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MLSS > SEC Filings for MLSS > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for MILESTONE SCIENTIFIC INC.

Form 10-Q for MILESTONE SCIENTIFIC INC.


12-Nov-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:

ˇ Enhancing our global reach by partnering with distribution companies in the medical sector and

ˇ 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).

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

United States and Canadian Market

In August 2013, Milestone entered an exclusive distributor agreement (beginning October 1, 2013), with Henry Schein, for the sale and distribution of the CompuDent handpieces in the United States and Canada

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.

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.

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 September 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 "Medical Joint Venture"). 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 $0 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 September 30, 2013, the Medical Joint Venture and the development project is ongoing and nearing completion of the two medical instruments.

In October 2013, our fifty (50) percent owned medical joint venture, Milestone Medical Inc., signed subscription agreements for the sale of 2 million shares of Milestone Medical's common stock at $1.50 per share in a private placement in Poland. The consummation of the private placement is subject to the satisfaction of all the closing conditions including, but not limited to, the admission of the Milestone Medical common stock for trading in the Alternative Trading System on the NewConnect market of the Warsaw Stock Exchange in Poland.
As of the date of this report, the payment by the new investors have been fully received in escrow. Upon closing, we will own approximately forty-five
(45) percent (post-transaction) of Milestone Medical Inc.

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 September 30,                                              Nine Months Ended September 30,
                                    2013                                   2012                                   2013                                   2012
DOMESTIC
Instruments            $     251,104              16.4 %      $     147,012              10.9 %      $     842,788              21.6 %      $     554,392              17.0 %
Handpieces                 1,248,636              81.8 %          1,170,108              87.1 %          2,971,609              76.0 %          2,621,801              80.5 %
Other                         26,868               1.8 %             25,678               2.0 %             93,163               2.4 %             80,740               2.5 %
Total Domestic         $   1,526,608             100.0 %      $   1,342,798             100.0 %      $   3,907,560             100.0 %      $   3,256,933             100.0 %
INTERNATIONAL
Instruments            $     240,075              26.2 %      $     221,024              28.1 %      $     917,291              27.8 %      $     941,381              30.2 %
Handpieces                   678,755              74.0 %            547,093              69.6 %          2,357,142              71.3 %          2,134,681              68.4 %
Other                         (1,243 )            -0.2 %             18,326               2.3 %             29,980               0.9 %             44,579               1.4 %
Total International    $     917,587             100.0 %      $     786,443             100.0 %      $   3,304,413             100.0 %      $   3,120,641             100.0 %
DOMESTIC/INTERNATIONAL
ANALYSIS
Domestic               $   1,526,608              62.5 %      $   1,342,798              63.1 %      $   3,907,560              54.2 %      $   3,256,933              55.1 %
International                917,586              37.5 %            786,443              36.9 %          3,304,413              45.8 %          3,120,641              48.9 %
Total Product Sales    $   2,444,194             100.0 %      $   2,129,241             100.0 %      $   7,211,973             100.0 %      $   6,377,574             100.0 %


Milestone earned gross profits of 72% and 71% for the three months ended September 30, 2013 and 2012, respectively, and 69% and 66% for the nine months ended September 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 nine months ended September 2013 and for the quarter ended June 30, 2009. At September 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 nine months ended September 30, 2013 compared to the same three and nine 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 September 30,                                                   Nine Months Ended September 30,
                             2013                                   2012                                       2013                                   2012
Products sales $   2,444,195                100 %      $  2,129,241                100 %         $    7,211973                100 %      $  6,377,574                100 %
Cost of
products sold        677,792                 28 %           625,710                 29 %             2,233,944                 31 %         2,142,661                 34 %
Gross Profit       1,766,403                 72 %         1,503,531                 71 %             4,978,029                 69 %         4,234,913                 66 %
Selling,
general and
administrative
expenses           1,317,433                 54 %         1,391,521                 65 %             4,045,465                 56 %         4,330,847                 68 %
Research and
development
expenses              12,698                  1 %            60,363                  3 %               177,419                  2 %           139,176                  2 %
Total
operating
expenses           1,330,131                 55 %         1,451,884                 68 %             4,000,885                 58 %         4,470,023                 70 %
Income (loss)
from
operations           436,272                 17 %            51,647                  3 %               755,145                 11 %          (235,110 )               -4 %
Other expenses
- interest &
expenses              (5,550 )                0 %           (36,497 )               -2 %               (52,576 )               -1 %          (145,282 )               -2 %
Loss on
Earnings from
Medical Joint
Venture             (212,199 )               -9 %                 0                  0 %              (259,291 )               -4 %          (124,179 )               -2 %
Net income
(loss)         $     218,523                  8 %      $     15,150                  1 %         $     443,277                  6 %      $   (504,571 )               -8 %

