UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2004
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.
(Name of Small Business Issuer in its Charter)
Delaware 13-3545623
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 South Orange Avenue, Livingston Corporate Park, Livingston, NJ 07039
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number (973) 535-2717
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, par value $.001 per share American Stock Exchange and Pacific Stock Exchange
Warrants, each to purchase one share of common stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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. Yes |X|
No | |
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is contained herein, and will be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
For the year ended December 31, 2004, the revenues of the registrant were
$4,751,186.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such common
equity, on the American Stock Exchange, on March 29, 2005 of $3.45 as
approximately $23,346,047
As of March 29, 2005 the registrant has a total of 10,462,334 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
MILESTONE SCIENTIFIC, INC.
Form 10-KSB Annual Report
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business............................................................... 3
Item 2. Description of Property............................................................... 15
Item 3. Legal Proceedings..................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................... 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............................. 16
Item 6. Management's Discussion and Analysis or Plan of Operation............................. 19
Item 7. Consolidated Financial Statements..................................................... 28
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.. 28
Item 8A. Controls and Procedures.............................................................. 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (s) of the Exchange Act ................ 29
Item 10. Executive Compensation................................................................ 31
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................. 33
Item 12. Certain Relationships and Related Transactions........................................ 35
Item 13. Exhibits ............................................................................. 36
Item 14. Principal Accountant Fees and Services................................................ 39
SIGNATURES........................................................................................... 40
EXHIBITS............................................................................................. 41
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Milestone to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Milestone's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
Milestone. Although Milestone believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, particularly in view of Milestone's early stage operations, the
inclusion of such information should not be regarded as a representation by
Milestone or any other person that the objectives and plans of Milestone will be
achieved.
2
PART I
Item 1. Description of Business
All references in this report to "we," "us," "our" or "Milestone" refer to
Milestone Scientific Inc., and its former subsidiary, Spintech, Inc.
("Spintech"), unless the context otherwise indicates. We have rights to the
following trademarks: CompuDent(R), CompuMed(R), CompuFlo(TM), The Wand(R), The
WandPlus(R),The SafetyWand(TM) and CoolBlue(TM) Wand. Milestone was incorporated
in the State of Delaware in 1989. On December 10, 2004, Milestone merged its
three subsidiaries into itself in order to reduce administrative expenses. Two
of the subsidiaries were wholly owned. The third, Spintech, was merged into
Milestone by a short-form merger. Also on December 10, 2004 we purchased a 19.9%
interest in a German wholesale distributorship that sells dental products
including our CompuDent technology and CoolBlue product lines in Germany, the
world's 3rd largest dental market.
All share number and share price information in this report have been
retroactively adjusted to reflect the 1-for-3 reverse stock split effected in
January 2004.
BUSINESS
Background
Milestone Scientific Inc. is the world leader in advanced injection
technology. Its principal product, a computer controlled, precision metered,
local anesthetic injection system (the "CompuDent"), enables a dentist to
consistently administer safe, effective and painless injections. CompuDent is a
revolutionary device, considered one of the major advances in dentistry of the
twentieth century. It has been favorably evaluated in approximately 50 peer
reviewed or independent clinical research reports. In 2004 the CompuDent was
prominently featured in the leading textbook on dental anesthesia, the "Handbook
of Local Anesthesia" by Stanley F. Malamed, DDS.(1)
CompuDent, including its ergonomically designed single use hand-piece
("The Wand"), provides numerous, well documented benefits:
o CompuDent minimizes the pain associated with palatal, mandibular
block and other injections, resulting in a more comfortable
injection experience for the patient;
o the pencil grip used with The Wand handpiece allows unprecedented
tactile sense and accurate control;
o new injections made possible with the CompuDent technology eliminate
collateral numbness of the tongue, lips and facial muscles;
o bi-directional rotation of The Wand handpiece eliminates needle
deflection resulting in greater success and more rapid onset of
anesthesia in mandibular block injections;
o the use of a single patient use, disposable handpiece minimizes the
risk of cross contamination;
o the ergonomic design of The Wand handpiece makes an injection easier
and less stressful to administer, lowering the risk of carpal tunnel
syndrome.
Milestone also believes that use of CompuDent reduces tissue tearing and
necrosis and results in less post-operative or post-procedure pain, but is
awaiting further clinical evidence before publicly making these claims.
----------
(1) Dr. Malamed is widely recognized as the preeminent authority on dental
anesthesia. New editions of his "Handbook of Local Anesthesia" are
published once every seven years and are used in all major U.S. and many
foreign dental schools. It is the largest selling textbook in dental
anesthesia and is the third largest selling dental textbook. The current
edition recommends use of the CompuDent and devotes 62 paragraphs to the
device and its application. Milestone understands that this is the first
instance in which Dr. Malamed's text has recommended a particular device.
3
Despite CompuDent's many benefits, including the administration of
painless injections, dentists in the United States have been reluctant to give
up the use of traditional syringes. Dentists have all been trained to use
syringes in dental school and often have become accustomed and comfortable in
their use during many years of clinical practice. Thus, following a successful
launch in early 1998 to "new adopters," sales were below expectations in 1999
and 2000. By the end of 2000, Milestone had limited financial resources(2) and
was forced to choose between maintaining its leadership position in advanced
injection technology or continuing to promote sales through high levels of sales
and marketing expense, including trade show appearances. Milestone chose to
maintain its technology leadership position and drastically reduced marketing
and sales expense, thus allowing domestic sales of new units to suffer. However,
despite limited marketing efforts, foreign sales continued to grow. Also
increasing handpiece use by the domestic customer base resulted in rising
handpiece sales.
Technology Development
After curtailing sales and marketing efforts, Milestone focused on
maintaining its technological leadership. First, it addressed a number of
customer needs for its CompuDent unit by developing such improvements as a
holster component for its handpiece which more effectively pierced anesthetic
cartridge membranes, an overflow reservoir in the unit that eliminated problems
occasionally caused by fluid from broken anesthetic cartridges shorting-out
control components, a dual speed flow rate foot control pedal and an audio
signal to alert the dentist to the speed at which the unit was operating. These
and other improvements essentially eliminated all field complaints with the
CompuDent unit before 2003.
To enhance its role as the world leader in advanced injection technology,
Milestone has developed the following array of other technologically advanced
products for the delivery of local anesthetics and liquid medicaments.
CompuMed
Milestone developed and in 2001 began limited marketing of "CompuMed(R)",
a computer controlled injection system geared to the needs of the medical market
and providing benefits similar to the CompuDent. CompuMed allows many medical
procedures, now requiring IV sedation, to be performed with only local
anesthesia because of the dramatic pain reduction. Also, dosages of local
anesthetic can often be significantly reduced, thus reducing side effects,
accelerating recovery times, lowering costs and eliminating complications.
CompuMed is now gaining growing clinical evidence showing benefits from use in
colorectal surgery, podiatry, dermatology, including MOH's surgery for the
removal of basal cell carcinomas and other oncological dermatologic procedures,
nasal and sinus surgery, including rhinoplasty, hair transplantation and plastic
surgery.
SafetyWand
Following adoption of the Federal Needlestick Safety and Prevention Act
Milestone developed, and in September 2003 the FDA approved marketing of,
Milestone's SafetyWand disposable handpiece, a patented injection device that
incorporates safety engineering sharps protection features to aid in the
prevention of needlesticks. The SafetyWand is the first patented injection
device to be fully compliant with OSHA regulations under the federal Needlestick
Safety Act while meeting the clinical needs of dentists.
The SafetyWand represents the culmination of two years' effort to develop
a safer injection device for dentists, physicians and hygienists. While safety
injection devices have been mandated since 2000 under federal law, OSHA had been
unable to enforce this law against dentists because of the inadequacy of
existing devices to meet both the requirements of the law and the clinical needs
of dentists. The SafetyWand meets these requirements and provides dental
practitioners with a safer retractable needle device, with single hand
activation, which is reusable multiple times during a single patient visit, yet
small and sleek enough not to obscure the dentist's sometimes limited field of
view. Since SafetyWand is now available commercially,
----------
(2) It received a going concern limitation in its 2000 financial report.
4
OSHA has begun to enforce existing regulations requiring the use of safety
engineered devices. OSHA is empowered to levy substantial fines for failure to
use these devices. We believe the Safety Wand will promote increased handpiece
use by the more than 15,000 CompuDent anesthetic delivery systems previously
sold in the United States while also providing new impetus for the purchase of
these systems by new users.
CompuFlo
"CompuFlo", developed by Milestone, is a revolutionary new technology for
injections. CompuFlo enables health care practitioners to monitor and precisely
control "pressure", "rate" and "volume" during all injections and can be used to
inject all liquid medicaments as well as anesthetics. CompuFlo can also be used
to aspirate body fluids.
Risk of death, transient or permanent paralysis, pain, tissue damage and
post-operative complications have long been tolerated as negative side effects
from the use of traditional hypodermic drug delivery injection systems. This is
well documented in dental and medical literature. The pain and tissue damage are
a direct result of uncontrolled flow rates and pressures that are created during
the administration of drug solutions into human tissue. While several
technologies have been capable of controlling flow rate, the ability to
accurately and precisely control pressure has been unobtainable until our
development of CompuFlo.
In September 2004, Milestone Scientific was issued United States Patent
No. 6,786,885 (date of issue September 14, 2004) on CompuFlo technology,
entitled "Pressure/Force Computer Controlled Drug Delivery System with Exit
Pressure. Proprietary software working with an innovative technology allows the
system to continuously monitor and control the exit pressure of fluid and/or
medication during an injection. This same technology also enables doctors to
accurately identify different tissue types based on exit pressure during an
injection. The technology appears to have many applications in both medicine and
dentistry including epidural injections.
In December 2004, the United States Patent Office issued a "Notice of
Allowance" for patent protection on two additional critical elements of the
CompuFlo automated drug delivery technology: "Drug Delivery System with
Profiles" and "Pressure/Force Computer Controlled Drug Delivery with Automated
Charging".
The Drug Delivery System with Profiles standardizes and simplifies the
drug delivery process, while reducing the risk of medical complications by
controlling parameters that are essential for the safe injection of local
anesthetics and other medications, as well as the aspiration of bodily fluids.
This is accomplished through an integrated injection database in the CompuFlo
technology that contains the critical components of specific drugs, parameters
of needles, tubing and syringes and all pertinent components for the safe and
efficacious delivery of medications, including procedures such as epidural
injections.
Pressure/Force Computer Controlled Drug Delivery with Automated Charging
-- provides the means to deliver any volume of medication or infused fluid, such
as a saline solution, into the human body. In many instances, the volume of
medication or other liquid that is required for a medical procedure exceeds the
capacity of the normal vessels used. This technology allows the smaller vessel
to be automatically refilled from a larger one without interrupting the surgery
or medical procedure.
Epidurals. In 2004, successful results of two independent pilot clinical
studies confirmed the efficacy of the CompuFlo pressure/force computer
controlled anesthetic delivery system in identifying the epidural space.
Identifying when a hypodermic needle has entered the epidural space is a
critically important factor in the safety and effectiveness of anesthetic
injections administered during childbirth and in the course of pain management
therapy. A report on the results of the study, conducted through the University
of Texas Health Science Center at Houston under the guidance of Dr. Oscar
Ghelber, Assistant Professor of Anesthesiology, was presented at the Society for
Technology in Anesthesia (STA) meeting on October 28th,
5
2004. Proper and consistent identification of the epidural space represents a
critical step towards the adoption of Milestone's technology for the
administration of epidural anesthesia.
----------
In addition to products enhancing its position in advanced injection
technology, in 2004 Milestone acquired rights to a proprietary dental
enhancement system now named the CoolBlue Wand(TM).
CoolBlue Wand Dental Enhancement System
The CoolBlue Wand(TM) dental enhancement system uses blue light emitting
diodes for fast curing of dental composite material, trans-illumination of teeth
and activation of whitening gels and pastes. Initially Milestone viewed the
CoolBlue Wand as an aid to its sales force in gaining access to dental offices
for sales of CompuDent. However, in view of the burgeoning consumer demand for
tooth whitening, the professional product will also provide Milestone with
access to the consumer tooth whitening market.
Consumer Tooth Whitening
In October 2004, Milestone announced the planned launch of its proprietary
tooth whitening system, for the home-use consumer market. The system and
consumable gels and rinses used with the system will be manufactured for
Milestone by United Systems, Inc. under an exclusive license agreement requiring
the purchase of a minimum of 1 million system Starter Kits from Milestone during
the four year term of the agreement.
The $400 million (annual revenues) consumer segment of the $1 billion-plus
tooth whitening market is one of the fastest growing areas in the oral hygiene
industry. Milestone's system utilizes a unique blue LED intra-oral light
(incorporated into a hand held battery-powered device) to activate proprietary
tooth-whitening gels. The system is designed to provide a safe, convenient and
time saving method of whitening teeth. When used on a regular basis with a
specially formulated rinse, also to be offered by the licensee, the system will
maintain the brightness of teeth on an ongoing basis.
The consumer tooth whitening product line includes a Starter Kit that
contains the gels, the rinse and the intra-oral light. Continuity Kits with a
30-day supply of the specially formulated rinse will also be available. The
product will be marketed through television spots, infomercials, print media and
ultimately through retail outlets. Television infomercials began running in 23
markets on March 13, 2005.
6
Milestone Renaissance
In 2003 we recognized that the domestic market had become ready to accept
our CompuDent technology. An authoritative and growing body of peer reviewed and
other independent clinical studies had established the superiority of the
CompuDent to the traditional syringe in administering dental anesthesia; the
CompuDent had been readily accepted in first world international markets,
despite limited marketing efforts; and more than 16 million injections had been
administered with CompuDent creating growing professional acceptance and
consumer demand for the administration of painless injections by their dental
practitioners. Two ingredients were missing, a new marketing approach and funds
to support the new sales effort required by this marketing approach.
During 2003 we tested the use of our own highly trained force of
independent sales representatives and inside sales support and sales staff to
generate additional sales to our existing base, to increase handpiece usage and
to both generate leads and to sell to new customers. Based on our pilot programs
and studies we determined that a new sales program built around the following
components could be successful:
o An increased base price for CompuDent to new customers to provide
sufficient gross profit to allow adequate compensation to a new
sales force.
o An inside sales support staff to generate leads for outside
independent sales representatives and also to set appointments,
provide technical support and customer service and foster increased
handpiece use.
o Providing ancillary products to its outside sales force, such as the
CoolBlue Wand, to assist that force in gaining access to dental
offices for sales of CompuDent.
o Primary reliance on an inside sales force in the domestic market.
o Use of independent highly trained exclusive outside sales
representatives only in high density markets to prevent excessive
costs.
The plan also contemplated increased marketing and promotional activities
including increasing trade show appearances, advertising directed towards dental
professionals and, possibly, to consumer advertising.
To fund this new marketing plan, we arranged for new equity funding
through Paulson Investment Company, Inc. This offering was consummated in
February, 2004 with a raise of gross proceeds of $9,388,000 from the sale of
1,440,000 units, each consisting of two shares of common stock and one warrant
to purchase an additional share of common stock at $4.89 per share.
As contemplated in the offering, we used the proceeds to significantly
expand the Company's sales capability by taking the following steps:
o Expanding significantly its independent sales force, both inside and
outside sales reps, and our sales support staff.
o Conducting extensive training programs for our new sales force.
o Beginning to implement new marketing and advertising campaigns
directed at the professional dental market and, possibly, the
consumer market.
o Completing the final production, tooling and other work necessary to
launch the SafetyWand
o Taking the initial steps necessary to re-establish our dental and
hygiene school teaching programs.
Because of the time required to rent additional facilities, install
computer lines and an internal computer network, obtain high traffic telephone
lines and otherwise create the essential infrastructure, hire and train
managers, allow managers to hire or engage sales representatives and then the
long training time necessary to provide the sales force with the skills required
to sell CompuDent, the effects of these new initiatives only became apparent in
the fourth quarter of 2004.
7
Competition
Our anesthetic delivery systems compete with disposable and reusable
syringes that generally sell at lower prices and that use established and
well-understood methodologies and other local anesthetic delivery systems, in
both the dental and medical marketplaces. When SafetyWand is commercially
available, it will compete with other safety engineered products in the medical
market and against a single product claiming to be compliant with OSHA
regulations under the Needle Stick Act in the dental market.
Our systems compete on the basis of their performance characteristics and
the benefits provided to both the practitioner and the patient. Clinical studies
have shown that our systems reduce fear, pain and anxiety for some patients, and
we believe that they can also reduce practitioner stress levels. CompuDent can
be used for all local anesthesia techniques that can be performed with a
syringe. CompuDent can also be used for new and modified techniques that cannot
be performed with traditional syringes. These new techniques allow faster
procedures shortening chair time, while minimizing numbing of the lips and
facial muscles, enhance productivity, reduce stress and virtually eliminate pain
and anxiety.
