similar to that of basic earnings
per common share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, such as those issuable upon
the exercise of stock options, warrants, and the conversion of notes
payable and preferred stock were issued during the period.
Since Milestone had net losses for the three and six months ended June
30, 2006 and 2005, the assumed effects of the exercise of outstanding
stock options and warrants and the conversion of preferred stock into
common stock were not included in the calculation as their effect would
have been anti-dilutive. Such outstanding options, warrants and
preferred stock totaled 3,539,085 and 3,589,256 at June 30, 2006 and
2005, respectively.
Note 7 - Significant Customer
Milestone had one foreign customer who accounted for approximately
21.5% and 22.4% of its net sales for the three months ended June 30,
2006 and 2005, respectively. At June 30, 2006, receivables from this
customer were approximately 69% 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 June 30, 2006, there were 214,167 outstanding options granted
under the Milestone 1997 Stock Option Plan and 131,000 outstanding
options granted under the Milestone 2004 Stock Option Plan. As a result
of adopting SFAS No. 123R, the Company recognized $35,751 in
share-based compensation expense and a corresponding increase in net
loss for the six months ended June 30, 2006. This share-based
compensation expense had minimal impact on the Company's basic and
diluted earnings per share.
The following table illustrates net loss and loss per share applicable
to common stockholders for the six and three months ended 2005, if
Milestone had applied SFAS No. 123. No options were granted during the
six months ended June 30, 2006.
9
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2005
------------------ ----------------
Net loss, as reported (790,297) (1,669,747)
Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards 27,016 228,188
-------- ----------
Net loss, pro forma (817,313) (1,897,935)
======== ==========
Loss per share applicable to common stock holders:
Basic and diluted
As reported (0.07) (0.16)
======== ==========
Pro forma (0.07) (0.18)
-------- ----------
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 six months ended June 30, 2005:
dividend yield of 0%; expected volatility of 123.19%; 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 June 30, 2006, and changes during the six
months then ended is presented below:
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE REMAINING AGGREGATE
OF EXERCISE CONTRACTUAL INTRINSIC
OPTIONS OPTIONS PRICE LIFE (YEARS) VALUE
------------------------------------------ ------- -------- ------------- -------
Outstanding, January 1, 2006 453,167 $ 2.63 3.6 -
Granted - - - -
Exercised - - - -
Forfeited or expired 108,000 2.52 3.4 -
Outstanding, June 30, 2006 345,167 2.66 3.0 -
Vested or expected to vest, June 30, 2006 345,167 2.66 3.0
Exercisable, June 30, 2006 290,833 2.71 3.3 -
As of June 30, 2006, there was $51,972 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.
Under the agreement, 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. During the 12
month period ended June 30, 2006 the purchases by Ionic White were
below the specified minimums.
10
MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
Under a previous agreement, Ionic White, Inc., agreed to purchase at
$3.00 per share 500,000 shares of Milestone common stock in quarterly
installments of 125,000 shares within 10 days after the end of each of
the four fiscal quarters commencing April 1, 2005. Milestone is not
required to sell these shares unless Ionic White has purchased at least
625,000 starter kits in the first quarter, at least 1,250,000 starter
kits in the first two quarters and at least 1,875,000 starter kits in
the first three quarters. The agreement further provides that, at
Milestone's option, all shares previously purchased must be returned to
Milestone and all monies paid to Milestone returned to Ionic White if
it has not purchased an aggregate of at least 3,000,000 starter kits
for the twelve-month period ending 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 June 30,
2006, and on August 10, 2006, the commencement date for stock purchase
was further deferred for additional successive quarters. The periods
during which Ionic White may purchase the required starter kits were
similarly extended. At June 30, 2006 no shares have been purchased by
Ionic White.
