10-Q 1 mlss-10q_20130930.htm 10-Q

      

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                               

Commission File Number: 001-14053

      

MILESTONE SCIENTIFIC INC.

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

13-3545623

(State or other jurisdiction of incorporation or organization)

   

(I.R.S. Employer Identification No.)

220 South Orange Avenue, Livingston, New Jersey 07039

(Address of principal executive offices)

(973) 535-2717

(Registrant’s telephone number, including area code)

      

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Large accelerated filer ¨

   

Non-accelerated filer ¨

      

Accelerated filer ¨

   

Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of November 12, 2013, the Issuer had a total of 17,615,096 shares of Common Stock, $.001 par value outstanding.

   

   

       


MILESTONE SCIENTIFIC INC

TABLE OF CONTENTS

   

 

PART I – FINANCIAL INFORMATION

   

   

   

   

Item 1. Financial Statements  

   

   

   

   

Condensed Balance Sheets  

   

   

September 30, 2013 (Unaudited) and December 31, 2012 (Audited)

 

 4

   

   

Condensed Statements of Operations  

   

   

Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

 5

   

   

Condensed Statement of Changes in Stockholders’ Equity  

   

   

Nine Months Ended September 30, 2013 (Unaudited)

 

 6

   

   

Condensed Statements of Cash Flows  

   

   

Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

 7

   

   

Notes to Condensed Financial Statements (Unaudited)  

 

 8

   

   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

 15

   

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

 

 21

   

   

Item 4. Controls and Procedures  

 

 21

   

   

PART II – OTHER INFORMATION

   

   

   

   

Item 1. Legal Proceedings  

 

 22

   

   

Item 1A. Risk Factors  

 

 22

   

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

 

 22

   

   

Item 3. Defaults Upon Senior Securities  

 

 22

   

   

Item 4. Mine Safety Disclosures  

 

 22

   

   

Item 5. Other Information  

 

 22

   

   

Item 6. Exhibits  

 

 23

Exhibits 31.1

   

   

Exhibits 31.2

   

   

Exhibits 32.1

   

   

Exhibits 32.2

   

   

   

   

SIGNATURES  

   

   

   

 

 2 

   


FORWARD-LOOKING STATEMENTS

When used in this Quarterly Report on Form 10-Q, 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 of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (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 the 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.  

   

   

   

 

 3 

   


MILESTONE SCIENTIFIC INC.

CONDENSED BALANCE SHEETS

   

 

   

September 30, 2013
(Unaudited)

   

      

December 31, 2012

   

ASSETS

   

   

   

      

   

   

   

Current Assets:

   

   

   

      

   

   

   

Cash and cash equivalents

$

401,836

   

      

$

165,249

   

Accounts receivable, net of allowance for doubtful accounts of $17,862 as of September 30, 2013 and $179,259 as of December 31, 2012

   

1,570,308

   

      

   

978,982

   

Receivable from Milestone Medical Inc

   

132,787

   

   

   

—  

   

Inventories

   

874,559

   

      

   

638,561

   

Advances on contracts

   

501,469

   

      

   

476,969

   

Prepaid expenses and other current assets

   

116,945

   

      

   

239,061

   

Total current assets

   

3,597,904

   

      

   

2,498,822

   

Accounts receivable-long term, net of allowance for doubtful accounts of $167,971 as of December 31, 2012

   

—  

   

      

   

119,201

   

Advances on contracts

   

2,052,092

   

      

   

2,350,477

   

Investment in Milestone Education LLC

   

50,000

   

      

   

—  

   

Furniture, Fixtures & Equipment net of accumulated depreciation of $471,822 as of September 30, 2013 and $458,708 as of December 31, 2012

   

26,622

   

      

   

36,624

   

Patents, net of accumulated amortization of $478,916 as of September 30, 2013 and $420,556 as of December 31, 2012

   

607,992

   

      

   

648,662

   

Other assets

   

12,917

   

      

   

7,317

   

Total assets

$

6,347,527

   

      

$

5,661,103

   

   

   

   

   

   

   

   

   

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

      

   

   

   

Current Liabilities:

   

   

   

      

   

   

   

Accounts payable

$

1,806,404

   

      

$

2,336,594

   

Accrued interest on Notes Payable

   

—  

   

      

   

356,563

   

Accrued expenses and other payables

   

747,296

   

      

   

581,407

   

Total current liabilities

   

2,553,700

   

      

   

3,274,564

   

Long-term Liabilities:

   

   

   

      

   

   

   

Notes Payable

   

—  

   

      

   

450,000

   

Total long-term liabilities

   

—  

   

      

   

450,000

   