The Luer Lock needle, sold by us, competes with dental needles produced
and distributed by a number of major manufacturers and distributors and other
producers or distributors of dental products, many of whom have significant
competitive advantages because of their size, strength in the marketplace,
financial and other resources and broad product lines. We compete on the basis
of convenience since we can package the product with an order for disposable
handpieces.
We face intense competition from many companies in the medical and dental
device industry, possessing substantially greater financial, marketing,
personnel, and other resources. Most of our competitors have established
reputations, stemming from their success in the development, sale, and service
of competing dental products. Further, rapid technological change and research
may affect our products. Current or new competitors could, at any time,
introduce new or enhanced products with features that render our products less
marketable or even obsolete. Therefore, we must devote substantial efforts and
financial resources to improve our existing products, bring our products to
market quickly, and develop new products for related markets. In addition, our
ability to compete successfully requires that we establish an effective
distribution network. New products must be approved by regulatory authorities
before they may be marketed. We cannot assure you that we can compete
successfully, that our competitors will not develop technologies or products
that render our products less marketable or obsolete, or that we will succeed in
improving our existing products, effectively develop new products, or obtain
required regulatory approval for those products.
Patents And Intellectual Property
We hold the following U.S. utility and design patents:
U.S. PATENT DATE OF
NUMBER ISSUE
-----
COMPUDENT
Hypodermic Anesthetic Injection Method ......................................... 4,747,824 5/31/88
Hypodermic Anesthetic Injection Apparatus & Method ............................. 5,180,371 1/19/93
(CompuFlo, CompuMed, and CompuDent )
Dental Anesthetic and Delivery Injection Unit .................................. 6,022,337 2/8/00
Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) ...... 6,152,734 11/28/00
Dental Anesthetic Delivery Injection Unit (continuation of No. 6,022,337) ...... 6,132,414 10/17/00
Design for a Dental Anesthetic Delivery System Handle .......................... D427,314 6/27/00
Design for a Dental Anesthetic Delivery System Holder .......................... D422,361 4/4/00
Design for a Dental Anesthetic Delivery System Housing ......................... D423,665 4/25/00
Dental Anesthetic and Delivery Injection Unit with Automated Rate Control ...... 6,652,482 11/25/03
SAFETYWAND
Handpiece for Injection Device with a Retractable and Rotating Needle .......... 6,428,517 8/6/02
Safety IV Catheter Device ...................................................... 6,726,658 4/27/04
8
COMPUFLO
Pressure/Force Computer Controlled Drug Delivery System ........................ 6,200,289 3/13/01
Pressure/Force Computer Controlled Drug Delivery System with Exit Pressure ..... 6,786,885 9/14/04
OTHER
Hypodermic Syringe and Method .................................................. 4,877,934 12/19/88
Apparatus and Method for Sterilizing, Destroying and Encapsulating
Medical Implement Wastes ....................................................... 4,992,217 2/12/91
Apparatus and Method for Verifiably Sterilizing Destroying and
Encapsulating Regulated Medical Wastes ......................................... 5,078,924 1/7/92
Apparatus and Method for Verifiably Sterilizing, Destroying and
Encapsulating Regulated Medical Wastes ......................................... 5,401,444 3/28/95
Self-Sterilizing Hypodermic Syringe and Method ................................. 5,512,730 4/30/96
Self-Sterilizing Hypodermic Syringe and Method ................................. 5,693,026 12/2/97
In December 2004, the United States Patent Office issued a "Notice of
Allowance" for patent protection on two critical elements of its CompuFlo
automated drug delivery technology: "Drug Delivery System With Profiles" and
"Pressure/Force Computer Controlled Drug Delivery with Automated Charging".
The Drug Delivery System with Profiles standardizes and simplifies the
drug delivery process, while reducing the risk of medical complications by
controlling parameters that are essential for the safe injection of local
anesthetics and other medications, as well as aspiration of bodily fluids. This
is accomplished through an integrated injection database in the CompuFlo
technology that contains the critical components of specific drugs, parameters
of needles, tubing and syringes and all pertinent components for the safe and
efficacious delivery of medications, particularly in procedures such as epidural
injections.
The Pressure/Force Computer Controlled Drug Delivery with Automated
Charging provides the means to deliver any volume of medication or infused
fluid, such as a saline solution, into the human body. In many instances, the
volume of medication or other liquid that is required for a medical procedure
exceeds the capacity of the normal vessels used. This technology allows the
smaller vessel to be automatically refilled from a larger one without
interrupting the surgery or medical procedure.
We also have several patent applications pending before the U.S. Patent
and Trademark Office, and hold a number of corresponding patents in Europe and
other major markets.
During the 2004 and 2003 fiscal years, we expensed $187,992 and $131,015,
respectively, on research and development activities. The higher costs incurred
during 2004 were primarily associated with the development of the SafetyWand.
We rely on a combination of patent, copyright, trade secret, and trademark
laws and employee and third party nondisclosure agreements to protect our
intellectual property rights. Despite the precautions taken by us to protect our
products, unauthorized parties may attempt to reverse engineer, copy, or obtain
and use products and information that we regard as proprietary, or may design
products serving similar purposes that do not infringe on our patents.
Litigation may be necessary to protect our intellectual property rights and
could result in substantial cost to us and diversion of our efforts with no
guarantee of success. Our failure to protect our proprietary information and the
expenses of doing so could have a material adverse effect on our operating
results and financial condition.
While there are no current claims that our products infringe the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against us in the future with
respect to current or future products or that any such assertion may not require
us to cease selling such products, or to enter into arrangements that require us
to pay royalties, or to engage in costly litigation. Although we have received
no claims of infringement, it is possible that infringement of existing or
future patents or proprietary rights of others may occur. In the event that our
products infringe upon patent or proprietary rights of others, we may be
required to modify our processes or to obtain a license. There can be
9
no assurance that we would be able to do so in a timely manner, upon acceptable
terms and conditions, or at all. The failure to do so would have a material
adverse effect on us.
Government Regulation
The FDA cleared CompuDent system and its disposable handpiece for
marketing in the U.S., for dental applications in July 1996, the CompuMed system
for marketing in the U.S. for medical applications in May 2001 and the
SafetyWand for marketing in the U.S. for dental applications in September 2003.
For us to commercialize our other products in the United States, we will have to
submit additional 510(k) applications with the FDA.
The manufacture and sale of medical devices and other medical products are
subject to extensive regulation by the FDA pursuant to the FDC Act, and by other
federal, state and foreign authorities. Under the FDC Act, medical devices must
receive FDA clearance before they can be marketed commercially in the United
States. Some medical products must undergo rigorous pre-clinical and clinical
testing and an extensive FDA approval process before they can be marketed. These
processes can take a number of years and require the expenditure of substantial
resources. The time required for completing such testing and obtaining such
approvals is uncertain, and FDA clearance may never be obtained. Delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each product submitted.
Similar delays also may be encountered in other countries. Following the
enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA
classified medical devices in commercial distribution into one of three classes.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through general
controls, such as adequate labeling, premarket notification, and adherence to
the FDA's Quality System Regulation ("QSR"), also referred to as "Good
Manufacturing Practices" ("GMP") regulations. Some Class I devices are further
exempted from some of the general controls. Class II devices are those devices
whose safety and effectiveness reasonably can be ensured through the use of
special controls, such as performance standards, post-market surveillance,
patient registries, and FDA guidelines. Class III devices are those which must
receive premarket approval by the FDA to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices.
If a manufacturer or distributor can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required
premarket approval, the manufacturer or distributor may seek FDA marketing
clearance for the device by filing a 510(k) Premarket Notification. The 510(k)
Premarket Notification and the claim of substantial equivalence may have to be
supported by various types of data and materials, including test results
indicating that the device is as safe and effective for its intended use as a
legally marketed predicate device. Following submission of the 510(k) Premarket
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. By regulation, the
FDA has no specific time limit by which it must respond to a 510(k) Premarket
Notification. At this time, the FDA typically responds to the submission of a
510(k) Premarket Notification within 90 days. The FDA response may declare that
the device is substantially equivalent to another legally marketed device and
allow the proposed device to be marketed in the United States. However, the FDA
may determine that the proposed device is not substantially equivalent or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay market
introduction of our products and could have a material adverse effect on us. If
a device that has obtained 510(k) Premarket Notification clearance is changed or
modified in design, components, method of manufacture, or intended use, such
that the safety or effectiveness of the device could be significantly affected,
separate 510(k) Premarket Notification clearance must be obtained before the
modified device can be marketed in the United States. If a manufacturer or
distributor cannot establish that a proposed device is substantially equivalent
to a legally marketed device, the manufacturer or distributor will have to seek
premarket approval of the proposed device, a more difficult procedure requiring
extensive data, including pre-clinical and human clinical trial data, as well as
extensive literature, to prove the safety and efficacy of the device.
10
Though CompuDent, the SafetyWand and CompuMed have received FDA marketing
clearance, there can be no assurance that any of our other products under
development will obtain the required regulatory clearance on a timely basis, or
at all. If regulatory clearance of a product is granted, such clearance may
entail limitations on the indicated uses for which the product may be marketed.
In addition, modifications may be made to our products to incorporate and
enhance their functionality and performance based upon new data and design
review. There can be no assurance that the FDA will not request additional
information relating to product improvements, that any such improvements would
not require further regulatory review thereby delaying the testing, approval and
commercialization of our development products or that ultimately any such
improvements will receive FDA clearance.
Compliance with applicable regulatory requirements is subject to continual
review and will be monitored through periodic inspections by the FDA. Later
discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
fines, delays or suspensions of regulatory clearances, seizures or recalls of
products, operating restrictions and criminal prosecution and could have a
material adverse effect on us.
We are subject to pervasive and continuing regulation by the FDA, whose
regulations require manufacturers of medical devices to adhere to certain QSR
requirements as defined by the FDC Act. QSR compliance requires testing, quality
control and documentation procedures. Failure to comply with QSR requirements
can result in the suspension or termination of production, product recall or
fines and penalties. Products also must be manufactured in registered
establishments. In addition, labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. The export of devices is also subject to regulation in certain
instances.
The Medical Device Reporting ("MDR") regulation obligates us to provide
information to the FDA on product malfunctions or injuries alleged to have been
associated with the use of the product or in connection with certain product
failures that could cause serious injury. If, as a result of FDA inspections,
MDR reports or other information, the FDA believes that we are not in compliance
with the law, the FDA can institute proceedings to detain or seize products,
enjoin future violations, or assess civil and/or criminal penalties against us,
our officers or employees. Any action by the FDA could result in disruption of
our operations for an undetermined time.
In June 2003 we received CE mark in the European Common Market for
marketing in Europe of the SafetyWand and The Wand Handpiece with Needle. In
July 2003, we obtained regulatory approval to sell CompuDent and its handpieces
in Australia and New Zealand.
Product Liability
Failure to use any of our products in accordance with recommended
operating procedures potentially could result in subjecting users to health
hazards or injury. Failures of our products to function properly could subject
us to claims of liability. We maintain liability insurance in an amount that we
believe is adequate. However, there can be no assurance that our insurance
coverage will be sufficient to pay product liability claims brought against us.
A partially or completely uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on us.
Employees
On December 31, 2004, Milestone had 31 full-time employees, including
three executive officers, a clinical director, three domestic sales managers,
five sales support representatives, fifteen inside sales representatives, an
international sales manager, an assistant controller, a bookkeeper, and an
administrative assistant. In addition, 14 independent sales representatives sell
our CompuDent system.
11
CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY
The following factors may affect the growth and profitability of Milestone
and should be considered by any prospective purchaser or current holder of
Milestone's securities:
We have no history of profitable operations. Continuing losses could exhaust our
capital resources and force us to discontinue operations.
Although our operations commenced in November 1995, until 1998 we had
limited revenues. For the years ended December 31, 1998, 1999, 2000, 2001, 2002,
2003, and 2004, our revenues were approximately $8.8 million, $2.9 million, $5.7
million, $4.1 million, $4.1 million, $4.0 million, and 4.8 million,
respectively. In addition, we have had losses for each year since the
commencement of operations, including net losses of approximately $2.4 million
and $3 million for 2003 and 2004, respectively. At December 31, 2004, we had an
accumulated deficit of approximately $47 million. Unless we can significantly
increase sales of our CompuDent units, handpieces or other injection devices, we
expect to incur losses for the foreseeable future.
We cannot become successful unless we gain greater market acceptance for our
products and technology.
As with any new technology, there is substantial risk that the marketplace
will not accept the potential benefits of this technology or be unwilling to pay
for any cost differential with the existing technologies. Market acceptance of
CompuDent, the SafetyWand, CompuMed and CompuFlo depends, in large part, upon
our ability to educate potential customers of their distinctive characteristics
and benefits and will require substantial marketing efforts and expense. More
than 26,000 units of the CompuDent or its predecessors have been sold worldwide
since 1998. Sales of disposable handpieces in 2003 reflect a moderate increase
in the world wide usage of our dental and medical systems. We cannot assure you
that our current or proposed products will be accepted by practitioners or that
any of the current or proposed products will be able to compete effectively
against current and alternative products.
Our limited distribution channels must be expanded for us to become successful.
Our future revenues depend on our ability to market and distribute our
anesthetic injection technology successfully. In the United States, we rely on a
limited number of independent representatives and in-house sales people. Abroad,
we lack distributors in many markets. To be successful we will need to hire and
retain additional sales personnel, provide for their proper training and ensure
adequate customer support. We cannot assure you that we will be able to hire and
retain an adequate sales force or engage suitable distributors, or that our
sales force or distributors will be able to successfully market and sell our
products.
We depend on two principal manufacturers. If we cannot maintain our existing
relationships or develop new ones, we may have to cease our operations.
We have informal arrangements with the manufacturer of our CompuDent and
CompuMed units and the principal manufacturer of our handpieces for those units
pursuant to which they manufacture these products under specific purchase orders
but without any long-term contract or minimum purchase commitment. We have been
supplied by these manufacturers since the commencement of production in 1998.
However, termination of the manufacturing relationship with any of these
manufacturers could significantly and adversely affect our ability to produce
and sell our products. Though we have established an alternate source of supply
for our handpieces in China and other alternate sources of supply exist, we
would need to recover our existing tools or have new tools produced to establish
relationships with new suppliers. Establishing new manufacturing relationships
could involve significant expense and delay. Any curtailment or interruptions of
the supply, whether or not as a result or termination of the relationship, would
adversely affect us.
12
We may be subject to product liability claims that are not fully covered by our
insurance and that could put us under financial strain.
We could be subject to claims for personal injury from the alleged
malfunction or misuse of our dental and medical products. While we carry
liability insurance that we believe is adequate, we cannot assure you that the
insurance coverage will be sufficient to pay such claims should they be
successful. A partially or completely uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on us.
We rely on the continuing services of our chairman and chief executive officer,
president and director of clinical affairs.
We depend on the personal efforts and abilities of our Chairman and Chief
Executive Officer, our President who was promoted to this position from that of
Senior Vice President in September 2003, and our Director of Clinical Affairs.
We maintain a key man life insurance policy in the amount of $1,000,000 on the
life of our Chairman and Chief Executive Officer. However, the loss of his
services or the services of each of our President or Director of Clinical
Affairs, on whom we maintain no insurance, could have a materially adverse
effect on our business.
The market price of our common stock has been volatile and may continue to
fluctuate significantly because of various factors, some of which are beyond our
control.
Our stock price has been extremely volatile, fluctuating over the last
three years between closing prices of $.42 and $7.77. These fluctuations have
been unrelated to or disproportionately affected by our operating performance.
The market price of our common shares could continue to fluctuate significantly
in response to a variety of factors, some of which may be beyond our control.
We currently have outstanding options, warrants and series A convertible
preferred stock to purchase 3,229,407 shares of our common stock at prices
ranging from $.87 to $13.50 per share with a weighted average exercise or
conversion price of $4.86. Holders of these warrants and options are given the
opportunity to profit from a rise in the market price of our common stock and
are likely to exercise their securities at a time when we would be able to
obtain additional equity capital on more favorable terms. Thus, the terms upon
which we will be able to obtain additional equity capital may be adversely
affected, since the holders of outstanding options and warrants can be expected
to exercise them at a time when we would, in all likelihood, be able to obtain
any needed capital on terms more favorable to us than the exercise terms
provided by such outstanding securities. The market price of our common shares
has been volatile and may continue to fluctuate significantly because of various
factors, some of which are beyond our control.
We are controlled by a limited number of shareholders.