On August 12, 2005, Milestone engaged a special marketing and sales
consultant to aid in the international sale and distribution of
CoolBlue(TM) Wand dental enhancement system, particularly in its
applications for professional tooth whitening. As part of the
compensation for a two-year consulting service, Milestone issued 40,000
shares of common stock valued at $100,000 to the consultant, $25,000 of
which was expensed in the six months ended June 30, 2006.
In addition, if as a result of the consultant's efforts, Milestone is
able to establish distribution relationships, on terms and conditions
satisfactory to Milestone, with one of the four top world-wide
distributors of dental products, or other major distributors as are
acceptable to Milestone, and Milestone sells such distributors
$3,000,000 of product within 18 months commencing August 12, 2005,
Milestone will pay the consultant a $20,000 bonus, in shares of
Milestone common stock, valued based on the then current market value.
At June 30, 2006, Milestone has not entered into any distribution
agreement with any of the distributors.
Note 10- New Accounting Pronouncement
In July, 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109" (FIN 48), which
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We do not expect the
adoption of FIN 48 to have a material impact on our financial
reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this Form 10-QSB. This
discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, such as
those set forth in our Form 10-KSB for the year ended December 31, 2005.
Most of our revenues continue to be generated through sales of our
CompuDent(R) system and the Wand(R) disposable handpiece used with that system.
Revenues have been earned domestically and internationally through sales in more
than 25 countries. This is an important measure as it validates the investment
made in our domestic sales distribution, particularly as handpiece revenues
increased as a result of the increase in CompuDent users. Also, we enjoy
significantly higher margins on domestic sales compared to the lower per unit
revenues we receive from our wholesale based international distribution network.
We 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 (TM) 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 two quarters of 2006, we took steps to enhance the
efficiency and effectiveness of our domestic sales operation. We reduced the
total headcount by one national sales manager, our 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(TM) Whitening Kits.
In March 2005 Ionic White was launched, through widely broadcast
infomercials. We license Ionic White technology and receive a royalty for each
unit sold. The product also appeared in retail outlets in September 2005,
including Walgreen's, Target and Linens and Things. The consumer tooth whitening
market is one of the fastest growing dental market places. We believe it
provides significant additional revenue opportunities. Towards the end of 2005,
Milestone Scientific began a controlled market launch of its CoolBlue
Professional Tooth Whitening System, which targets the $1 billion global
professional teeth whitening market. As with other Milestone products, the
CoolBlue system is designed to maximize long-term revenues from disposable
per-patient kits that are utilized in the whitening treatment process. While
revenues from the CoolBlue system in the second quarter 2006 were not
significant, we believe the product will allow a higher degree of market
penetration, which will also provide additional selling opportunities for our
CompuDent system.
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.
We also continue development efforts on our CompuFlo(TM) technology,
which is first being targeted for spinal anesthesia, including epidural
anesthesia. Our 510 (k) Premarket Notification was cleared by the FDA in July
and we are now seeking strategic partners to market the product. The Company has
contracted with an outside firm to identify additional clinical applications for
this technology in the all important medical space.
Selling, general and administrative expenses for the second quarter
decreased substantially from last year, reflecting stabilization of the hiring
and related costs for the domestic sales organization as well as other cost
containment programs. Related research and development expenses for STA and
CompuFlo (TM) totaled $390,741 for the second quarter of 2006. While this total
represented 26% of the total operating expenses, the continued investment in
these development programs is crucial for our future success.