Total liabilities

   

2,553,700

   

      

   

3,724,564

   

Commitments and Contingencies

   

   

   

      

   

   

   

Stockholders’ Equity

   

   

   

      

   

   

   

Common stock, par value $.001; authorized 50,000,000 shares; 17,572,055 shares issued 1,655,317 shares to be issued and 17,538,722 shares outstanding as of September 30, 2013; 16,563,306 shares issued, 1,635,709 shares to be issued, and 16,529,973 shares outstanding as of December 31, 2012

   

19,228

   

      

   

18,199

   

Additional paid-in capital

   

65,973,206

   

      

   

64,560,224

   

Accumulated deficit

   

(61,287,091

)

      

   

(61,730,368

)

Treasury stock, at cost, 33,333 shares

   

(911,516

)

      

   

(911,516

)

Total stockholders’ equity

   

3,793,827

   

      

   

1,936,539

   

Total liabilities and stockholders’ equity

$

6,347,527

   

      

$

5,661,103

   

   

   

   

See Notes to Condensed Financial Statements

   

   

   

 

 4 

   


MILESTONE SCIENTIFIC INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

   

 

   

   

Three Months Ended September 30,

   

      

Nine Months Ended September 30,

   

   

   

2013

   

   

2012

   

      

2013

   

   

2012

   

Product sales

   

   

$

2,444,195

   

   

$

2,129,241

   

   

$

7,211,973

   

   

$

6,377,574

   

Cost of products sold

   

   

   

677,792

   

   

   

   

625,710

   

   

   

2,233,944

   

   

   

2,142,661

   

Gross profit

   

   

   

1,766,403

   

   

   

1,503,531

   

   

   

4,978,029

   

   

   

4,234,913

   

Selling, general and administrative expenses

   

   

   

1,317,433

   

   

   

1,391,521

   

   

   

4,045,465

   

   

   

4,330,847

   

Research and development expenses

   

   

   

12,698

   

   

   

   

60,363

   

   

   

177,419

   

   

   

139,176

   

Total operating expenses

   

   

   

1,330,131

   

   

   

1,451,884

   

   

   

4,222,884

   

   

   

4,470,023

   

Income (loss) from operations

   

   

   

436,272

   

   

   

51,647

   

   

   

755,145

   

   

   

(235,110

   

)

Other income (expenses)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Other income

   

   

   

0

   

   

   

   

0

   

   

   

17,543

   

   

   

0

   

Interest expense

   

   

   

(5,550

   

)

   

   

(36,497

   

)

   

   

(70,119

   

)

   

   

(142,217

   

)

Interest-Amortization of debt issuance

   

   

   

0

   

   

   

0

   

   

   

   

0

   

   

   

   

(3,065

   

)

Loss on Earnings from Medical Joint Venture

   

   

   

(212,199

   

)

   

   

0

   

   

   

(259,291

   

)

   

   

(124,179

   

)

Total other  expenses

   

   

   

(217,749

   

)

   

   

(36,497

   

)

   

$

(311,868

   

)

   

$

(269,461

   

)

Net income (loss)

   

   

$

218,523

   

   

$

15,150

   

   

   

$

443,277

   

   

$

(504,571

   

)

Net income (loss) per share applicable to common  stockholders –

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

   

$

0.01

   

   

$

0.00

   

   

   

$

0.03

   

   

$

(0.03

)

   

   

Diluted

   

   

$

0.01

   

   

$

0.00

   

   

   

$

0.03

   

   

$

(0.03

)

   

   

Weighted average shares outstanding and to be  issued –

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

   

   

17,333,941

   

   

$

16,244,800

   

   

   

16,955,048

   

   

$

15,953,925

   

Diluted

   

   

   

17,716,964

   

   

   

16,369,814

   

   

   

17,322,388

   

   

   

15,953,925

   

   

   

   

   

   

   

   

   

   

See Notes to Condensed Financial Statement

   

   

   

 

 5 

   


MILESTONE SCIENTIFIC INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2013

(Unaudited)

   

   

   

 

   

Common Stock

   

   

   

   

Additional Paid-in Capital

   

   

   

   

Accumulated Deficit

   

   

   

   

Treasury Stock

   

   

   

   

Total

   

   

   

Shares

   

   

   

   

Amount

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Balance, January 1, 2013

   

   

18,199,015

   

   

   

$

18,199

   

   

   

$

64,560,224

   

   

   

$

(61,730,368

   

)

   

$

(911,516

   

)

   

$

1,936,539

   

   

Options to employees and consultants

   

   

—  

   

   

   

   

—  

   

   

   

   

56,205

   

   

   

   