Our principal shareholders, Leonard Osser and K. Tucker Andersen, own
30.97% of the issued and outstanding shares of our common stock. As a result,
they have the ability to exercise substantial control over our affairs and
corporate actions requiring shareholder approval, including electing directors,
selling all or substantially all of our assets, merging with another entity or
amending our certificate of incorporation. This de facto control could delay,
deter or prevent a change in control and could adversely affect the price that
investors might be willing to pay in the future for our securities.
Future sales or the potential for sale of a substantial number of shares of our
common stock could cause the trading price of our common stock and warrants to
decline and could impair our ability to raise capital through subsequent equity
offerings.
Sales of a substantial number of shares of our common stock in the public
markets, or the perception that these sales may occur, could cause the market
price of our stock to decline and could materially impair our ability to raise
capital through the sale of additional equity securities. We currently have
outstanding options and warrants to purchase 3,225,017 shares of our common
stock at prices ranging
13
from $.87 to $13.50 per share with a weighted average exercise or conversion
price of $4.86. Holders of these warrants and options are given the opportunity
to profit from a rise in the market price of our common stock and are likely to
exercise their securities at a time when we would be able to obtain additional
equity capital on more favorable terms. Thus, the terms upon which we will be
able to obtain additional equity capital may be adversely affected, since the
holders of outstanding options and warrants can be expected to exercise them at
a time when we would, in all likelihood, be able to obtain any needed capital on
terms more favorable to us than the exercise terms provided by such outstanding
securities. The market price of our common shares has been volatile and may
continue to fluctuate significantly because of various factors, some of which
are beyond our control. Currently, there are 9,824,287 shares of common stock
actually issued and 9,790,954 outstanding. Also, there are another 4,246,292
shares of common stock reserved for future issuance as follows:
o up to 1,440,000 shares underlying the warrants issued in the Public
Offering;
o up to 335,614 shares underlying warrants granted to satisfy
obligations in connection with the 2004 public offering;
o up to 432,000 shares underlying the representative's warrants issued
in the Public Offering, including the shares underlying the warrants
included in the representative's warrants;
o up to 314,333 shares underlying stock options previously granted, or
to be granted, under our 1997 Stock Option Plan
o up to 500,000 shares underlying stock options to be granted under
our 2004 Stock Option Plan;
o up to 1,219,955 shares underlying other stock options and warrants
that were granted and remained outstanding as of December 31, 2004;
o and
o 4,390 shares of common stock underlying our series A convertible
preferred stock;
We have 9,790,954 shares of common stock outstanding, of which 5,824,287
are freely tradable. The remaining 3,966,667shares are either held by
"affiliates", as defined by the rules and regulations promulgated under the
Securities Act of 1933, or are "restricted securities" as defined in Rule 144
promulgated under the Securities Act of 1933. Of this amount, 271,303 restricted
shares not held by affiliates and 3,695,364 restricted or non-restricted shares
held by "affiliates," can only be sold in compliance with the timing and volume
limitations of Rule 144 promulgated under the Securities Act of 1933.
The decrease of our outstanding shares as a result of the reverse stock split,
without change to our authorized capitalization, increased the ability of our
board of directors to issue shares without stockholder approval. Issuance of
shares may dilute the value of our outstanding shares or have a negative impact
on the trading price of the common stock.
The 1-for-3 stock split effected in January 2004 reduced our outstanding
shares from 18,338,033 to 6,112,678 (9,663,907 shares after giving effect to the
consummation of the Public Offering and related issuances of units). Since the
reverse stock split was effected without change in our authorized shares, the
differential between outstanding shares and authorized shares increased, thus
providing the Board of Directors with increased ability to effect issuances of
stock without stockholder authorization. For example, shares may be issued in
capital raising transactions, mergers or acquisitions or for compensatory
reasons where other governing rules or statutes do not separately require
stockholder approval. The issuance of these shares for less than their book
value or for less than value paid by purchasers in the recently completed
offering could have a dilutive effective on purchasers in this offering. Further
the issuance of the shares could also have a negative impact on the trading
price of our then outstanding common stock, including the stock issued in the
recently completed offering
14
Implementation of procedures to comply with the Sarbanes-Oxley Act and SEC rules
concerning internal controls may be so costly that compliance could have an
adverse effect on us.
We must comply with Sarbanes-Oxley requirements requiring a management
report on internal control over financial reporting disclosure requirements in
our annual report for our financial year ending December 31, 2006. It may be
time-consuming, costly and difficult for us to develop and implement the
necessary internal controls and reporting procedures, possibly requiring us to
hire additional personnel. These additional costs could have an adverse effect
on our profitability.
If we are unable to satisfy the American Stock Exchange maintenance
requirements, our common stock may be delisted from the American Stock Exchange
and, as a result, our liquidity and the value of our common stock may be
impaired.
Shares of our common stock are currently listed on the American Stock
Exchange. Continued listing on the American Stock Exchange requires that we
maintain at least $6,000,000 in stockholders' equity since we have sustained
losses in our five most recent fiscal years. We received notice from the
American Stock Exchange on January 4, 2005 indicating that we were below the
Exchange's continued listing standards requiring stockholders' equity of $6
million. On January 14, 2005 we submitted a plan to the Exchange for regaining
compliance with the Exchange's stockholder equity continued listing requirement
by the end of the plan period on June 30, 2005. On January 27, 2005 the Exchange
determined that this plan made a reasonable demonstration of our ability to
regain compliance with the continued listing standards by the end of the plan
period. As a result of the acceptance of this plan, we will remain listed on the
Exchange until the end of the plan period, subject to periodic review by the
Exchange to determine whether we are progressing consistent with the plan.
However, failure to make such progress could result in our being delisted
earlier from the Exchange. If our securities are delisted from the Exchange,
trading, if any, in our securities would be conducted in the over the counter
market on the NASD's "OTC Bulletin Board". Consequently, the liquidity of our
securities could be impaired, not only in the number of securities that could be
bought and sold, but also through delays in the timing of transactions,
reduction in security analyst and news media coverage of Milestone, and lower
prices for our securities than might otherwise be obtained.
Item 2. Description of Property
Our offices are located in Livingston Corporate Park in Livingston, New Jersey.
We lease approximately 4,503 square feet of office space including 1,810 square
feet of additional office space acquired in April 2004. As part of this
expansion, the lease term was extended through June 30, 2009 at a monthly cost
of $7,317 which we believe to be competitive. We may have to increase our office
space again in the future, and we believe that we will be able to find adequate
premises on comparable terms. A third party distribution and logistics center in
Pennsylvania handles shipping and order fulfillment on a month to month basis.
Item 3. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Milestone's Common Stock is traded on the American Stock Exchange under
the symbol "MS" and the Pacific Stock Exchange under the symbol "MS." As of
March 18, 2004, Milestone's warrants are traded on the American Stock Exchange
under the symbol "MS.WS". Milestone's units, each consisting of two shares of
common stock and one warrant to purchase one share of common stock traded, under
the symbol "MSE.U" for a limited 30 day period beginning on February 18, 2004
and ending on March 17, 2004 at prices ranging from $5.50 to $5.62.
Common Stock
The following table sets forth the high and low sales prices of our Common
Stock, as quoted by the American Stock Exchange after adjustment for the 1-for-3
reverse stock split in January 2004.
HIGH LOW
---- ---
2003
First Quarter............................................. $0.96 $0.45
Second Quarter............................................ $1.20 $0.54
Third Quarter............................................. $4.98 $0.81
Fourth Quarter............................................ $7.77 $3.09
2004
First Quarter ............................................ $4.20 $2.38
Second Quarter............................................ $2.46 $1.75
Third Quarter............................................. $2.48 $1.67
Fourth Quarter............................................ $1.85 $1.55
Warrants
The following table sets forth the high and low sales prices of our
warrants, each to purchase one share of common stock, as quoted by the American
Stock Exchange, commencing on March 18, 2004, their first day of trading.
2004
HIGH LOW
---- ---
First Quarter (Commencing March 18 and ending March 31)... $.65 $.55
Second Quarter............................................ $.70 $.25
Third Quarter............................................. $.60 $.26
Fourth Quarter............................................ $.52 $.26
16
Holders
According to the records of our transfer agent, there were approximately
3,000 holders of record of our common stock as of December 31, 2004.
Dividends
The holders of our Common Stock are entitled to receive such dividends as
may be declared by Milestone's Board of Directors. Milestone has not paid and
does not expect to declare or pay any dividends in the foreseeable future.
Sales of Unregistered Securities
In July 2002, we issued 62,500 units consisting of one share of common
stock and one warrant to purchase an additional share of common stock to a
vendor in accordance with the agreement valued at $150,000.
In August 2002, we issued 66,667 shares of common stock in exchange for
payment of $90,000 of outstanding legal fees.
On August 13, 2002 we received a binding commitment (modifying and
confirming a March 29, 2002 undertaking), requiring our legal counsel to
purchase equity securities, valued at fair market value, in payment of $200,000
of then accrued legal fees. The specific timing of this issuance is governed by
a December 22, 2003 agreement. Pursuant to the agreement, we issued and
delivered 30,675 Units in February 2004. The investor is an accredited investor.
In June 2003 we issued a 6% convertible note in the amount of $50,000 and
warrants to purchase 53,419 shares of our common stock at $1.56 per share.
In September 2003 we issued a 6% convertible note in the amount of $50,000
and warrants to purchase 5,000 shares of our common stock at $6.00 per share.
In October 2003 we issued 1,646,419 shares of common stock in satisfaction
of 6% / 12% Secured and Senior Secured Notes in the aggregate amount of
approximately $5 million. We also committed to issue 25,365 shares of 8%
convertible preferred stock in satisfaction of $25,365 of principal and accrued
interest. The preferred stock will be convertible into 4,390 shares of common
stock at $5.79. Subsequently, we issued 94,327 additional shares of common stock
to these former noteholders as consideration for their previous consent to
extend the maturity date of these notes.
On October 9, 2003 we entered into a binding agreement with our CEO and a
major investor under which we have sold and issued to them 246,044 units, each
consisting of two shares of common stock and one warrant to purchase one share
of common stock (the "Units") in payment of $1,604,204 of debt and interest due
to our CEO and a major investor, and approximately 58,896 Units in payment of
$384,000 of accrued compensation due to our CEO. The Units were issued on the
date of our offering. Both investors are accredited investors.
On October 31, 2003 we issued 102,195 shares of our common stock to
principal vendors, in satisfaction of trade payables in the aggregate amount of
approximately $503,000.
In April, 2004, we issued to Marina Co., a nominee of partners of Morse,
Zelnick, Rose & Lander LLP, our legal counsel, options expiring April 16, 2009
for the purchase of 160,000 shares of our common stock, at an exercise price of
$3.26 per share, and warrants, expiring April 16, 2009, to purchase 80,000
shares of our common stock at $4.89 per share, as partial consideration for
services rendered in connection with our February, 2004 public offering.
17
In April 2004, pursuant to an agreement to purchase media placement
services, we issued 1,106 shares of common stock valued at $2,500.
In May of 2004, we issued 1,133 options for consulting services valued at
$1,548.
On May 10, 2004, our Board of Directors granted options, expiring May 10,
2009, to purchase 40,000 shares of our common stock at an exercise price of
$2.25 per share, to our investor relations consultant as consideration for the
provision of consulting services. On the same date, the Board of Directors also
granted options, expiring May 10, 2009, for the purchase of an aggregate number
of 59,668 shares of common stock at an exercise price of $4.92 per share, to
certain vendors in payment of services.
On August 31, 2004, we issued 36,331 shares to a vendor, LC Mold, Inc., in
satisfaction of $70,410 of payables owed in connection with the manufacturing of
product molds for our Safety Wand product.
In November 2004, we satisfied the $50,000 promissory note and accrued
interest at 6% of $4,475 by issuing 58,200 shares of common stock.
In December 2004 we issued 6,060 shares having a fair value of $10,000 to
two employees and 9,091shares to a distributor having a fair value of $15,000.
The foregoing securities were issued in reliance upon the exemption from
the registration requirements of the Securities Act of 1933, as amended,
provided in Section 4(2) thereof, as a transaction by an issuer not involving a
Public Offering. The registrant reasonably believed that each purchaser had such
knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks of the investment, each purchaser represented an
intention to acquire the securities for investment only and not with a view to
distribution thereof and appropriate legends were affixed to the stock
certificates or warrants. No commissions were paid in connection with such
issuances.
18
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
You should read the following discussions of our financial condition and
results of operations in conjunction with the financial statements and the notes
to those statements included elsewhere in this Form 10-KSB. This discussion may
contain forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, such as those set
forth under "Risk Factors" and elsewhere in this Form 10-KSB.
OVERVIEW
We began 2004 with a six point plan to penetrate the dental and medical markets
with our computer controlled injection technologies as outlined below:
o Complete the equity raise necessary to fund the business operations.
o Develop a domestic sales organization to market and sell our
products
o Develop new product offerings to compliment the existing product
lines and generate higher revenues. Secure patent protection for all
new technologies.
o Continue to invest in our core technology platform.
o Grow our sales volume by double digit amounts over the comparable
period of the previous year.
o Manage our spending to achieve cash flow breakeven within the second
quarter 2005.
Based upon the results to date, we believe that we have achieved or are in
position to achieve all of the above objectives. We have developed a highly
trained domestic sales organization to penetrate 31 markets in the United
States. We have thus far covered 25 markets. Accordingly we have increased our
spending and incurred losses, all of which were planned in line with our
projections. We believe that the return on this investment has been and will
continue to be increased revenues. From the second quarter 2004, revenues have
increased by double digit percentages compared to the comparable quarter in the
previous year.
During 2004, we developed a new consumer tooth whitening product line and
entered into a manufacturing and distribution agreement with a third party. The
third party has in turn entered into a marketing agreement, which provides for
the sale of the products through infomercials followed by major worldwide
retailers. We expect these arrangements to generate revenues for us commencing
in early 2005 on a no-risk basis, as all costs, including tooling, marketing and
the infomercial expenses, will be incurred by the third parties.
During 2004, we continued development of our Professional Whitening product,
which is targeted to the dental office. This product also targets a very large
market and offers a lower priced, safer alternative to existing whitening
products. We anticipate significant margins on the whitening gels in excess of
70% while also commanding a strong margin on the equipment used to activate the
gels of over 50%. The launch of this product is expected within the second
quarter of 2005.
We have also developed new advanced sophisticated technology, for which we have
been granted patent protection that can be used for a number of medical
purposes, including the delivery of epidural injections. A prototype of the
epidural injection device has been successfully reviewed in two clinical studies
at a major university connected hospital.
Our focus on sales and marketing initatives are reflected in the strong
revenue growth in 2004. Revenues have increased both domestically and
internationally, generated from increases in all product lines
19
including CompuDent units, an increasing base of handpiece sales and the sales
from CoolBlue products. CompuDent unit sales increased by 25% domestically and
12.8% internationally. Worldwide handpiece sales increased by 20.7% over 2003.
The following table shows a breakdown of our revenues, domestically and
internationally, by product category, and the percentage of total revenue by
each product category:
Year Ended December 31,
-------------------------
2004 2003
---- ----
DOMESTIC
CompuDent $ 813,610 24.1% $ 649,156 23.2%
Handpieces 2,334,297 69.1% 1,933,052 69.1%
Other 230,627 6.8% 214,245 7.7%
---------- ------- ---------- --------
Total Domestic $3,378,534 100.0% $2,796,453 100.0%
---------- ------- ---------- --------
INTERNATIONAL
CompuDent $ 682,708 49.7% $ 605,378 51.5%
Handpieces 682,968 49.8% 567,302 48.3%
Other 6,976 0.5% 2,574 0.2%
---------- ------- ---------- --------
Total International $1,372,652 100.0% $1,175,254 100.0%
---------- ------- ---------- --------
DOMESTIC/INTERNATIONAL ANALYSIS
Domestic $3,378,534 71.1% $2,796,453 70.4%
International 1,372,652 28.9% 1,175,254 29.6%
---------- ------- ---------- --------
Totals $4,751,186 100.0% $3,971,707 100.0%
========== ======= ========== =======
We have earned gross profits of 49.2% and 49.6% in the years ended
December 31, 2004 and 2003, respectively. However, our revenues have not been
sufficient to support our overhead, research and development expense and
interest on our debt. We have therefore reported substantial losses for each of
those periods. We have taken steps to cut our overhead, increase sales and
reduce our interest expense.
In contrast to the cost containment measures in place through 2003,
because of cash constraints, 2004 was a period of planned expansion with a focus
on investing in revenue generating opportunities. The completed February 2004
public offering enabled us to execute our strategic plan of creating a domestic
sales organization, expand marketing and advertising programs and invest in new
product development. During 2004, our operating results reflected increased
spending in the following areas:
o Hired and trained 3 new sales managers and 19 combined inside
and outside sales representatives to penetrate the US dental
market.
o Contracted with advertising placement agencies and market
research firm to maximize the effectiveness of our sales and
marketing efforts.
o Invested in research and development and patent protection on
new and existing products including SafetyWand, CoolBlue and
CompuFlo products.
