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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
     
o   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. þ Yes o 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). o Yes o 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 o   Accelerated Filer o   Non-accelerated filer o   Smaller reporting company þ
        (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). o Yes þ No
As of August 12, 2011, the Issuer had a total of 15,152,006 shares of Common Stock, $.001 par value outstanding.
 
 

 

 


 

         
PART I — FINANCIAL INFORMATION
 
       
       
 
       
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PART II — OTHER INFORMATION
 
       
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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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.

 

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MILESTONE SCIENTIFIC INC.
CONDENSED BALANCE SHEETS
                 
    June 30, 2011     December 31, 2010  
    (Unaudited)        
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 98,592     $ 627,082  
Accounts receivable, net of allowance for doubtful accounts of $202,160 in 2011 and 2010
    1,685,706       796,221  
Inventories
    597,588       986,947  
Advances to contract manufacturer
    728,509       730,491  
Prepaid expenses and other current assets
    280,331       247,465  
 
           
Total current assets
    3,390,726       3,388,206  
 
               
Accounts receivable-long term, net of allowance for doubtful accounts of $402,840 as of June 30, 2011 and $438,840 as of December 31, 2010
    257,160       361,160  
Advances to contract manufacturer, non current
    2,646,901       1,713,794  
Investment in distributor, at cost
    76,319       76,319  
Furniture, Fixtures & Equipment net of accumulated depreciation of $435,166 as of June 30, 2011 and $426,482 as of December 31, 2010
    62,425       66,936  
Patents, net of accumulated amortization of $337,764 as of June 30, 2011 and $294,934 as of December 31, 2010
    924,275       944,858  
Other assets
    24,413       57,750  
 
           
Total assets
  $ 7,382,219     $ 6,609,023  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable — short term
  $ 2,889,635     $ 2,883,587  
Accrued expenses and other payable
    1,069,904       511,304  
 
           
Total current liabilities
    3,959,539       3,394,891  
 
           
 
               
Long-term Liabilities:
               
Accounts payable — long term
    868,806       440,376  
Notes Payable-net of discount of $6,130 and $8,361 respectively
    443,871       441,639  
 
           
Total long-term liabilities
    1,312,677       882,015  
 
           
 
               
Commitments and Contingencies
               
Stockholders’ Equity
               
Common stock, par value $.001; authorized 50,000,000 shares; 15,152,006 shares issued 637,013 shares to be issued and 15,118,673 shares outstanding as of June 30, 2011; 14,915,959 shares issued, 637,013 shares to be issued, and 14,882,626 shares outstanding as of December 31, 2010
    15,788       15,552  
Additional paid-in capital
    62,823,404       62,606,043  
Accumulated deficit
    (59,817,673 )     (59,377,962 )
Treasury stock, at cost, 33,333 shares
    (911,516 )     (911,516 )
 
           
Total stockholders’ equity
    2,110,003       2,332,117  
 
           
Total liabilities and stockholders’ equity
  $ 7,382,219     $ 6,609,023  
 
           
See Notes to Condensed Financial Statements (Unaudited)

 

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MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
 
                               
Product sales, net
  $ 2,464,119       3,218,669     $ 4,890,107     $ 5,781,247  
Cost of products sold
    868,074       1,161,847       1,747,663       2,062,558  
 
                       
Gross profit
    1,596,045       2,056,822       3,142,444       3,718,689  
 
                       
 
                               
Selling, general and administrative expenses
    1,801,668       1,778,193       3,425,924       3,319,896  
Research and development expenses
    56,225       79,736       99,943       168,200  
 
                       
Total operating expenses
    1,857,893       1,857,929       3,525,867       3,488,096  
 
                       
 
                               
(Loss) Income from operations
    (261,848 )     198,893       (383,423 )     230,593  
 
                               
Other income (expense)
                      61,916  
Interest expense
    (34,691 )     (17,946 )     (54,077 )     (27,288 )
Interest-Amortization of debt issuance
    (1,532 )     (699 )     (2,231 )     (1,398 )
Interest income
    5       112       20       459  
 
                       
Net (loss) income applicable to common stockholders
  $ (298,066 )   $ 180,360     $ (439,711 )   $ 264,282  
 
                       
 
                               
Net (loss) income per share applicable to common stockholders -
                               
Basic
  $ (0.02 )   $ 0.01     $ (0.03 )   $ 0.02  
 
                       
Diluted
  $ (0.02 )   $ 0.01     $ (0.03 )   $ 0.02  
 
                       
 
                               
Weighted average shares outstanding and to be issued -
                               
Basic
    15,046,728       14,795,432       15,005,260       14,778,134  
 
                       
Diluted
    15,046,728       15,172,700       15,005,260       15,185,304  
 
                       
See Notes to Condensed Financial Statements (Unaudited)

 

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MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2011
(Unaudited)
                                                 
                    Additional                    
    Common Stock     Paid-in     Accumulated     Treasury        
    Shares     Amount     Capital     Deficit     Stock     Total  
 
                                               
Balance, January 1, 2011
    15,552,972     $ 15,552     $ 62,606,043     $ (59,377,962 )   $ (911,516 )   $ 2,332,117  
Options issued to employees and consultants
                106,513                   106,513  
Options exercised
    100,000       100       24,900                   25,000  
Common stock issued for directors compensation
    75,000       75       44,925                       45,000  
Common stock issued for payment of consulting services to settle accounts payable
    42,834       43       26,041                   26,084  
Common stock issued for payment of employee compensation
    18,214       18       14,982                   15,000  
Net Loss
                      (439,711 )           (439,711 )
 
                                   
Balance, June 30, 2011
    15,789,020     $ 15,788     $ 62,823,404     $ (59,817,673 )   $ (911,516 )   $ 2,110,003  
 
                                   
See Notes to Condensed Financial Statements (Unaudited)

 

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MILESTONE SCIENTIFIC INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
                 
    SIX MONTHS ENDED JUNE 30,  
    2011     2010  
Cash flows from operating activities:
               
Net (loss) income
  $ (439,711 )   $ 264,282  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Depreciation expense
    10,776       37,663  
Amortization of patents
    42,830       41,257  
Amortization of debt discount
    2,231       1,398  
Common stock and options issued for compensation, consulting and vendor services
    155,097       249,594  
Bad debt expense (decrease) increase
    (36,000 )     5,000  
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (749,485 )     (745,525 )
Decrease (Increase) in inventories
    389,359       (460,289 )
Increase to advances to contract manufacturer
    (931,125 )     (838,768 )
(Increase) Decrease to prepaid expenses and other current assets
    4,634       68,667  
Decrease in other assets
    33,338       34,033  
Increase in accounts payable
    434,478       1,098,552  
Decrease in accrued expenses
    558,600       114,605  
 
           
Net cash used in operating activities
    (524,978 )     (129,532 )
 
           
Cash flows from investing activities:
               
Purchases of property and equipment
    (6,265 )     (23,269 )
Payment for patents rights
    (22,247 )     (56,739 )
 