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

Total product sales for the three months ended September 30, 2013 and 2012 were $2,444,195 and $2,129,241, respectively. The total increase in product sales of $314,954, or 15%, in 2013 from 2012 is principally the result of increased domestic revenues. Domestic STA instruments sales increased by $112,192 in 2013 from 2012. Additionally, in the domestic market, total handpiece sales increased by $78,528, or 6.7% in 2013 over 2012. The increase in domestic instruments is due to the marketing efforts of our exclusive STA Instrument and handpiece distributor. The increase in handpieces was due to an exclusive distributor's agreement with Henry Schein for the purchases of CompuDent handpieces in the third quarter of 2013. On the international front, instruments sales increased in the third quarter of 2013 from 2012 by $19,051, or 8.6%. Significant new market countries for the STA Instruments have not come on board in the quarter ending September 30, 2013. Internationally, handpiece sales increased by $131,662, or 24% in 2013 over 2012. CompuDent/Wand Plus handpieces increased by $99,013 or 33% and STA handpiece sales increased by $32,649, or 13% for the third quarter 2013 over 2012. This trend supports the increased value of the STA Instruments being sold internationally versus the sale of the legacy CompuDent/Wand Plus Instruments.

Cost of products sold for the three months ended September 30, 2013 and 2012 were $677,792 and $625,710, respectively, an increase of $52,082, or 8.3%.

For the three months ended September 30, 2013, Milestone generated a gross profit of $1,766,403, or 72%, as compared to a gross profit of $1,503,531, or 71%, for the three months ended September 30, 2012. The total increase in gross profit dollars of $262,872 is primarily due to an increase in revenue.

Selling, general and administrative expenses for the three months ended September 30, 2013 and 2012 were $1,317,433 and $1,391,521, respectively. This reduction in expenses of $74,088, or 5.32%, is described in the following sections of this report. Marketing expenses decreased by approximately $28,000; sales expenses decreased by approximately $55,000; salary decreased by approximately $148,000; legal increased by approximately $9,000 and other expenses increased by approximately $147,000. Milestone continues to focus on controlling expenses in all categories. The third 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 decrease in marketing is due to the reduction of trade show and related expenses (travel, fees and staffing) of approximately $4,000, marketing key opinion leaders and brochures of approximately $16,000 and


advertising of approximately $7,000. 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 $55,000, due to decrease in travel, tradeshow attendance and hygienists. The increase in other expenses of approximately $147,000 is primarily due to an increase in payment of an international commission of approximately $91,000 and the excise tax of approximately $8,000.
The reduction in salary expenses is due to the approximately $60,000 shared expense for compensation for the Medical Joint Venture and the reversal of bonus accruals of approximately $35,000. Legal fees decreased by approximately $6,000 in the aggregate, for routine litigation and patent annuities. Stock Based Compensation decreased by approximately $9,000.

Research and development expenses for the three months ended September 30, 2013 and 2012 was $12,698 and $60,363, respectively, a decrease of $47,665.

The income from operations for three months ended September 30, 2013 and 2012 were $436,272 and $51,647, respectively. The $384,625, increase is explained above.

Interest expense of $5,550, 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 September 30, 2013, as compared to $22,053 for the same period in 2012, (see Note 8 to the financials). Additionally, Milestone accrued interest expense of zero and $13,805 for the overdue accounts payable on the balance to the instrument's contract manufacturer at September 30, 2013 and 2012, respectively.