12
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------------- -------------------- -------------------- ---------------------
DOMESTIC
CompuDent $ 230,068 22.7% $ 377,076 33.6% $ 451,862 22.0% $ 704,764 33.1%
Handpieces 735,482 72.5% 639,104 57.0% 1,477,136 72.1% 1,303,495 61.1%
Other 48,450 4.8% 105,713 9.4% 120,997 5.9% 122,809 5.8%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Domestic $1,014,000 100.0% $1,121,893 100.0% $2,049,995 100.0% $2,131,068 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
INTERNATIONAL
CompuDent $ 59,378 14.4% $ 119,141 35.6% $ 291,286 31.1% $ 292,208 37.3%
Handpieces 315,585 76.6% 164,585 49.1% 555,074 59.3% 433,166 55.3%
Other 36,858 9.0% 51,112 15.3% 90,385 9.6% 58,192 7.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total International $ 411,821 100.0% $ 334,838 100.0% $ 936,745 100.0% $ 783,566 100.0%
---------- ----- ---------- ----- ---------- ----- ---------- -----
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic $1,014,000 71.1% $1,121,893 77.0% $2,049,995 68.6% $2,131,068 73.1%
International 411,821 28.9% 334,838 23.0% 936,745 31.4% 783,566 26.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Product Sales $1,425,821 100.0% $1,456,731 100.0% $2,986,740 100.0% $2,914,634 100.0%
========== ===== ========== ===== ========== ===== ========== =====
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to accounts receivable, inventories, stock-based compensation, and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from those estimates under different
assumptions or conditions.
Inventory
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
13
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 following table sets forth, for the periods presented, statement of
operations data as a percentage of revenues. The trends suggested by this table
may not be indicative of future operating results.
Three Months Ended June 30 Six Months Ended
---------------------------------------------- -------------------------------------------
2006 2005 June 30, 2006 June 30, 2005
---------------------- ------------------ ------------------- -------------------
Products sales, net $ 1,425,821 97% 1,456,731 87% 2,986,740 94% 2,914,634 93%
Royalty income 49,473 3% 219,210 13% 186,310 6% 219,210 7%
----------- --- --------- --- --------- --- --------- ---
Total revenue 1,475,294 100% 1,675,941 100% 3,173,050 100% 3,133,844 100%
----------- --- --------- --- --------- --- --------- ---
Cost of products sold 688,124 47% 538,604 32% 1,439,286 45% 1,253,310 40%
Royalty expense 5,637 -- 26,305 -- 22,057 -- 26,305 --
----------- --- --------- --- --------- --- --------- ---
Total cost of revenue 693,761 47% 564,909 34% 1,461,343 45% 1,279,615 40%
----------- --- --------- --- --------- --- --------- ---
Gross Profit 781,533 53% 1,111,032 66% 1,711,707 55% 1,854,229 59%
----------- --- --------- --- --------- --- --------- ---
Selling, general and
administrative expenses 1,369,497 93% 1,854,562 111% 2,849,212 90% 3,456,255 110%
Research and
development expenses 390,741 27% 69,844 4% 554,183 18% 101,389 3%
----------- --- --------- --- --------- --- --------- ---
Total operating expenses 1,760,238 119% 1,924,406 115% 3,403,395 108% 3,557,644 114%
----------- --- --------- --- --------- --- --------- ---
Loss from operations (978,705) -66% (813,374) -49% (1,691,688) -52% (1,703,415) -53%
14
Three Months ended June 30, 2006 compared to three months ended June 30, 2005
Total revenues for the three months ended June 30, 2006 and 2005
were $1,475,294 (product sales of $1,425,821 and royalty income of $49,473) and
$1,675,941 (product sales of $1,456,731 and royalty income of $219,210)
respectively. The $30,910 or 2.1 % decrease in net product sales is primarily
related to a domestic decrease of $147,008 or 39% in CompuDent sales and was
partially offset by $96,378 or 15.1% increase in domestic handpiece sales;
international CompuDent sales decreased $59,763 or 50.2% and was offset by a
$151,000 or 92% increase in handpiece sales. 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. Royalty
income is from granting United Systems Inc. a license to manufacture, market,
and sublicense the Ionic White to the consumer market. This area decreased
$169,737 or 77% reflecting increased retail competition in this increasingly
highly competitive market.
