10QSB 1 d52721_10-qsb.txt FORM 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Mark One |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 0-26284 MILESTONE SCIENTIFIC INC. (Exact name of Registrant as specified in its charter) Delaware 13-3545623 State or other jurisdiction (I.R.S. Employer or organization) Identification No.) 220 South Orange Avenue, Livingston, New Jersey 07039 (Address of principal executive office) (Zip Code) (973) 535-2717 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) or the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of November 15, 2002, the Registrant had a total of 12,633,370 shares of Common Stock, $.001 par value, outstanding. 1 FORWARD LOOKING STATEMENTS When used in this Quarterly Report on Form 10-QSB, the words "may", "will", "should", "expect", "believe", "anticipate", "continue", "estimate", "project", "intend" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial condition. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements pursuant to the safe harbor established in the Private Securities Litigation Reform Act of 1995. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set forth herein and others set forth from time to time in the Company's reports and registration statements files with the Securities and Exchange Commission (the "Commission"). The Company disclaims any intent or obligation to update such forward-looking statements. 2 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES I N D E X

PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets September 30, 2002 (Unaudited) and December 31, 2001 4 Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001 (Unaudited) 6-7 Notes to Condensed Consolidated Financial Statements 8-14 ITEM 2. Management's Discussion and Analysis or Plan of Operations 15-20 ITEM 3 Controls and Procedures 21 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 CERTIFICATIONS 24-25 EXHIBITS 26-27

3 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, December 31, ASSETS 2002 2001 ---- ---- (Unaudited) (Audited) Current assets: Cash $ 12,748 $ 15,742 Accounts receivable, net of allowance for doubtful accounts of $55,150 and $54,865 in 2002 and 2001, respectively 516,758 363,743 Inventories 82,026 162,640 Advances to contract manufacturer 251,498 315,000 Prepaid expenses 41,363 30,985 ------------ ------------ Total current assets 904,393 888,110 Property and equipment, net 235,852 207,823 Advances to contract manufacturer - long-term 263,582 374,529 Deferred debt financing costs - long term 239,227 32,915 Other assets 32,333 12,362 ------------ ------------ Totals $ 1,675,387 $ 1,515,739 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable, including $327,764 and $43,000 to a related party in 2002 and 2001, respectively $ 1,342,041 $ 1,063,363 Accrued expenses 125,249 105,410 Accrued interest - short term 372,012 -- Notes payable 3,560,328 -- Note payable-officer/stockholder 40,000 -- ------------ ------------ Total current liabilities 5,439,630 1,168,773 Accrued interest - long term 118,450 221,982 Accounts payable, including $272,866 to a related party -- 338,940 Deferred compensation payable to officer/stockholder 240,000 491,346 Notes payable-long term 965,078 3,553,665 Note payable-officer/stockholder 200,000 200,000 ------------ ------------ Total liabilities 6,963,158 5,974,706 ------------ ------------ Commitments and contingencies Stockholders' deficiency: Common stock, par value $.001; authorized, 25,000,000 shares; 12,733,370 issued as of September 30, 2002 and 11,372,847 as of December 31, 2001 12,733 11,373 Additional paid-in capital 36,877,623 36,090,566 Accumulated deficit (40,950,822) (39,346,570) Unearned advertising (278,017) (302,820) Unearned compensation and services (37,772) -- Treasury stock, at cost, 100,000 shares (911,516) (911,516) ------------ ------------ Total stockholders' deficiency (5,287,771) (4,458,967) ------------ ------------ Totals $ 1,675,387 $ 1,515,739 ============ ============

See Notes to Condensed Consolidated Financial Statements. 4 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited)

Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales $ 1,034,190 $ 798,776 $ 3,215,907 $ 2,979,588 Cost of sales 517,292 377,250 1,499,063 1,433,807 ------------ ------------ ------------ ------------ Gross profit 516,898 421,526 1,716,844 1,545,781 ------------ ------------ ------------ ------------ Selling, general and administrative expenses 877,441 1,042,414 2,712,649 4,214,539 Research and development expenses 18,549 3,675 63,928 31,756 ------------ ------------ ------------ ------------ Totals 895,990 1,046,089 2,776,577 4,246,295 ------------ ------------ ------------ ------------ Loss from operations (379,092) (624,563) (1,059,733) (2,700,514) Other income 24,000 -- 72,000 -- Interest, net (226,739) (185,754) (616,519) (554,326) ------------ ------------ ------------ ------------ Net loss $ (581,831) $ (810,317) $ (1,604,252) $ (3,254,840) ============ ============ ============ ============ Loss per share - basic $ (.05) $ (.07) $ (.13) $ (.29) ============ ============ ============ ============ Weighted average shares outstanding 12,412,618 11,272,847 12,253,022 11,101,738 ============ ============ ============ ============

See Notes to Condensed Consolidated Financial Statements. 5 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited)