           
Net cash used in investing activities
    (28,512 )     (80,008 )
 
           
Cash flows from financing activities:
               
Proceeds from sale of stock options
    25,000        
 
           
Net cash provided by financing activities
    25,000        
 
           
 
               
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (528,490 )     (209,540 )
Cash and cash equivalents at beginning of period
    627,082       1,029,129  
 
           
Cash and cash equivalents at end of period
  $ 98,592     $ 819,589  
 
           
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 23,000     $ 46,000  
 
           
See Notes to Condensed Financial Statements (Unaudited)

 

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MILESTONE SCIENTIFIC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
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, 2010 included in Milestone’s Annual Report on Form 10-K.
In the opinion of Milestone, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present Milestone’s financial position as of June 30, 2011 and December 31, 2010 and the results of its operations for the three and six months ended June 30, 2011 and 2010.
The results reported for the three and six months ended June 30, 2011 are not necessarily indicative of the results of operations which may be expected for a full year.
The Company had negative cash flows from operating activities of $524,978 and $129,532 at June 30, 2011 and June 30, 2010, respectively. At June 30, 2011, the Company had cash and cash equivalents of $98,592 and a negative working capital of $568,813. The Company borrowed $450,000 in 2008 from a shareholder, with a due date of January 2009. This additional borrowing was refinanced at December 31, 2008 and refinanced again on June 29, 2011 with the due date extended to July 2013. The Company is continuing the pursuit 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. The Company may require the need for a higher level of marketing and sales efforts that at present it cannot fund. If the Company is unable to continue positive cash flows from its operating activities it will need to raise additional capital. There is no assurance that the Company will be able to achieve positive operating cash flows or that capital can be raised on terms and conditions satisfactory to the Company, if at all. If positive cash flow cannot be achieved or if additional capital is required and it cannot be raised, then the Company 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 the Company’s operating results.
The Company’s historical losses — raises 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
Cash and Cash Equivalents
Milestone considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

 

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Accounts Receivable
The realization of Accounts Receivable current and long-term will have a significant impact on the Company. Consequently, Milestone estimates losses resulting from the inability of its customers to make payments for amounts billed. The collectability of outstanding amounts is continually assessed.
Inventories
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.
Patents
Patents are recorded at actual cost to prepare and file the applicable documents with the United States Patent Office, or internationally with the applicable governmental office in the respective country. Although certain patents have not yet been approved, the costs related to these patents are being amortized using the straight-line method over the estimated useful life of the patent. If the applicable patent application is ultimately rejected, the remaining unamortized balance will be expensed in the period in which the Company receives a notice of such rejection. Patent applications filed and patents obtained in foreign countries are subject to the laws and procedures that differ from those in the United States. Patent protection in foreign countries may be different from patent protection under United States laws and may not be favorable to the Company. The Company also attempts to protect our proprietary information through the use of confidentiality agreements and by limiting access to our facilities. There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our proprietary technology.
Accounts Payable
Current and long term accounts payable represents amounts due to suppliers of the Company. Long term accounts payable is based on an informal payment agreement with the supplier to assist in the purchasing of instruments and handpieces, beyond one year from the balance sheet date.
Revenue Recognition
Revenue from product sales is recognized net of discounts and allowances to the domestic distributor on the date of shipment of the goods, for essentially all shipments, since the terms are FOB warehouse. The Company will recognize revenue on date of arrival where shipments are FOB destination. Shipments to the 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 sale installation, set-up or maintenance, these being the responsibility of the buyer. Customer acceptance is considered made at delivery. The only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, inventory valuation, cash flow assumptions regarding evaluation for impairment of long-lived assets and valuation allowances on deferred tax assets. Actual results could differ from those estimates.
Fair Value Measurements: We follow the provisions of ASC 820, Fair Value Measurements and Disclosures related to financial assets and liabilities that are being measured and reported on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). We are required to classify fair value measurements in one of the following categories:
Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

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Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.
Level 3 inputs are defined as unobservable inputs for the assets or liabilities.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may effect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The carrying amounts reported in the balance sheet for cash, accounts receivable, advances to contract manufacturer, accounts payable and accrued expenses approximate fair value based on the maturity of these instruments.
Recent Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements of U.S. GAAP and IFRSs.” The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2011. The adoption of this standard is not expected to have any impact on our financial condition, results of operations or cash flow.
In May 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which requires that all nonowner changes in shareholder’s equity be presented either in single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present the components of other comprehensive income and the total comprehensive income. The guidance provided in the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have any impact on our financial condition, results of operations or cash flow.
NOTE — 2 BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Milestone presents “basic” and “fully diluted” earnings (loss) per common share applicable to common stockholders, and, if applicable, “diluted” earnings (loss) per common share applicable to common stockholders pursuant to the provisions of FASB ASC Topic 260. Basic earnings (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 earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options and warrants were issued during the period.
Since Milestone had net losses for the three and six months ended June 30, 2011 the assumed effects of the exercise of outstanding stock options and warrants were not included in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled 1,258,503 at June 30, 2011.
NOTE — 3 ACCOUNTS RECEIVABLE — CURRENT AND LONG TERM
The Company sells a significant amount of its product on credit terms to its major distributors. The Company 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, the Company 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. The regulatory approval has been delayed and as such the customer has not paid the full amount of the invoiced shipment. The Company is receiving periodic payments from the international distributor. Based on the periodic payment plan prepared by the international distributor, the Company has recorded a long term net accounts receivable of $257,160 as of June 30, 2011. The current portion of this net accounts receivable is approximately $163,000 The Company reserved $600,000 of the total accounts receivable from this distributor at June 30, 2011.

 

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NOTE — 4 STOCK OPTION PLANS
FASB ASC Topic 505, “Share-Based Payment”, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations over the service period, as an operating expense, based on the grant-date fair values.
A summary of option activity for employees under the plans as of June 30, 2011, and changes during the six months ended, is presented below:
                                 
                    Weighted        
            Weighted     Average     Aggregate  
    Number     Averaged     Remaining     Intrinsic  
    of     Exercise     Contractual     Options  
    Options     Price     Life (Years)     Value  
 
                               
Outstanding, January 1, 2011
    928,504     $ 1.07       3.92     $  
Granted
                       
Exercised
                       
Forfeited or expired
    30,000       0.83              
Outstanding, June 30, 2011
    898,504       1.08       3.54       51,600  
Exercisable, June 30, 2011
    443,397       0.96       2.40       51,214  
Milestone recognizes compensation expense on a straight line basis over the requisite service period. During the six months ended June 30, 2011, Milestone recognized $101,794 of total compensation cost. As of June 30, 2011, there was $188,096 of total unrecognized compensation cost related to non-vested options which Milestone expects to recognize over a weighted average period of 1.80 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 as of June 30, 2011, and changes during the six months ended, is presented below:
                                 
                    Weighted        
            Weighted     Average     Aggregate  
    Number     Averaged     Remaining     Intrinsic  
    of     Exercise     Contractual     Options  
    Options     Price     Life (Years)     Value  
 
                               
Outstanding, January 1, 2011
    534,999       1.85       1.51        
Granted
                       
Exercised
    100,000       0.25              
Forfeited or expired
    120,000       1.75              
Outstanding, June 30, 2011
    314,999       2.39       1.59       13,300  
Exercisable, June 30, 2011
    297,776       2.46       1.47       13,300  
During the six months ended June 30, 2011, Milestone recognized $18,079 of expenses related to non-employee options that vested during the period. The total unrecognized compensation cost related to non-vested options was $5,936 as of June 30, 2011.