During 2003, we took several steps to reduce our operating overhead and
improve our utilization of cash. These included reconfiguring our sales force,
cutting marketing expenses, closing our Illinois facility and outsourcing the
receiving, shipping and storage functions previously conducted there. We also
took several steps to reduce our debt burden, including cutting interest rates
on some of our Notes and satisfying certain debts. We took steps intended to
increase future revenues, one of which was to complete development of the
SafetyWand and make it available commercially.
20
Since our public offering in February 2004 we have invested heavily in the
development of a national sales organization implementing the new marketing and
sales plan successfully tested in 2003. This sales force is currently configured
as follows:
o Manager of Outside Sales Representatives
Seven outside sales representatives
o Manager of Inside Sales
Seventeen inside sales representatives communicating with
customers primarily by telephone, e-mail and fax
Four sales support representatives working in conjunction with
our outside sales representatives
We anticipate eventually having 10 outside sales representatives, while we
plan to increase our inside sales representatives to a total of 21. In both
cases, however, we have experienced an attrition rate of approximately 35% per
year.
We plan to further support our increased sales and marketing activity
through an increase in trade show appearances, increased advertising to dental
professionals and, perhaps, direct to consumer advertising. Since our public
offering we have provided further support for our expanded activities through
added investment in the following areas:
SafetyWand
o Purchase of multi-cavity production tooling enabling the manufacture
of adequate inventory levels of the SafetyWand at manageable costs.
This tooling cost approximately $291,000 and is now in use for
production. Since SafetyWand can only be used with our CompuDent
unit and since the Federal Needle Stick Safety Act requires the use
of safety engineered sharps, we believe that SafetyWand will provide
additional motivation for dentists in the United States to purchase
CompuDent.
Tooth Whitening and Curing
o Acquisition of inventory component parts to manufacture our CoolBlue
Light System
Inventory cost of approximately $95,000 is currently in use to
manufacture our CoolBlue product for the dental market.
o Acquisition for tooling for this product line.
The cost of tooling to ensure adequate supply of the molded
plastic parts was approximately $64,000, and is currently in
use
CompuFlo
o Development of new software for the epidural clinical studies
Required additional engineering effort to make the software
suitable for clinical studies
o Research related activities to support the software development and
clinical trials
Conducted a focus group in addition to other marketing and
clinical research
Current Condition of Milestone
With the progress achieved in 2004, we believe that we are now positioned
to seize the market opportunities that we believe are available to us through
our patent protected products. We believe that our ownership of the SafetyWand
technology in the light of OSHA regulations issued pursuant to recent federal
and state government legislation mandating needle stick safety standards
positions us to become a leading provider for dentists and other health care
professionals in the administration of local anesthesia. We have used the
financial resources gained in the Public Offering to build the infrastructure
necessary to market our products throughout the United States. Our goal in 2005
is to carry out the plan we initiated in 2004 and grow our revenue base of
CompuDent users, thereby increasing our recurring revenue stream from the sales
21
of our consumable hand piece products.
New Sales Promotion Program:
One of the persistent issues that prevents dentists from purchasing the
CompuDent system is the recurring cost for handpieces. Milestone has not faced
pricing pressures on the drive unit, raising prices several times from a low of
$1,000 in 1998 to the $2,495 current retail price. However, Milestone has found
that once dentists begin using CompuDent in a regular way their concern with the
$1.50 cost of each handpiece disappears. Accordingly, in December 2004,
Milestone piloted a program whereby the dentist would purchase a CompuDent
system at full retail price and receive a one year supply of handpieces free.
This program was very successful, with 31 new customers participating in this
program.
Based on the success of this program and taking into account the lack of
pricing resistance on the purchase of the drive unit, Milestone has implemented
a sales program in the first quarter of 2005 designed to drive revenues from the
sale of the CompuDent unit. The program particulars follow:
1. After upgrading the CompuDent system, increase its retail price in
the U.S. to $2,495 from $2,195. This will increase the gross margin
on the unit to 87%.
2 Offer to first-time buyers of CompuDent at the retail price a free
one year supply of handpieces, including our new SafetyWand
handpiece.
3 Additional new programs have been implemented.
The premise of this program is to increase the installed base of users,
eliminate the initial cost issue associated with handpieces and nurture the
customer so that they will begin purchasing handpieces when they run out.
Enhanced CompuDent
o A software enhancement to the current CompuDent will add
TurboFlo(TM) , enabling a practitioner to deliver medication using a
third speed. This eliminates one of the few remaining obstacles to
the sale of the product, as some practitioners are concerned that
the system takes longer to deliver medication than a traditional
syringe.
o The retail price of the CompuDent has been increased to $2,495, as
the enhanced feature will add significant value to the sale.
SafetyWand
This product has been launched in January 2005 in California, Chicago and
the New York metropolitan areas and will be launched in the rest of the U.S.
during the second quarter. Plans for the introduction of this product include
advertising in professional journals, promotional activity during trade shows,
website enhancement and awareness campaigns targeted to existing users.
Professional Tooth Whitening Product
There are two basic methods used to whiten teeth in the dental office. The
first method, which varies in price from $600 to $900, utilizes a high intensity
plasma arc light to illuminate a very potent gel material on the teeth. The heat
from this light accelerates the whitening process. After application of the
gels, the teeth are illuminated for 20 minutes and then the gels are removed.
This is repeated at least twice. This method typically takes between one and two
hours. The patient is given a home kit which consists of custom molded trays
which the dentist must produce requiring approximately 30 minutes of time for
their teeth and enough gel material to continue the treatment for several days.
22
The second method, which costs between $300 and $500, consists of the
dentist making custom molds of the patient's teeth and providing the patient
with gel material which is applied for one hour per day over a period of three
to five weeks.
The CoolBlue Tooth Whitening system is a professional whitening system
marketed directly to dental offices. The technique used with this system is
differentiated from the competition in the following manner.
1. It uses blue Light Emitting Diodes (LED) to accelerate the whitening
process.
2. It requires a minimum amount of time in the dental chair, as the
teeth are illuminated for only ten seconds which is enough to begin
the whitening process.
3. The patient goes home with our proprietary whitening rinse, which
does not require custom trays, again reducing the time in the
dentist's office.
This method has advantages for both the dentist and patient. For the
dentist, it requires less chair time, which increases the number of patients a
dentist can see. It will also cost considerably less than the methods described
above, and thus has the potential to increase the dentist's margin. From the
patients' perspective, less chair time and lower costs are both very attractive.
We believe that the sales initiative for this product will enable us to
access an expanded number of dental offices, thereby providing an opening to
sell our core product - the CompuDent system. It is our intention to make the
CoolBlue Tooth Whitening system available in the second quarter of 2005.
Consumer Tooth Whitening Product
Ionic White(TM) Tooth Whitening system is a consumer product designed to
whiten and brighten teeth. This product uses a proprietary formulation of
whitening gels in conjunction with an intra-oral mouthpiece which contains a
series of blue LEDs used to accelerate the whitening process. There are patents
pending in the US and internationally on both the design and method of this
product
What differentiates this product from other over the counter (OTC)
consumer products can be summed up in the following points:
o The formulation of the whitening gels uses micropore gel, which is
1/10th the size of the typical molecules used in tooth whitening
products. This allows the gels to enter the dentin tubules for
superior whitening.
o The unique construction of the intra-oral mouthpiece allows the gels
to migrate to the top and bottom of the teeth as well as the front
and back. OTC products, including whitening strips, typically whiten
only the front of the teeth. As teeth are translucent, if the back
of the teeth are stained, the teeth will not look white.
o The initial process takes only 21 minutes. There will be a
noticeable difference in the brightness of the teeth after just 21
minutes, and once the customer begins using the whitening rinse on a
regular basis, their teeth will continue to whiten.
o Following any whitening procedure, teeth will continue to stain,
primarily due to coffee, tea and other items that cause chromagenic
stain. The Ionic White system also uses a proprietary whitening
rinse, which when used with the intra-oral mouthpiece, maintains
white, bright teeth.
There will be two products marketed. The first is the starter kit which
will contain 3 applications of the whitening gels, the intra-oral mouthpiece as
well as a 30 day supply of the whitening rinse. The second kit will include 3
applications of the whitening gels and another 30 - 60 day supply of the
whitening rinse. The recurring revenue will come from customer who begin using
the starter kit and want to maintain white, bright teeth.
23
Milestone has reached an agreement with United Systems, a specialty
manufacturer, to produce the Ionic White as well as to distribute the product on
an exclusive, world wide basis. The agreement with United Systems calls for a
minimum of one million starter kits over the first four years of the initial
twenty-year contract period. United Systems in turn has entered into a
distribution agreement with a major marketing company that specializes in
television infomercials. This agreement calls for a minimum of two million
starter kits over the four year term of the agreement. The marketing company
also has access to retail slots with the major retailers in the US for products.
The marketing company's goal is to begin placing the product into the retail
outlets once the product has received adequate exposure via infomercials.
Ionic White was launched via television infomercials in March 2005.
The technology underlying our SafetyWand, the CompuFlo and an improvement
to the controls for CompuDent were developed by our Director of Clinical Affairs
and assigned to us. We purchased this technology pursuant to an agreement dated
January 1, 2005, for, 43,424 shares of restricted common stock and $145,000 in
cash, payable on April 1, 2005. In addition, he will receive additional deferred
contingent payments of 2.5% of the total sales price of products using certain
of these technologies, and 5% of the total sales price of products using certain
other of the technologies. If products produced by third parties use any of
these technologies (under license from us) then he will receive the
corresponding percentage of the consideration received by us for such sale or
license.
The technology underlying our CoolBlue Professional Whitening and Ionic
White Consumer Whitening Products was acquired from DaVinci Systems. We will pay
a 7% royalty to Da Vinci Systems on the amounts paid to us by our joint venture
partner as a result of its sale of the consumer whitening product.
We will also pay a 5% fee to Strider Inc. on the amounts paid to us by our
joint venture partner as a result of its sale of the consumer whitening product.
Strider assisted in bringing the CoolBlue and Ionic White product lines to
Milestone.
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated 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.
Inventory
Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.
Impairment of Long-Lived Assets
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 recovered.
Revenue Recognition
Revenue is recognized when title passes at the time of shipment and
collectibility is reasonably assured.
24
Results of Operations
The consolidated results of operations for the year ended December 31,
2004 compared to 2003 reflect our focus on the development and implementation of
our strategic sales and marketing initiatives in the United States. During 2004
we recruited and trained 22 sales personnel including three new sales managers
and 19 inside and outside sales representatives. Our spending on marketing also
increased through more aggressive advertising and greater attendance at industry
tradeshows. Increased expenses associated with this expansion are in line with
management's expectations and contribute to a greater loss compared to 2003.
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.
Year Ended December 31,
----------------------------------------------
2004 2003
---------------------- ---------------------
Net sales $ 4,751,186 100.0% $ 3,971,707 100.0%
Cost of Sales 2,415,826 50.8% 2,003,139 50.4%
Gross Profit 2,335,360 49.2% 1,968,568 49.6%
Selling, general and administration expenses 5,155,569 108.5% 3,483,439 87.7%
Closing of Deerfield facility -- 0.0% 86,165 2.2%
Research & development 187,992 4.0% 131,015 3.3%
Loss from operations (3,008,201) -63.3% (1,732,051) -43.6%
Fiscal Year ended December 31, 2004 compared to year ended December 31, 2003
Net sales for the years ended December 31, 2004 and 2003 were $4,751,186
and $3,971,707, respectively. The $779,479 or 19.6% increase is primarily
related to a $164,454 or 25.3% increase in domestic sales of CompuDent and
CompuMed, an increase of $77,330 or 12.8% in international CompuDent and
CompuMed sales and a $516,910 or 20.7% increase in worldwide sales of the Wand
handpieces. Total domestic sales, including CompuDent, CompuMed, handpieces, and
our new CoolBlue products increased 20.8%, while total international sales
increased by 16.8% in 2004.
Cost of sales for the years ended December 31, 2004 and 2003 were
$2,415,826 and $2,003,139, respectively. The $412,687 increase is primarily
attributable to the additional cost of goods sold for the higher revenues
previously discussed.
For the year ended December 31, 2004, Milestone generated a gross profit
of $2,335,360 or 49.2% as compared to a gross profit of $1,968,568 or 49.6% for
the year ended December 31, 2003. The increase in total gross profit is related
to the 19.6% increase in revenues. The slight decrease in gross profit
percentage is the net result of improved margins from increased domestic sales
as a percentage of total sales, offset by lower margins associated with bundled
pricing offerings. Sales to foreign distributors are of higher volume but at a
reduced margin.
Selling, general and administrative expenses for the years ended December
31, 2004 and 2003 were $5,155,569 and $3,483,439, respectively. The $1,672,130
or 48.0% increase is primarily attributable to Milestone's continued execution
of its strategy to develop our domestic sales force and distribution capacity.
Sales headcount increased from 1 manager, 3 sales representatives and 10
independent contractors in 2003 to 4 sales managers, 19 inside sales
representatives and 14 independent contractors. Accordingly, hiring and related
employee expenses increased by $674,000, a 46.1% increase over the prior period.
Legal and professional fees increased by $369,000 or 74.5% for legal fees
relating to divisional patent protection for CompuFlo and SafetyWand products,
advertising and marketing initiatives and investor relations expenses. The
increases in these expenses were anticipated and in line with management's
strategy of investing in revenue generating areas of the business.
25
Research and development expenses for the years ended December 31, 2004
and 2003 were $187,992 and $131,015 respectively. These costs are associated
with the development of Milestone's SafetyWand, CoolBlue and CompuFlo products.
The loss from operations for the years ended December 31, 2004 and 2003
was $3,008,201 and $1,732,051, respectively. The $1,276,150 increase in loss
from operations is explained above.
Interest income of $80,867 was earned through December 31, 2004 compared
with no interest income for the prior year. This difference was due to the
change in cash balances related to the February equity placement.
Interest expense of $69,530 was incurred for the year ended December 31,
2004 as compared to $680,857 for the year ended December 31, 2003. The decrease
is mainly attributable to a $5 million debt to equity conversion on September
30, 2003 and a $1.4 million retirement of debt in the first quarter of 2004.
The net loss for the year ended December 31, 2004 was $2,996,864 as
compared to a net loss of $2,412,908 for the year ended December 31, 2003. The
$583,956 increase in net loss is the result of planned increases in operating
expenses explained above offset by lower debt service costs.
Liquidity and Capital Resources
Public Offering. On February 17, 2004, we significantly improved our
liquidity position by completing a $9.4 million public offering ($7.6 million
after underwriter discount, underwriter non accountable expense allowance and
other expenses). Overall, for the year ended December 31, 2004, we generated
$7,818,919 from financing activities. This amount consisted of $7,868,919 of
proceeds from the public offering, reduced by a $50,000 payment of notes
payable. Additional costs of $248,815 related to the Public Offering were paid
in 2003. The public offering consisted of the sale of 1,440,000 units at a price
of $6.52 per unit. Each unit consisted of two shares of common stock and one
warrant. The warrants included in the units are exercisable at any time after
they become separately tradable until their expiration date, five years after
the date of the closing of the public offering at an exercise price equal to
$4.89 Some or all of the warrants may be redeemed by us at a price of $0.01 per
warrant, by giving not less than 30 days notice to the holders of the warrants,
which we may do at any time, beginning 6 months from the effective date of the
offering after the closing price for our common stock on the principal exchange
on which it trades (i.e. AMEX) has equaled or exceeded 200% of the price of our
common stock on the effective date of the offering.
Restructuring and additional financing. We also improved our liquidity
position in 2004 by continuing the process, begun in 2003, of satisfying debt
and paying liabilities through issuance of equity securities. We reached
agreements with a major investor and our CEO and a principal vendor to satisfy
approximately $2,541,000 of promissory notes, accrued interest, trade payables
and deferred compensation through the issuance of common stock and proceeds from
the public offering. In February 2004, to satisfy $640,000 of deferred
compensation to the Company's CEO, approximately $1,700,000 in promissory notes
and $200,000 of accounts payable, we issued 335,614 units at a price of $6.52
per unit and paid approximately $353,000 from the net proceeds received from the
Public Offering. In April of 2004 we issued 1,106 shares of our common stock
having a fair value of $2,500 to principal vendors in payment of trade payables.
In August of 2004 we issued 36,331 shares of our common stock having a fair
value of $70,411 to a principal vendor as partial payment for equipment. In May
2004 we paid out $52,033 in connection with the satisfaction of a 6% short term
note payable of $50,000 plus accrued interest. In November 2004 we issued 58,200
shares of our common stock in satisfaction of a 6% short term note payable of
$50,000 plus accrued interest. Lastly, in December 2004 we issued 15,151 shares
of common stock having a fair value of $25,000 to two key employees and a
principal vendor in recognition of contributions made during 2004.