—  

   

   

   

   

—  

   

   

   

56,205

   

   

Common stock to be issued to employee for bonuses

   

   

19,608

   

   

   

   

20

   

   

   

   

19,980

   

   

   

   

   

   

   

   

   

   

   

   

   

20,000

   

   

Common stock issued for directors compensation

   

   

39,129

   

   

   

   

39

   

   

   

   

44,961

   

   

   

   

—  

   

   

   

   

—  

   

   

   

45,000

   

   

Common stock issued for payment of consulting services to settle accounts payable

   

   

250,934

   

   

   

   

   

   

251

   

   

   

   

   

   

317,249

   

   

   

   

   

   

—  

   

   

   

   

   

   

—  

   

   

   

   

   

   

317,500

   

   

Common stock issued for conversion of notes payable and accrued interest

   

   

614,344

   

   

   

   

   

   

614

   

   

   

   

   

   

859,466

   

   

   

   

   

   

—  

   

   

   

   

   

   

—  

   

   

   

   

   

   

860,081

   

   

Common stock issued for payment of employee compensation

   

   

28,628

   

   

   

   

29

   

   

   

   

35,596

   

   

   

   

—  

   

   

   

   

—  

   

   

   

35,625

   

   

Exercise of stock options

   

   

40,000

   

   

   

   

   

   

40

   

   

   

   

   

   

29,560

   

   

   

   

   

   

—  

   

   

   

   

   

   

—  

   

   

   

   

   

   

29,600

   

   

Sale of Common Stock

   

   

35,714

   

   

   

   

36

   

   

   

   

49,524

   

   

   

   

—  

   

   

   

   

—  

   

   

   

50,000

   

   

Net income

   

   

—  

   

   

   

   

—  

   

   

   

   

—  

   

   

   

   

443,277

   

   

   

   

—  

   

   

   

   

443,277

   

   

Balance, September 30, 2013

   

   

19,227,372

   

   

   

$

19,228

   

   

   

$

65,973,206

   

   

   

$

(61,287,091

   

)

   

$

(911,516

)

   

   

$

3,793,827

   

   

   

   

   

   

   

   

   

See Notes to Condensed Financial Statements

   

   

   

 

 6 

   


MILESTONE SCIENTIFIC INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

   

 

   

NINE MONTHS ENDED SEPTEMBER 30,

   

   

2013

   

      

2012

   

Cash flows from operating activities:

   

   

   

      

   

   

   

Net income (loss)

$

443,277

      

      

$

(504,571

)

Adjustments to reconcile net income (loss) net cash provided by operating activities:

   

   

   

      

   

   

   

Depreciation expense

   

13,114

      

      

   

14,482

      

Amortization of patents

   

58,360

      

      

   

57,097

      

Amortization of debt discount

   

0

      

      

   

3,065

      

Common stock and options issued for compensation, consulting, and vendor services

   

512,846

      

      

   

281,648

      

Loss on sale/disposal of equipment

   

0

      

      

   

1,604

   

Accrued interest expense on notes payable

   

0

      

      

   

0

      

Bad debt reversal

   

(295,488

)  

      

   

(140,293

)

Loss on Earning on Medical Joint Venture

   

259,291

      

      

   

124,179

      

Changes in operating assets and liabilities:

   

   

   

      

   

   

   

(Increase) Decrease in accounts receivable

   

(309,424

)  

      

   

596,931

      

(Increase) Decrease in inventories

   

(235,998

)  

      

   

119,839

      

Decrease to advances to contracts

   

273,885

      

      

   

315,736

      

Decrease to prepaid expenses and other current assets

   

137,117

      

      

   

168,237

      

(Increase) Decrease in other assets

   

(5,600

)  

      

   

20,503

      

Decrease in accounts payable

   

(530,190

)  

      

   

(1,326,398

)

Increase in accrued expenses

   

120,889

      

      

   

320,733

      

Net cash provided by operating activities

   

442,079

      

      

   

52,792

   

Cash flows from investing activities:

   

   

   

      

   

   

   

Investment in Milestone Education LLC

   

(50,000

)  

      

   

0

      

Investment in Milestone Medical, Inc.