 

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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.
The Company held its Annual Meeting of the Stockholders on June 16, 2011. There was an approval of the Company’s 2011 Stock Option Plan for the issuance of up to 2,000,000 common shares.
NOTE — 5 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 to contract manufacturer. 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 to contract manufacturer. Milestone entered into a purchase agreement with a vendor to supply Milestone with 5,000 instruments of CompuDent and 12,000 STA Instruments. As part of these agreements, Milestone has advanced approximately $3,375,410 and $2,444,285 to the vendor for purchase of materials at June 30, 2011 and December 31, 2010, 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 provided a reserve that it believes is sufficient record accounts receivable at net realizable value as of June 30, 2011 and December 31, 2010.
A five percent shareholder of the Company is also a major supplier of handpieces to the Company and additionally, is a member of the joint venture group to produce two medical devices. The Company purchased $834,285 and $1,379,393 from the supplier for the period ended June 30, 2011 and 2010, respectively. The Company owes $943,313 to this supplier as of June 30, 2011.
NOTE — 6 ADVANCES TO CONTRACT MANUFACTURER
The net advances to contract manufacturer represent funding of future STA, CompuDent and Wand Plus inventory purchases. The balance of the net advances as of June 30, 2011 and December 31, 2010 is $3,375,410 and $2,444,285, 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. The Company has an outstanding accounts payable of $1,961,460 and $1,520,533 at June 30, 2011 and December 31, 2010, respectively to the contract manufacture specifically related to the advances. The Company is making monthly payments to the contract manufacturer.
NOTE — 7 LINE OF CREDIT AND NOTE PAYABLE
On June 28, 2007 the Company secured a $1 million line of credit from a stockholder. This borrowing was amended to $1,300,000 as of September 30, 2008 under the same terms and conditions as the original. The $1.3 million Line of Credit was converted into shares of Milestone’s common stock in December 2009 at a conversion rate of $1.58 per share. A total of 822,785 shares were issued and the debt liquidated at that date. Interest on the Line of Credit of aggregated $67,163 was accrued as of June 30, 2011. $23,000 of this interest was paid in the six months ended June 30, 2011. The remaining interest will be paid in 2012. The Company borrowed an additional $450,000 from the same shareholder in 2008. The borrowing was originally on short term loan with a maturity date of January 19, 2009. In December 2008, this borrowing was refinanced with the shareholder with a due date of June 30, 2012. The loan was refinanced again on June 29, 2011, without cost to the Company, and the due date was extended to July 2013. The borrowing includes a 12% interest rate, interest compounded quarterly, with interest and principal due at the maturity. Further, the note has warrants exercisable for five years at the price of $0.32 per share for 45,000 shares of stock. The warrants were valued using the Black-Scholes model and are reflected as a discount against the debt. At June 30, 2011, the discount was $6,130.

 

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Interest expense on this Line of Credit for the six months ended June 30, 2011 and 2010 is $54,077 and $27,288, respectively. Accrued interest related to the line of credit was $229,592 and $214,824 at June 30, 2011 and December 31, 2010, respectively. The charge for amortization of Debt Discount related to this Line of Credit is $2,231 and $1,398 for the six months ended June 30, 2011 and June 30, 2010, respectively.
NOTE — 8 STOCK ISSUANCE
During the six months ended June 30, 2011, the Company issued 42,834 shares of common stock valued at $26,084 to two parties owed in connection with consulting expenses. Additionally, 18,214 shares of common stock valued at $15,000 were issued for payment of employee compensation. 100,000 shares were issued upon exercise of stock options for $25,000 ($0.25 per share). The Company issued 75,000 shares (25,000 shares per outside directors), to the members of the Company’s Board of Directors as partial compensation for serving on the Board for the 2011-2012 period. The cost of the compensation was $45,000 or $.60 per share. The expense will be amortized over a six month period.
NOTE — 9 SIGNIFICANT CUSTOMERS
Milestone had net product sales to two customers (distributors) for the six months ended June 30, 2011 of which in the aggregated accounted for approximately 43% and three customers (distributors) which in the aggregate accounted for approximately 78% of revenue for six months ended June 30, 2010. Milestone had sales to one of these major customers (a worldwide distributor of Milestone’s products based in China) of $1,853,468 (32%) for the six months ended June 30, 2010. Accounts receivable from these three customers amounted to $1,135,282 and $533,191 representing 58% and 44% of gross accounts receivable as of June 30, 2011 and December 31, 2010, respectively.
Milestone’s sales by product and by geographical region are as follows:
                 
    Three Months Ended June 30,  
    2011     2010  
Instruments
  $ 1,153,534     $ 1,824,364  
Handpieces
    1,279,643       1,372,480  
Other
    30,942       21,825  
 
           
 
  $ 2,464,119     $ 3,218,669  
 
           
 
               
United States
  $ 1,365,685     $ 1,258,856  
Canada
    151,383       188,239  
Other Foreign
    947,051       1,771,574  
 
           
 
  $ 2,464,119     $ 3,218,669  
 
           
                 
    Six Months Ended June 30,  
    2011     2010  
Instruments
  $ 1,964,532     $ 2,424,252  
Handpieces
    2,859,967       3,308,783  
Other
    65,608       48,212  
 
           
 
  $ 4,890,107     $ 5,781,247  
 
           
 
               
United States
  $ 2,678,252     $ 2,463,827  
Canada
    304,508       370,509  
Other Foreign
    1,907,347       2,946,911  
 
           
 
  $ 4,890,107     $ 5,781,247  
 
           
NOTE — 10 COMMITMENTS AND OTHER
Contract Manufacturing Arrangement
Milestone has informal arrangements for the manufacture of its products. CompuDent, STA and CompuMed instruments are manufactured for Milestone by Tricor Systems, Inc. pursuant to specific purchase orders. The Wand disposable handpiece without a needle is manufactured for Milestone in Mexico pursuant to scheduled production requirements. The Wand handpiece (with and without needles) is supplied to Milestone by a product broker that arranges for its manufacture by manufacturers in China.