Use of proceeds of public offering; sales expansion efforts. The completed
February 2004 public offering enabled us to execute our strategic plan of
creating a domestic sales organization, expand marketing and advertising
programs and invest in new product development. Some of the net proceeds of the
offering
26
were used to pay down promissory notes, the credit facilities, interest and
deferred compensation as discussed above. The remainder of the proceeds are
being used primarily to expand and support our domestic sales and marketing
efforts for CompuDent and professional CoolBlue products, including a market
focused sales organization penetrating the top 31 dental markets in the United
States, new marketing and advertising campaigns, support the launch of the
recently announced SafetyWand product line, expand international sales efforts
and develop commercial models of products using other new subcutaneous injection
technologies.
The costs incurred in connection with execution of our sales expansion
plan had near term negative effects on our liquidity. In contrast to the cost
containment measures implemented in 2003, in 2004 our operating results reflect
increased spending in the following areas:
o Hired and trained 3 new sales managers and 19 combined inside
and outside sales representatives to penetrate US dental
market.
o Contracted with advertising placement agencies and market
research firm to maximize the effectiveness of our sales and
marketing efforts.
o Invested in research and development and patent protection on
new and existing products including SafetyWand, CoolBlue and
CompuFlo products.
Operating overhead and cash flow results for 2004. As shown in the
accompanying consolidated financial statements, we incurred a net loss of
approximately $2,997,000 and a negative cash flow from operating activities of
approximately $4,285,000 during the year ended December 31, 2004, both
representing increases against 2003. Facilitated by the increased liquidity
resulting from the proceeds of our February 2004 public offering, our selling,
general and administrative expense for 2004 of $5,155,569 represents an increase
in spending of $1,672,130 or 48%. As a percentage of revenue, selling, general
and administrative expense grew from 88% in 2003 to 1.09% in 2004. As of
December 31, 2004, we had cash and cash equivalents of $3,041,306. For the year
ended December 31, 2004, our net cash used in operating activities was
$4,284,869. This was attributable primarily to a net loss of $2,996,864 adjusted
for noncash items of $135,264 and a change in operating assets and liabilities
amounting to $1,423,269.
For the year ended December 31, 2004, we used $496,021 in investing
activities. These expenditures included a $350,529 purchase of fixed assets, a
$75,536 payment to Spintech's shareholders, a subsidiary company of Milestone,
to acquire Spintech's patent rights, and a $69,956 payment for the investment in
a German based distributor.
Need for additional capital. Although at December 31, 2004 our total
stockholders' equity was $4,520,707, we need a net worth of $6,000,000 at June
30, 2005 to remain in compliance with continued listing requirements of the
American Stock Exchange. Accordingly, during 2005, we intend to seek new sources
of equity funding. However, we can give no assurance that we will be able to
find new sources of funding on acceptable terms. The issuance of additional
equity securities may impair the value of our stock. Further, if we fail to
satisfy the American Stock Exchange's listing requirements with respect to
stockholder equity, we could be delisted from the Exchange after June 30, 2005
or earlier if we fail to make progress consistent with the plan of recovery that
we submitted to the Exchange. Any delisting would, in turn, make it more
difficult for us to raise capital in the public markets.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities-an
Interpretation of ARB No. 51 ("FIN 46"), which addresses consolidation of
variable interest entities. FIN 46 expands the criteria for consideration in
determining whether a variable interest entity should be consolidated by a
business entity, and requires existing unconsolidated variable interest entities
(which include, but are not limited to, special purpose entities, or SPEs) to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. On October 9, 2003, the FASB issued Staff
Position No. 46-6 which deferred the effective date for applying the provisions
of FIN 46 for interests held by public entities in variable interest entities or
potential variable interest entities created before February 1, 2003. On
December 24, 2003, the FASB issued
27
a revision to FIN 46. Under the revised interpretation, the effective date was
delayed to periods ending after March 15, 2004 for all variable interest
entities, other than SPEs. The adoption of FIN 46 did not have an impact on our
financial condition, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Shared-Based Payment ("FAS 123R"), which replace FAS 123 and supercedes APB No.
25. FAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values beginning with the first interim or annual period after June
15, 2005, with early adoption encouraged. The pro forma disclosures previously
permitted under FAS 123 no longer will be an alternative to financial statement
recognition. The Company is required to adopt FAS 123R beginning July 1, 2005.
Under FAS 123R, the Company must determine the appropriate fair value model to
be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The
transition methods include prospective and retroactive adoption options. The
Company is currently assessing the impact that FAS 123R will have on our results
of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 amends Accounting
Research Bulletin no. 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) should
be recognized as current-period charges. In addition, FAS No 151 requires that
allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. FAS 151 is effective for periods
beginning January 1, 2006 and is not expected to have a significant impact on
the Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions
("FAS 153"). FAS 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Adoption of FAS 153 is required on a prospective basis, for
nonmonetary exchanges beginning after June 15, 2005. We do not expect this
standard to have any impact on the Company's results of operations or financial
position.
Item 7. Consolidated Financial Statements
The financial statements of Milestone required by this item are set forth
beginning on page F-1.
Item 8. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Item 8A. Controls and Procedures
A) Evaluation of Disclosure Controls and Procedures. Milestone's
management, with the participation of the chief executive officer
and the chief financial officer, carried out an evaluation of the
effectiveness of Milestone's "disclosure controls and procedures"
(as defined in the Securities Exchange Act, Rule 13a-14a. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that Milestone's disclosure controls and
procedures were effective, as of the date of their evaluation, for
purposes of recording, processing, summarizing and timely reporting
material information required to be disclosed in reports filed by
Milestone under the Securities Exchange Act of 1934. There were no
changes in our internal control over financial reporting that
occurred during Milestone's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
Milestone's internal control over fiscal reporting.
28
PART III
Item 9. Directors and Executive Officers of the Registrant
The current executive officers, directors and key personnel of Milestone
and their respective ages as of March 30, 2005 are as follows:
NAME AGE POSITION DIRECTOR SINCE
Leonard A. Osser................. 57 Chairman and Chief Executive Officer 1991
Stuart J. Wildhorn............... 47 President
Kevin T. Lusardi................. 48 Vice President and Chief Financial Officer
Mark Hochman, D.D.S.............. 47 Director of Clinical Affairs
Eugene Casagrande, D.D.S......... 61 Director of Professional Relations
Paul Gregory(2).................. 70 Director 1997
Leonard M. Schiller(1)(2)........ 63 Director 1997
Jeffrey Fuller(1) 59 Director 2003
Leslie Bernhard(1)............... 60 Director 2003
----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Leonard A. Osser has been our Chairman and Chief Executive Officer since
July 1991. From 1980 until the consummation of Milestone's Public Offering in
November 1995, he was engaged primarily as the principal owner and Chief
Executive of U.S. Asian Consulting Group, Inc., a New Jersey based provider of
consulting services in "work-out" and "turnaround" situations for publicly and
privately owned companies in financial difficulty.
Stuart J. Wildhorn has been our President since September 2003 and prior
to that he had been our Senior Vice President since April 2001. From 1990 until
April 2001, Mr. Wildhorn held progressive senior management positions with
Datex-Ohmeda, a leading manufacturer of anesthesia and patient monitoring
products.
Kevin T. Lusardi has been our Vice President and Chief Financial Officer
since June 2004. Mr. Lusardi is a CPA and holds a BA degree in Business
Administration from Muhlenberg College. From 1986 until May 2004, Mr. Lusardi
worked in the telecommunications industry spending 14 years with Verizon
Wireless where he held progressive senior financial management positions and two
years with Everest Broadband Networks as the Corporate Controller.
Dr. Mark Hochman has been a clinical consultant to Milestone since 1997
and has served as the Director of Clinical Affairs and Director of Research and
Development since 1999. He has a doctorate of dental surgery with advanced
training in the specialties of periodontics and orthodontics from New York
University College of Dentistry and has been practicing dentistry since 1984. He
holds a faculty appointment as a clinical associate professor at NYU School of
Dental Surgery. Dr. Hochman is a recognized world authority on advanced drug
delivery systems, has published numerous articles in this area and is personally
responsible for inventing much of the technology currently available from
Milestone.
Dr. Eugene Casagrande has been the Director of Professional Relations for
Milestone since September 1998. In his capacity, Dr. Casagrande represents
Milestone in a variety of clinical and industry related opportunities. Dr.
Casagrande is the President and founder of Casagrande Consulting Services, an
entity devoted to quality management to the dental industry.
Paul Gregory has been a director of Milestone since April 1997. Mr.
Gregory has been a business
29
and insurance consultant at Innovative Programs Associates Inc. and Paul Gregory
Associates Inc. since January 1995 and January 1986, respectively, where he
services, among other entities, foreign and domestic insurance groups, law and
accounting firms and international corporations.
Leonard M. Schiller has been a director of Milestone since April 1997. Mr.
Schiller has been a partner in the Chicago law firm of Schiller, Klein &
McElroy, P.C. since 1977. He has also been President of The Dearborn Group, a
residential property management and real estate acquisition company since 1980.
Jeffrey Fuller has been a director of Milestone since January 2003. Mr.
Fuller has been president and owner of two municipal water supply systems,
Hudson Valley Water Co. and Lake Lenape Water Co. since 1983 and in addition has
been an executive recruiter since 1995. Early in his career, for a period of two
years, he was an auditor with Arthur Andersen LLP, and thereafter, for four
years, a senior internal auditor with the Dreyfus Corp. Mr. Fuller has been an
adjunct professor since 2002 at Berkeley College, NY, teaching several courses
including Accounting.
Leslie Bernhard has been a director of Milestone since May 2003. Ms.
Bernhard co-founded AdStar, Inc., and since 1986 has been its president, chief
executive officer and a director. AdStar is an application service provider for
the newspaper classified advertising industry.
All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed.
Milestone's Board of Directors has established compensation and audit
committees. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all the officers of Milestone,
reviews general policy matters relating to compensation and benefits of
employees of Milestone, and administers the issuance of stock options to
Milestone's officers, employees, directors and consultants. All compensation
arrangements between Milestone and its directors, officers and affiliates are
reviewed by the compensation committee, the majority of which is made up of
independent directors. The Audit Committee meets with management and Milestone's
independent auditors to determine the adequacy of internal controls and other
financial reporting matters. The board of directors has determined that Jeffrey
Fuller qualifies as an Audit Committee Financial Expert pursuant to Item 401 (e)
of regulations S-B. Mr. Fuller is independent, as that term is used in Item7 (d)
(3)(iv) of schedule 14A under the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Milestone's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of Milestone's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and greater than ten percent (10%) stockholders are required
by SEC regulations to furnish Milestone with copies of all Section 16(a) forms
they file.
To the best of Milestone's knowledge, based solely on review of the copies
of such forms furnished to Milestone, or written representations that no other
forms were required, Milestone believes that all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) shareholders were complied with during 2004.
Code of Ethics
Milestone has adopted a code of ethics that applies to Milestone's
principal executive officer, principal financial officer and other persons
performing similar functions. This code of ethics is posted on Milestone's web
site at www.milesci.com.
30
Item 10. Executive Compensation.
The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2004,
2003, and 2002 by (i) Milestone's Chief Executive Officer and (ii) the most
highly compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the 2004 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives") and may be provided to any person, without charge, upon a
written request, made to Milestone's Chief Financial Officer.
SUMMARY OF COMPENSATION TABLE
ANNUAL COMMON COMMON STOCK
COMPENSATION STOCK UNDERLYING
SALARY AWARD OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ # #
------------------------------ -------- -------------- --------- --------------
Leonard A. Osser 2004 300,000(1)
Chief Executive Officer 2003 351,770(2) 16,667
and Chairman 2002 351,800(3) 16,667
Stuart J. Wildhorn 2004 180,740 3,030(4)
President 2003 163,207
2002 155,400 2,333
Kevin T. Lusardi 2004 81,599 30,000
Chief Financial Officer and
Vice President
Thomas A. Stuckey 2004 145,385
Chief Financial Officer and 2003 144,835
Vice President (6) 2002 136,267(5) 2,333
(1) Includes $150,000 in deferred compensation in accordance with his
employment agreement to be paid in common stock and not paid until the
termination of the agreement in 2010. Excludes $25,773 paid by Milestone
to Marilyn Elson, a certified public accountant, in payment of tax
services. Ms. Elson is the wife of Mr. Osser.
(2) Includes $320,000 in deferred compensation but excludes $51,928 paid
by Milestone to Marilyn Elson, a certified public accountant, in payment
of tax services and assistance with preparation of the recently completed
registration statement.
(3) Includes $320,000 in deferred compensation but excludes $19,049 paid
by Milestone to Marilyn Elson, Mr. Osser's wife, in payment of
professional tax services.
(4) On December 16, 2004, the Board of Directors approved a grant of 3,030
shares of restricted stock to Mr. Wildhorn. The dollar value of the grant
reflected in the Summary Compensation Table is calculated by multiplying
the shares by $1.65, the closing price of Milestone stock on the date of
grant. Dividends are not paid on restricted stock. The value of these
shares was $5,393 on December 31, 2004 based on a closing price of $1.78.
(5) Includes a $20,000 bonus paid in 2002.
(6) Mr. Stuckey was CFO until his resignation on June 9, 2004. Mr. Stuckey
was paid a severance package through December 31, 2004
31
STOCK OPTIONS
The following tables show certain information with respect to incentive
and non-qualified stock options granted in 2004 to Named Executives under
Milestone's 1997 Stock Option Plan and the aggregate value at December 31, 2004
of such options. In general, the per share exercise price of all options is
equal to the fair market value of a share of Common Stock on the date of grant.
Option Grants In 2004 Individual Grants Of Options
NUMBER OF PERCENT OF TOTAL
SHARES OF COMMON OPTIONS GRANTED
STOCK UNDERLYING TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS IN 2004 ($/SH) EXPIRATION DATE
---- ------- ------- ------ ---------------
Stuart J. Wildhorn........ 16,667(1) 20% $4.92 05-09-09
Kevin T. Lusardi.......... 30,000(1) 37% $2.00 12-21-09
(1) Options vest ratably one third on each anniversary date of the grant date
Aggregated 2004 Year End Options Values
For Options Granted Prior To And During 2004
Number of Shares of
Common
Stock Underlying Value of Unexercised
Unexercised In-The-Money Options At
Options At 12-31-2004 12-31-2004 (1)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
Leonard A. Osser......... 16,667 / 50,000 $0 / $17,333
Stuart J. Wildhorn....... 19,000 / 16,667 $0 / $0
Kevin T. Lusardi......... 0 / 30,000 $0 / $0
(1) Based on the closing price on December 31, 2004 of $1.78 as quoted on the
American Stock Exchange.
Employment Contracts
In December 2003, Milestone entered into a new employment agreement with
Mr. Osser for a five-year term commencing January 1, 2004. Under the new
agreement Mr. Osser receives base compensation of $300,000 per year, payable one
half in cash and one half in common stock valued at the average closing price of
the common stock during the first 15 trading days in the month of December
during each year of the term. While the number of shares to be issued will be
determined each year, the stock will not be issuable until the end of the term
of the agreement. In addition, Mr. Osser may earn annual bonuses up to an
aggregate of $300,000, payable one half in cash and one half in common stock,
contingent upon Milestone achieving predetermined annual operating cash flow,
revenue and earnings targets. For 2005 he can earn a $100,000 bonus based upon
Milestone achieving break-even cash flow from operations, a $100,000 bonus based
upon Milestone achieving net revenues of $7,000,000 and a $100,000 bonus based
upon Milestone achieving break-even earnings determined in accordance with
generally accepted accounting principles. The cash flow bonus and the earnings
bonus will not be payable to the extent that the payment thereof will reduce
operating cash flow or earnings below break-even, respectively. For purposes of
the agreement operating cash flow shall mean cash flow from operations plus
accounts receivable increases and less accounts payable increases. Shares of
common stock issued in partial payment of bonuses will be valued at the average
closing price of the common stock during the first 15 trading days in the month
of December during each year of the term. The stock portion of the bonus awards,
if any, will be paid at the end of the term of the agreement.
32
In addition, if during any year of the term of the agreement Mr. Osser
earns a bonus under the above formula, he shall also be granted 5-year stock
options to purchase twice the number of shares earned under the above formula,
each such option to be exercisable at a price per share equal to the fair market
value of a share on the date of grant (110% of fair market value if Mr. Osser is
a 10% or greater stockholder on the date of grant). The options shall vest and
become exercisable to the extent of one-third of the shares covered at the end
of each of the first three years following the date of grant, but shall only be
exercisable while Mr. Osser is employed by Milestone or within 30 days after the
termination of his employment.
