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MLSS > SEC Filings for MLSS > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for MILESTONE SCIENTIFIC INC.

Form 10-K for MILESTONE SCIENTIFIC INC.


13-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial condition and Results of Operations.

The following discussions of the 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 annual report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that


involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements. See "Certain Risk Factors" on page 11 of this Form 10-K.

OVERVIEW

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

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

• 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 products have been used to deliver over 49 million 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 application 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 distributor, for the sale and distribution of the STA instruments and handpieces in the 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 early October 2012, the State Food and Drug Administration (SFDA) of the People's Republic of China approved Milestone's Single Tooth Anesthesia System® (STA System). Unfortunately, the SFDA bifurcated approval of the STA Systems from the Wand® handpieces.

As of December 13, 2013, Milestone Scientific has not received the appropriate registration approval from the regulatory body in China. It is expected that the approval by the appropriate Chinese regulatory body will be received by 2014.

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 handpieces. 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 held a 50% interest in the joint venture and Beijing 3H held 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 $1.5 million to the joint venture to enable the joint venture to design and develop two commercial instruments and related disposables using Milestone's CompuFlo® 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 December 31, 2013, the Medical Joint Venture and the development project is ongoing and nearing the completion of the two medical instruments.

In November 2013, our then fifty (50) percent owned medical joint venture, Milestone Medical Inc., issued 2 million shares of Milestone Medical's common stock at $150 per share, total ($3.0 million) in a private placement in Poland. The consummation of the private placement provided for the admission of the Milestone Medical common stock for trading on a platform maintained by the Warsaw Stock Exchange. As a result of this transaction, Milestone now owns approximately forth-five (45.5%) percent (post-transaction) of Milestone Medical Inc and Milestone recorded a $1,363,650 Gain on the Dilutive Effect of these additional shares issued by Milestone Medical Inc.

In the fourth quarter of 2012, Milestone wrote off its investment in a German Distributor, $76,319, (cost basis) due to its continued low performance and continued losses.

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:

                                                   Years Ended December 31,
                                              2013                          2012
  DOMESTIC
  Instruments                       $  1,221,589         23.1 %    $   843,837        19.4 %
  Handpieces                           3,958,548         74.7 %      3,397,193        78.2 %
  Other                                  119,415          2.2 %        102,776         2.4 %
  Total Domestic                    $  5,299,552        100.0 %    $ 4,343,806       100.0 %
  INTERNATIONAL
  Instruments                       $  1,450,436         30.8 %    $ 1,302,919        30.3 %
  Handpieces                           3,336,262         70.8 %      2,946,828        68.5 %
  Other                                  (74,830 )       -1.6 %         54,689         1.2 %
  Total International               $  4,711,868        100.0 %    $ 4,304,436       100.0 %
  DOMESTIC/INTERNATIONAL ANALYSIS
  Domestic                          $  5,299,552         52.9 %    $ 4,343,806        50.2 %
  International                        4,711,868         47.1 %      4,304,436        49.8 %
  Total Product Sales               $ 10,011,420        100.0 %    $ 8,648,242       100.0 %

Milestone earned gross profit of 68% and 65% in the years ended December 31, 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 Milestone anticipates expending funds for research and development in 2014, these amounts will vary based on the operating results for each quarter. Milestone has incurred annual operating losses and negative cash flows from operating activities since its inception, except for 2013. Milestone, at December 31, 2013, believes that it may not have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. Milestone is actively pursuing the continued generation of positive cash flows from operating activities through increase in revenue, assessment of current contracts and current negotiations. There is no assurance that Milestone will be able to continue positive operating cash flows or that additional capital raised on terms and conditions satisfactory to Milestone, if at all. If additional capital is required and it cannot be raised, then Milestone would be forced to curtail its development activities, reduce marketing for existing dental products or adopt other cost saving measures, any of which might negatively affect Milestone's operating results.

In 2014, Milestone plans to further support increased sales and marketing activity through our newly appointed exclusive distributor of the STA instruments and handpieces in the U.S. and Canada and utilization of independent hygienists' for training individual practitioners and group practices domestically, refined and directed advertising to dental professionals, and support and broaden our global distribution network.