2002 2001 ----------- ----------- Operating activities: Net loss $(1,604,252) $(3,254,840) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of advertising costs 24,803 21,398 Amortization of debt discount and deferred financing costs 234,837 196,312 Depreciation 41,672 58,486 Amortization of unearned compensation -- 15,528 Stock options issued for services 2,500 97,649 Common stock issued for services -- 150,000 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (153,015) 342,940 (Increase) decrease in inventories 80,614 (136,130) Decrease in advances to contract manufacturer 174,449 304,530 (Increase) decrease in prepaid expenses (10,378) 88,748 Increase in other assets (19,971) (2,044) Increase in accounts payable 169,465 305,114 Increase in accrued interest 381,682 360,901 Increase (decrease) in accrued expenses 19,829 (17,629) Increase in deferred compensation 240,000 262,500 ----------- ----------- Net cash used in operating activities (417,765) (1,206,537) ----------- ----------- Investing activities - capital expenditures (69,691) (9,013) ----------- ----------- Financing activities: Proceeds from sale of common stock -- 500,000 Proceeds from issuance of notes and lines of credit, net 525,000 565,373 Payments for deferred financing costs (40,538) -- ----------- ----------- Net cash provided by financing activities 484,462 1,065,373 ----------- ----------- Net decrease in cash (2,994) (150,177) Cash, beginning of period 15,742 172,867 ----------- ----------- Cash, end of period $ 12,748 $ 22,690 =========== ===========

See Notes to Condensed Consolidated Financial Statements. 6 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited) Supplemental schedule of noncash financing activities: In January 2002, the Company issued 33,840 units consisting of one share of common stock and one warrant to purchase an additional share of common stock in exchange for payment of accrued interest totaling $27,072. In January 2002, in consideration for payment of $491,346 in deferred compensation, the Company issued 614,183 units (consisting of one share of common stock and one warrant to purchase an additional share of common stock).The warrants are exercisable at $.80 per share through January 31, 2003; at $1.00 per share through January 31, 2004 and thereafter at $2.00 per share through January 31, 2007. In January 2002, pursuant to the 20% promissory note agreements, the Company converted $63,377 of accrued interest into additional principal. In April 2002, pursuant to the 6%/12% promissory note agreements, the Company converted $65,168 of accrued interest into additional principal. In April 2002, pursuant to the debt restructuring, the Company recorded a deferred financing charge of $329,572. This resulted in an increase to notes payable of $140,203 and accrued interest of $189,369. In July 2002, the Company issued 187,500 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 (See Note 2). In August 2002, the Company issued 200,000 shares of common stock in exchange for payment of $90,000 of outstanding legal fees. In September 2002, pursuant to the 6% / 12% promissory note agreements, the Company converted $41,512 of accrued interest into additional principal. In January 2001, pursuant to the 20% promissory note agreements, the Company converted $51,111 of accrued interest into additional principal. In January 2001, the Company granted warrants to purchase 20,000 shares of common stock (with an estimated fair value of $23,400) in connection with $100,000 drawn from a $1,000,000 credit facility provided by a major existing investor. This resulted in an initial increase to debt discount and to additional paid-in capital. In February 2001, the Company issued 27,641 shares of common stock in exchange for payment of accrued interest totaling $36,279. In February 2001, the Company issued 92,308 shares of common stock with a value of $150,000 for services rendered. In March 2001, pursuant to a $500,000 line of credit agreement, the Company granted warrants to purchase 100,000 shares of common stock (with an estimated fair value of $80,000). This resulted in an initial increase to debt discount and in additional paid-in capital. In March 2001, the Company granted warrants to purchase 390,625 shares of common stock with an estimated fair value of $324,418 for advertising services. This amount was recorded in stockholders' deficiency as an increase to unearned advertising and to additional paid-in capital. In April 2001, pursuant to the 20% promissory note agreements, the Company converted $53,472 of accrued interest into additional principal. 7 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Summary of accounting policies: The unaudited condensed consolidated financial statements of Milestone Scientific Inc. and Subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-KSB. The accounting policies used in preparing these financial statements are the same as those described in the December 31, 2001 financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring entries) necessary to present fairly the financial position as of September 30, 2002 and the results of operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. The results reported for the three and nine months ended September 30, 2002 are not necessarily indicative of the results of operations, which may be expected for a full year. Note 2 - Basis of presentation: As of September 30, 2002, Milestone had $12,748 in cash and a working capital deficiency of $4,535,237. As listed below and further described in Note 4, to date, several steps have been taken to meet Milestone's working capital needs until it is able to further reduce its costs, obtain higher levels of sales, as well as achieve and sustain profitability. These steps must be continued in order for the Company to sustain its operation in its present state through October 1, 2003. The Company is currently dependent on (i) the equity line (See Note 5), (ii) the willingness of certain stockholders to continue to defer and/or receive stock in lieu of their compensation and (iii) continued ability to convert debt into equity. Further, any amounts available under the equity line are dependent on the Company's stock price and the trading volume. If the Company is unable to obtain the required funding under the equity line, management will have to obtain such financing from alternative sources. However, management cannot assure that the Company will be able to obtain any alternative funding. During the nine months ended September 30, 2002, the Company has taken the following steps, among others, to meet its working capital needs. 