   

(259,291

)

   

   

0

   

Purchases of property and equipment

   

(3,111

)  

      

   

(4,061

)

Payment for patents rights

   

(17,690

)  

      

   

(21,529

)

Net cash used in investing activities

   

(330,092

)  

      

   

(25,590

)

Cash flows from financing activities:

   

   

   

      

   

   

   

Proceeds from exercise of stock options

   

29,600

   

   

   

0

   

Proceeds from the sale of common stock

   

50,000

      

      

   

150,000

      

Proceeds from related party loan  

   

50,000

      

      

   

0

      

Repayment of related party loan

   

(5,000

)

   

   

0

   

Net cash provided by financing activities

   

124,600

      

      

   

150,000

      

NET INCREASE IN CASH AND CASH EQUIVALENTS

   

236,587

      

      

   

177,202

      

Cash and cash equivalents at beginning of period

   

165,249

      

      

   

96,324

      

Cash and cash equivalents at end of period

$

401,836

      

      

$

273,526

      

Supplemental disclosure of cash flow information

   

   

   

   

   

   

   

Shares issued to directors for the exercise of stock options

$

29,600

   

   

   

0

   

Shares issued to directors for compensation

$

45,000

   

   

$

45,000

   

Shares issued for conversion of notes payable and accrued interest

$

860,081

   

   

$

0

   

Shares issued to employees in lieu of cash compensation

$

35,625

   

   

$

31,250

   

   

   

See Notes to Condensed Financial Statements

   

   

   

       

 

 7 

   


MILESTONE SCIENTIFIC INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

September 30, 2013

   

ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

Milestone Scientific Inc. (“Milestone” or the “Company”) was incorporated in the State of Delaware in August 1989.

The unaudited financial statements of Milestone 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, 2012 included in Milestone’s Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present Milestone’s financial position as of September 30, 2013 and the results of its operations for the three and nine months then ended.

The results reported for the three and nine months ended September 30, 2013 are not necessarily indicative of the results of operations which may be expected for a full year.

Milestone had a positive cash flow from operating activities for the nine months ending September 30, 2013 and 2012 of $$442,079 and $52,792, respectively. At September 30, 2013, Milestone had cash and cash equivalents of $401,836 and a positive working capital of $1,044,204. The working capital increased by $1,819,946 as compared to December 31, 2012 negative working capital of $775,742. The positive change in working capital is due to the Company’s increase in current assets (cash and accounts receivable) and a substantial reduction in accounts payable. Milestone borrowed $450,000 in 2008 from a shareholder. This note and the related accrued interest was converted to common stock on August 8, 2013. The Company is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue based upon management’s assessment of present contracts and current negotiations and reductions in operating expenses. As of September 30, 2013, Milestone does not expect to have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. Milestone may require a higher level of marketing and sales efforts that it cannot fund. If Milestone is unable to generate positive cash flows from its operating activities it will need to raise additional capital. There is no assurance that Milestone will be able to achieve positive operating cash flows or that traditional capital can be raised on terms and conditions satisfactory to Milestone, if at all. If positive cash flow cannot be achieved or if additional capital is required and cannot be raised, then Milestone would be forced to curtail its development activities, reduce marketing expenses for existing dental products or adopt other cost saving measures, any of which might negatively affect Milestone’s operating results.

Milestone’s recurring losses raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

   

NOTE 1 – SUMMARY OF ACCOUNTING POLICIES

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income, by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance was effective prospectively for reporting periods beginning after December 15, 2012. As this guidance relates to presentation only, the adoption of this guidance did not impact the Company’s financial position or results of operations.

 

 8 

   


In July 2013, the FASB issued guidance to eliminate the diversity in practice in presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new guidance, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforward that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The guidance is effective prospectively, but allows optional retrospective adoption (for all periods presented), for reporting periods beginning after December 15, 2013. As this guidance relates to presentation only, the adoption of this guidance will not impact the Company’s financial position or results of operations.

   

NOTE – 2 BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

Milestone presents “basic” and “fully diluted” income (loss) per common share applicable to common stockholders, and, if applicable, “diluted” income (loss) per common share applicable to common stockholders pursuant to the provisions of FASB ASC Topic 260. Basic income (loss) per common share is calculated by dividing net income or loss applicable to common stockholders 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 income 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 and warrants were issued during the period.

Since Milestone had net losses for the nine months ended September 30, 2012, the assumed effects of the exercise of outstanding stock options and warrants, and the conversion of convertible debt were not included in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled 1,445,614 at September 30, 2012.

   

NOTE – 3 ACCOUNTS RECEIVABLE

Milestone sells a significant amount of its product on credit terms to its major distributors. Milestone estimates losses from the inability of its customers to make payments on amounts billed. A majority of credit sales are due within sixty days from invoicing. In 2010, Milestone shipped a significant order to a major international distributor. At the time of the shipment, regulatory approval to sell the product in the respective country was in process. Obtaining such regulatory approval was not a condition of the purchase order and sale to the distributor. A segment of the regulatory approval has been delayed and as such the customer has not paid the full amount of the invoiced shipment. The remaining balance due from this distributor is $24,160 and $527,172 as of September 30, 2013 and December 31, 2012, respectively. Milestone is receiving periodic payments from the international distributor and a substantial portion has been paid in 2013. Milestone reserved $12,862 and $308,350 of the total accounts receivable from this distributor as of September 30, 2013 and December 31, 2012, respectively.

