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MLSS > SEC Filings for MLSS > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for MILESTONE SCIENTIFIC INC.


8-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussions of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Form 10-Q. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.

OVERVIEW

In 2013, Milestone remains focused on advancing efforts to achieve our two primary objectives; those being:

- Optimizing our tactical approach to product sales and marketing in order to materially increase penetration of the global dental and medical markets with our proprietary, patented Computer-Controlled Local Anesthesia Delivery (C-CLAD) solution, including the STA Single Tooth Anesthesia Instrument (STA Instrument); and

- Enhancing our global reach by partnering with distribution companies in the medical sector.

STA Instrument Growth

Since its market introduction in early 2007, the STA Instrument and a prior computerized controlled local anesthesia delivery product have been used to deliver over 48 million of safe, effective and comfortable injections. The instrument has also been favorably evaluated in numerous peer-reviewed, published clinical studies and associated articles. Moreover, there appears to be a growing consensus among users that the STA Instrument is proving to be a valuable and beneficial instrument that is positively impacting the practice of dentistry worldwide.

Global Distribution Network

North America Market

In November 2012, Milestone entered an exclusive distribution and marketing agreement with a well known U.S. domestic manufacturer and distribution, for the sale and distribution of the STA instruments and handpieces in United States and Canada.

The mission Milestone's Domestic Sales Director is to grow our business through marketing our STA Instrument to Dental Group Practices. Through direct marketing to the Dental Group Practices and utilizing a group of independent hygienists, the instrument and handpiece sales should increase substantially in the future. Milestone signed on its first Group Dental Practice in January 2011, Towncare Dental.

In July 2013, Milestone entered a strategic partnership with the largest provider of specialty sales and distribution solutions for healthcare. During the three year strategic partnership, the distributor will hold the exclusive rights to market, resell, label and distribute Milestone's CompuFlo injection technology for use in epidural applications for childbirth and other pain management needs in the U.S. hospital sector.

International Market

On the global front, we also have granted exclusive marketing and distribution rights for the STA Instrument to select dental suppliers in various international regions in Asia, Africa, South America and Europe.

In April 2009, we signed an Exclusive Distribution and Marketing Agreement with China National Medicines Corporation, d/b/a Sinopharm, which is China's largest domestic manufacturer, distributor and marketer of pharmaceuticals and importer of medical devices and the country's largest domestic distributor of dental anesthetic carpules to the Chinese dental industry. Prior to the end of 2009, China National Medicines issued Milestone a blanket purchase order for 12,000 STA instruments to be delivered over 36 months, thereby marking Milestone's initial penetration into China's emerging dental market.

In early October 2012, the State Food and Drug Administration (SFDA) of the People's Republic of China approved Milestone's Single Tooth Anesthesia SystemŽ (STA System). Unfortunately, the SFDA bifurcated approval of the STA Systems from the WandŽ handpieces.


As of June 30, 2013, Milestone Scientific has not received the appropriate registration approval from the regulatory body in China. It is expected that the approval by the Chinese regulatory body will be received in 2013.

Shortly before the end of the second quarter 2009, we announced that we were refining our international marketing strategy to gain greater access to and penetration of the international dental markets for the STA Instrument, CompuDent and related disposable hand pieces. The new sales strategy provides for increasing hands-on oversight and support of our existing international distribution network, while also attracting new distributors throughout Europe, Asia and South America. To assist in this endeavor, Milestone added in the spring of 2010 an International Sales Director to focus on growth of our products outside the USA and Canada.

In July 2011, we entered into a definitive joint venture agreement with Beijing 3H (Heart-Help-Health) Scientific Technology Co., Ltd. (Beijing 3H) for the development, commercialization, manufacture and marketing of epidural and intra-articular injection medical instruments. Milestone Scientific has a 50% interest in the joint venture and shareholders of Beijing 3H and others have a 50% interest. The Beijing 3H shareholders include a large shareholder in Milestone who is also the principal of a supplier to Milestone.

