MILESTONE SCIENTIFIC INC. - Quarter Report: 2018 June (Form 10-Q)

 

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ASSETS	June 30, 2018			December 31, 2017
		(Unaudited)			(Audited)
Current Assets:
Cash and cash equivalents	$	865,654		$	2,636,956
Accounts receivable, net		1,840,145			1,535,513
Accounts receivable, from related party		2,817,990			1,725,450
Note receivable from financing transaction, current		-			500,000
Prepaid expenses and other current assets		484,753			436,410
Deferred cost, related party		1,796,036			1,109,671
Inventories, net		2,310,330			3,379,209
Advances on contracts		861,782			697,192
Total current assets		10,976,690			12,020,401
Furniture, fixtures & equipment, net		105,529			141,760
Patents, net		2,320,392			2,789,748
Note receivable from financing transaction, noncurrent		-			650,000
Other assets		26,878			26,878
Total assets		13,429,489			15,628,787
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,365,491		$	853,859
Accounts payable, related party		1,352,802			1,109,442
Accrued expenses and other payables		1,937,571			2,287,908
Deferred profit, related party		636,126			751,500
Deferred revenue, related party		2,817,990			1,725,450
Total current liabilities		8,109,980			6,728,159
Deferred gain from financing transaction		-			1,400,000
Total liabilities	$	8,109,980		$	8,128,159
Commitments and Contingencies
Stockholders’ Equity
Series A convertible preferred stock, par value $.001, authorized 5,000,000 shares, and 7,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017	$	7		$	7
Common stock, par value $.001; authorized 50,000,000 shares; 33,660,970 shares issued, 1,912,503 shares to be issued and 33,627,637 shares outstanding as of June 30, 2018; 33,191,571 shares issued, 1,401,247 shares to be issued and 33,158,238 shares outstanding as of December 31, 2017;		35,571			34,593
Additional Paid in Capital		87,832,358			86,689,084
Accumulated deficit		(81,784,998	)		(78,568,284	)
Treasury stock, at cost, 33,333 shares		(911,516	)		(911,516	)
Total Milestone Scientific Inc. stockholders' equity		5,171,422			7,243,884
Noncontrolling interest		148,087			256,744
Total stockholders’ equity		5,319,509			7,500,628
Total liabilities and stockholders’ equity	$	13,429,489		$	15,628,787
See notes to Condensed Consolidated Financial Statements

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	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Product sales, net	$	2,428,498		$	2,523,750		$	4,234,103		$	6,212,738
Cost of products sold		1,021,573			873,586			1,584,250			2,275,871
Gross profit		1,406,925			1,650,164			2,649,853			3,936,867
Selling, general and administrative expenses		2,821,837			3,082,534			5,840,601			5,790,161
Research and development expenses		9,775			120,065			235,592			225,080
Total operating expenses		2,831,612			3,202,599			6,076,193			6,015,241
Loss from operations		(1,424,687	)		(1,552,435	)		(3,426,340	)		(2,078,374	)
Other expenses		(1,756	)		(1,024	)		(3,457	)		(1,763	)
Interest income		1,926			2,154			4,590			2,442
Loss before provision for income taxes and equity in net losses of equity investments		(1,424,517	)		(1,551,305	)		(3,425,207	)		(2,077,695	)
Provision for income taxes		(4,075	)		(4,664	)		(15,538	)		(11,865	)
Loss before equity in net losses of equity investments		(1,428,592	)		(1,555,969	)		(3,440,745	)		(2,089,560	)
Earnings (Loss) on earnings from China Joint Venture		78,591			15,460			115,374			(28,941	)
Net loss		(1,350,001	)		(1,540,509	)		(3,325,371	)		(2,118,501	)
Net loss attributable to noncontrolling interests		6,994			61,684			108,657			134,808
Net loss attributable to Milestone Scientific Inc.	$	(1,343,007	)	$	(1,478,825	)	$	(3,216,714	)	$	(1,983,693	)
Net loss per share applicable to common stockholders—
Basic		(0.04	)		(0.05	)		(0.09	)		(0.06	)
Diluted		(0.04	)		(0.05	)		(0.09	)		(0.06	)
Weighted average shares outstanding and to be issued—		35,297,906			32,399,997			34,939,306			32,122,482
Basic		35,297,906			32,399,997			34,939,306			32,122,482
Diluted
See notes to Condensed Consolidated Financial Statements

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	Preferred Stock Shares			Preferred Stock Amount			Common Stock Shares			Common Stock Amount			Additional Paid in Capital			Accumulated Deficit			Noncontrolling interest			Treasury Stock			Total
Balance, January 1, 2018		7,000		$	7			34,592,818		$	34,593		$	86,689,084		$	(78,568,284	)	$	256,744		$	(911,516	)	$	7,500,628
Stock based compensation		-			-									170,901			-			-			-			170,901
Common stock to be issued to employee for bonuses		-			-			402,383			402			399,098			-			-			-			399,500
Common stock issued for payment of consulting services		-			-			296,046			294			249,455			-			-			-			249,749
Common stock to be issued to employee for compensation		-			-			37,267			37			37,463			-			-			-			37,500
Common stock issued for Asset Acquisition		-			-			244,959			245			286,357			-			-			-			286,602
Net loss		-			-						-			-			(3,216,714	)		(108,657	)		-			(3,325,371	)
Balance as June 30, 2018		7,000		$	7			35,573,473		$	35,571		$	87,832,358		$	(81,784,998	)	$	148,087		$	(911,516	)	$	5,319,509
See notes to Condensed Consolidated Financial Statements