Compensation Of Directors
Milestone paid no cash or stock based compensation to the directors in
2004. On March 19, 2005, Milestone awarded to each of its outside directors
options expiring March 19, 2010 for the purchase of 20,000 shares of its common
stock, exercisable immediately at $3.27 per share, with respect to the year
starting with Milestone's 2004 annual meeting and ending with Milestone's 2005
annual meeting.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table, together with the accompanying footnotes, sets forth
information, as of March 29, 2005, regarding stock ownership of all persons
known by Milestone to own beneficially more than 5% of Milestone's outstanding
common stock, Named Executives, all directors, and all directors and officers of
Milestone as a group:
Shares of
Common Stock
Beneficially Percentage of
Name of Beneficial Owner (1) Owned (2) Ownership
Executive Officers and Directors
Leonard Osser............................... 1,673,146(3) 15.71%
Stuart J. Wildhorn.......................... 27,586(4) *
Paul Gregory................................ 30,858(5) *
Leonard M. Schiller......................... 37,672(6) *
Jeffrey Fuller.............................. 26,667(7) *
Leslie Bernhard 26,667(8) *
All directors & executive officers as a
group (6 persons)......................... 1,822,596 17.11%
K. Tucker Andersen.......................... 2,078,168(9) 19.51%
----------
* Less than 1%
(1) The addresses of the persons named in this table are as follows:
Leonard A. Osser, and Stuart Wildhorn are both at 220 South Orange Avenue,
Livingston Corporate Park, Livingston, NJ 07039; Thomas M. Stuckey, 19
Grant Avenue Highland Park, NJ 08904; Paul Gregory, Innovative Programs
Associates Inc., 370 E. 76th Street, New York, New York 10021; Leonard M.
Schiller, Schiller, Klein & McElroy, P.C., 33 North Dearborn Street, Suite
1030, Chicago, Illinois 60602; Jeffrey Fuller, Eagle Chase, Woodbury, NY
11797; Leslie Bernhard, AdStar, Inc., 4553 Glencoe Avenue, Suite 325,
Marina del Rey, California 90292; K. Tucker Anderson, c/o Cumberland
Associates LLC, 1114 Avenue of the Americas, New York, New York 10036.
33
(2) A person is deemed to be a beneficial owner of securities that can be
acquired by such person within 60 days from the filing of this annual
report upon the exercise of options and warrants or conversion of
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants and convertible securities
that are held by such person (but not held by any other person) and that
are exercisable or convertible within 60 days from the filing of this
report have been exercise or converted. Except as otherwise indicated, and
subject to applicable community property and similar laws, each of the
persons named has sole voting and investment power with respect to the
shares shown as beneficially owned. All percentages are determined based
on the number of all shares, including those underlying options
exercisable within 60 days from the filing of this report held by the
named individual, divided by 9,790,954 outstanding shares on December 31,
2004 and those shares underlying options exercisable within 60 days from
the filing of this report.
(3) Includes (i) 204,728 shares issuable upon exercise of stock options
within 60 days of the date hereof, which are exercisable at $6.00 and
120,994 shares issuable upon the exercise of warrants within 60 days of
the date hereof, which are exercisable at $4.89.
(4) Includes 16,667 shares subject to stock options, exercisable within 60
days of the date hereof at $7.50 per share, 2,333 shares subject to stock
options, exercisable within 60 days of the date hereof at $2.25 per share,
5,556 shares subject to stock options, exercisable within 60 days of the
date hereof at $4.92 per share and 3,030 shares held by Mr. Wildhorn.
(5) Includes 50 shares held by Mr. Gregory's wife, 4,141 shares subject to
stock options, exercisable within 60 days of the date hereof at $4.83 per
share, 6,667 shares subject to stock options, exercisable within 60 days
of the date hereof at $1.50 per share and 20,000 shares subject to stock
options, exercisable within 60 days of the date hereof at $3.27 per
share..
(6) Includes 4,141 shares subject to stock options, exercisable within 60
days of the date hereof at $4.83 per share, 6,667 shares subject to stock
options, exercisable within 60 days of the date hereof at $1.50 per share,
20,000 shares subject to stock options, exercisable within 60 days of the
date hereof at $3.27 per share and 6,864 shares held by Mr. Schiller.
(7) Includes 6,667 shares subject to stock options, exercisable within 60
days of the date hereof at $1.50 per share and 20,000 shares subject to
stock options, exercisable within 60 days of the date hereof at $3.27 per
share.
(8) Includes 6,667 shares subject to stock options, exercisable within 60
days of the date hereof at $1.50 per share and 20,000 shares subject to
stock options, exercisable within 60 days of the date hereof at $3.27 per
share.
(9) Includes 393,559 shares subject to warrants all of which are
exercisable within sixty (60) days of the date hereof at prices ranging
from $3.75 to $9.00.
34
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
The following table summarizes the (i) options granted under the Milestone
1997 Stock Option Plan, and (ii) options and warrants granted outside the
Milestone 1997 Stock Option Plan, as of December 31, 2004. The shares covered by
outstanding options and warrants are subject to adjustment for changes in
capitalization stock splits, stock dividends and similar events. No other equity
compensation has been issued.
Number of Number of
securities(1) Weighted securities(1)
to be issued -average remaining available
upon exercise exercise price for future
of outstanding of outstanding issuance under
options, options, equity
warrants and warrants and compensation
rights rights plans
--------------------------------------------------------
Equity compensation plans approved by
stockholders (1):
Grants under our 1997 Stock Option Plan........... 256,116 $3.70 58,217
Equity compensation plans not approved by
stockholders(2)
Aggregate Individual Option Grants.............. 463,297 $4.84 Not Applicable
Total......................................... 719,413 $4.44
(1) Consisting of our 1997 stock option plan covering a total of 333,333
common shares underlying options issuable to officers and other key
employees and excluding 2,333 options, which were exercised in October
2003, and 16,667 options, which were exercised in December 2003. The plan
has a term of 10 years and is administered by a committee appointed by the
board of directors. The committee, in its sole discretion, determines who
is eligible to receive these incentive stock options, how many options
they will receive, the term of the options, the exercise price and other
conditions relating to the exercise of the options. Stock options granted
under the plan must be exercised within a maximum of 10 years from the
date of grant at an exercise price that is not less than the fair market
value of the common shares on the date of the grant. Options granted to
shareholders owning more than 10% of our outstanding common shares must be
exercised within five years from the date of grant and the exercise price
must be at least 110% of the fair market value of the common shares on the
date of the grant.
(2) The aggregate individual option grants outside the Stock Option Plan
referred to in the table above include options issued as payment for
services rendered to us by outside consultants and providers of certain
services. The aggregate individual warrant grants referred to in the table
above include warrants granted to investors in Milestone as part of
private placements and credit line arrangements.
In July, 2004 the Board of Directors approved the adoption of the 2004
Stock Option Plan. The 2004 Stock Option Plan provides for the grant of
options to purchase up to 500,000 shares of Milestone's common stock.
Options may be granted to employees, officers, directors and consultants
of Milestone for the purchase of common stock of Milestone at a price not
less than the fair market value of the common stock on the date of the
grant. In general, options become exercisable over a three-year period
from the grant date and expire five years after the date of grant. As of
December 31, 2004, no option grants were made out of the 2004 Stock Option
Plan.
Item 12. Certain Relationships and Related Transactions
As of September 30 and November 10, 2003 we issued an aggregate of 147,011
shares of common stock to Mr. Osser in repayment of $404,459 of principal and
accrued interest on the 6%/12% notes and the prior extension of these notes, an
aggregate of 779,184 shares of common stock to K. Tucker Andersen, in
35
satisfaction of $2,345,304 of principal and accrued interest on the 6%/12%, 8%
and 10% notes and the prior extension of these notes and an aggregate of 660,257
shares of common stock to Cumberland Associates, LLC, in satisfaction of
$1,816,450 of principal and accrued interest on the 6%/12% notes and the prior
extension of these notes. The shares issued to Mr. Osser, Mr. Andersen and
Cumberland Associates, represented their share of common stock issued to the
holders of that debt in the aggregate amount of approximately $5 million,
including accrued interest, and Mr. Osser, Mr. Andersen and Cumberland
Associates received no extra or special benefit that was not shared on a pro
rata basis by all of the holders of that debt.
On October 9, 2003 we reached an agreement to satisfy $1,265,545 of debt
and accrued interest due to a major investor, K. Tucker Andersen, and $435,985
of debt and accrued interest and $640,000 of deferred compensation due to our
Chief Executive Officer and Chairman, Leonard Osser. Of the total debt and
accrued interest due to Messrs. Andersen and Osser, and the deferred
compensation owed to Mr. Osser, $1,604,204 and $384,000 respectively were paid
February 24, 2004 through the issuance of 241,988 and 61,350 units valued at the
initial offering price. The remaining $97,326 of indebtedness to Messrs.
Andersen and Osser and $256,000 of deferred compensation to Mr. Osser was paid
in cash on February 23, 2004. The cash portion of the total payment represents
the estimated tax on the interest and compensation.
The technology underlying our SafetyWand, the CompuFlo and an improvement
to the controls for the Compudent were developed by our Director of Clinical
Affairs and assigned to us. We purchased this technology pursuant to an
agreement dated January 1, 2005, for 43,424 shares of restricted common stock
and $145,000 in cash, payable on April 1, 2005. In addition, he will receive
additional deferred contingent payments of 2.5% of the totals sales price of
products using certain of these technologies, and 5% of the total sales price of
products using certain other of these technologies. If products produced by
third parties use any of these technologies (under license from us) then he will
receive the corresponding percentage of the consideration received by us for
such sale or license.
We have adopted a policy that, in the future, the audit committee must
review all transactions with any officer, director or 5% shareholder.
Item 13. Exhibits
Exhibits
Certain of the following exhibits were filed as Exhibits to previous
filings filed by the Registrant under the Securities Act of 1933, as amended, or
reports filed under the Securities and Exchange Act of 1934, as amended, and are
hereby incorporated by reference.
36
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------
3.1 Certificate of Incorporation of Milestone (1)
3.2 Certificate of Amendment filed July 13, 1995 (2)
3.3 Certificate of Amendment filed December 6, 1996 (3)
3.4 Certificate of Amendment filed December 17, 1997 (4)
3.5 Certificate of Amendment filed July 23, 2003 (6)
3.6 Certificate of Amendment filed January 8, 2004. (6)
3.7 Certificate of Designation filed January 15, 2004 (6)
3.8 By-laws of Milestone (1)
4.1 Specimen stock certificate (2)
4.2 Intentionally Left Blank
4.3 Form of warrant agreement, including form of warrant (8)
10.1 Lease dated November 25, 1996 between Livingston Corporate Park
Associates, L.L.C. and Milestone. (3)
10.2 to
10.25 Intentionally Left Blank
10.26 Letter from Leonard Osser, dated April 15, 2003 deferring payment.
(5)
10.27 Letter from Morse, Zelnick, Rose & Lander LLP, dated April 2003
deferring payment. (6)
10.28 Line of Credit for $900,000 and extension of $500,000 line of
credit, dated April 15, 2003. (6)
10.29 Agreement with DaVinci Systems dated July 30, 2003. (6)
10.30 Agreement with Mark Hochman and amendments thereto dated April 9,
1998, December 16, 1999, November 28, 2001, October 10, 2002 and
December 19, 2003. (6)
10.31 Agreement with Strider dated September 3, 2003. (6)
10.32 Agreement with Len Osser and K. Tucker Andersen, dated October 9,
2003. (6)
10.33 Agreement with Morse, Zelnick, Rose & Lander dated December 22,
2003. (6)
10.34 Employment Agreement with Leonard Osser dated December 20, 2003. (6)
10.35 Agreement with United Systems dated October 20, 2004. *
10.36 Agreement with Mark Hochman dated as of January 1, 2005. *
10.37 Lease amendment dated April 28, 2004 between Livingston Corporate
Park Associates, L.L.C. and Milestone. *
14 Code of Ethics (7)
23.1 Consent of Eisner LLP*
23.2 Consent of J. H. Cohn LLP*
31.1 Rule 13a-14(a) Certifications - Chief Executive Officer*
31.2 Rule 13a-14(a) Certifications - Chief Financial Officer*
32.1 Section 1350 Certifications- Chief Executive Officer*
32.2 Section 1350 Certifications- Chief Financial Officer*
----------
* Filed herewith.
(1) Incorporated by reference to Milestone's Registration Statement on Form
SB-2 No. 33-92324.
(2) Incorporated by reference to Amendment No. 1 to Milestone's Registration
Statement on Form SB-2 No. 333-92324.
37
(3) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1996.
(4) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1999.
(5) Incorporated by reference to Milestone's Registration Statement on Form
S-2 No. 333-110376, Amendment No. 1.
(6) Incorporated by reference to Milestone's Registration Statement on Form
S-2 No. 333-110376, Amendment No. 3.
(7) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2003.
(8) Incorporated by reference to Milestone's Registration Statement on Form
S-2 No. 333-110367, Amendment No. 5.
38
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed during 2004 and 2003 by J. H. Cohn LLP,
Milestone's principal accountant through June 10, 2004 were $101,209 and $98,872
respectively, each covering the audit of our annual financial statements and the
review of our financial statements for the first three quarters of each of these
years. The aggregate fees billed since July 1, 2004 by Eisner LLP, Milestone's
principal accountant since June 10, 2004, were approximately $100,000, covering
the audit of our annual financial statements for 2004 and review of our
financial statements for the second and third quarters of 2004.
Audit-Related Fees
Eisner LLP billed Milestone $5,850 in connection with the September
2004 S-3 filing. J. H. Cohn LLP billed Milestone $117,507 in connection
with the February 2004 offering. Progress billing totaling $40,000 were
billed as of December 31, 2003 and was included in deferred registration
cost on December 31, 2003.
Tax Fees
There were no fees for services related to tax compliance, tax
advice and tax planning billed by our principal accountants in 2003 and 2004.
All Other Fees
There were no other fees billed during 2003 and 2004 by Milestone's
principal accountant.
Audit Committee Administration of the Engagement
The engagement with Eisner LLP, Milestone's principal accountant,
was approved in advance by our Audit Committee. No non-audit services were
approved by the audit committee in 2004.
Hours expended on audit by persons other than Milestone's principal
accountant's full time, permanent employees.
The percentage of hours expended on audit by persons other than the
Milestone's principal accountant's full time, permanent employees, did not
exceed 50%.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Leonard Osser
------------------------------------
Chairman and Chief Executive Officer
Date: March 31, 2005
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on March
31, 2005 .
Signature Date Title
/s/ Leonard Osser March 31, 2005 Chairman, and Chief Executive Officer
------------------------
Leonard Osser
/s/ Kevin T. Lusardi March 31, 2005 Vice President and Chief Financial Officer
------------------------
Kevin T. Lusardi
/s/ Leonard Schiller March 31, 2005 Director
------------------------
Leonard Schiller
/s/ Paul Gregory March 31, 2005 Director
------------------------
Paul Gregory
/s/ Jeffrey Fuller March 31, 2005 Director
------------------------
Jeffrey Fuller
/s/ Leslie Bernhard March 31, 2005 Director
------------------------
Leslie Bernhard
40
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Milestone Scientific, Inc.
We have audited the accompanying consolidated balance sheet of Milestone
Scientific, Inc. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Milestone Scientific, Inc. and subsidiaries as of December 31, 2004, and their
consolidated results of operations and their cash flows for the year then ended,
in conformity with United States generally accepted accounting principles.