   

NOTE – 4 INVESTMENT IN JOINT VENTURE

In March 2011, Milestone entered into an agreement with a People’s Republic of China ("PRC") entity Beijing 3H Scientific Technology Co., Ltd (Beijing 3H), to establish a Medical Joint Venture entity in the PRC to develop intra-articular and epidural drug delivery instruments utilizing Milestone’s patented CompuFlo technology. Beijing 3H agreed to contribute up to $1.5 million to this Medical Joint Venture entity, based on progress reports from Milestone and subject to refund if the instruments are not developed because of technological problems within 30 months of the inception date. Milestone evaluates the technological feasibility of the products to be developed using the CompuFlo technology periodically and at every reporting date to establish if circumstances indicate that the technology continues to be feasible. Based on the available evidence Milestone concluded that the contingency associated with the return of capital to Beijing 3H would be remote as of September 30, 2013 and accordingly no amounts have been accrued in the accompanying financial statements relating to this contingency. Milestone, with the consent of Beijing 3H, organized a domestic research and development corporation to which the principal shareholders of Beijing 3H and other shareholders completed a capital contribution of $ 1,500,000. The Medical Joint Venture entity is owned fifty percent by shareholders of Bejing 3H and fifty percent by Milestone. Milestone contributed an exclusive worldwide royalty-free license to use CompuFlo technology to the Medical Joint Venture which had a remaining net book value of approximately $245,000 and has accounted for its investment in the Medical Joint Venture using the equity method of accounting. Further, Milestone was authorized by the Medical Joint Venture to manage and oversee the development of the two products for the Medical Joint Venture. In connection with this authorization, Milestone also entered into an agreement with a significant vendor to develop the two instruments included in the Medical Joint Venture.

 

 9 

   


Milestone will have distribution responsibility in the U.S. and Canada. Beijing 3H will distribute products exclusively in the PRC, Macao, Hong Kong and other regions of Asia. The rest of the world responsibilities will be shared by Milestone and Beijing 3H.

Milestone recorded a Loss on Medical Joint Venture of $259,291 for the nine months ended September 30, 2013 and $212,199 for the three months ended September 30, 2013. The losses described represent fifty percent of the applicable losses record by medical joint venture during the periods. Milestone utilizes the equity of accounting to recognize its financial results of the joint venture.

Milestone expended approximately $112,000 in the third quarter of 2013 for legal related to the FDA (510k) certifications. As part of the joint venture agreement, the Company is to pay all fees related to the USA FDA certification process.

The Medical Joint Venture’s cumulative expenses since inception are approximately $2 million. Milestone had reduced its investment to the Medical Joint Venture to zero in 2012. The accumulative loss that is not recognized on the statement of operations is approximately $89,000. These losses will not be charged to the statement of operations as Milestone has not guaranteed and has no obligation to fund losses of the Medical Joint Venture in excess of its equity contribution.

Milestone provides management, financial, engineering and accounting services to Milestone Medical, Inc the value of these services prior to July 31, 2013, was not reimbursed by Milestone Medical, Inc and were charged to the investment in medical joint venture as shared services expenditures.

As of July 1, 2013, Milestone Scientific Inc. and Milestone Medical Inc., signed an agreement for the reimbursement of specific expenses incurred by Milestone Scientific Inc. specifically for the benefit of Milestone Medical Inc. Reimbursable expenses related to the agreement were approximately $133,000 for the quarter ending September 30, 2013. The expenses related to the agreement have not been paid as of September 30, 2013 and are included in account receivable, net.

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 hospitals in the U.S.

Milestone established a joint venture, Milestone Education, LLC, in the first quarter of 2013. Milestone contributed $50,000 as did the other joint venture partner. Each of the partners owns fifty (50) percent of the joint venture. The joint venture is expected to provide training and education to our dentists throughout the world. There were no income and expenses associated with this joint venture in the third quarter of 2013. The Company accounted for its investment in the Education Joint Venture using the equity method of accounting.