 

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The termination of the manufacturing relationship with any of the above manufacturers could have a material adverse effect on Milestone’s ability to produce and sell 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.
In January 2010, the Company issued a purchase order to Tricor Instruments for the purchase of 12,000 Wand/STA Instruments to be delivered over the next three years. The purchase order is for $5,261,640. The Company will be required to make periodic payments over the next eighteen months to purchase the parts necessary to complete this production. As of June 30, 2011, the Company’s production and sales of instruments for this commitment has been delayed. Consequently, advances to contractor and accounts payable has been classified as current and long term at June 30, 2011.
Other Events
In December 2009, Milestone announced that it signed an Agreement of Intent with China National Medicines Corporation, Ltd. and Yichang Humanwell Pharmaceutical Co. Ltd., both incorporated in the People’s Republic of China (PRC), to develop intra-articular and epidural drug delivery instruments utilizing Milestone’s patented CompuFlo technology. Milestone and its two PRC joint venture partners agreed to establish a joint venture entity for this purpose in 2010. The required initial funding for the new entity, estimated by the parties at $1.4 million, was to have been provided by the two PRC companies, although Milestone would determine the proposed uses of their contribution. The Company has notified China National Medicines, LTD and Yichang Humanwell Pharmaceutical Co. Ltd, both signatories to the December 2009, Agreement of Intent, to develop these medical instruments, that the Company has terminated this Agreement of Intent, effective July 13, 2011.
In March 2011, Milestone entered into a new agreement with a PRC entity to establish a joint venture entity in the PRC to develop intra-articular and epidural drug delivery instruments utilizing Milestone’s patented CompuFlo technology. The PRC entity agreed to contribute up to $1.5 million to this 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. The initial $500,000 capital contribution was to have been made at inception. The PRC joint venture entity has not been established. Therefore, to move the process forward, Milestone organized a domestic research and development corporation to which its joint venture partner made an initial capital contribution of $400,000, as of June 30, 2011, $105,000 of which was disbursed to Milestone in March 2011 as reimbursement for previously incurred research and development costs expensed by Milestone in prior years. Such amount ($105,000) is included in accrued expenses and other payable at June 30, 2011 until the PRC joint venture entity is established and the required initial funding by the other party is completed. The domestic corporation will be owned fifty percent by Milestone and fifty percent by the other party. Milestone will account for its investment in the joint venture using the equity method of accounting after an agreement is signed by both parties and the required initial funding by the other party is completed. The newly formed corporation has net assets of approximately $258,000 of cash as of June 30, 2011. Milestone believes that this new joint venture represents a significant step forward in Milestone’s efforts to have its innovative computer-controlled drug delivery technology adapted for medical usage.
Subsequent to June 30, 2011, the joint venture partners completed the funding of its first capital financing tranche of $500,000 to the US research and development corporation. Effective, July 14, 2011, the US research and development corporation (Milestone Scientific Research & Development Inc) will proceed with the development of the two medical instruments (intra-articular and epidural drug delivery instruments).

 

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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 Exchange Act, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.
OVERVIEW
In 2011, Milestone remains focused on advancing efforts to achieve our two primary objectives; those being:
   
Optimizing our tactical approach to product sales and marketing in order to materially increase penetration of the global dental and medical markets with our proprietary, patented Computer-Controlled Local Anesthesia Delivery (C-CLAD) solution, the STA Single Tooth Anesthesia Instrument (STA Instrument); and
 
   
Identifying and pursing strategic collaborations with third parties to jointly develop new products utilizing our patented CompuFlo pressure force technology for novel new medical applications.
STA Instrument Awards — Industry Recognition
Since its market introduction in the spring of 2007, the STA Instrument has received favorable reviews and awards from the dental industry. In July 2007, noted industry publication Dentistry Today featured the STA Instrument as one of the “Top 100 Products in 2007,” helping to promote much broader recognition of the instrument and validating the STA Instrument’s value proposition for dentists and patients alike. In April 2008, Medical Device & Diagnostic Industry magazine distinguished the STA Instrument as a 2008 Medical Design Excellence Award winner in the “Dental Instruments, Equipment and Supplies” product category. Of the 33 products to receive this coveted award, the STA Instrument was one of only two winning products that serve dental practitioners.
In December 2008, the STA Instrument was again recognized as one of the dental industry’s best technological innovations, winning a “Townie Choice Award” from Dentaltown Magazine in the category “Anesthetics: Technique Instrument”. This marked the second consecutive year that Milestone won a “Townie Choice Award”; in 2007, we won the same award for our CompuDent/The Wand. Also in December 2008, our Wand/STA Instrument was named as a Dental Products Report “Top 100 2008 Product of Distinction”. Each year, DPR spotlights the year’s Top 100 products. Of these 100 products, 50 are the ones most often inquired about by DPR’s readers via an online and Product Information Card reader service program. The other 50 represent “New Classics,” which recognize both old and newer products and categories chosen by DPR’s editorial staff for their “perceived impact on driving innovation or helping to establish a new, higher standard of care for patients.” The STA Instrument was recognized as a “New Classic” in the Technology category.
In July 2010, the STA Instrument was recognized as one of “Dentistry Today’s”, Top 100 Products, for the third consecutive year. This honor is significant because it is unprecedented in Milestone’s history and serves to support our objective of establishing our instrument as the new global standard of care for painless dental injections.
Second Annual Symposium on C-CLAD
On May 1 through 3, 2009, we hosted the Second International Annual Symposium on C-CLAD in Amelia Island, Florida. Stanley Malamed, DDS, Professor of Anesthesia & Medicine at the University of Southern California, School of Dentistry, again served as Chairman of the invitational event. With attendance triple that of 2008, the Second Symposium covered a broad range of C-CLAD related topics including:
   
The History of C-CLAD
 
   
Treating with Connection

 

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Heart Rate Study
 
   
STA Compassionate Care in the 21st Century           
 
   
Injection Advances and Challenges
 
   
Physiologic and Clinical Characteristics of PDL Anesthesia Delivered by a High Pressure Hand piece and a Computerized Device
 