8 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 2 - Basis of presentation (continued): On March 28, 2002, the Company entered into an agreement with a vendor to issue a total of 187,500 units having an aggregate fair value of $150,000 in satisfaction of its current obligation of $93,924 and for future services of $56,076. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $.80 per share through January 31, 2003, at $1.00 per share through January 31, 2004 and thereafter at $2.00 per share through January 31, 2007. The Company issued the common stock in July 2002. At September 30, 2002, a balance of $10,272 remained for future services. The company recorded the future services as unearned compensation/services in its stockholders' deficiency. On March 29, 2002, the Company entered into the following agreements for: o Deferring payment on accounts payable to a related party totaling $272,866 at December 31, 2001 until January 2, 2003. o Extending the maturing date of its $200,000 obligation and accrued interest of $26,600 as of December 31, 2001, to its Chief Executive Officer ("CEO") until January 2, 2003. o Deferring payment on $320,000 of the CEO's $350,000 salary until January 2, 2003. o Establishing a 6% $100,000 line of credit with its CEO through January 2, 2003, payable on April 2, 2003. All of the agreements with the exception of the line of credit were further amended on August 13, 2002 and again on November 12, 2002 to provide the following: o Extending the maturity date of its 9% $200,000 obligation and accrued interest of $40,250 until October 1, 2003. o At the option of the Company's Board of Directors, $250,000 of the accounts payable to the related party can be paid through the issuance of the Company's common stock. o Deferring payment on $480,000 of the CEO salary until October 1, 2003. Note 3 - Loss per share: Basic loss per common share is computed using the weighted average number of common shares outstanding. Options and warrants to purchase 4,753,355 and 805,625 shares of common stock were outstanding as of September 30, 2002 and 2001, respectively, but were not included in the computation of diluted loss per share because the effect would have been anti-dilutive. Note 4 - Notes payable: 6% / 12% senior secured promissory notes: On March 16, 2001, the Company restructured its obligations to the holders of its 10% Senior Secured Promissory Notes. Under the terms of the agreement, each of the noteholders agreed to exchange their 10% Notes for a new, zero coupon note (the "Zero Coupon Note") 9 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 - Notes payable (continued): (a) paying interest at 20% per annum until maturity on March 31, 2002, (b) having a face amount equal to the outstanding principal owed to the noteholders plus accrued interest and interest payable until maturity, (c) giving the Company the option to pay the face value of the notes in cash or in shares of common stock, provided that the shares have been registered under the Securities Act of 1933, and (d) paying each noteholder 108% of the face value of his Zero Coupon Note, including unearned interest to maturity, if there is a change of control of Milestone. Moreover, the warrants previously issued to the noteholders were repriced back to the initial exercise price of $1.75 per share at the date of grant. As a result of the Company restructuring its obligations, the unamortized portion of the debt discount and deferred financing costs were amortized through March 31, 2002. On March 31, 2002, the holders agreed to extend the maturity date up to 30 days. Subsequently on April 15, 2002, the holders additionally agreed to extend the promissory notes to July 1, 2003 and to lower the interest rate to 6% if paid in cash or to 12% if paid in common stock. In connection with the extension, the Company recorded $16,215 in deferred financing charges relating to professional fees and $140,203 of deferred financing costs relating to consideration to the note holders valued at $120 per share of the Company's common stock for each $1,000 face amount outstanding at maturity which increased the aggregate carry value of the notes by $140,203. The Company is accruing interest expense at 12%. These deferred financing costs are being amortized through July 1, 2003. $500,000 line of credit: On March 9, 2001, the Company obtained from a major existing investor, a 10%, $500,000 line of credit maturing on August 31, 2002. Additionally, the Company pays a 2% facility fee on the line. At the option of the Company, interest and the facility fee would have been payable either on (i) August 31, 2002 in cash, or (ii) quarterly in shares of the Company's common stock. In connection with obtaining the line of credit, the lender received warrants to purchase 100,000 shares of common stock at an exercise price of $1.10. The estimated fair value of the warrants approximated $40,000 which was recorded as a debt discount and was being amortized through August 31, 2002. In addition, the Company incurred financing fees of $28,384 associated with obtaining the loan which were deferred and amortized to August 31, 2002. On April 12, 2002, the investor agreed to extend the line of credit and payment for interest to August 1, 2003. In connection with the extension until August 1, 2003, the Company incurred $4,054 of deferred financing charges. Accordingly, the deferred financing charges and the unamortized debt discount were being amortized through August 1, 2003. On November 12, 2002, the investor agreed to extend the line of credit and payment for interest to November 19, 2003. Accordingly, the line of credit including accrued interest has been recorded as long-term in the consolidated financial statements. As of September 30, 2002, the Company has drawn down the $500,000 from the line of credit. 