 

 10 

   


   

NOTE – 5 STOCK OPTION PLANS

A summary of option activity for employees under the plans and changes during the nine months ended September 30, 2013, is presented below:

   

 

   

Number
of
Options

   

      

Weighted
Averaged
Exercise
Price $

   

      

Weighted
Average
Remaining
Contractual
Life (Years)

   

      

Aggregate
Intrinsic
Options
Value $

   

Outstanding, January 1, 2013

   

1,283,741

      

      

   

0.79

      

      

   

3.07

      

      

   

768,692

      

Granted

   

—  

      

      

   

—  

      

      

   

—  

      

      

   

—  

      

Exercised

   

40,000

      

      

   

0.74

      

      

   

—  

      

      

   

—  

      

Forfeited or expired

   

36,666

      

      

   

0.94

      

      

   

—  

      

      

   

—  

      

Outstanding, September 30, 2013

   

1,207,075

      

      

   

0.87

      

      

   

2.49

      

      

   

614,768

      

Exercisable, September 30, 2013

   

794,620

      

      

   

0.84

      

      

   

1.93

      

      

   

421,506

      

Milestone recognizes compensation expense on a straight line basis over the requisite service period. For the three months ended September 30, 2013, the Company recognized $18,735 of total compensation cost. During the nine months ended September 30, 2013, Milestone recognized $56,205 of total compensation cost. As of September 30, 2013, there was $109,971 of total unrecognized compensation cost related to non-vested options which Milestone expects to recognize over a weighted average period of 2 years. A six percent rate of forfeitures is assumed in the calculation of the compensation cost for the period.

Expected volatilities are based on historical volatility of Milestone’s common stock over a period commensurate with anticipated term. Milestone uses historical data to estimate option exercise and employee termination within the valuation model.

A summary of option activity for non-employees under the plans and changes during the nine months ended September 30, 2013, is presented below:

   

 

   

Number
of
Options

   

      

Weighted
Averaged
Exercise
Price $

   

      

Weighted
Average
Remaining
Contractual
Life (Years)

   

      

Aggregate
Intrinsic
Options
Value $

   

Outstanding, January 1, 2013

   

239,999

      

      

   

1.56

      

      

   

1.32

      

      

   

168,166

      

Granted

   

—  

      

      

   

—  

      

      

   

—  

      

      

   

—  

      

Exercised

   

—  

      

      

   

—  

      

      

   

—  

      

      

   

—  

      

Forfeited or expired

   

66,667

      

      

   

2.50

      

      

   

—  

      

      

   

—  

      

Outstanding, September 30, 2013

   

173,332

      

      

   

0.48

      

      

   

0.85

      

      

   

151,750

      

Exercisable, September 30, 2013

   

170,533

      

      

   

0.48

      

      

   

0.82

      

      

   

150,805

      

During the nine months ended September 30, 2013, Milestone had no expenses related to non-employee options that vested during the period. There was no unrecognized compensation cost related to non-vested options as of September 30, 2013.

In accordance with the provisions of FASB ASC 505-50-15, all other issuances of common stock, stock options or other equity instruments to non-employees as consideration for goods or services received by Milestone are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued is estimated based on the Black-Scholes option-pricing model and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to the guidance, (generally, the earlier of the date the other party becomes committed to provide goods or services or the date of performance by the other party is complete) and capitalized or expensed as if Milestone had paid cash for the goods or services.

 

 11 

   


   

NOTE – 6 CONCENTRATION OF CREDIT RISK

Milestone’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable, and advances on contracts. Milestone places its cash and cash equivalents with large financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Milestone has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks. Financial instruments which potentially subject Milestone to credit risk consist principally of trade accounts receivable, as Milestone does not require collateral or other security to support customer receivables, and advances on contracts. Milestone entered into a purchase agreement with a vendor to supply Milestone with 12,000 STA Instruments (7,585 instruments are remaining on the purchase order as of September 30, 2013). As part of these agreements, Milestone has advanced approximately $2,554,000 and $2,827,000 to the vendor for purchase of materials at September 30, 2013 and December 31, 2012, respectively. The advance will be credited to Milestone as the goods are delivered. Milestone does not believe that significant credit risk exists with respect to this advance to the contract manufacturer.

Milestone closely monitors the extension of credit to its customers while maintaining allowances, if necessary, for potential credit losses. On a periodic basis, Milestone evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. Management has a reserve that it believes is sufficient to record accounts receivable at net realizable value as of September 30, 2013 and December 31, 2012.

   

NOTE – 7 ADVANCES ON CONTRACTS

The net advances on contracts represent funding of future STA inventory purchases. The balance of the net advances as of September 30, 2013 and December 31, 2012 is $2,554,000 and $2,827,000, respectively. The portion of this advance expected to be utilized in the next twelve months is classified as current asset, with the remainder classified as non-current asset. Milestone has an outstanding accounts payable of approximately $18,000 and $705,000 at September 30, 2013 and December 31, 2012, respectively to the contract manufacturer specifically related to the advances. Milestone is making monthly payments to the contract manufacturer.