Milestone announced the formation of a strategic alliance, whereby a third party distributor will serve as the exclusive distributor of Milestone's Single Tooth Anesthesia System® (STA System) and all related disposable items in the United States and


Canada, beginning November 15, 2012. Additionally, the third party distributor will initiate a marketing campaign to drive sales in these territories.

In August 2013, Milestone appointed Henry Schein as its exclusive distributor in the USA and Canada for the CompuDent handpieces.

Current Product Platform

See Item 1. Description of Business

Technology Rights

The technology underlying the SafetyWand and CompuFlo technology and an improvement to the controls for CompuDent were developed by the Director of Clinical Affairs and assigned to Milestone. Milestone purchased this technology pursuant to an agreement dated January 1, 2005, for 43,424 shares of restricted common stock and $145,000 in cash, paid on April 1, 2005. In addition, the Director of Clinical Affairs will receive additional deferred contingent payments of 2.5% of the total sales of products using some of these technologies, and 5% of the total sales of products using some of the other technologies. If products produced by third parties use any of these technologies, under a license from Milestone, then he will also receive the corresponding percentage of the consideration received by us for such sale or license.

Milestone provided the exclusive worldwide royalty-free license to Milestone Medical Inc. for the use of Milestone's patients as using to develop two medical instruments in 2011. In return for the license, Milestone originally received a 50% interest in Milestone Medical Inc.

Summary of Critical Accounting Policies and Significant Judgments and Estimates

Milestone's discussion and analysis of the financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles, generally accepted in the U.S. 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, Milestone evaluates its estimates, including those related to accounts receivable, inventories, stock-based compensation and contingencies. Milestone bases its 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.

While significant accounting policies are more fully described in Note B to the financial statements included elsewhere in this report, Milestone believes that the following accounting policies and significant judgments and estimates are most critical in understanding and evaluating the reported financial results.

Accounts Receivable

The realization of Accounts Receivable current and long-term will have a significant impact on Milestone. The criteria used by management to evaluate the adequacy of the allowance for doubtful accounts included, among others, credit worthiness of the customer, current trends, prior payment performance, the age of the receivables and Milestone's overall historical experience.

Inventories

Inventory costing, obsolescence and physical control are significant 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

Milestone has entered into a Medical Joint Venture with a third party for the development and commercialization of two medical products. Milestone owns 45.5 percent at December 31, 2013 and 50 percent at December 31, 2012 of the joint venture and has recorded its investment on the equity basis of accounting. Milestone's proportionate share of expenses incurred by the Joint Venture is charged to the Statement of Operations and adjusted against the Investment in Medical Joint Venture.


Impairment of Long-Lived Assets

The long lived assets of Milestone, principally patents and trademarks are the base features of the business. Milestone reviews 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 domestic distributors on the date of shipment for essentially all shipments, since the shipment terms are FOB warehouse. Milestone 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, Milestone has no obligation on these sales for any post installation, set-up or maintenance, these being the responsibility of the buyer. Milestone's only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period.

Results of Operations

The following table sets forth for the consolidated results of operations for the year ended December 31, 2013 compared to 2012 as a percentage of revenues. The trends suggested by this table may not be indicative of future operating results:

                                                           Years Ended
                                        December 31, 2013                December 31, 2012
Total revenue                     $    10,011,420           100 %    $ 8,648,242            100 %
Cost of products sold                   3,198,908            32 %      3,055,991             35 %
Gross Profit                            6,812,512            68 %      5,592,251             65 %
Selling, general and
administrative expenses                 5,534,463            55 %      5,930,625             69 %
Research and development
expenses                                  191,345             2 %        181,979              2 %
Operating expenses                      5,725,808            57 %      6,112,604             71 %
Income (loss) from operations           1,086,704            11 %       (520,353 )           -6 %
Total other expense                       378,226             4 %       (349,952 )           -4 %
Income (loss)                           1,464,930            15 %       (870,306 )          -10 %
Provision for Income Tax                        -             -                -              -
Net Income (loss)                 $     1,464,930            15 %       (870,306 )          -10 %

Year ended December 31, 2013 compared to year ended December 31, 2012

Total revenues for the twelve months ended December 31, 2013 and 2012 were $10,011,420 and $8,648,242, respectively. The total increase in product sales is $1,363,178 or 16%. Domestic revenue increased by $955,746, or 22% and represents approximately 70% of the total revenue increases for Milestone. Of the increase, $561,355 represented increased handpiece revenues. This increase is principally due to an arrangement with Henry Schein as the exclusive distributor in the USA and Canada for the CompuDent handpieces that was finalized the second half of 2013. Domestic instrument sales, principally STA instrument sales, was the result of marketing efforts by an exclusive distributor for the product line.