Milestone contributed an exclusive worldwide royalty-free license to use its patents as they pertain to these two instruments and disposables only to the Medical Joint Venture. Beijing 3H and its shareholders contributed $1.5 million to the joint venture to enable the joint venture to design and develop two commercial instrument and related disposables using Milestone's CompuFloŽ technology. Milestone will have distribution responsibility in the U.S. and Canada while Beijing 3H will distribute products exclusively in the People's Republic of China, Macao, Hong Kong and other regions of Asia. As of June 30, 2013, the Medical Joint Venture and the development project is ongoing and nearing completion of the two medical instruments.

Segmented Sales Performance

The following table shows a breakdown of Milestone's 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,
                                                        2013                                   2012                                  2013                                  2012
DOMESTIC
Instruments                                $     383,546              35.5 %      $    250,698              24.0 %      $    591,685              24,9 %      $    407,380              21.3 %
Handpieces                                       666,921              61.7 %           768,613              73.6 %         1,722,973              72,4 %         1,451,693              75.8 %
Other                                             29,984               2.8 %            24,335               2.4 %            66,294               2,7 %            55,063               2.9 %
Total Domestic                             $  1,0810,451             100.0 %      $  1,043,646             100.0 %      $  2,380,952             100.0 %      $  1,914,136             100.0 %
INTERNATIONAL
Instruments                                $     367,905              30.7 %      $    308,469              24.0 %      $    677,216              28.4 %      $    720,357              30.9 %
Handpieces                                       808,775              67.5 %           960,689              74.9 %         1,678,386              70.3 %         1,587,589              68.0 %
Other                                             21,104               1.8 %            14,172               1.1 %            31,224               1.3 %            26,252               1.1 %
Total International                        $   1,197,784             100.0 %      $  1,283,330             100.0 %      $  2,386,826             100.0 %      $  2,334,198             100.0 %
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic                                   $   1,080,451              47.4 %      $  1,043,646              44.8 %      $  2,380,952              49.9 %      $  1,914,136              45.1 %
International                                  1,197,784              52.6 %         1,283,330              55.2 %         2,386,826              50.1 %         2,334,198              54.9 %
Total Product Sales                        $   2,278,235             100.0 %      $  2,326,976             100.0 %      $  4,767,778             100.0 %      $  4,248,334             100.0 %

Milestone earned gross profits of 67% and 63% for the three months ended June 30, 2013 and 2012, respectively, and 67% and 64% for the six months ended June 30, 2013 and 2012, respectively. However, the revenues and related gross profits have not been sufficient to support overhead, new product introduction and research and development expenses.


Although we anticipates expending funds for research and development in 2013, these amounts will vary based on the operating results for each quarter. We incurred operating losses and negative cash flows from operating activities since its inception, except for the three and six months ended June 2013 and for the quarter ended June 30, 2009. At June 30, 2013, we believe that we do not have sufficient cash reserves to meet all of our anticipated obligations for the next twelve months. We are actively pursuing the generation of positive cash flows from operating activities through increase in revenue, assessment of current contracts and current negotiations. There is no assurance that we will be able to achieve positive operating cash flows or that additional capital raised on terms and conditions satisfactory to us, if at all. If additional capital is required and it cannot be raised, then we would be forced to curtail our development activities, reduce marketing for existing products or adopt other cost saving measures, any of which might negatively affect the our operating results.

Summary of Significant Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts receivable, inventories, stock-based compensation, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

Accounts Receivable

The realization of accounts receivable will have a significant impact on us. Consequently, Milestone estimates allowance for doubtful accounts resulting from the inability of its customers to make payments for amounts billed. The collectability of outstanding amounts is continually assessed.

Inventories

Inventory costing, obsolescence and physical control are significantly important to the on-going operation of the business. Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or market. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is recorded if required based on past and expected future sales.

Investment in Medical Joint Venture

We entered into a Medical Joint Venture with a third party, Beijing 3H, for the development and commercialization of two medical products. We own fifty percent of the Medical Joint Venture and have recorded our investment on the equity basis of accounting. Milestone's proportionate share of expenses incurred by the Medical Joint Venture will be charged to the Statement of Operations on a periodic basis.