Cost of products sold for the three months ended June 30, 2006 and 2005
were $688,124 and $538,604, respectively. The $149,520 or 27.8% increase is
primarily attributable to the increase in units sold due to the CompuDent sales
initiatives extended to our existing customer base. Royalty expense related to
the royalty income from the sales of the Ionic White tooth whitening system was
$5,637 for the three months ended June 30, 2006, down $20,668 or 78.6% due to
lower Royalty Income.
For the three months ended June 30, 2006, Milestone generated a gross
profit of $781,533 or 53% as compared to a gross profit of $1,111,032 or 66% for
the same period in 2005. Excluding the net royalty income (net of royalty
expense) of $43,836, which has a gross profit of 88%, the gross profit of
products sales was $737,697 or 52% in 2006. The decrease in gross profit
percentage from the three months last year is the result of sales incentives
extended to our existing customer base during the current period.
Selling, general and administrative expenses for the three months ended
June 30, 2006 and 2005 were $1,369,497 and $1,854,562, respectively. The
$485,065 or 26.2% decrease is pursuant to a plan to decrease salaries,
professional fees and travel. Salaries declined approximately $93,400,
professional fees were reduced approximately $321,800, and travel was
approximately $26,400 less than second quarter 2005 levels.
Research and development expenses for the three months ended June 30,
2006 and 2005 were $390,741 and $69,844 , respectively. These costs are
primarily associated with the intensified effort into the development of our
Single Tooth Anesthetic (STA) delivery system and continuing efforts on the
CompuFlo(TM) technology.
Interest income of $24,690 was earned in the three months ended June
30, 2006 compared to $23,584 earned for the same period in 2005. The increase of
$1,106 or 5% in interest income is the result of increased interest rates in
2006.
For the reasons explained above, net loss for the three months ended
June 30, 2006 was $954,015 as compared to a net loss of $789,790 for the same
period in 2005.
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
Total revenues for the six months ended June 30, 2006 and 2005 was $3,173,050
(product sales of $2,986,740 and royalty income of $186,310) and $3,133,844
(product sales of $2,914,634 and royalty income of $219,210) respectively. Total
revenues increased by $39,206 or 1%. Contributing to this increase was primarily
a $295,149 or 17.0% increase in worldwide sales of disposable Wand handpieces
offset by a reduction in domestic CompuDent sales of $252,902 or 36%. Royalty
income is from granting United Systems Inc. a license to manufacture, market,
and sublicense the Ionic White to the consumer market. This area decreased
$32,900 or 15% reflecting increased retail competition in this increasingly
highly competitive market.
15
Gross profit for the six months ended June 30, 2006 and 2005 was
$1,711,707 or 55% and $1,854,229 or 59%, respectively. The $142,522 or 8%
decrease in gross profit was due principally to the increase in units sold due
to the CompuDent sales incentives initiated during the second quarter of 2006 to
our existing sales base.
Selling, general and administrative expenses for the six months ended
June 30, 2006 and 2005 were $2,849,212 and $3,456,255 respectively. The decrease
of $607,043 or 18.0% in these expenses is pursuant to a plan to decrease
salaries, travel and professional fees. Salaries declined approximately
$276,400, travel was reduced approximately $52,900 and professional fees were
approximately $291,100 less than 2005 levels.
Research and development expenses for the six months ended June 30,
2006 and 2005 were $554,183 and $101,389, respectively. These costs are
primarily associated with the intensified effort into the development of our
Single Tooth Anesthetic (STA) delivery system and continuing efforts on the
CompuFlo(TM) technology.
Interest income of $52,094 was earned for the six months ended June 30,
2006 compared to $34,682 for the same period of the prior year. This difference
was due to increasing interest rates in the 2006 period.
For the reasons explained above, net loss for the six months ended June
30, 2006 decreased by $29,139 or 2% over the net loss for the six month period
ended June 30, 2005.