10 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 - Notes payable (concluded): 6% / 12% promissory notes: In August 2000, the Company borrowed $1,000,000 which consists of two loans from two funds managed by Cumberland Associates LLC, and bear interest at 20% per year and payable in cash or through the issuance of additional 20% notes on which both interest and principal are payable. The loans are secured by substantially all assets of the Company and are subordinated to the 6% / 12% senior secured promissory notes that were amended April 15, 2002. The Company can prepay the loans in cash at any time. The Company can prepay the notes and accrued interest with common stock at its option after March 31, 2001. Stock issued in lieu of payment of this debt will be valued at 85% of the then market price. For the nine months ended September 30, 2002, the Company converted $171,785 of accrued interest into principal. During 2001, the Company had previously converted $222,417 of accrued interest into principal. On April 12, 2002, Cumberland Associates LLC agreed to extend the maturity date of these loans through July 1, 2003 and to lower the interest rate from 20% to 6%, if paid in cash, or to 12%, if paid in common stock. In connection with the extension, the Company recorded $16,215 of deferred financing charges relating to professional fees and $189,369 relating to consideration issued to the note holders valued at $120 per share of the Company's common stock for each $1,000 face amount outstanding at maturity. The Company is currently accruing interest expense at 12%. Accordingly, the deferred financing costs and the unamortized financing charges are being amortized through July 1, 2003. 8% promissory notes: On July 31, 2000, the Company established a $1,000,000 credit facility with an existing investor. Initially, $500,000 was borrowed under the line, which was originally due on June 30, 2003. On April 15, 2002, the investor agreed to extend the maturity date of the $500,000 to August 1, 2003. Accordingly, in connection with the extension, the Company incurred $4,054 of deferred financing charges relating to professional fees. Accordingly, the deferred financing costs and the unamortized debt discount are being amortized through August 1,2003. In connection with the initial $500,000, the investor received five-year warrants to purchase 70,000 shares of the Company's common stock, exercisable at $3.00 per share. In December 2000 and January 2001, the Company borrowed an additional $400,000 and $100,000, respectively, under the line which is due on December 31, 2003. In connection with the $400,000, the investor received five-year warrants to purchase 80,000 shares of the Company's common stock exercisable at $1.25 per share. In connection with the $100,000, the investor received five-year warrants to purchase 20,000 shares of the Company's common stock at $1.25 per share. 11 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 - Notes payable (continued): $250,000 promissory note: On May 28, 2002, the Company received $250,000 from an existing investor which provides for interest at 8% if paid in cash and 10% if paid in stock. The note will convert into the Company's common stock if the Company issues 1,000,000 shares or raises at least $1,000,000 from the sale of equities prior to August 1, 2003, at the market price in that transaction but not less than $.50 per common share, or more than $2.00 per share. The Company accrued interest at 10%. $150,000 promissory note: On February 19, 2002, the Company issued a $150,000 promissory note to an existing investor. The note bears interest at 8% if paid in cash and 10% if paid in stock and matures on August 1, 2003. For the nine months ended September 30, 2002, interest was accrued at 10%. $85,000 promissory note: The Company received $85,000 during the third quarter of 2002 in exchange for a promissory note from an existing investor. The note bears interest at 8% if paid in cash and 10% if paid in stock. The note will convert into the Company's common stock if the Company issues 1,000,000 shares or raises at least $1,000,000 from the sale of equities prior to August 1, 2003, at the price in that transaction but not less than $.50 per common share and not more than $2.00 per share. The Company accrued interest at 10%. $100,000 line of credit: On March 29, 2002, the Company entered into an agreement with its CEO establishing a 6% $100,000 line of credit. On September 20, 2002, the Company borrowed $40,000 from the line. As of November 11, 2002, the Company had borrowed the entire line. Outstanding borrowings are due and payable on April 2, 2003. It is the Company's current intention to satisfy the majority of its debt and accrued interest upon their maturity with the issuance of common stock. The agreements allow the Company to convert these obligations into common stock upon maturity without any further approval from the debt holders. At September 30, 2002, the Company has the ability to convert $3,950,400 and $413,553 of debt and accrued interest, respectively, into approximately 16,414,000 shares of its common stock. 12 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5 - Equity line commitment: In January 2001, Milestone entered into a three-year private equity line agreement with Hillgreen Investments Limited ("Hillgreen"), a British Virgin Islands corporation, pursuant to which Hillgreen is obligated to purchase, subject to the fulfillment of specified conditions, up to 2,100,000 shares of Milestone common stock over the next 36 months. Hillgreen has allocated $20,000,000 to fund its purchase obligations. The transaction was arranged by Jesup & Lamont Securities Corporation, a New York based investment banking firm. Milestone's right to draw upon this facility is subject to a number of limitations and conditions, including a limitation on the amounts sold to Hillgreen within specified periods. Subject to these and other conditions and limitations, Milestone will have full control over the timing of any financing under the equity line and