Internationally, the overall revenue for this segment increased by $407,432, or 10% over 2012. The principal driver for the increase was handpiece sales, which increased by $389,434. The CompuDent handpieces continued to have a substantial market share of the total handpieces on an international basis, even though our CompuDent instrument sales have been curtailed. Internationally, the STA instruments revenue is growing steadily and our STA handpieces business is increasing at a faster rate than the instrument sales.

Cost of products sold for the years ended December 31, 2013 and 2012 were $3,198,908 and $3,055,991, respectively. The $142,917, or 5% increase in product cost is primarily due to a write off of advance to contract manufacturer for STA and CompuDents materials of $60,000 and $135,535, in 2013 and 2012, respectively, offset by lower production costs of the STA instruments.

Milestone generated a gross profit of $6,812,512 or 68% in 2013 as compared to a gross profit of $5,592,251 or 65% in 2012. The total dollar increase in gross profit was $1,220,261 in 2013 over 2012.

Selling, general and administrative expenses for the years ended December 31, 2013 and 2012 were $5,534,463 and $5,930,625, respectively. The decrease of $396,162, approximately 7%, was included in all areas of expense categories. Marketing expenses decreased by $97,047 as Milestone reduced its individual corporate expense in trade shows and advertising periodicals in the


USA, since our exclusive STA distributor provided these services in the domestic market. Selling expenses decreased by $143,306, with a more limited exposure of corporate personnel and third party field hygienists focusing their attention on dental groups and dental schools. The higher volume of traveling expenses in this category, for individual dentist office calls has been transferred to our exclusive distributor. Payroll expenses decreased by $123,150 overall for this expense category principally due to the sharing of corporate personnel (expense transfer) to our Medical Joint Venture affiliate. Other expenses decreased by $33,502, principally due to a reversal of $100,700 of bad debt reserve. The reserve was established in 2010 for the sale of STA instruments to a distributor in China. As of December 31, 2013, the entire accounts receivable has been collected and the reserve is fully reversed.

Research and development expenses for the years ended December 31, 2013 and 2012 were $191,345 and $181,979, respectively, a decrease of $9,366.

The income from operations for the year ended December 31, 2013 was $1,086,704 and loss from operations for the year ended December 31, 2012 was $520,353, respectively. The $1,607,057 or 309% increase in income from operations, is mainly attributable to an increase in gross profit of $1,220,261 and a decreased operating expenses of $386,796.

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 twelve months ended December 31, 2013, compared to $87,016 for the same period in 2012, (see Note I to the Financial Statements). Additionally, Milestone accrued interest expense of $14,573 and $86,270 for the overdue accounts payable balance to the instrument manufacturer at December 31, 2013 and 2012, respectively.

The loss on earnings from the Medical Joint Venture, $924,363 in 2013, of which $509,803 is from 2013 operations and $414,560 is from suspended losses in 2012 and prior years, relate to the development of two medical instruments. This loss is not a cash drain on Milestone, since the Joint Venture partner contributed the cash for the development project. The loss on earnings from the Education Joint Venture is $7,918 in 2013.

In 2013, Milestone recognized a Gain on Dilutive Effect on its share in the Medical Joint Venture. As a result of the issuance of 2 million shares by Milestone Medical Inc., (joint venture), Milestone's overall ownership percentage was reduced to 45.5% from originally 50%. The dilution in ownership percentage in accordance with the equity method of accounting resulted in recognized gain, (treated as if the reduced ownership shares were sold). As a result of the accounting, Milestone recognized a gain of $1,363,650.

For the reasons explained above, the net income for the year ended December 31, 2013 was $1,464,930 as compared to the net loss for the year ended December 31, 2012 was $870,306. The $2,335,236 or 268%, increase in net income is primarily a result of an increase in gross profit of $1,220,261 as a result of higher sales volume, complimented by a significant decrease in Selling, General and Administrative and Research and Development expenses of $384,796 and the decrease in other expense of $728,178.