Impairment of Long-Lived Assets

Our long lived assets consisting principally of patents and trademarks are the foundation of our business. We review long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. The carrying value of the asset is evaluated in relation to the operating performance and future undiscounted cash flows of the underlying assets.

Revenue Recognition

Revenue from product sales is recognized net of discounts and allowances to the domestic distributors on the date of shipment for essentially all shipments, since the shipment terms are FOB warehouse. We will recognize revenue on date of arrival of the goods at the customer's location where shipments are FOB destination. Shipments to international distributors are FOB the warehouse and revenue is therefore recognized on shipment. In both cases the price to the buyer is fixed and the collectability is reasonably assured. Further, we have no obligation on these sales for any post installation, set-up or maintenance, these being the responsibility of the buyer. Customer acceptance is considered made at delivery. Milestone's


only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty periods, which volumes have historically been immaterial.

Results of Operations

The consolidated results of operations for the three and six months ended June 30, 2013 compared to the same three and six months period in 2012 reflect our focus and development on the Wand/STA Instrument.

The following table sets forth, for the periods presented, the 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 June 30,
                             2013                                   2012                                       2013                                   2012
Products sales $   2,278,235              100.0 %      $  2,326,976                100 %         $   4,767,778                100 %      $  4,248,334                100 %
Cost of
products sold        744,108                 33 %           854,005                 37 %             1,556,152                 33 %         1,516,951                 36 %
Gross Profit       1,534,127                 67 %         1,472,971                 63 %             3,211,626                 67 %         2,731,382                 64 %
Selling,
general and
administrative
expenses           1,340,129                 59 %         1,487,076                 64 %             2,728,031                 57 %         2,939,326                 69 %
Research and
development                                                                                            164,722
expenses             42,885                   2 %            39,502                  2 %                                        3 %            78,814                  2 %
Total
operating
expenses           1,383,014                 61 %         1,526,578                 66 %             2,892,753                 60 %         3,018,140                 71 %
Income (loss)
from
operations           151,113                 -7 %           (53,607 )               -2 %               318,873                  7 %          (286,757 )               -7 %
Other expenses
- interest &
expenses             (30,011 )               -1 %           (64,850 )               -3 %               (47,026 )               -1 %          (108,785 )               -3 %
Loss on
Earnings from
Medical Joint
Venture              (47,093 )               -2 %           (46,084 )               -2 %               (47,093 )               -1 %          (124,179 )               -3 %
Net income
(loss)         $      74,009                 -3 %      $   (164,541 )               -7 %         $     224,754                 -5 %      $   (519,722 )              -13 %

Three months ended June 30, 2013 compared to three months ended June 30, 2012

Total product sales for the three months ended June 30, 2013 and 2012 were $2,278,235 and $2,326,976, respectively. The total increase in product sales of $48,741 or 2%, in 2013 from 2012 is principally the result of decrease in handpiece revenues. Domestic STA instruments sales increased by $194,008 in 2013 from 2012. This increase is due in part to management's decision to establish an exclusive U.S. distributor of the STA instruments and handpieces in the domestic market, along with the implementation of the sales and training strategy focused on concentrated geographical sales effort and increased support for all customers. In the domestic market, total handpiece sales decreased by $101,692 or 13% in 2013 over 2012. On the international front, instruments sales increased in the second quarter of 2013 from 2012 by $59,436 or 19%. The Wand Plus Instrument is no longer being shipped to our European customers, due to a change in the regulations in 2012. Although the sales of Wand Plus Instruments to the European community will not continue, there are many Wand Plus users in Europe that continue to utilize the instrument. This trend is expected to continue in 2013.

Significant new market countries for the STA Instruments are on board but are ramping up on a slower than expected pace. Internationally, handpiece sales decreased by $151,914 or 16% due to an decrease in Wand handpieces sales of $428,566 in 2013 over 2012. STA handpiece sales increased by $276,652 or 116% for the second quarter 2013 over 2012.