/s/Eisner LLP
New York, NY
February 22, 2005, except as to Note R, the date of which is March 31, 2005
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Milestone Scientific, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' deficiency and cash flows for the year ended December 31, 2003
of Milestone Scientific, Inc. and Subsidiaries. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Milestone Scientific, Inc. for the year ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
/s/J.H. Cohn LLP
Roseland, New Jersey
March 26, 2004
F-2
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2004
ASSETS
Current Assets:
Cash and cash equivalents $ 3,041,306
Accounts receivable , net of allowance for doubtful accounts of $24,903 421,339
Inventories 936,221
Advances to contract manufacturer 62,034
Prepaid expenses 104,562
------------
Total current assets 4,565,462
Investment in distributor, at cost 69,956
Equipment, net 612,263
Patents, net 101,242
Other assets 20,408
------------
Total assets $ 5,369,331
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 474,075
Accrued expenses 224,549
------------
Total current liabilities 698,624
Deferred compensation payable to officer 150,000
------------
Total liabilities 848,624
------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.001; authorized 5,000,000 shares 8% Cumulative
convertible preferred stock, par value $.001; authorized,
issued and outstanding, 25,365 shares 25
Common stock, par value $.001; authorized 50,000,000 shares; 9,824,287
shares issued and 9,790,954 shares outstanding 9,824
Additional paid-in capital 52,618,913
Accumulated deficit (47,196,539)
Treasury stock, at cost, 33,333 shares (911,516)
------------
Total stockholders' equity 4,520,707
------------
Total liabilities and stockholders' equity $ 5,369,331
============
See Notes to Consolidated Financial Statements
F-3
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Net sales $ 4,751,186 $ 3,971,707
Cost of sales 2,415,826 2,003,139
------------ ------------
Gross profit 2,335,360 1,968,568
Selling, general and administrative expenses 5,155,569 3,483,439
Closing of Deerfield, IL facility -- 86,165
Research and development expenses 187,992 131,015
------------ ------------
5,343,561 3,700,619
------------ ------------
Loss from operations (3,008,201) (1,732,051)
Other income (expense)
Interest income 80,867 --
Interest expense (69,530) (680,857)
------------ ------------
Other income (expense), net 11,337 (680,857)
------------ ------------
Net loss (2,996,864) (2,412,908)
Dividends applicable to preferred stock (2,029) --
------------ ------------
Net loss applicable to common stockholders $ (2,998,893) $ (2,412,908)
============ ============
Loss per share applicable to common stockholders - basic
and diluted $ (0.33) $ (0.52)
============ ============
Weighted average shares outstanding - basic
and diluted 9,147,634 4,672,266
============ ============
See Notes to Consolidated Financial Statements
F-4
Milestone Scientific Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years Ended December 31, 2004 and 2003
Preferred Stock Common Stock Additional
--------------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
--------- --------- --------- --------- ------------ ------------
Balance January 1, 2003 4,244,457 $ 4,244 $ 36,608,096 $(41,786,767)
Warrants issued pursuant to notes payable 24,823
Amortization of stock options issued
for future services
Common stock issued for payment of
accounts payable 102,195 102 502,698
Common stock issued for payment of
outstanding debt and related interest 1,646,419 1,646 4,987,254
Common stock issued as additional
consideration to noteholders 94,327 95 285,717
Preferred stock issued for payment of
outstanding debt and related interest 25,365 $ 25 25,089
Exercise of stock options 19,000 19 57,731
Common stock issued under equity line 39,613 40 191,441
Stock fees (22,500)
Net loss (2,412,908)
--------- --------- --------- --------- ------------ ------------
Balance, December 31, 2003 25,365 25 6,146,011 6,146 42,660,349 (44,199,675)
Proceeds from equity financing, net 2,880,000 2,880 7,617,224
Common stock and warrants issued
for payment of:
Outstanding debt and related interest 492,087 492 1,603,712
Accounts payable 77,610 77 199,923
Deferred compensation 117,791 118 383,882
Common stock issued for payment of outstanding
debt and related interest 58,200 58 54,417
Common stock issued for equipment purchase 36,331 37 70,374
Common stock issued for payment of
services rendered 10,197 10 17,490
Common stock issued for payment of
bonus & commissions 6,060 6 9,994
Issuance of options for consulting services 1,548
Net loss (2,996,864)
----------------------------------------------------------------------------
Balance, December 31, 2004 25,365 $ 25 9,824,287 $ 9,824 $ 52,618,913 $(47,196,539)
============================================================================
Unearned Treasury
Compensation Stock Total
------------ ---------- -----------
Balance January 1, 2003 $ (20,000) $ (911,516) $(6,105,943)
Warrants issued pursuant to notes payable 24,823
Amortization of stock options issued
for future services 20,000 20,000
Common stock issued for payment of
accounts payable 502,800
Common stock issued for payment of
outstanding debt and related interest 4,988,900
Common stock issued as additional
consideration to noteholders 285,812
Preferred stock issued for payment of
outstanding debt and related interest 25,114
Exercise of stock options 57,750
Common stock issued under equity line 191,481
Stock fees (22,500)
Net loss (2,412,908)
---------- ---------- -----------
Balance, December 31, 2003 -- (911,516) $(2,444,671)
Proceeds from equity financing, net 7,620,104
Common stock and warrants issued
for payment of:
Outstanding debt and related interest 1,604,204
Accounts payable 200,000
Deferred compensation 384,000
Common stock issued for payment of outstanding
debt and related interest 54,475
Common stock issued for equipment purchase 70,411
Common stock issued for payment of
services rendered 17,500
Common stock issued for payment of
bonus and commissions 10,000
Issuance of options for consulting services 1,548
Net loss (2,996,864)
---------------------------------------
Balance, December 31, 2004 $ -- $ (911,516) $ 4,520,707
=======================================
See Notes to Consolidated Financial Statements
F-5
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (2,996,864) $ (2,412,908)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 50,920 26,101
Amortization of debt discount and deferred financing costs 51,003 289,119
Amortization of unearned advertising cost -- 20,000
Stock and options issued for compensation and consulting 29,048 --
Stock issued for interest on notes payable 2,700
Bad debt expense 1,593
Loss on disposal of fixed assets -- 11,248
Changes in operating assets and liabilities:
(Increase) in accounts receivable (34,032) (149,465)
(Increase) in inventories (509,510) (307,420)
Decrease in advances to contract manufacturer 166,463 159,438
Decrease (increase) in prepaid expenses 12,622 (52,232)
Decrease in other assets 6,933 4,992
(Decrease) increase in accounts payable (1,015,516) 905,750
(Decrease) increase in accrued interest (83,532) 391,738
Increase (decrease) in accrued expenses 139,303 (26,952)
(Decrease) increase in deferred compensation (106,000) 320,000
------------ ------------
Net cash used in operating activities (4,284,869) (820,591)
------------ ------------
Cash flows from investing activities:
Payment for capital expenditures (350,529) (35,268)
Payment for intangible assets (75,536) --
Payment for investment in distributor (69,956) --
------------ ------------
Net cash used in investing activities (496,021) (35,268)
------------ ------------
Cash flows from financing activities:
Expenses relating to registering shares -- (22,500)
Proceeds from (payment for) equity financing, net 7,868,919 (248,815)
Proceeds from note payable - officer/stockholder -- 180,537
Payments of note payable - officer/stockholder (50,000) (122,322)
Proceeds from issuance of notes payable -- 900,000
Proceeds from exercised options 57,750
Proceeds from exercise of equity line, net of expenses 191,481
Payments for deferred financing activities (86,678)
------------ ------------
Net cash provided by financing activities 7,818,919 849,453
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,038,029 (6,406)
Cash and cash equivalents at beginning of year 3,277 9,683
------------ ------------
Cash and cash equivalents at end of year $ 3,041,306 $ 3,277
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 99,359 $ --
============ ============
Cash paid during the year for taxes $ -- $ --
============ ============
See Notes to Consolidated Financial Statements
F-6
Consolidated Statements of Cash Flows (continued)
Supplemental schedule of noncash financing activities:
In February 2004 Milestone issued 335,614 units in consideration for notes
payable and accrued interest due to an officer and a shareholder of $1,604,204,
accounts payable due to outside legal counsel of $200,000 and deferred
compensation to an officer of $384,000. Each unit consisted of 2 shares of
Milestone's common stock (671,228 shares of common stock) and a warrant.
As part of its payment for services in connection with the February 2004 public
offering, Milestone issued to its outside general counsel 5-year options to
purchase 160,000 common shares of at an exercise price of $3.26 per share and
warrants to purchase 80,000 common shares of stock at an exercise price of
$4.89.
In October 2004 in satisfaction of a $50,000 promissory note and accrued
interest of $4,475, Milestone issued 58,200 shares of common stock.
In September 2004, Milestone issued 36,331 shares of common stock valued at
$70,411 for the purchase of equipment.
In April and December 2004, Milestone issued 1,106 shares of common stock to a
media placement company and 9,091 shares of common stock to a distributor for
services rendered valued at $17,500.
In December 2004 we issued a total of 6,060 shares valued at $10,000 to two
employees for payment of bonus and commissions which was recognized as expense
in 2004.
During May 2004, Milestone issued 1,133 options for consulting services valued
at $1,548 which was recognized as expense during the period.
In November 2004 we incurred a liability of $25,706 in connection with the
acquisition of the minority interest in Spintech, a subsidiary of the Company.
In November 2003, Milestone issued 102,195 shares of common stock for payment of
accounts payable totaling $502,800.
In October and November 2003, Milestone issued 94,327 shares of common stock
with an estimated fair value of $285,812 to certain debt holders for agreeing to
extend the maturity date of certain of our outstanding loans.
In September 2003, Milestone granted warrants to purchase 5,000 shares of common
stock (with an estimated fair value of $10,400) in connection with a $50,000
credit facility provided by an existing investor. This resulted in an initial
increase to debt discount and to additional paid-in capital.
During the nine months ended September 30, 2003 pursuant to the promissory note
agreements, Milestone converted $206,989 of accrued interest into additional
principal.
On September 30, 2003, in consideration for payment of $5,014,267 of aggregate
debt and interest, Milestone issued 1,646,419 shares of common stock and $25,365
face amount of 8% cumulative convertible preferred stock.
In June 2003, Milestone granted warrants to purchase 53,419 shares of common
stock (with an estimated fair value of $14,423) in connection with a $50,000 6%
note payable provided by an existing investor. This resulted in an initial
increase to debt discount and to additional paid-in capital.
F-7
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION and BUSINSESS
Milestone Scientific Inc. ("Milestone") was incorporated in the State of
Delaware in August 1989. Milestone has developed a proprietary,
computer-controlled anesthetic delivery system, through the use of The
Wand, a single use disposable handpiece. The system is marketed in
dentistry under the trademark CompuDent and Wand Plus and in medicine
under the trademark CompuMed. CompuDent is suitable for all dental
procedures that require local anesthetic. CompuMed and Wand Plus are
suitable for many medical procedures regularly performed in Plastic
Surgery, Hair Restoration Surgery, Podiatry, Colorectal Surgery,
Dermatology, Orthopedics and a number of other disciplines. The systems
are sold in the United States and in over 25 countries abroad. Milestone's
products are manufactured by a third-party contract manufacturer.
Milestone effected a 1-for-3 reverse stock split in its common stock,
effective January 14, 2004, pursuant to previously obtained stockholder
approval authorizing the board of directors to effect a reverse stock
split in a ratio of up to 1-for-10. All share and per share information in
these consolidated financial statements has been restated retroactively to
reflect the 1 for 3 reverse split.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The consolidated financial statements include the accounts of
Milestone, its subsidiary, Spintech, and two inactive subsidiaries
prior to the date of merger. On December 7, 2004 Milestone purchased
the 35% minority interest in Spintech, and on December 10, 2004 the
three subsidiaries were merged into the Company. All significant
intercompany balances and transactions have been eliminated in
consolidation. The cost of the minority interest in Spintech of
$101,242 has been allocated to patents which are being amortized
over their remaining useful lives.
2. Cash and Cash Equivalents
Milestone considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
3. Inventories
Inventories principally consist of finished goods and component
parts stated at the lower of cost (first-in, first-out method) or
market.
4. Equipment
Equipment is recorded at cost, less accumulated depreciation.
Depreciation expense is computed using the straight-line method over
the estimated useful lives of the assets, which range from 5 to 7
years. The costs of maintenance and repairs are charged to
operations as incurred.
5. Investments
Investments in less than 20% owned entities are accounted for under
the cost basis and are reviewed for impairment periodically.
6. Debt Issue Cost and Debt Discount
Debt issue costs are deferred and amortized to interest expense over
the term of the related loan on a straight-line method, which
approximates the interest method. Debt discounts are offset against
the principal balance and amortized using the straight-line method
over the term of the related loan.
F-8
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Impairment of Long-Lived Assets
Milestone reviews long-lived assets for impairment whenever
circumstances and situations change such that there is an indication
that the carrying amounts may not be recovered.
8. Revenue Recognition
Revenue is recognized net of discounts and allowances when title
passes at the time of shipment and collectibility is reasonably
assured and the Company has no further performance obligations.
9. Research and Development
Research and development costs, which consist principally of new
product development costs incurred to third parties, are expensed as
incurred.
10. Advertising Expenses
Milestone expenses advertising costs as they are incurred. For the
years ended December 31, 2004 and 2003, Milestone recorded
advertising expenses of $107,000 and $62,000, respectively.
11. Income Taxes
Milestone accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed for temporary differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax
provision or credit is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets
and liabilities.
12. Basic and diluted net loss per common share
Milestone presents "basic" earnings (loss) per common share
applicable to common stockholders and, if applicable, "diluted"
earnings per common share applicable to common stockholders pursuant
to the provisions of Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). Basic earnings (loss) per
common share is calculated by dividing net income or loss applicable
to common stock by the weighted average number of common shares
outstanding 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, warrants, and the conversion of
notes payable and preferred stock were issued during the period.
Milestone has not included the common shares issuable upon
conversion of the outstanding 25,365 preferred shares in the
weighted average number of shares outstanding in the computation of
basic loss per share because their effect would have been
anti-dilutive. This treatment is in accordance with the "two class"
method of computing earnings (loss) per share set forth in SFAS 128.
Since Milestone had net losses for 2004 and 2003, the assumed
effects of the exercise of outstanding stock options and warrants,
and the conversion of notes payable and preferred stock into common
stock at December 30, 2004 and 2003, were not included as their
effect would have been anti-dilutive. Such outstanding options and
warrants totaled 3,229,407 at December 31, 2004 and 1,309,920 at
December 31, 2003.
Net loss applicable to common stockholders is computed after
providing for cumulative dividends applicable to preferred stock at
a rate of 8% per year.
13. 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
F-9
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
evaluations for impairment of long-lived assets and valuation
allowances on deferred tax assets. Actual results could differ from
those estimates.
14. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for
cash, accounts receivable, advances to contract manufacturer,
accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments.
15 Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides for the use of a
fair value based method of accounting for employee stock
compensation. However, SFAS 123 also allows an entity to continue to
measure compensation cost for stock options granted to employees
using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25. "Accounting for Stock
Issued to Employees" ("APB 25"), which only requires charges to
compensation expenses for the excess, if any, of the fair value of
the underlying stock at the date a stock option is granted (or at
the appropriate subsequent measurement date) over the amount the
employee must pay to acquire the stock. Milestone has elected to
continue to account for employee stock options using the intrinsic
value method under APB 25. By making that election, it is required
by SFAS 123 and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"), to provide pro forma
disclosures of net loss and loss per common share as if a fair value
based method of accounting had been applied.
If Milestone had elected to recognize compensation expense based
upon the fair value at the grant date, consistent with the
methodology prescribed by SFAS No. 123, pro forma net loss
applicable to common stockholders and net loss per share applicable
to common stockholders for the years ended December 31, 2004 and
2003 would have increased to the following pro forma amounts:
December 31,
----------------------------
2004 2003
------------ ------------
Net loss applicable to common stockholders, as reported $ (2,998,893) $ (2,412,908)
Deduct total stock-based employee compensation
expenses determined under the fair value
based method for all awards 27,660 46,416
------------ ------------
Net loss applicable to common stockholders, pro forma $ (3,026,553) $ (2,459,324)
============ ============
Loss per share applicable to common stock holders:
Basic and diluted
As reported $ (0.33) $ (0.52)
============ ============
Pro forma $ (0.33) $ (0.53)
============ ============
F-10
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average fair value of the individual options granted
during 2004 and 2003 was estimated as $1.32 and $0.38, respectively,
on the date of grant. The fair value for 2004 and 2003was determined
using the Black-Scholes option-pricing model with the following
assumptions:
December 31,
-------------
2004 2003
------ -------
Volatility 109% 135%
Risk-free interest rate 3.7% 2.5%
Expected life 5 years 5 years
Dividend yield 0% 0%
In accordance with the provisions of SFAS 123, 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 are estimated based on
the Black-Scholes option-pricing model, which meets the criteria set
forth in SFAS 123, 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 in the
consensus of the Emerging Issues Task Force ("EITF") for EITF Issue
No. 96-18 (generally, the earlier of the date the other party become
committed to provide goods or services or the date performance by
the other party is complete) and capitalized or expensed as if
Milestone had paid cash for the goods or services.
16. Concentration of Credit Risk
Milestone's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and trade accounts
receivable. Milestone places its cash with high quality credit
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.
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 does not believe that significant credit risk
exists with respect to accounts receivable at December 31, 2004.
F-11
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C -- INVENTORIES
Inventories consist of the following:
Finished goods $ 824,691
Component parts and other materials 111,530
----------
$ 936,221
==========
NOTE D -- ADVANCES TO CONTRACT MANFACTURER
Advances to contract manufacturer represent deposits to our contract
manufacturer to fund future inventory purchases. The balance of advances
as of December 31, 2004 totaled $62,034.