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		Six Months Ended June 30,
		2018				2017
Cash flows from operating activities:
Net loss		$	(3,325,371	)		$	(2,118,501	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense			40,762				31,023
Amortization of patents			469,356				35,364
Stock compensation			170,901				237,858
Equity (income) loss on China joint venture			(115,374	)			28,941
Inventory reserve			290,349				-
Changes in operating assets and liabilities:
Increase in accounts receivable			(304,632	)			(617,347	)
Increase (decrease) in accounts receivable, related party			(1,092,540	)			2,358,200
Decrease in other receivables			-				10,000
Decrease in inventories			778,530				104,348
Increase to in advances on contracts			(164,590	)			(150,604	)
Decrease (increase) in prepaid expenses and other current assets			(48,343	)			(454,562	)
Increase in other assets			-				(9,523	)
Increase (decrease) in accounts payable			511,632				(355,471	)
Increase (decrease) in accounts payable, related party			243,360				(853,620	)
(Decrease) in deferred cost, related party			(686,365	)			438,925
(Decrease) increase in accrued expenses and other payables			623,014				1,007,983
Increase (decrease) in deferred revenue, related party			1,092,540				(645,400	)
Net cash used in operating activities			(1,516,771	)			(952,386	)
Cash flows from investing activities:
Purchase of intangible assets			(4,531	)			(39,199	)
Purchase of property and equipment			-				(3,349	)
Net cash used in investing activities			(4,531	)			(42,548	)
Cash flows from financing activities:
Net proceeds on Private Placement Offering			-				150,836
Proceeds from exercise of stock options			-				62,500
Proceeds (payments) financing transaction			(250,000	)			125,000
Net cash provided by financing activities			(250,000	)			338,336
Net decrease in cash and cash equivalents			(1,771,302	)			(656,598	)
Cash and cash equivalents at beginning of period			2,636,956				3,602,229
Cash and cash equivalents at end of period		$	865,654			$	2,945,631
Supplemental disclosure of cash flow information:
Shares issued to employees for bonuses		$	399,500			$	194,885
Shares issued to consultants in lieu of cash payments		$	249,749			$	422,249
Common stock issued for asset acquisition		$	286,602			$	-
Sale of Milestone China share, financing transaction		$	(1,400,000	)		$	1,400,000
See notes to Condensed Consolidated Financial Statements

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NOTE 1 — ORGANIZATION AND BUSINESS

 

All references in this report to “Milestone Scientific,” “us,” “our,” “we,” the “Company” or “Milestone” refer to Milestone Scientific Inc., and its consolidated subsidiaries, Wand Dental, Inc., Milestone Advanced Cosmetic Devices, Inc., Milestone Medical, Inc. and Milestone Education LLC (all described below), unless the context otherwise indicates. Milestone Scientific is the owner of the following registered U.S. trademarks: CompuDent® CompuMed® CompuFlo® DPS Dynamic Pressure Sensing technology® Milestone Scientific ® the Milestone logo ® SafetyWand® STA Single Tooth Anesthesia Device® and The Wand ®. 

 

Milestone Scientific was incorporated in the State of Delaware in August 1989. Milestone Scientific has developed a proprietary, computer-controlled anesthetic delivery device, using The Wand®, a single use disposable handpiece. The device is marketed in dentistry under the trademark CompuDent®, and STA Single Tooth Anesthesia Device® and in medicine under the trademark CompuMed®. CompuDent® is suitable for all dental procedures that require local anesthetic. CompuMed® is suitable for many medical procedures regularly performed in plastic surgery, hair restoration surgery, podiatry, colorectal surgery, dermatology, orthopedics and many other disciplines. The dental devices are sold in the United States, Canada and in 53 other countries. To date there have been no medical devices sold in the United States and limited amounts sold internationally, as certain medical devices have previously obtained CE mark approval and can be marketed and sold in most European countries. 

 

During 2016, Milestone Scientific filed for 510(k) marketing clearance with the U.S. Food and Drug Administration (FDA) for both intra-articular and epidural injections with the CompuFlo® Computer Controlled Anesthesia System (the “CompuFlo Epidural System”).  In June 2017, the FDA approved the CompuFlo Epidural System for epidural injections.  Milestone Scientific is in the process of introductory meetings with medical device distributors within the United States and foreign markets. Milestone Scientific’s immediate focus is on marketing its epidural device throughout the United States and Europe.

 

In December 2016, we received notification from the FDA that based upon the 510(k)-application submitted for intra- articular injections, we did not adequately document that the device met the equivalency standard required for 510(k) clearances. Following consultation with the FDA Office of Device Evaluation, we filed a new 510(k) application for the device in June 2018. In August 2018, the FDA provided Milestone Scientific with a  list of questions on the intra-articular 510(k) application filed in June 2018. Milestone Scientific is in the process of reviewing and responding to FDA questions.  