is under no obligation to sell any shares to Hillgreen. Any shares that are sold will be priced at 87.5% of the volume weighted average market price of Milestone common stock during a fixed period prior to the sale. Milestone has discretion to establish a floor price below which shares will not be sold by Milestone to Hillgreen. At November 15, 2002, without any restrictions and based on the closing stock price, the maximum proceeds that the Company could receive would be approximately $643,000. Note 6 - Legal proceedings On June 10, 2002, a former distributor, Henry Schein, Inc., sued Milestone in the Supreme Court of the State of New York for $110,851 claimed to be due them for returned merchandise. Milestone denies any liability. The parties are currently engaged in discovery. Milestone believes it has meritorious defense to this complaint based, in part, on its position that the plaintiff had no right to return the goods. Note 7 - Contingencies In March 2001, the Company entered into an advertising agreement with News USA, Inc. and Vested Media Partners, Inc. (the "Agreement") to increase the awareness of healthcare professionals and the public to the benefits of The Wand(R) and the CompuFlo(TM) technologies. Under the Agreement, News USA is required to prepare articles and advertisements for the Company's products and technologies and place them in newspapers and on radio stations. News USA has guaranteed 72,000 media placements during the 18-month initial term of the Agreement. In exchange for these services the Company granted warrants to purchase 1,171,875 shares of common stock exercisable on the following dates and prices over the life of the Agreement; (1) $1.28 during the first 18 months, (2) $2.25 during the next nine months and (3) $3.00 during the next nine months. 13 MILESTONE SCIENTIFIC INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 7 - Contingencies (continued): In March 2001, the Company initially recorded unearned advertising cost of $324,218 which represents the estimated fair value of the 390,625 of the warrants for one-third of the total warrants granted based on the 24,000 minimum placements. The unearned advertising costs are being amortized as publications are received by the Company over the minimum placements. As of September 30, 2002, unearned advertising costs was $278,017 and during the nine months ended September 30, 2002, the Company recorded $24,803 in advertising expenses relating to placements during the period. The estimated fair value of the remaining warrants to purchase 781,250 of the Company's common stock have not been recorded in the Company's consolidated financial statements due to the likelihood that the Agreement will not be fulfilled. As of September 30, 2002, the parties have suspended the agreement until a new agreement may be reached. Accordingly, the exercisability of the 1,171,875 warrants and the corresponding exercise price are currently being negotiated. 14 ITEM 2. Management's Discussion and or Analysis Plan of Operations 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 receivables, inventories, advances to our contract manufacturer, 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. Overview The results from operations for the three and nine months ended September 30, 2002, reflect Milestone's concentrated effort to drastically reduce its overhead while slowly growing its user base in the dental market and introducing the Wand(R) technology in a variety of medical disciplines. The year to date loss of approximately $1.6 million represents a 51% reduction from the same period in 2001. During the nine months ended September 30, 2002, Milestone reduced its average monthly cash used from operations to less than $50,000, completed a $4.1 million debt restructuring program, and obtained $585,000 in additional financing. The program included equity conversions; deferring payment on certain payables; restructuring its debt and outsourcing our sales force. Furthermore, Milestone signed an agreement for the distribution of CompuDent(TM) in the Eastern U.S., a national hair restoration provider agreed to equip its offices with the CompuMed(TM), and the U.S. Patent Office granted a Notice of Allowance for broad patent protection of a new safety engineered needle technology to be issued to the Company. Statement of Operations Three months ended September 30, 2002 compared to Three months ended September 30, 2001 Net sales for the three months ended September 30, 2002 and 2001 were $1,034,190 and $798,776, respectively. The $235,414 or 29.5% increase is primarily related to an 8% or $35,000 increase in domestic sales of The Wand(R) handpiece, CompuMed(TM) sales of approximately $23,000 and a $83,000 increase in CompuDent(TM) revenue. Cost of sales for the three months ended September 30, 2002 and 2001 were $517,292 and $377,250, respectively. The $140,042 increase is attributable primarily to higher sales volume. For the three months ended September 30, 2002, the Company generated a gross profit of $516,898 or 50% as compared to a gross profit of $421,526 or 53% for the three months ended September 30, 2001. The decrease in gross profit percentage is primarily attributable to increased sales to foreign distributors. Sales to foreign distributors are of higher volume but at a reduced margin. 