Additionally, Milestone has an agreement with the manufacturer of the CompuDent and STA instruments to accrue interest on their outstanding accounts payable balance. For the three months ending September 30, 2013 and 2012, the interest expense for this indebtness was zero and $13,805, respectively. For the nine months ending September 30, 2013 and 2012, the interest expense for this indebtness was $14,573 and $75,945, respectively.

   

NOTE – 8 LINE OF CREDIT AND NOTES PAYABLE

Milestone borrowed $450,000 from a shareholder in 2008. The loan was originally a short term loan with a maturity date of January 19, 2009. In December 2008, May 30, 2012 and again on March 29, 2013, this loan was extended with the shareholder and the due date has been extended to January 5, 2015. The loan accrues interest at 12% per annum, interest compounds quarterly, and interest and principal is due at the maturity. The loan ($450,000) and related interest ($333,907) was converted to common stock on August 8, 2013. Further, the lender was granted 45,000 warrants exercisable at $0.32 per share, which expired unexercised in 2012.

Interest expense for the three months ended September 30, 2013 and 2012 was $5,550 and $36,497, respectively. Interest expense for the nine months ended September 30, 2013 and 2012 was $70,119 and $142,217, respectively.  The Company had also secured a line of credit, from this shareholder, for $1.3 million which was converted into equity in 2009. The accrued interest, of $76,174, on the line of credit was converted to common stock on August 8, 2013.  For the three months ended September 30, 2013 and 2012, the charge for amortization of Debt Discount related to the outstanding line of credit is zero. The charge for amortization of Debt Discount related to the outstanding line of credit is zero and $3,065 for the nine months ended September 30, 2013 and September 30, 2012, respectively.

 

 12 

   


   

NOTE – 9 STOCK ISSUANCE

During the nine months ended September 30, 2013, Milestone issued 35,714 units, at $1.40 per unit and raised gross proceeds of $50,000. Each unit consists of one share of common stock and one sixty day option to purchase a share of common stock at $1.40 per share.  Milestone issued 28,628 shares of common stock valued at $35,625 for payment of employee compensation in the nine months ended September 30, 2013. Milestone issued 39,129 (13,043 shares to each of the non-employee directors), to the members of the Company’s Board of Directors as partial compensation, (full year is $30,000 per director), for serving on the Board for the 2013-2014 period. The cost of the compensation, for nine months, is $45,000 or $1.15 per share. The expense is being amortized over a six month period. Additionally, Milestone issued 40,000 shares of common stock to two independent directors for $29,600 on their exercised stock options, $0.74 per share, and 250,934 shares valued at $317,500 were issued for payment of consulting services and reduction on the account payable balance. The Company issued 614,344 shares of common stock, valued at $860,081 or $1.40 per share, for the conversion of note payable and accrued interest, as identified in Note—8.

   

NOTE – 10 RELATED PARTY TRANSACTIONS

A shareholder of Milestone is also a shareholder of a major supplier of handpieces to Milestone. In addition, he is an investor in the PRC entity, Beijing 3H, which entered into a Medical Joint Venture agreement with Milestone.

Milestone purchased $2,146,096 and $1,439,640 from the supplier for the nine months ended September 30, 2013 and 2012, respectively. Milestone owed $854,680 and $808,908 to this supplier as of September 30, 2013 and December 31, 2012, respectively, which is included in accounts payable on the accompanying condensed balance sheet.

In the first quarter of 2013, the CEO of Milestone loaned the Company $50,000 for use in capitalizing a fifty percent equity portion in the joint venture with Milestone Education LLC.  This balance is included in the accrued expenses on the condensed balance sheets. There were no interest to this agreement. $5,000 of the loan has been paid to the CEO and the remaining balance will be paid by December 31, 2013.

In August 2013, a shareholder of the Company entered a three year agreement with the Milestone to provide financial and business strategic services. The fee for these services are $100,000 annually.

   

NOTE – 11 SIGNIFICANT CUSTOMERS & GEOGRAPHICAL INFORMATION

For the three months ended September 30, 2013, Milestone had three customers (distributors) that had approximately 57% of its net product sales and two customers (distributors) that had approximately 54% of its net product sales for the three months ended September 30, 2012. Milestone had four customers (distributors) for the nine months ended September 30, 2013, that had approximately 52% of its net product sales and two customers (distributors) that had approximately 40% of its net product sales for nine months ended September 30, 2012. Milestone had accounts receivable for two customers that amounted to $919,381 representing 54% of gross accounts receivable as of September 30, 2013 and accounts receivable for  three customers that amounted to $421,890 representing 38% of gross accounts receivable as of December 31, 2012, respectively.