   
The STA for Tots and Teens
 
   
Computerized Local Anesthesia in Dentistry: A Review
 
   
Today’s Technology
 
   
Managing a Successful Dental Practice: Why People Keep Coming Back
 
   
STA — The Dental School’s Perspective
 
   
Futuristic Vistas: The Dentist/Hygienist Partnership
In 2010, the company published and broadly distributed more than 100,000 copies of a comprehensive monograph reflecting the topics discussed at the Symposium and a consensus on the attendees’ attitudes, ideas and suggestions relating to promoting global industry adoption of C-CLAD technologies as the new standard of care for administering dental injections.
STA System Growth
Since its market introduction in early 2007, the STA System, a prior computerized controlled local anesthesia delivery product, has been used to deliver tens of millions 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 System is proving to be a valuable and beneficial instrument that is positively impacting the practice of dentistry worldwide. The utility and value of the STA System is perhaps best summarized by Dr. Joe Blaes, who wrote in the December 2008 edition of Dental Economics, “I tried the STA System and my patients absolutely love it. This is a no brainer — go get one ASAP!”
Global Distribution Network
North America Market
The STA Instrument and related hand pieces are marketed to the dental industry in the United States and Canada by many of the nation’s leading dental supply companies, including Henry Schein, Inc., Patterson Dental Supply, Atlanta Dental, Benco Dental, Burkhart Dental, Cedar Dental, Darby Dental Supply, Dental Health Products, Goetze Dental, Iowa Dental, Nashville Dental, Newark Dental and Parkway Dental. In Canada, our independent distributors include Dental 2000, Mediclub, and Specialty Dental.
In the third quarter of 2010, the company added a Domestic Sales Director to refocus our attention on the USA and Canadian markets. The mission of the Domestic Sales Director is to grow our business through marketing our STA Instrument to Dental Group Practices, as well as individual dental practitioners. Through direct marketing to the Dental Group Practices and utilizing a group of independent hygienists, the instrument and handpiece sales should increase substantially in the future. The Company closed its’ first Group Dental Practice in January 2011, Towncare Dental.
International Market
On the global front, we also have granted exclusive marketing and distribution rights for the Wand/STA Instrument to select dental suppliers in various international regions in Asia, Africa, South America and Europe. They include Istrodent in South Africa and Unident in the Scandinavian countries of Denmark, Sweden, Norway and Iceland.
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 the Company’s initial penetration into China’s emerging dental market.

 

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As of June 30, 2011, China National Medicine has not received the appropriate registration approval from the regulatory body in China, therefore, shipment of Wand/STA Instruments and handpieces have been suspended pending the approval to sell and distribute these products in China. It is expected that the approval by the appropriate Chinese regulatory body will be received by the end of 2011.
According to a report published by the U.S. Department of Commerce, titled “China’s Emerging Markets: Opportunities in the Dental and Dental Lab Industry,” China’s dental market lags behind other healthcare services and has largely been neglected in the past. In fact, CS Market Research reports that “of China’s 1.3 billion plus population, 50% of the adults and 70% of the children are estimated to have decayed tooth problems, and over 90% have periodontal disease.” However, with increasing affluence of the Chinese population, as well as increasing attention towards personal care, demand for dental services has been growing. Market research firm Freedonia agrees, noting that demand for dental products in China is expected to climb to 21.5 billion RMB (US$3.15 billion) by 2012, due primarily to escalating personal income levels and government programs promoting awareness of the benefits of good oral care.
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 Wand/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. The new addition to the company’s staff has proven to be a positive improvement to our sales and marketing effort outside the USA and Canada.
Medical Instruments Joint Venture
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 instruments. Milestone Scientific will have a 50% interest in the joint venture and Beijing 3H together with a number in individuals, including a large shareholder in Milestone who is also the principal of a supplier to Milestone, will also have a 50% interest in joint venture.
The joint venture provided for Milestone’s contribution of an exclusive worldwide royalty-free license to use its patents. Beijing 3H will contribute $1.5 million to the joint venture to develop and design the prototype using Milestone’s CompuFlo® technology and disposables. Milestone will have distribution responsibility in the U.S. and Canada while Beijing 3H will distribute products exclusively in the Peoples Republic of China, Macao, Hong Kong and other regions of Asia.

 

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Segmented Sales Performance
The following table shows a breakdown of our product sales (net), domestically and internationally, by product category, and the percentage of product sales (net) by each product category:
                                 
    Three Months Ended June 30,  
    2011     2010  
DOMESTIC
                               
Instruments
  $ 652,865       47.8 %   $ 332,392       26.4 %
Handpieces
    690,346       50.5 %     908,626       72.2 %
Other
    22,474       1.7 %     17,838       1.4 %
 
                       
Total Domestic
  $ 1,365,685       100.0 %   $ 1,258,856       100.0 %
 
                       
INTERNATIONAL
                               
Instruments
  $ 500,669       45.6 %   $ 1,491,972       76.1 %
Handpieces
    589,297       53.6 %     463,854       23.7 %
Other
    8,468       0.8 %     3,987       0.2 %
 
                       
Total International
  $ 1,098,434       100.0 %   $ 1,959,813       100.0 %
 
                       
 
                               
DOMESTIC/INTERNATIONAL ANALYSIS
                           
Domestic
  $ 1,365,685       55.4 %   $ 1,258,856       39.1 %
International
    1,098,434       44.6 %     1,959,813       60.9 %
 
                       
Total Product Sales
  $ 2,464,119       100.0 %   $ 3,218,669       100.0 %
 
                       
                                 
    Six Months Ended June 30,  
    2011     2010  
DOMESTIC
                               
Instruments
  $ 1,008,837       37.7 %   $ 583,989       23.7 %
Handpieces
    1,626,395       60.7 %     1,838,610       74.6 %
Other
    43,020       1.6 %     41,228       1.7 %
 
                       
Total Domestic
  $ 2,678,252       100.0 %   $ 2,463,827       100.0 %
 
                       
INTERNATIONAL
                               
Instruments
  $ 955,695       43.2 %   $ 1,840,263       55.5 %
Handpieces
    1,233,572       55.8 %     1,470,173       44.3 %
Other
    22,588       1.0 %     6,984       0.2 %
 
                       
Total International
  $ 2,211,855       100.0 %   $ 3,317,420       100.0 %
 
                       
 
                               
DOMESTIC/INTERNATIONAL ANALYSIS
                               
Domestic
  $ 2,678,252       54.8 %   $ 2,463,827       42.6 %
International
    2,211,855       45.2 %     3,317,420       57.4 %
 
                       
Total Product Sales
  $ 4,890,107       100.0 %   $ 5,781,247       100.0 %
 
                       
Our gross profit margins were 65% and 64% for the three months ended June 30, 2011 and 2010, respectively. However, our revenues and related gross profits have not been sufficient to support our overhead, new product introduction and research and development expenses. Although we anticipate expending funds for research and development in 2011, these amounts will vary based on the operating results for each quarter. We have incurred operating losses since its inception. We are actively pursuing the generation of sustainable positive cash flows from operating activities through increases in revenue, to be derived from a change in the business model in U.S. and Canada. This change in business model incorporates a team of local dental hygienists training and educating the respective dentist in their territories. This business model replaces our prior sale force and third party manufactures rep’s business model.
New Product Development and Commercialization Utilizing CompuFlo Technology
Over the last decade, the drug delivery industry has evolved to become a key area in the development of value-added pharmaceutical products. According to market research firm Business Insights, “The global market grew from $15 billion to $40 billion during 2000—2006 as companies increasingly turned to drug delivery technologies as a means of expanding product lifecycles, enhancing drug efficacy and maximizing revenues.” Moreover, industry analysts agree that as patients live longer and are diagnosed with chronic and often debilitating ailments, the result will be a dramatic increase in self-administration of drug therapies in non-traditional settings for a number of conditions. This trend is creating an increased interest in routes of administration that are patient-friendly and cost-effective. It appears that pharma company decision makers are realizing that new drug product success no longer depends only on the medication itself, but also on achieving a patient-friendly form of delivery.
Central to Milestone’s robust IP portfolio, currently comprised of 24 issued patents, is its FDA-approved CompuFlo® system for the precise delivery and aspiration of all medicaments. Milestone’s patented CompuFlo® system and DPS Dynamic Pressure Sensing® technology are revolutionary technologies that are relevant for the entire category of subcutaneous drug delivery injections and fluid aspiration — enabling healthcare practitioners to achieve multiple unique benefits that cannot currently be accomplished with existing technologies.
The negative side effects possible when using the manual hypodermic syringe are well documented in the medical and dental literature, and include tissue damage, transient or permanent paralysis, subjective pain response, post-operative complications, and the risk of medical emergencies, which in certain circumstances can result in a patient fatality. Patient pain and tissue damage are a direct physical result of a clinician’s inability to accurately control a wide range of variables when using the manual syringe.