15 Selling, general and administrative expenses for the three months ended September 30, 2002 and 2001 were $877,441 and $1,042,414, respectively. The $164,973 decrease is attributable primarily to an approximate $144,000 decrease in expenses associated with the sale and marketing of The Wand(R) technology due to the transitioning of its sales force to independent representatives. In addition, during the third quarter of 2001, the Company issued 150,000 shares for services rendered with a value of $97,649, a non-cash charge. Research and development expenses for the three months ended September 30, 2002 and 2001 were $18,549 and $3,675, respectively. The $14,874 increase is the result of higher costs incurred during the third quarter of 2002, which were associated with the development of the Company's safety needle. The loss from operations for the three months ended September 30, 2002 and 2001 were $379,092 and $624,563, respectively. The $245,471 decrease in loss from operations is explained above. The Company incurred interest expense of $226,739 for the three months ended September 30, 2002 as compared to $185,754 for the three months ended September 30, 2002. The increase is attributable to higher average borrowings in 2002. The net loss for the three months ended September 30, 2002 was $581,831 as compared to a net loss of $810,317 for the three months ended September 30, 2001. The $228,486 decrease in net loss is attributable to lower selling, general and administrative expenses and a higher gross profit as a result of a higher level of sales as explained above. Nine months ended September 30, 2002 compared to Nine months ended September 30, 2001 Net sales for the nine months ended September 30, 2002 and 2001 were $3,215,907 and $2,979,588, respectively. The $236,319 increase is attributable primarily to 7% or $95,000 increase in domestic sales of The Wand(R) handpiece, a $260,000 increase in The Wand(R) handpiece sales to foreign distributors and the CompuMed(TM) sales of approximately $138,000 The increase is partially offset by an approximately $192,000 decrease in sales of CompuDent(TM). Lower CompuDent(TM) sales in the U.S. are the direct result of the downsizing of the Company's sales and marketing effort, in that area. Cost of sales for the nine months ended September 30, 2002 and 2001 were $1,499,063 and $1,433,807 respectively. The $65,256 increase is attributable primarily to increase sales volume. For the nine months ended September 30, 2002, the Company generated a gross profit of $1,716,844 or 53% as compared to a gross profit of $1,545,781 or 52% for the nine months ended September 30, 2001. The increase in gross profit is mainly attributable to an increase in domestic sales of The Wand(R) handpiece and CompuMed(TM) sales, which yield higher margins. Selling, general and administrative expenses for the nine months ended September 30, 2002 and 2001 were $2,712,649 and $4,214,539 respectively. The $1,501,890 decrease is attributable primarily to an approximate $775,000 decrease in expenses associated with the sale and marketing of The Wand(R) technology due to the transitioning of its sales force to independent representatives and an approximate $272,000 decrease in legal fees. In addition, during the first nine months of 2001, the Company issued in aggregate, 242,308 shares for services rendered with a value of $247,649 in non-cash compensation or consulting services. The Company had incurred additional legal expenses in 2001 due to advertising agreements; medical patent registrations; and additional patents on The Wand(R) and CompuFlo(TM) technologies. 16 Research and development expenses for the nine months ended September 30, 2002 and 2001 were $63,928 and $31,756 respectively. The $32,172 increase is the result of higher costs incurred during 2002, which were associated with the development of the Company's safety needle. The loss from operations for the nine months ended September 30, 2002 and 2001 were $1,059,733 and $2,700,514 respectively. The $1,640,781 decrease in loss from operations is explained above. The Company incurred interest expense of $616,519 for the nine months ended September 30, 2002 as compared to $554,326 for the nine months ended September 30, 2001. The increase of $62,193 is attributable to higher average borrowing in 2002. The net loss for the nine months ended September 30, 2002 was $1,604,252 as compared to a net loss of $3,254,840 for the nine months ended September 30, 2001. The $1,650,588 decrease in net loss is primarily attributable to lower selling and administrative expenses. Liquidity and Capital Resources At September 30, 2002, Milestone had $12,748 in cash and a working capital deficiency of $4,535,237. Included in the working capital deficiency is $330,803 of accrued interest and $3,560,328 in debt which the Company can convert at its option into common stock. For the nine months ended September 30, 2002, the Company's cash decreased by $2,994. For the nine months ended September 30, 2002, the Company's net cash used in operating activities was $417,765. This was attributable primarily to a net loss of $1,604,252 adjusted for noncash items of $303,812 (of which $234,837 was for amortization of debt discount and deferred financing costs); a $153,015 increase in accounts receivable; an $80,614 decrease in inventories; a $174,449 decrease in advances to contract manufacturer; a $10,378 increase in prepaid expenses; an increase in other assets of $19,971; an increase in accrued expenses of $19,829; a $381,682 increase in accrued interest; a $169,465 decrease in accounts payable; and an $240,000 increase in deferred compensation. For the nine months ended September 30, 2002, the Company used $69,691 in investing activities for capital expenditures. For the nine months ended September 30, 2002, the Company generated $484,462 from financing activities as it issued promissory notes to an existing investor totaling $485,000, borrowed $40,000 of its $100,000 line of credit with its Chief Executive Officer and paid $40,538 of financing costs relating to its debt restructuring . As of September 30, 2002, Milestone had $12,748 in cash and a working capital deficiency of $4,535,237. As listed below, to date, several steps have been taken to meet Milestone's working capital needs until it is able to further reduce its costs, obtain higher level of sales, as well as achieving and sustaining profitability. These steps must be continued in order for the Company to sustain its operation in its present state through October 1, 2003. The Company is currently dependent on (i) the equity line, (ii) the willingness of certain stockholders to continue to defer and/or receive stock in lieu of their compensation and (iii) continued ability to convert debt into equity. Further, any amounts available under the equity line are dependent on the Company's stock price and the trading volume. If the Company is unable to obtain the required funding under the equity line, management will have to obtain such financing from alternative sources. However, management cannot assure that the Company will be able to obtain any alternative funding. 