Milestone’s sales by product and by geographical region are as follows:

   

 

   

Three Months Ended September 30,

   

   

Nine Months Ended September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Instruments

$

491,179

   

   

$

368,036

   

   

$

1,760,079

   

   

$

1,495,773

   

Handpieces

   

1,927,391

   

   

   

1,717,201

   

   

   

5,328,751

   

   

   

4,756,482

   

Other

   

25,625

   

   

   

44,004

   

   

   

123,143

   

   

   

125,319

   

   

$

2,444,195

   

   

$

2,129,241

   

   

$

7,211,973

   

   

$

6,377,574

   

United States

$

1,526,608

   

   

$

1,342,798

   

   

$

3,907,560

   

   

$

3,256,933

   

Canada

   

119,594

   

   

   

133,605

   

   

   

241,937

   

   

   

470,451

   

Other Foreign

   

797,993

   

   

   

652,838

   

   

   

3,062,476

   

   

   

2,650,190

   

   

$

2,444,195

   

   

$

2,129,241

   

   

$

7,211,973

   

   

$

6,377,574

   

   

 

 13 

   


   

NOTE – 12 COMMITMENTS AND OTHER

Contract Manufacturing Arrangement

Milestone has informal arrangements for the manufacture of its products. STA, single tooth anesthesia, CompuDent and CompuMed instruments are manufactured for Milestone by Tricor Systems, Inc. pursuant to specific purchase orders. The STA and The Wand Handpiece with Needle are supplied to Milestone by a contractor in the United States, which arranges for its manufacture in China.

The termination of the manufacturing relationship with any of the above manufacturers could have a material adverse effect on Milestone’s ability to produce its products. Although alternate sources of supply exist and new manufacturing relationships could be established, Milestone would need to recover its existing tools or have new tools produced. Establishment of new manufacturing relationships could involve significant expense and delay. Any curtailment or interruption of the supply, whether or not as a result of termination of such a relationship, would adversely affect Milestone.

The technology underlying the SafetyWand and CompuFlo, and an improvement to for CompuDent were developed by the Director of Clinical Affairs and assigned to us. Milestone purchased this technology pursuant to an agreement dated January 1, 2005. The Director will receive additional payments of 2.5% of the total sales of products using certain of these technologies, and 5% of the total sales of products using certain other of the technologies. In addition, the Director is granted, pursuant to the agreement, an option to purchase, at fair market value on the date of the grant, 8,333 shares of the common stock upon the issuance of each additional patent relating to these technologies. If products produced by third parties use any of these technologies (under license from us) then the Director will receive the corresponding percentage of the consideration received by Milestone for such sale or license. For the three months ended September 30, 2013 and 2012, Milestone expensed the Director’s royalty fee of $77,886 and $70,330, respectively. Milestone expensed the Director’s royalty fees of $256,127 and $221,987 for the nine months ended September 30, 2013 and 2012, respectively. Additionally, for the three months ended September 30, 2013 and 2012, the Company expensed consulting fees to the Director of $12,350 and $39,000, respectively. Milestone expensed consulting fees to the Director of $90,350 and $117,000 for the nine months ended September 30, 2013 and 2012, respectively.

In January 2010, the Company issued a purchase order to Tricor Instruments for the purchase of 12,000 STA Instruments to be delivered over the next three years. The purchase order is for $5,261,640. The Company was invoiced $3,095,763 advance of the purchase order and has paid the advance in full at September 30, 2013. As of September 30, 2013, the Company’s production and sales of instruments as it relates to this commitment has been delayed. Consequently, advances on contracts have been classified as current and long term at September 30, 2013.

Other Events

Milestone entered into finder’s agreements with selected individuals for the purpose of identifying and closing a medical joint venture. As of September 30, 2013, none of the potential agreements has been consummated and therefore no expenses have been incurred. There is no expiration to these agreements.

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 U. S. hospitals sector.

In August 2013, a shareholder of the Company entered a three year agreement with the Milestone to provide financial and business strategic services. The fee for these services are $100,000 annually.

Subsequent Events

In October 2013, the Company’s 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, the Company will own approximately forty-five (45) percent (post-transaction) of Milestone Medical Inc.

 

 14 

   


   

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:

 

·

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 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 System® (STA System). Unfortunately, the SFDA bifurcated approval of the STA Systems from the Wand® handpieces.

 

 15 

   


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 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 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

%

 

 16 

   


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

 

 17 

   


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

%