NOTE E --EQUIPMENT
Equipment consists of the following:
Leasehold improvements $ 5,363
Artwork 85,550
Office furniture and equipment 101,092
Trade show displays 50,036
Computers and software 222,899
Tooling equipment 355,263
----------
Total 820,203
Less accumulated depreciation & amortization (207,940)
----------
$ 612,263
==========
Depreciation expense was $50,920 and $26,101 for the years ended December
31, 2004 and December 31, 2003, respectively.
NOTE F - INVESTMENT IN DISTRIBUTOR
In December 2004 the Company purchased a 19.9% equity interest in a German
distribution company which is an affiliate of the Company's principal
international distributor.
NOTE G -- NOTES PAYABLE TO OFFICER/STOCKHOLDER
Notes payable to officer/stockholder of $358,215 at December 31, 2003 and
accrued interest thereon of $77,770 representing obligations payable to
our CEO, were satisfied through the issuance of 62,098 units at $6.52 per
unit (see Note I), and cash payment of $31,107 in February 2004. Interest
expense on these notes for the years ended December 31, 2004 and 2003
amounted to $ 3,360 and $28,109, respectively.
NOTE H -- NOTES PAYABLE
Notes payable (current) at December 31, 2003 consisted of 8% promissory
notes payable to two investors totaling $1,100,000 and a 6% promissory
note in the principal amount of $50,000 ($41,186, net of debt discount of
$8,814). Notes payable (non-current) at December 31, 2003 consisted of a
6% promissory note in the principal amount of $50,000 ($41,333 net of debt
discount of $8,667).
The $1,100,000 8% promissory notes payable and line of credit borrowings
and accrued interest thereon of $165,545
F-12
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were satisfied through the issuance of 183,946 units at $6.52 per unit
(see Note I), and cash payment of $66,219 in February 2004. A $50,000
promissory note and accrued interest thereon of $2,033 was paid in May
2004. A $50,000 promissory note and accrued interest thereon of $4,475 was
satisfied through the issuance of 58,200 shares of common stock in
November 2004.
NOTE I - STOCKHOLDER'S EQUITY
PUBLIC OFFERING
On February 17, 2004, Milestone completed a $9.4 million Public Offering
($7.6 million after underwriter discount, underwriter non accountable
expense allowance and other expenses). The Public Offering consisted of
the sale of 1,440,000 units at a price of $6.52 per unit. Each unit
consisted of two shares of common stock and one warrant. The warrants
included in the units are exercisable at any time after they became
separately tradable until their expiration date, five years after the date
of the closing of the Public Offering, at an exercise price equal to $4.89
(150% of the closing market price of Milestone's common stock on the
pricing date of the Offering). Some or all of the warrants may be redeemed
by Milestone at a price of $0.01 per warrant, by giving not less than 30
days notice to the holders of the warrants, which the Company may do at
any time, beginning 6 months from the effective date of the offering after
the closing price for the Company's common stock on the principal exchange
on which it trades (i.e. AMEX) has equaled or exceeded 200% of the price
of the Company's common stock on the effective date of the offering. The
common stock included in the units and the warrants traded only as a unit
for 30 days following the closing date of the Public Offering.
Net proceeds of the Public Offering were used to pay down promissory
notes, credit facilities, interest and deferred compensation. The Company
intends to use the remainder of the proceeds primarily to expand and
support sales and marketing efforts for CompuDent in the United States,
including new marketing and advertising campaigns, support the launch of
the recently announced SafetyWand product line, expand international sales
efforts and develop commercial models of products using other advanced
injection technology.
OTHER ISSUANCES OF COMMON STOCK
During 2004, we issued common stock in payment of amounts due for goods
and services, satisfaction of notes payable and as compensation to two
employees and a key distributor for services during 2004:
In June 2004 we issued 1,106 shares of common stock having a fair value of
$2,500 in partial payment of services to be provided under 1 year public
relations consulting agreement which amount was charged to expense in
2004.
In August 2004 we issued 36,331 shares of common stock having a fair value
of $70,411 in payment of trade accounts payable related to the purchase of
fixed assets valued at $70,411
In November 2004, Milestone satisfied the $50,000 promissory note and
accrued interest at 6% of $4,475 by issuing 58,200 shares of common stock.
In December 2004 we issued 6,060 shares having a fair value of $10,000 to
two employees and 9,091 shares to a distributor having a fair value of
$15,000.
PREFERRED STOCK
The 25,365 shares of 8% convertible preferred stock outstanding at
December 31, 2004 are each convertible into .1731 shares of common stock.
If not converted earlier, the shares shall automatically convert into
.1731 shares of common stock on November 1, 2005. The voting rights of the
preferred stock holders are the same as those of the common stock holders.
F-13
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OUTSTANDING WARRANTS
At December 31, 2004 there were 2,205,604 warrants exercisable at price
ranging from $1.56 to $9.00 per share expiring at various dates between
January 31, 2005 through April 19, 2009.
In February 2004, Milestone issued 1,775,614 warrants, exercisable at
$4.89 through 2009 including 1,440,000 warrants issued as part of the
public offering, 304,939 warrants issued to an officer and a shareholder
in satisfaction of notes payable, accrued interest and deferred
compensation and 30,675 warrants issued to outside general counsel in
satisfaction of accounts payable.
In April 2004, Milestone issued 80,000 warrants exercisable at $4.89
through 2009 to outside general counsel in consideration for services
rendered in connection with the public offering.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 2004 there were 4,246,292 shares reserved for future
issuance including 814,333 shares underlying stock options available under
the Plans, 3,427,569 shares underlying other stock options and warrants
that were outstanding at December 31, 2004 and 4,390 shares underlying our
Series A convertible preferred stock.
NOTE J -- STOCK OPTION PLAN
In 1997, the Board of Directors approved the adoption of the 1997 Stock
Option Plan. The 1997 Stock Option Plan provides for the grant of options
to purchase up to 166,667 shares of Milestone's common stock. In 1999, the
Plan was amended, providing for the grant of options to purchase up to
333,333 shares of Milestone's common stock. Options may be granted to
employees, officers, directors and consultants of Milestone for the
purchase of common stock of Milestone at a price not less than the fair
market value of the common stock on the date of the grant. In general,
options become exercisable over a three-year period from the grant date
and expire five years after the date of grant.
In July 2004, the Board of Directors approved the adoption of the 2004
Stock Option Plan. The 2004 Stock Option Plan provides for the grant of
options to purchase up to 500,000 shares of Milestone's common stock.
Options may be granted to employees, officers, directors and consultants
of Milestone for the purchase of common stock of Milestone at a price not
less than the fair market value of the common stock on the date of the
grant. In general, options become exercisable over a three-year period
from the grant date and expire five years after the date of grant.
F-14
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J (CONTINUED)
Stock option plan activity during 2004 and 2003 is summarized below:
Shares of Weighted
common stock average
attributable exercise price
to options of options
---------- ----------
Options outstanding at January 1, 2003 247,281 $12.24
Granted 51,668 1.20
Exercised (19,000) 3.04
Forfeited (45,167) 42.96
--------
Options outstanding at December 31, 2003 234,782 4.66
-------- ------
Granted 81,333 3.84
Forfeited (59,999) 7.63
--------
Options outstanding at December 31, 2004 256,116 $ 3.70
======== ======
F-15
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J (CONTINUED
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2004.
Remaining
Exercise Number Contractual Number
Prices Outstanding Life (Years) Exercisable
$ .8700 16,667 3.0 0
.9000 8,333 3.7 2,778
1.5000 26,668 3.2 13,334
1.6500 16,667 2.0 0
2.0000 30,000 5.0 0
2.2500 13,499 2.0 13,499
2.6250 16,667 0.0 16,667
3.6000 8,333 2.5 5,555
4.8300 8,282 0.5 8,282
4.9200 51,333 4.4 0
5.4375 2,333 0.1 2,333
6.0000 16,667 1.0 0
6.5625 17,334 0.5 17,334
7.5000 23,333 1.6 23,333
256,116 103,115
======= =======
The weighted-average exercise price of options exercisable at December 31,
2004 was $4.44.
NOTE K -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION
In January 2002, in consideration for payment of deferred compensation
totaling $491,346 Milestone issued 625,000 units to its CEO. Each unit
consisted of one share of Milestone's common stock and one warrant to
purchase an additional share of common stock. The warrants are exercisable
at $2.40 per share through January 31, 2003 and then at $3.00 per share
through January 31, 2004 and thereafter at $6.00 per share through January
31, 2007.
On December 20, 2003, Milestone entered into a new employment agreement
with the CEO for a five-year term commencing January 1, 2004. Under the
new agreement, the CEO will receive base compensation of $300,000 per
year, payable one half in cash and one half in common stock valued at the
average closing price of the common stock during the first 15 trading days
in the month of December during each year of the term. While the number of
shares to be issued will be determined each year, the stock will not be
issuable until the end of the term of the agreement. In addition, the CEO
may earn annual bonuses up to an aggregate of $300,000, payable one half
in cash and one half in common stock,
F-16
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contingent upon Milestone achieving predetermined annual operating cash
flow, revenue and earning targets as defined in the employment agreement.
No bonuses were earned in 2004.
In addition, if during any year of the term of the agreement the CEO earns
a bonus, he shall also be granted 5-year stock options to purchase twice
the number of shares earned. Each such option is to be exercisable at a
price per share equal to the fair market value of a share on the date of
grant (110% of fair market value if the CEO is a 10% or greater
stockholder on the date of grant). The options shall vest and become
exercisable to the extent of one-third of the shares covered at the end of
each of the first three years following the date of grant, but shall only
be exercisable while the CEO is employed by Milestone or within 30 days
after the termination of his employment.
In accordance with the employment contract, deferred compensation of
$150,000 has been recorded as of December 31, 2004 representing the value
of 89,180 shares of common stock to be paid out at the end of the contract
in an amount calculated by the terms of the agreement discussed above.
NOTE L -- LEGAL PROCEEDINGS
On May 9, 2003, Milestone was served with a Breach of Contract Complaint.
In the complaint, the plaintiff, Korman/Lender Management (landlord of the
facility formerly used by Milestone in Deerfield, IL) sought damages plus
costs, including attorney's fees, interest and continuing rental
obligation. In March 2004, the parties reached an out of court settlement
for $43,500 and exchanged mutual releases.
In 2003, Milestone entered into a settlement with a former distributor
whereby Milestone would provide the distributor with certain inventory.
The settlement was paid in full in the second quarter of 2004.
The effect of the settlements was recorded in 2003.
NOTE M -- CLOSING OF DEERFIELD, IL FACILITY
In 2003 Milestone completed the closing our Deerfield facility, combined
our operating facility with our corporate headquarters in Livingston, New
Jersey and outsourced distribution and logistics to a third party, Design
Centre of York, Pennsylvania. Related costs including moving expenses, the
disposal of related fixed assets, employee related expenses and rent
totaled $86,165 during 2003.
F-17
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N -- INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at December 31,
2004 and 2003 are as follows:
Current assets and liabilities 2004 2003
---- ----
Allowance for doubtful accounts $ 10,000 $ 12,000
Inventory alllowance 11,000 59,000
Accrued interest -- 92,000
------------ ------------
Subtotal 21,000 163,000
Valuation allowance (21,000) (163,000)
------------ ------------
Current deferred tax asset $ -- $ --
------------ ------------
Non-current assets and liabilities
Net operating loss carryforward $ 12,800,000 $ 12,000,000
Warrants and options issued to consultants -- 43,000
------------ ------------
12,800,000 12,043,000
Valuation allowance (12,800,000) (12,043,000)
------------ ------------
Non-current deferred tax asset (liability) $ -- $ --
------------ ------------
The allowance increased by $615,000 and $1,071,000 for the years
ended December 31, 2004 and 2003, respectively.
As of December 31, 2004, Milestone has Federal and State net operating
loss carryforwards of approximately $32,000,000 that will be available to
offset future taxable income, if any, through December 2024. The
utilization of Milestone's net operating losses may be subject to a
substantial limitation due to the "change of ownership provisions" under
Section 382 of the Internal Revenue Code and similar state provisions.
Such limitation may result in the expiration of the net operating loss
carryforwards before their utilization. Milestone has established a 100%
valuation allowance for all of its net deferred tax assets due to the
significant doubt that their benefit will be realized in the future.
NOTE O -- PRODUCT SALES AND SIGNIFICANT CUSTOMERS
Milestone's sales by product and by geographical region are as follows:
Year Ended December 31,
-----------------------------
2004 2003
---- ----
CompuDent $ 1,496,318 $ 1,254,534
Handpieces 3,017,265 2,500,354
Other 237,603 216,819
----------- -----------
$ 4,751,186 $ 3,971,707
=========== ===========
United States $ 3,378,534 $ 2,796,453
Canada 267,678 172,435
Other Foreign Countries 1,104,974 1,002,819
----------- -----------
$ 4,751,186 $ 3,971,707
=========== ===========
F-18
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O (CONTINUED)
During the years ended December 31, 2004 and 2003, Milestone had sales to
one customer (a worldwide distributor of Milestone's products based in
South Africa) of approximately $1,073,000 and $827,000, respectively. This
represented 23% and 21% of the total net sales for 2004 and 2003,
respectively. Accounts receivable from this customer amounted to
approximately $327,830 representing 78% of net accounts receivable at
December 31, 2004.
NOTE P -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
Milestone leases office space under a noncancelable operating lease with a
base rental of $87,808 per annum which was amended in April 2004 to extend
the lease expiration date through June 30, 2009. This lease provides for
escalations of Milestone's share of utilities and operating expenses.
Milestone also leases office and telecom equipment under operating leases.
Aggregate minimum rental commitments under noncancelable operating leases
are as follows:
Year Ending December 31,
-------------------------
2005 $ 102,616
2006 94,480
2007 91,768
2008 91,768
2009 47,204
---------
$ 427,836
=========
For the years ended December 31, 2004 and 2003, rent expense amounted to
approximately $79,000 and $66,000, respectively.
Since February 2003, we have had an informal agreement with a third party
distribution and logistics center in Pennsylvania to handle our shipping
and order fulfillment. Administration and fulfillment fees excluding
shipping expenses and initial set up fees from the third party distributor
were approximately $185,000 and $182,000 for the years ended December 31,
2004 and 2003 respectively.
Contract Manufacturing Agreement
Milestone has informal arrangements for the manufacture of its products.
CompuDent and CompuMed units are manufactured for Milestone by Tricor
Systems, Inc. pursuant to specific purchase orders. The Wand disposable
handpiece is manufactured for Milestone in Mexico by Nypro Precision
Assemblies ("NPA"), a subsidiary of Nypro Inc., pursuant to scheduled
production requirements. The Wand Handpiece with Needle is supplied to
Milestone by United Systems, which arranges for its manufacture by
manufacturers in China. Milestone may expand its relationship with this
supplier to include production of other types of handpieces. 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.
F-19
MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Commitments
The technology underlying our SafetyWand, the CompuFlo and an improvement
to the controls for CompuDent were developed by our Director of Clinical
Affairs and assigned to us. We purchased this technology pursuant to an
agreement dated January 1, 2005, for, 43,424 shares of restricted common
stock and $145,000 in cash, payable on April 1, 2005. In addition, he will
receive additional payments of 2.5% of the total sales price of products
using certain of these technologies, and 5% of the total sales price of
products using certain other of the technologies. In addition, he is
granted, pursuant to the agreement, an option to purchase, at fair market
value on the date of the grant, 8,333 shares of our 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 he will receive the corresponding percentage of the
consideration received by us for such sale or license.
The technology underlying our CoolBlue Professional Whitening and Ionic
White Consumer Whitening Products was acquired from DaVinci Systems. Under
the terms of a licensing agreement, with a third party manufacturer, we
will receive licensing fees resulting from the sales of the consumer
whitening product. A royalty in the amount of 7% of our licensing fee will
be paid to Da Vinci Systems. A royalty of 5% of our licensing fees
generated from the sale of the consumer whitening product will be paid to
Strider Inc. Strider assisted in bringing the CoolBlue and Ionic White
product lines to Milestone.
NOTE Q -- CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
For the years ended December 31, 2004 and 2003, the Company paid $25,773
and $51,928 to the wife of Milestone's CEO, for professional services,
principally related to income tax compliance.
NOTE R - SUBSEQUENT EVENTS
On March 24, 2005 and subsequent days Milestone entered into binding
Subscription Agreements for an approximately $3 million private placement
of 101,044 Units to investors. Each Unit consisted of 10 shares of Common
Stock and two Warrants. Each Warrant entitles the holder to purchase a
share of Common Stock at $4.89 per share through the close of business on
February 16, 2009. By March 31, 2004, Milestone had received approximately
$1.78 million. I-Bankers Securities, Inc. acted as Placement Agent for
Milestone in this transaction and will receive a fee of 7% of the proceeds
and Warrants identical in terms to those issued to the investors, to
purchase 10% of the shares of Common Stock included in the Units.
F-20