Loss on the Medical Joint Venture of $212,199 and zero for the quarter ending September 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, the net income for the three months ended September 30, 2013 and 2012 were $218,523 and $15,150, respectively. The $203,373, or 1342%, increase in net income is primarily a result of an increase in gross margin dollars of $262,872 enhanced by a decrease in selling, general and administrative expenses of $74,088, decrease in research and development expense of $47,665 and a decrease in interest expense of $30,947.

Nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

Total revenues for the nine months ended September 30, 2013 and 2012 were $7,211,973 and $6,377,574, respectively. Total revenues increased by $834,399, or 13%. Domestic product revenue increased $650,627 in 2013, or 20%, the increase is due to the increase in STA Single Tooth Anesthesia SystemŽ instruments sales by $364,458. This increase is due in part to management's implementation of an exclusive domestic distributor and the sales and training strategy focused on concentrated geographical sales effort and increased support for all customers. The domestic disposable handpiece sales increased by $349,808, or 13% due to a buying of CompuDent handpieces as a part of their exclusive distributor agreement with Milestone for the marketing and distribution of the CompuDent handpieces in the United States and Canada.
International revenue increased by $183,772. International sales of disposable handpieces increased by $222,461 or 10.4%.

Cost of products sold for the nine months ended September 30, 2013 and 2013 were $2,233,944 and $2,142,661, respectively, an increase of $91,283, or 4.3%.

Gross profit for the nine months ended September 30, 2013 and 2012 was $4,978,029 or 69%, and $4,234,913, or 66%, respectively. Gross profit dollars in the nine months of 2013 increased by $743,116, or 18%, due to an increase in sales volume and gross profit margin in 2013 over 2012.

Selling, general and administrative expenses for the nine months ended September 30, 2013 and 2012 were $4,045,465 and $4,330,847, respectively. The decrease of $285,382 or 6.6% is primarily attributable to a decrease in marketing expenses of $57,018; a decrease in sales expenses of $155,445, increase in general and administrative (G&A) expenses of $31,694 and a decrease in salary expenses of $91,087, principally due to a shared expense compensation of approximately $60,000 related to the Medical Joint Venture. The marketing expenses decrease is principally due to a reduction in advertising and media placement costs of $17,406, free goods and gifts by $41,360 and tradeshow attendance by $44,260 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 $155,445, 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 increased by $31,694. Additionally, recovery of bad debt expense, $155,195, based on partial collection of previously recorded bad debt reserve for an international accounts receivable.

Research and development expenses for the nine months ended September 30, 2013 and 2012 were $177,419 and $139,176, respectively. The increase of $38,243, or 27% is primarily due to the enhancement of STA instrument.

The income from operations for the nine months ended September 30, 2013 was $755,145 and the loss from operations for nine months ended September 30, 2012 was $235,110, respectively. The $990,255, increase is explained above.

Other income is $17,543 for the nine months ended September 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 $53,518, 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 nine months ended September 30, 2013, compared to $64,329 for the same period in 2012, (see Note 8 to the financials). Additionally, Milestone accrued interest expense of $14,573 and $75,945 for the overdue accounts payable balance to the instrument manufacturer at September 30, 2013 and 2012, respectively.

Loss on the Medical Joint Venture of $259,291 and $124,179 for the nine months ended September 30, 2013 and 2012, respectively, is due to development cost on the medical devices incurred by the Medical Joint Venture.

For the reasons explained above, net income for the nine months ended September 30, 2013 was $443,277 and the net loss for September 30, 2012 was $504,571, respectively. The $947,848, increase in net income is primarily a result of an increase in gross margin dollars of $743,116 offset by a decrease in selling, general and administrative expenses of $285,382; an increase in research and development expense of $38,243; other income of $17,543; a decrease in interest expense by $75,163 and the increase to non-cash Loss on the Medical Joint Venture of $135,112.

Working capital as of September 30, 2013 is a positive $1,044,204, as explained in the following liquidity and capital resources section.

Liquidity and Capital Resources

As of September 30, 2013, Milestone had cash and cash equivalents of $401,836 and a positive working capital of $1,044,204. Milestone had net income of $443,277 and a net loss of $504,571 for the nine months ended September 30, 2013 and 2012, respectively. The working capital of $1,044,204 in 2013 was the . . .

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