 

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In contrast, the technical advantages of the CompuFlo® system with DPS Dynamic Pressure Sensing® technology are numerous and dramatic. They include precise controlling and monitoring of all critical variables during drug delivery, including:
   
a true “painless” experience for all injections
   
eliminates disruptive injection behavior
   
site specific targeting
   
controlled needle exit-pressure
   
precise flow rate and drug volumes
   
patient treatment documentation
   
superior ergonomics
   
elimination of needle deflection (causing missed injections, lost time and anxiety )
   
advanced tactile needle control
   
precision fluid metering
The use of Milestone’s technology also enables the clinician to receive real-time continuous feedback relating to the local tissue conditions during the injection process. This real-time feedback enables the accurate differentiation and identification of specific tissues types and anatomical locations, making subcutaneous drug delivery safer, easier and more effective, thereby fundamentally transforming what formerly was an “art” into a “science.”
Recognized as a world leader in advanced computer-controlled injection technologies, Milestone has spent over a decade developing and perfecting its portfolio of technologies that eliminate pain and enable unequaled precision that can be applied to a wide array of subcutaneous injections routinely used in the practice of Medicine and Dentistry. Moreover, none of Milestone’s C-CLAD injection products look like a syringe or feel like a syringe, and they perform far better than the antiquated manual syringe, resulting in a much enhanced experience for the patient, the practitioner and the business of dentistry.
Based on an independent 2006 study, the number of potential applications for the CompuFlo® technology stands at more than 700. Due to the sizable number of product development opportunities within the medical arena for the technology, Milestone created an internal review committee to assess and analyze the opportunities in a variety of medical sectors. Consequently, the Company has elected to focus on those medical uses of the CompuFlo® system which have shown to be most promising for obtaining a return on investment while simultaneously representing new product introductions that will have the greatest impact on patients and the medical profession. Areas of initial interest include developing CompuFlo®-based injection/aspiration systems for use in Epidurals, Intra-Articular Injections, Self-Administered Injections, Neurosurgery, Ophthalmic surgery and Derma Filler/Cosmetic surgery.
It should be noted that the CompuFlo® system is embedded in an FDA-approved prototype. This technology is currently commercially available in the STA Single Tooth Anesthesia System®, which is being sold worldwide in the dental market. Over 40 million patient injections have been given with Milestone’s technologies to date.
Milestone’s technological innovations have been tried and proven by healthcare providers with over 50 publications validating the efficacy and safety in a variety of medical and dental injection applications. It is anticipated that future devices that are developed utilizing the CompuFlo® system will only require a basic 510K approval from the FDA, thus minimizing development cost and time to market.
Intellectual Property
In August 2009, we were issued a Notice of Allowance by the U.S. Patent and Trademark Office for it’s a patent application directed for the use of our disposable hand piece for fluid administration. Our award-winning handpiece is an instrument currently utilized in conjunction with the Company’s STA Single Tooth Anesthesia System®, the CompuDent® instrument and the CompuMed® instrument.
In September 2009, the U.S. Patent and Trademark Office issued a Notice of Allowance for our U.S. patent application, titled “Computer Controlled Drug Delivery System with Dynamic Pressure Sensing.” This intellectual property represents one of the key technological components of our product development strategy relating to the development of advanced computer-controlled injection products for specific applications in the medical industry — most notably intra-articular injections and epidurals.

 

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During the second quarter of 2010, Milestone was issued a Notice of Allowance by the U.S. Patent and Trademark Office for its U.S. patent application, titled “Self-Administration Injection System.” Milestone’s innovative computer-controlled drug delivery platform has been designed to reduce the anxiety and pain of self-administration of medications for the rapidly expanding home-use market. The computer-controlled self-administration system provides a less threatening, virtually painless means for patients to safely self-administer a variety of injections.
To date, we have been awarded and presently hold 24 U.S. utility and design patents relating to our C-CLAD technologies.
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 current and long-term will have a significant impact on the Company. Consequently, Milestone estimates losses 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.
Impairment of Long-Lived Assets
The long lived assets of the Company, principally patents and trademarks are the base features of the 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.
Accounts Payable
Current and long term accounts payable represents amounts due to suppliers of the Company. Long term accounts payable is based on an informal financing agreement with the supplier to assist in the purchasing of instruments and handpieces, beyond one year from the balance sheet date.
Revenue Recognition
Revenue from product sales is recognized net of discounts and allowances to domestic distributor on the date of shipment for essentially all shipments, since the shipment terms are FOB warehouse. The company 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, the Company has 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 period.

 

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Results of Operations
The consolidated results of operations for the three and six months ended June 30, 2011 compared to the same three and six month period in 2010 reflect our focus and development on the Wand/STA Instruments, as well as continuing efforts on identifying collaborative partners for new product development utilizing our CompuFlo technology.
The following table sets forth for the periods presented statement of operations data as a percentage of revenues. The trends suggested by this table may not be indicative of future operating results.
                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
 
                                                               
Products sales, net
  $ 2,464,119       100 %   $ 3,218,669       100 %   $ 4,890,107       100 %   $ 5,781,247       100 %
Cost of products sold
    868,074       35 %     1,161,847       36 %     1,747,663       36 %     2,062,558       36 %
 
                                               
Gross Profit
    1,596,045       65 %     2,056,822       64 %     3,142,444       64 %     3,718,689       64 %
 
                                               
Selling, general and administrative expenses
    1,801,668       73 %     1,778,193       55 %     3,425,924       70 %     3,319,896       57 %
Research and development expenses
    56,225       2 %     79,736       2 %     99,943       2 %     168,200       3 %
 
                                               
Total operating expenses
    1,857,893       75 %     1,857,929       57 %     3,525,867       72 %     3,488,096       60 %
 
                                               
(Loss) income from operations
    (261,848 )     -11 %     198,893       6 %     (383,423 )     -8 %     230,593       4 %
Other income — interest & expense
    (36,218 )     -1 %     (18,533 )     -1 %     (56,288 )     -1 %     33,689       1 %
 
                                               
Net (loss) income
  $ (298,066 )     -12 %   $ 180,360       5 %   $ (439,711 )     -9 %   $ 264,282       5 %
 