Liquidity and Capital Resources

As of December 31, 2013, Milestone had cash and cash equivalents of $1,147,198 and a working capital of $2,344,135. Milestone had net income of $1,464,930 for the year ended December 31, 2013 and a net loss of $870,306 for the year ended December 31, 2012, respectively. The working capital of $2,344,135 in 2013 was the positive result of increased current assets (cash and accounts receivable) and the substantial reduction of accounts payable due to contract manufacturer, this in spite of the continued 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. At December 31, 2013, advance to contract manufacturers decreased, (current and long term), as compared to December 31, 2012 through payment of the outstanding long term liability.

Current accounts receivable increased by $553,874, due to a large billing month in December 2013 over 2012, inventories increased by $683,091 particularly in handpieces, to provide a safety stock of these items to meet our end user needs. Also, cash increased by $981,949 for operations. Current liabilities decreased by $739,064, principally due to a decrease in accounts payable by $316,226 and accrued interest on notes payable of $356,563. The decrease in accrued interest on notes payable is due to the August 2013 conversion of the then $450,000 notes payable and accrued interest as of that date. (See Note I on the Financial Statements.)

Milestone has also decreased noncurrent advances to a contract manufacturer of $769,603. Milestone continues to take positive steps to maintain adequate inventory levels and advances to contract manufacturers to maintain available inventory to meet our domestic and international sales requirements. Milestone had net income of $1,464,930 for the year ended December 31, 2013 and a net loss of $870,306 for the year ended 2012. Cash flows from operating activities for the year ended December 31, 2013 was a positive $1,258,736 and for the year ended December 31, 2012 was a negative $49,718. The significant increase in net cash provided in operations, is a substantial improvement over prior years.


Milestone entered a Medical Joint Venture agreement with a third party in 2011, for the development and commercialization of two medical instruments. Milestone invested an additional $75,000 into this Medical Joint Venture in 2013. Additionally, based on the joint venture agreement, Milestone financed the development and legal fees for FDA regulations in the USA ($409,828) in 2013. Milestone recorded a $1,363,650 Gain on the Dilutive Effect of these additional shares issued by Milestone Medical Inc. (See Note F to the Financial Statements.)

Milestone borrowed $450,000 from a shareholder in 2008 and issued a $450,000 promissory note to the same shareholder. In December 2008 and again in June 2011, Milestone refinanced the $450,000 note, extending the due date to January 3, 2014. The $450,000 Note is classified as a Long Term Note Payable on the Balance Sheet at December 31, 2012. In 2013, Milestone issued 613,644 shares ($1.40 per share) of common stock on conversion of $860,081 of principal and interest outstanding on the debt. (See Note I to the Financial Statements.)

For the year ended December 31, 2013, net cash provided in operating activities was $1,258,736. This was attributable primarily to a net income of $1,464,930 adjusted for noncash items of $433,617 and decrease in changes in operating assets and liabilities of $639,811. The increase in noncash items in 2013 as compared to 2012 is principally due to the increase in shares issued for compensation of $403,522 in 2013, loss on earnings for medical joint venture of $924,363 and the Gain on Dilutive Effect on Joint Venture - Medical of $1,363,650 (2013).

For the years ended December 31, 2013 and 2012, Milestone used $561,387 and $31,357, respectively, in investing activities, primarily attributable to legal fees related to payment for patent rights and joint venture activities.

Milestone has incurred annual operating losses and negative cash flows from operating activities since its inception, except year ended December 31, 2013. Milestone is actively pursuing the generation of positive cash flows from operating activities through increases in revenues based upon management's assessment of present contracts and current negotiations and reductions in operating expenses. As of December 31, 2013, Milestone believes that it may not have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. However, if Milestone requires a higher level of marketing and sales effort, or if Milestone is unable to continue generating positive cash flows from its operating activities it will need to raise additional capital. There is no assurance that Milestone will be able to continue to achieve positive operating cash flows or that additional capital can be raised on the terms and conditions satisfactory to Milestone if at all. If additional capital is required and it cannot be raised, then Milestone would be forced to curtail its development activities, reduce marketing expenses for existing dental . . .

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