Cost of products sold for the three months ended June 30, 2013 and 2012 were $744,108 and $854,005, respectively, a decrease of $109,897 or 12.9%.

For the three months ended June 30, 2013, Milestone generated a gross profit of $1,534,127 or 67%, as compared to a gross profit of $1,472,971, or 63%, for the three months ended June 30, 2012. The total increase in gross profit dollars of $61,156 is primarily due to an increase in instrument revenue sales.


Selling, general and administrative expenses for the three months ended June 30, 2013 and 2012 were $1,340,129 and $1,487,076, respectively. This reduction in expenses of $146,947, or 10%, is described in the following sections of this report. Marketing expenses increased by approximately $14,000; sales expenses decreased by approximately $37,000; salary increased by approximately $9,000; legal decreased by approximately $29,000 and other expenses decreased by approximately $104,000. Milestone continues to focus on controlling expenses in all categories. The second quarter of 2013 noted several areas of savings as Milestone continues on its planned business model change, through the training and education hygienist program. The increase in marketing is due to the international rebate program of $47,000 offset by reduction of trade show and related expenses (travel, fees and staffing) of approximately $31,000.
Milestone targeted this venue as a more costly method to present our Wand/STA Instrument. Milestone has decided to focus its attention to the national shows that are more focused on larger attendance by the individual as well as dental practice groups. Additionally, a large portion of our previous marketing and selling costs in the U. S. and Canada are now incurred by our exclusive STA distributor. Sales expenses also decreased by approximately $37,000, principally in commissions. The reduction in other expenses is primarily due to approximately $148,000 reversal of the bad debt reserve based on payments made by the Chinese distributor in the second quarter of 2013 offset by the travel expenses by approximately $33,000 and the excise tax of approximately $11,000.
Salary increased by approximately $9,000. Legal fees decreased by approximately $29,000 in the aggregate for routine litigation and patent annuities. The international commission decreased by approximately $15,000. Stock Based Compensation decreased by approximately $12,000. International travel cost increased by approximately $33,000.

Research and development expenses for the three months ended June 30, 2013 and 2012 were $42,885 and $39,502, respectively, an increase of $3,383 or 8.6%, due to the software enhancement of the STA Instruments.

The income from operations for the three months ended June 30, 2013 was $151,113 and the loss from operations for three months ended June 30, 2012 was $53,607. The $204,720, or 382%, increase is explained above.

Interest expense of $24,220, relating to the $1.3 million line of credit which was subsequently converted into common stock in December 2009 and the $450,000 long term note payable, was charged for the three months ended June 30, 2013, as compared to $21,437 for the same period in 2012, (see Note 8 to the financials). Additionally, Milestone accrued interest expense of $5,128 and $41,239 for the overdue accounts payable on the balance to the instrument's contract manufacturer at June 30, 2013 and 2012, respectively.

Loss on the Medical Joint Venture of $47,093 and $46,084 for the quarter ending June 30, 2013 and 2012, respectively, is due to development cost on the medical devices incurred by the Medical Joint Venture during the quarter.

For the reasons explained above, net income for the six months ended June 30, 2013 was $74,009 as compared to the net loss of $164,541 for the three months ended June 30, 2012. The $238,550, or 145%, increase in net income is primarily a result of an increase in gross margin dollars of $61,156 enhanced by a decrease in selling, general and administrative expenses of $146,947, decrease in interest expense of $80,924 offset by an increase in research and development expense of $3,383.

Six months ended June 30, 2013 compared to the six months ended June 30, 2012

Total revenues for the six months ended June 30, 2013 and 2012 were $4,767,778 and $4,248,334, respectively. Total revenues increased by $519,444, or 13%.
Domestic product revenue increased $466,817 in 2012, or 24%, the increase is due to the increase in STA Single Tooth Anesthesia SystemŽ instruments sales by $252,267. This increase is due in part to management's implementation of the sales and training strategy focused on concentrated geographical sales effort and increased support for all customers. The disposable handpiece sales increased by $271,280, or 19%. International revenue increased by $52,627. International sales of disposable handpieces increased by $90,797 or 6%.