16
LIQUIDITY AND CAPITAL RESOURCES
Milestone incurred net losses of approximately $1,640,000 and $1,669,000 and
negative cash flows from operating activities of approximately $861,000 and
$1,892,000 during the six months ended June 30, 2006 and 2005, respectively. On
June 16, 2006 we received notice from the American Stock Exchange ("AMEX") that
we are not in compliance with AMEX's continued listing standards related to
shareholders' equity and losses as specified in Section 1003(a)(iii) of the AMEX
Company Guide, which requires us to have shareholder equity of $6,000,000.
Milestone appealed AMEX's determination and requested a hearing before a Listing
Qualification Panel. A hearing has been scheduled for August 16, 2006. At June
30, 2006 our total stockholders' equity was $4.81 million. We continue to seek
new sources of equity funding, but can give no assurance that we will be able to
find new sources of funding on acceptable terms. The issuance of additional
equity securities may impair the value of our stock. Further, if we are
unsuccessful in our appeal of AMEX's determination, we could be delisted from
the AMEX. Any delisting would, in turn, make it more difficult for us to raise
capital in the public markets. If our securities are delisted from the Exchange,
trading, if any, in our securities would be conducted in the over the counter
market on the NASD's "OTC Bulletin Board". Consequently, the liquidity of our
securities could be impaired, not only in the number of securities that could be
bought and sold, but also through delays in the timing of transactions,
reduction in security analyst and news media coverage of Milestone, and lower
prices for our securities than might otherwise be obtained.
Private Placement
The company completed private placements in April and June of 2005
which resulted in aggregate net proceeds of approximately $3.5 million. There
have been no further placements beyond June, 2005.
CASH FLOW RESULTS
As of June 30, 2006, Milestone had cash and cash equivalents of
$1,999,019 and working capital of $3,722,950 .
For the six months ended June 30, 2006, Milestone's net cash used in
operating activities was $861,400. This was attributable primarily to a net loss
of $1,639,594 adjusted for noncash items of $175,059, and changes in operating
assets and liabilities of $603,135.
For the six months ended June 30, 2006 Milestone used $32,260 in
investing activities for capital expenditures, $21,544 of which was due to legal
fees related to new patent applications and $10,716 was for the purchase of
equipment.
Management believes that it has sufficient resources to meet its
obligations over the next twelve months.
NEW ACCOUNTING PRONOUNCEMENT
In July, 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109" (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
17
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Management, with the
participation of our chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e) and 15d-15(e)
as of the end of the period covered by this report (the "Evaluation
Date"). Based upon that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms. Information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal
financial officers, as appropriate to allow timely reporting decisions
regarding required disclosure.
b) Changes in internal control over financial reporting. There were no
changes in our internal controls over financial reporting, known to the
chief executive officer or the chief financial officer that occurred
during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
18
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Milestone held its 2006 annual meeting of Stockholders on June 20,
2006.
(i) The matters voted on were as follows: Election of Directors. Present below
are the voters cast for each director nominee:
WITHHOLD
NAME FOR AUTHORITY
---- --- ---------
Leonard Osser 9,786,034 214,147
Leonard M. Schiller 9,910,134 90,047
Jeffery Fuller 9,912,467 87,714
Leslie Bernhard 9,911,931 88,250
Pablo Serna C. 9,911,931 88,250
(ii) Approval of the issuance or proposed issuance of 300,000 shares of
Milestone's common stock. The results were as follows:
FOR AGAINST ABSTAIN NOT VOTED
--- ------- ------- ----------
4,030,443 520,722 18,236 5,430,780
(iii) Confirmation of the appointment of Eisner LLP as Milestone's independent
auditors for the fiscal year ending December 31, 2006. The results were as
follows:
FOR AGAINST ABSTAIN
--- ------- -------
9,964,971 24,406 10,804
19
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.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MILESTONE SCIENTIFIC INC.
-------------------------
Registrant
/s/Leonard Osser
------------------------------------
Leonard Osser
Chairman and Chief Executive Officer
/s/David Cohn
------------------------------------
David Cohn
Chief Financial Officer
Dated: August 14, 2006
21