                                               
Three months ended June 30, 2011 compared to three months ended June 30, 2010
Total revenues for the three months ended June 30, 2011 and 2010 were $2,464,119 and $3,218,669, respectively. The decrease in product sales of $754,550 or 23.4% in 2011 over 2010 is primarily due to $1,296,000 of STA instrument sales to a Chinese distributor in the second quarter of 2010 that did not occur in 2011. Domestic STA Single Tooth Anesthesia System® instruments sales increased $279,544 in 2011 over 2010. This notable increase is due to the increase demand at the distributor and the group dental practice level in the domestic market. In the domestic market, handpiece sales decreased by $218,280 or 24%. This decrease is due to a lower demand in the second quarter of this year, primarily as a result of advance buying on the part of the distributors in advance of a price increase taking affect on April 1, 2011. On the international front, total revenue aggregated $1,098,434 in 2011, a 44% decrease over 2010. International STA Single Tooth Anesthesia System® instruments sales decreased in the second quarter of 2011 over 2010 by $1,146,920 or 61%. This decrease is primarily due to the fact that instrument sales in the second quarter of 2010 included $1,296,000 of STA Single Tooth Anesthesia System® instruments sales to a Chinese distributor that did not occur in 2011. International handpiece sales in the second quarter of 2011 over 2010 increased by $125,443 or 27% due to an increase demand for Wand Plus handpieces in the international market. Overall, the international revenue for the three months ended June 30, 2011, exclusive of the Chinese shipment of the STA Single Tooth Anesthesia System® instruments ($1,296,000) in the second quarter of 2010, increased by $149,080 over the same period in 2010. This increase is due to the expansion of our international footprint and demand for our product.
Cost of products sold for the three months ended June 30, 2011 and 2010 were $868,074 and $1,161,847 respectively. The $293,773, or 25%, decrease is attributable to a decrease in sales volume.
For the three months ended June 30, 2011, Milestone generated a gross profit of $1,596,045 or 65% as compared to a gross profit of $2,056,822, or 64%, for the three months ended June 30, 2010. The total decrease in gross profit of $460,777 is due to a decrease in sales volume, while the gross profit margin increase is due to a reduction in the manufacturing costs for the STA instruments in 2011.

 

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Selling, general and administrative expenses for the three months ended June 30, 2011 and 2010 were $1,801,668 and $1,778,193, respectively. The $23,475, or 1.3%, net increase in selling, general and administrative expenses is due to an increase in sales expenses of $35,856 and an increase in salary expense of $315,819 including, a bonus of $300,000 payable to the Chief Executive Officer for closing a financing joint venture arrangement with a Chinese investor group, offset by a reduction in: (i) Marketing Expenses of $63,996 and (ii) other G&A Expenses of $279,154 including, but not limited to, decreases in, International Sales Commission of $43,201 based on decreased international sales, royalty payments of $36,844, international travel expense of $17,144, recruiting expenses of $30,000 (recruiting a Director, International Business in April 2010) and consulting finder’s fee of $64,800. Consulting expenses increased by $15,481.
Research and development expenses for the three months ended June 30, 2011 and 2010 were $56,225 and $79,736, respectively.
The loss from operations for the three months ended June 30, 2011 was $261,848 as compared to an income from operations for the three months ended June 30, 2010 of $198,893. The difference of $460,741 or 232%, decrease in income from operations is explained above.
Interest expense was $19,149 and amortization of debt issuance was $1,532 relating to conversion of the $1.3 million line of credit into common stock in December 2009 was charged for the three months ended June 30, 2011, compared to interest expense and amortization of debt issuance of $1,532 and $699, respectively, for the same period in 2010.
For the reasons explained above, net loss for the three months ended June 30, 2011 was $298,066 as compared to a net income of $180,360 for the three months ended June 30, 2010. The $478,426, or 265%, decrease in net income is primarily a result of the decrease in sales and gross profit and an increase in payroll expenses, and in other selling, general and administrative expenses.
Six months ended June 30, 2011 compared to the six months ended June 30, 2010
Total revenues for the six months ended June 30, 2011 and 2010 were $4,890,107 and $5,781,247, respectively. Total revenues decreased by $891,140, or 15%. This decrease was due to $1,296,000 of STA instrument sales and $494,000 of handpiece sales to a Chinese distributor in 2010 that did not occur in 2011. On a comparative basis, excluding the 2010 sales to the Chinese distributor, total revenues increased by $898,860. International revenue decreased $1,105,563, or 33%, as compared to the 2010 period, as previously noted, as a result of the decrease in revenues from China. Excluding the 2010 sales to the Chinese distributor, the international revenue increased by $684,437, as we continue our expansion in the international market. Domestic product revenue increased $214,424 in 2011, or 9%, the increase is due to the increase in STA Single Tooth Anesthesia System® instruments sales, as management implements a new sales strategy focusing on group dental practices in the U.S. Domestic disposable handpiece sales decreased by $212,216, or 12%. International sales of disposable handpieces decreased by $236,600 or 16%, based on not shipping handpieces to China in 2011. This decrease is not specifically identifiable to any trend. However, we believe that the domestic market focus on independent hygienist to train dentists throughout the USA will assist in the growth in handpiece sales in the future.
Gross profit for the six months ended June 30, 2011 and 2010 was $3,142,444 or 64%, and $3,718,689, or 64%, respectively. Gross profit dollars in the first six months of 2011 decreased by $576,245, 15% due to a decrease in sales volume and gross profit margin in 2011 over 2010. The gross profit margin increase is due to a reduction in the manufacturing costs for the STA Single Tooth Anesthesia System® instruments in 2011.
Selling, general and administrative expenses for the six months ended June 30, 2011 and 2010 were $3,425,924 and $3,319,896, respectively. The increase of $106,028, or 3.2%, is primarily attributable to a decrease in Marketing Expenses of $27,076; increases in Sales Expenses of $70,605, an increase in Salary Expenses of $362,666 offset by decrease in General and Administrative (G&A) Expense of $345,482. Marketing expense decreased is principally due to a reduction in printing costs of $21,105. Sales expenses increased by $70,605, due to an overall increase in business travel domestic and international. Also included in the category are the costs related to our independent third party hygienists. Salary expenses increase by $362,666 due primarily to a bonus to the Chief Executive Officer of $300,000 for finalizing a joint venture agreement with a third party to develop two medical instruments and the increased costs of Directors of International and Domestic Sales. Other General and Administrative expenses decreased by $345,482, due to the decreased international commission of $113,177, royalty expense of $38,656, based on reduced international sales and domestic sales. Additionally, recovery of bad debt expense, $41,000, based on partial collection of previously recorded bad debt reserve for an international accounts receivable. A decrease in employer recruitment cost of $36,603, a reduction in consulting fees of $64,800 and investment council fee of $31,765.