Cost of products sold for the six months ended June 30, 2013 and 2012 were $1,556,152 and $1,516,951, respectively, an increase of $39,201, or 3%.

Gross profit for the six months ended June 30, 2013 and 2012 was $3,211,626 or 67%, and $2,731,383, or 64%, respectively. Gross profit dollars in the first six months of 2013 increased by $480,243, or 18%, due to an increase in sales volume and gross profit margin in 2013 over 2012.

Selling, general and administrative expenses for the six months ended June 30, 2013 and 2012 were $2,728,031 and $2,939,326, respectively. The decrease of $211,295 or 7.2% is primarily attributable to a decrease in marketing expenses of $28,531; a decrease in sales expenses of $100,075, decrease in general and administrative (G&A) expenses of $116,198 and


an increase in salary expenses of $56,421, principally due to a change in the bonus program for our Chief Executive Officer. The marketing expenses decrease is principally due to a reduction in advertising and media placement costs of $9,010, free goods and gifts by $25,910 and tradeshow attendance by $40,510 offset by the international marketing rebate program of $47,000. Milestone has decided to focus its attention to the national shows that are more focused on larger attendance by the individual as well as dental practice groups. Additionally, a large portion of our previous marketing and selling costs in the U. S. and Canada are now incurred by our exclusive STA distributor. Sales expenses decrease by $100,075, due to an overall decrease in business travel domestic and international. Also included in the category are the costs related to our independent third party hygienists. Other general and administrative expenses decreased by $116,198, due to the decrease in international commission of $84,675, increase in royalty expense of $26,584, based on increase in sales. Additionally, recovery of bad debt expense, $161,405, based on partial collection of previously recorded bad debt reserve for an international accounts receivable.

Research and development expenses for the six months ended June 30, 2013 and 2012 were $164,722 and $78,814, respectively. The increase of $85,908, or 109% is primarily due to the enhancement of STA instrument.

The income from operations for the six months ended June 30, 2013 was $318,873 and the loss from operations for six months ended June 30, 2012 was $286,757, respectively. The $605,630, or 211%, increase is explained above.

Other income is $17,543 for the six months ended June 30, 2013. This represents the sale of tax credits under the New Jersey Technology Business Tax Certificate Program. This did not occur in 2012.

Interest expense of $48,639, relating to the converted $1.3 million line of credit into common stock in December 2009 and the $450,000 long term note payable, was charged for the six months ended June 30, 2013, compared to $42,277 for the same period in 2012, (see Note 8 to the financials). Additionally, Milestone accrued interest expense of $14,573 and $62,140 for the overdue accounts payable balance to the instrument manufacturer at June 30, 2013 and 2012, respectively.

For the reasons explained above, net income for the six months ended June 30, 2012 and 2011 was $224,754 and $519,722, respectively. The $744,476, or 143.2%, increase in net income is primarily a result of an increase in gross margin dollars of $480,243 offset by a decrease in selling, general and administrative expenses of $211,294; an increase in research and development expense of $85,908; other income of $17,543; a decrease in interest expense by $46,205 and the reduction to non-cash Loss on the Medical Joint Venture of $77,086.

Working capital as of June 30, 2013 is a positive $233,847, as explained in the following liquidity and capital resources section.

Liquidity and Capital Resources

As of June 30, 2013, Milestone had cash and cash equivalents of $171,640 and a positive working capital of $233,847. Milestone had net income of $224,754 and a net loss of $519,722 for the six months ended June 30, 2013 and 2012, respectively. The working capital of $233,847 in 2013, was the positive result of the substantial reduction of accounts payable due to contract manufacturer even with the delay in obtaining regulatory approval to sell our instruments and handpieces in China. Based on the initial purchase order from our distributor in China in 2009, Milestone ramped up purchasing of parts in anticipation of significant sales in 2010 and future years. As a result of the delay in shipping, the advances on contracts have decreased, (current and long term) at June 30, 2013 as compared to December 31, 2012. Additionally, the accounts . . .

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