17 During the nine months ended September 30, 2002, the Company has taken the following steps, among others, to meet its working capital needs. On March 28, 2002, the Company entered into an agreement with a vendor to issue a total of 187,500 units having an aggregate fair value of $150,000 in satisfaction of its current obligation of owing $93,924 and for future services of $56,076. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $.80 per share through January 31, 2003, at $1.00 per share through January 31, 2004 and thereafter at $2.00 per share through January 31, 2007. The Company issued common stock in July 2002. At September 30, 2002, a balance of $10,272 remained for future services. The Company recorded the future services as unearned compensation/services in its stockholders' deficiency. On March 29, 2002, the Company entered into the following agreements for: o Deferring payment on accounts payable to a related party totaling $272,866 at December 31, 2001 until January 2, 2003. o Extending the maturing date of its $200,000 obligation and accrued interest of $26,600 as of December 31, 2001, to its Chief Executive Officer ("CEO") until January 2, 2003. o Deferring payment on $320,000 of the CEO's $350,000 salary until January 2, 2003. o Establishing a 6% $100,000 line of credit with its CEO through January 2, 2003, payable on April 2, 2003. All of the agreements with the exception of the line of credit were further amended on August 13, 2002 and again on November 12, 2002 to provide the following: o Extending the maturity date of its 9% $200,000 obligation and accrued interest of $40,250 until October 1, 2003. o At the option of the Company's Board of Directors, $250,000 of the accounts payable to the related party can be paid through the issuance of the Company's common stock. o Deferring payment on $480,000 of the CEO salary until October 1, 2003. As of September 30, 2002, Milestone has an equity line commitment through January 1, 2004 to sell up to 2,100,000 shares of its common stock. Milestone's right to draw upon this facility and the amount of each draw is subjected to certain limitations. The most restrictive of which is the investor or any of its affiliates cannot directly own more than 9.9% of the Company's then outstanding number of shares of common stock unless the Company either issues (i) additional shares of common stock, (ii) converts any of its debt and or (iii) the investor is unable to sell to third parties any of the shares previously purchased, the Company only has the ability to sell approximately 1,261,000 shares from which it will derive proceeds of approximately $386,000. At November 15, 2002, without any restrictions and based on the closing stock price, the maximum proceeds that the Company could receive would be approximately $643,000. OPERATIONS The Company believes that CompuDent(TM), CompuMed(TM) and The Wand(R) technology represents a major advance in the delivery of local anesthesia and that the potential applications of this technology extends beyond dentistry. Based on scientific and anecdotal support, the Company contends that CompuMed(TM) could enhance the practices of the estimated 90,000 U.S. based physicians included in such non-dental disciplines as Podiatry, Hair Restoration Surgery, Plastic Surgery, Dermatology, colorectal surgery and procedures in Orthopedics, OB-GYN and Ophthalmology. Despite limited resources, the Company has continued its efforts to realize the market potential of The Wand(R) and become profitable. These steps include (i) relaunching of The Wand Plus(TM) drive unit 18 domestically, under the name CompuDent(TM), (ii) distribution of CompuDent(TM) through a host of channels (i.e. independent sales representatives, an inside sales group and a major dental distributor), (iii) launching The Wand Plus(TM) drive unit for medical purposes and marketing it as CompuMed(TM), (iv) increasing presence at medical trade shows, (v) advertising to increase the awareness of the product, (vi) implementing cost reduction programs, and (vii) restructuring certain outstanding obligations. Management believes that these steps are critical to the realization of Milestone's long-term business strategy. In March 2002, Milestone announced an agreement whereby Medical Hair Restoration ("MHR") will equip each of its 21 Surgery centers in the U.S. with CompuMed(TM). In August 2002, the United States Patent Office issued a patent on Milestone's safety engineered needle technology to be issued to Milestone. When commercialized, this new technology will be used with a plethora of infusion devices, including the Company's CompuDent(TM) and CompuMed(TM) computer controlled local anesthetic delivery systems as well as the CompuFlo(TM), an enabling technology for computer controlled infusion, perfusion, suffusion and aspiration of fluids. It provides features previously unavailable to medical and dental practitioners; fully automated true single-handed activation with needle anti-deflection and force-reduction capability. In addition, practitioners can re-use this safety engineered device repeatedly during a single patient session making it highly functional in a wide variety of medical and dental applications. In April 2002, Milestone announced acceptance of an independent clinical study concluding that use of Milestone's computer controlled local anesthetic delivery technology in nasal and sinus surgery produced a "safe, acceptable, tolerable, and