 

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Research and development expenses for the six months ended June 30, 2011 and 2010 were $99,943 and $168,200, respectively. The decrease of $68,257 is due to a reduction in expenditures for the development of new medical devices ($25,477) and foreign language enhancements for our STA Single Tooth Anesthesia System® instruments ($43,185), made in 2010, not recurring in 2011.
The loss from operation for six months ended June 30, 2011 was $383,422 and the net income from operations for the six months ended June 30, 2010 was $230,593, respectively. The $614,015, or 266.3%, decrease is explained above.
Other Income includes $61,916 in 2010. This represents the balance of the sale of tax credits under the New Jersey Technology Tax Certificate Program. This did not occur in 2011.
Interest expense of $54,077 and amortization of debt issuance was $2,231 relating to the conversion of the $1.3 million line of credit into common stock in December 2009 was charged for the six months ended June 30, 2011, compared to $27,288 and $1,398, respectively, for the same period in 2010.
Interest income of $20 was earned for the six months ended June 30, 2011 compared to $460 for the same period in 2010.
For the reasons explained above, net loss for the six months ended June 30, 2011 was $439,711 as compared to a net income of $264,282 for the six months ended June 30, 2010. The $703,993, or 266.4%, decrease in net profit is primarily a result of a decrease in gross margin dollars of $576,244 offset by an increase in selling, general and administrative expenses of $106,027; a reduction in research and development expense of $68,257 and a reduction of $61,916 (2010 sale of tax credit) in other income.
Working capital as of June 30, 2011 is a negative $568,813, as explained in the following liquidity and capital resources section.
Liquidity and Capital Resources
As of June 30, 2011 we had cash and cash equivalents of $98,592 and a working capital of $568,813, a decrease in working capital from December 31, 2010 of $562,128. Milestone incurred a net loss of $439,711 and generated a net income of $264,282 for the six months ended June 30, 2011 and 2010, respectively. There was a negative cash flow from operating activities of $524,978 and $129,532 for the six months ended June 30, 2011 and June 30, 2010, respectively. The significant decrease in working capital of $562,128 in 2011 was caused by a 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, we ramped up purchasing of parts in anticipation of significant sales in 2010 and future years. As a result of the delay in shipping, the advances to contract manufacturer has increased significantly, (current and long term), in 2011 as compared to 2010. Additionally, the accounts payable due to suppliers has also increased and is classified as current and long term. And finally, the accounts receivable from the China distributor has been classified between current and long term net of a reserve of doubtful accounts of $600,000.
As a result of this delay on shipments to China, the decrease in working capital at June 30, 2011, of $562,128 consists of a net current asset increase of $2,520 and an increase in current liabilities $564,648. The current asset changes are; current accounts receivable increased by $889,485, cash decreased by $528,490, which was utilized in operations and to pay for parts required for the China production and inventory decreased by 389,359. These increases are anticipated to continue in order to deliver the instruments on time and complete per the purchase order. On a related basis, current liabilities increased by $564,648 of which $868,806 relates to the advance to contract manufactures and the purchases of handpieces for the China purchase order. Both the advance and payable to contract manufacturer are expected to continue to exist until the 12,000 instrument order is delivered to the distributor.

 

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We have also incurred increases in non current advances to contract manufacturer of $933,107 and an increase in non current accounts payable of $428,430 as a result of the delay in shipping instruments and handpieces to our distributor in China. We continue 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. Cash flows from operating activities for the six months ended June 30, 2011 and 2010 was a negative $524,978 and $129,532, respectively.
For the six months ended June 30, 2011, our net cash used in operating activities was $524,978. This was attributable primarily to a net loss of $439,711, adjusted for noncash items of $174,934, principally common stock and options issued for compensation, consulting and vendor services and changes in operating assets and liabilities of $260,201. The changes in operating assets and liabilities are due to building up of inventory and the increase in advances for the expected sales growth in the third and fourth quarter of 2011.
For the six months ended June 30, 2011, Milestone used $28,512 in investing activities. This was attributable to $22,247 of legal fees related to new patent application. Capital expenditures of $6,265 were primarily for the leasehold improvement in the Livingston, New Jersey office.
For the six months ended June 30, 2011, $25,000 was provided by financing activities. This was attributable to the exercising of stock options.
As of June 30, 2011 and December 31, 2010, Milestone had recorded on the Balance Sheet a long term note payable of $450,000 from a stockholder. This note was amended on June 29, 2011, to include an extended due date of July 2013, at no cost to us.
We have incurred operating losses and negative cash flows from operating activities since inception, except for 2009. We are 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 June 30, 2011, we believe that we have sufficient cash reserves to meet all of our anticipated obligations for the next twelve months. However, if we require a need for a higher level of marketing and sales effort, or if we are unable to continue generating positive cash flows from its operating activities we will need to raise additional capital. There is no assurance that we 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 us if at all. If additional capital is required and it cannot be raised, then we would be forced to curtail its development activities, reduce marketing expenses for existing dental products or adopt other cost savings measures, any of which might negatively affect our operating results.
Our recurring losses and negative operating cash flows raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Item 3.  
Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company we are not required to provide the information required by this Item.

 

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Item 4.  
Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of June 30, 2011 are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding disclosure.
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter ended June 30, 2011 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II — OTHER INFORMATION
ITEM 1.  
LEGAL PROCEEDINGS
None.
ITEM 1A.  
RISK FACTORS
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 2.  
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In the quarter ended June 30, 2011, Milestone issued total 236,048 shares valued at $111,084 as follows:
                 
    Shares     $  
Shares issued for director’s fee
    75,000     $ 45,000  
Shares issued for employee compensation
    18,214       15,000  
Shares issued for services
    42,834       26,084  
Options exercised
    100,000       25,000  
 
           
 
    236,048     $ 111,084  
These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Act”) and a legend restricting the sale, transfer, or other disposition of these shares other than in compliance with the Act was imprinted on stock certificates evidencing the shares.
ITEM 3.  
DEFAULT UPON SENIOR SECURTIES
None.
ITEM 4.  
[Removed and Reserved]
None.
ITEM 5.  
OTHER INFORMATION
None.
ITEM 6.  
EXHIBITS
The following exhibits are filed herewith:
         
  31.1    
Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Chief Financial Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101.INS**    
XBRL Instance Document
       
 
  101.SCH**    
XBRL Taxonomy Extension Schema Document.
       
 
  101.CAL**    
XBRL Taxonomy Calculation Linkbase Document.
       
 
  101.LAB**    
XBRL Taxonomy Extension Label Linkbase Document.
       
 
  101.PRE**    
XBRL Taxonomy Extension Presentation Linkbase Document.
       
 
  101.DEF**    
XBRL Taxonomy Extension Definition Linkbase Document.
 
     
*   Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  MILESTONE SCIENTIFIC INC.
 
 
  /s/ Leonard Osser    
  Leonard Osser   
  Chief Executive Officer   
 
  /s/ Joseph D’Agostino    
  Joseph D’Agostino   
  Chief Financial Officer   
Date: August 12, 2011

 

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