cost effective method of sedating patients creates a sense of security and adds to the ultimate satisfaction associated with nasal surgery." The study also concluded "Recovery room and expensive hospital costs are avoided, making nasal surgery more affordable and within reach of a greater range of potential nose surgery patients." One of the study's authors, Dr. Pieter Swanepoel, a world-renowned surgeon, presented his study at the 8th International Symposium of the Academy in New York City in May 2002. The new technique is an adaptation of similar regional nerve blocking techniques used by dental surgeons and replaces the need for costly and invasive general anesthesia. Dr. Swanepoel in conducting his research using pre-production prototypes of our CompuFlo(TM) system, since it allowed him to measure flow rate and tissue pressure and determine parameters for optimal results. The core technology embodied in the CompuMed(TM) unit may be used to deliver local anesthesia within the parameters ascertained by Dr. Swanepoel to produce optimal results and then achieve conscious sedation in nasal surgery. In May 2002, Milestone signed a dental distribution agreement with Benco Dental under which Benco Dental will distribute CompuDent(TM) through their direct sales organization. Benco has the right to become the exclusive dental distributor in selected states within the United States if it achieves certain sales objectives. Milestone is providing the initial sales and product training to the entire Benco sales organization through September 2002. Following these initial training sessions, Milestone will support this effort through "Dealer Managers and Technical Support Specialists." LEGAL PROCEEDINGS On June 10, 2002, Inc. a former distributor sued Milestone in the Supreme Court of the State of New York for $110,851 claimed to be due them for returned merchandise. Milestone denies any liability. The parties are currently engaged in discovery. Milestone believes it has meritorious defense to this complaint based, in part, on its position that the plaintiff had no right to return the goods. 19 OTHER MATTERS - AMERICAN STOCK EXCHANGE On May 2, 2002, Milestone received a letter from the American Stock Exchange advising that the Company have fallen below the stockholders' equity criterion and requesting the submission of a recovery plan detailing any actions taken, or planned to be taken within the next 18 months to bring the Company into compliance. On June 10, 2002, the Company submitted a detailed recovery plan to the American Stock Exchange showing how Milestone expects to achieve stockholder equity of $4,000,000 by December 31, 2003. In response, the Company received informal advice from the American Stock Exchange that in view of the expected loss in 2002, Milestone needed to demonstrate how the Company will achieve $6,000,000 in stockholders' equity by the end of 2003. On August 14, 2002, a supplemental plan demonstrating how Milestone expects to meet these requirements. On August 23, 2002, the American Stock Exchange advised the Company that they had determined that the plan makes a reasonable demonstration of Milestone's ability to regain compliance with the continued listing standards by the conclusion of the plan period at the end of 2003. The continued listing of Milestone's securities on the American Stock Exchange during this period will be subject to periodic reviews by the Exchange. Failure to show progress consistent with the plan or to regain compliance by the end of the plan period could still result in the Milestone being delisted. In the event that Milestone's securities are delisted from the American Stock Exchange, trading, if any, in the common stock and warrants would be conducted in the over the counter market in the so-called "pink sheets" or on the NASD's "OTC Bulletin Board." Consequently the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts and new media coverage of Milestone, and lower prices for Milestone's securities than might otherwise be obtained. 20 ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of disclosures. The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Within 90 days prior to the filing of this Quarterly Report on Form 10-QSB, an evaluation, was completed under the supervision and participation of management, including the Chief Executive Officer and Chief Financial Officer, of the design and operation of this disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including the Company's consolidated subsidiaries) required to be included in the periodic SEC filings. (b) Changes in internal controls. There were no significant changes in internal controls or other factors that could significantly affect the Company's internal controls subsequent to the date of our evaluation. 21 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: 99.1 - Certification of Chief Executive Officer, pursuant to 18 W.S.C. Section 1350 99.2 - Certification of Chief Financial Officer, pursuant to 18 W.S.C. Section 1350 (b) Reports on Form 8-K: None 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned MILESTONE SCIENTIFIC INC. ------------------------------------- Registrant /s/ Leonard Osser ------------------------------------- Leonard Osser Chairman and Chief Executive Officer /s/ Thomas M. Stuckey ------------------------------------- Thomas M. Stuckey, Vice President and Chief Financial Officer Dated: November 15, 2002 23 CERTIFICATION I, Leonard Osser, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Milestone Scientific Inc. ("the registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 15, 2002 /s/ Leonard Osser ----------------- Leonard Osser Chief Executive Officer 24 CERTIFICATION I, Thomas M. Stuckey, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Milestone Scientific Inc. ("the registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 15, 2002 /s/ Thomas M. Stuckey --------------------- Thomas M. Stuckey Chief Financial Officer 25