 

 

NOTE 2- LIQUIDITY AND UNCERTAINTIES

    

In accordance with Accounting Standard Codification (“ASC”) 205-40, “Presentation of Financial Statements – Going Concern”, the Company has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Milestone Scientific has incurred operating losses and negative cash flows from operating activities in virtually each year since its inception. The capital raised in December 2016 and January 2017 provided Milestone Scientific with working capital to continue to develop its medical devices and obtain regulatory approval for one of its CompuFlo® Epidural Computer Controlled Anesthesia System (the “CompuFlo Epidural System”), as well as to market its dental devices. Milestone Scientific is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue from its dental business worldwide, the generation of revenue from its medical devices and disposables business in the United States and worldwide, and a reduction in operating expenses. 

  

The Company is subject to several risks like those of development stage companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market including the China market (see Note 8), the potential need to obtain additional capital necessary to fund the development of its products, and competition from larger companies and other medical device companies that develop similar or substitute products.

 

 

 

 NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

1. Principles of Consolidation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Milestone Scientific and its wholly owned and majority owned subsidiaries, including, Wand Dental (wholly owned), Milestone Advanced Cosmetic (majority owned) and Milestone Medical (majority owned). Milestone Education is a variable interest entity of which Milestone Scientific is the primary beneficiary and is consolidated into Milestone Scientific's financial statements. All significant, intra-entity transactions and balances have been eliminated in the consolidation.   

  

2.  Basis of Presentation

 

The unaudited condensed consolidated financial statements of Milestone Scientific have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information with the instructions for Form 10Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, included in Milestone Scientific's Annual Report on Form 10-K.

 

3.  Reclassifications

 

Certain reclassifications have been made to the 2017 financial statements to conform to the condensed consolidated 2018 financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

4.  Revenue Recognition

 

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:

 

i.	identification of the promised goods or services in the contract;
ii.	determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;
iii.	measurement of the transaction price, including the constraint on variable consideration;
iv.	allocation of the transaction price to the performance obligations based on estimated selling prices; and
v.	recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606

 

The Company derives its revenues from the sale of its products, primarily dental instruments, handpieces, and other related products. The Company sells its products through a global distribution network and that includes both exclusive and non-exclusive distribution agreements with third parties.

 

Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon date of shipment. For certain arrangements where the shipping terms are FOB destination, revenue is recognized upon delivery. The Company has no obligation on product sales for any installation, set-up or maintenance, these being the responsibility of the buyer. Milestone Scientific's only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period.

  

Sales Returns

 

We generally do not accept non-defective returns from our customers. Product returns under warranty are accepted, evaluated and repaired or replaced in accordance with the Company’s warranty policy. Returns not within the warranty policy are evaluated and the customer is charged for repair.

 

 

 Financing and Payment

 

Our payment terms differ by geography and customer, but payment is generally required within 90 days from the date of shipment or delivery.

 

Disaggregation of Revenue

 

We operate in two operating segments: dental and medical. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. See Note 12 for revenues by geographical market, based on the customer’s location, and product category for the three and six months ended June 30, 2018 and 2017.

 

5.Variable Interest Entities

 

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. 

 

If Milestone Scientific determines that it has operating power and the obligation to absorb losses or receive benefits, Milestone Scientific consolidates the VIE as the primary beneficiary. Milestone Scientific’s involvement constitutes power that is most significant to the entity when it has unconstrained decision-making ability over key operational functions within the entity.        

 

Because Milestone Scientific has an increasing variable interest in Milestone China, it considered the guidance in ASC 810, “Consolidation” as it relates to determining whether Milestone China is a VIE and, if so, identifying the primary beneficiary. As Milestone Scientific’s equity at risk and voting rights were not proportional to their economic interest in Milestone China, Milestone China was determined to be a VIE. Milestone Scientific would be considered the primary beneficiary of the VIE if it has both of the following characteristics:

 

●	Power Criterion: The power to direct the activities that most significantly impact the entity’s economic performance; and
●	Losses/Benefits Criterion: The obligation to absorb losses that could potentially be significant or the right to receive benefits that could potentially be significant to the VIE

 

Milestone Scientific does not have the ability to control the activities that most significantly impact Milestone China's economics and, therefore, the power criterion has not been met. Management placed the most weight on the relationship and significance of activities of Milestone China to the CEO and significant shareholder of Milestone China which has the power to direct the activities that most significantly impact the economic performance of Milestone China. Management has concluded that Milestone Scientific is not the primary beneficiary under ASC 810. Accordingly, Milestone China has not been consolidated into the financial statements of Milestone Scientific and continues to be accounted for under the equity method. See Note 8.

 

6. Cash and Cash Equivalents

 

Milestone Scientific considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

7. Accounts Receivable

 

Milestone Scientific sells a significant amount of its product on credit terms to its major distributors. Milestone Scientific estimates losses from the inability of its customers to make payments on amounts billed. Most credit sales are due within 90 days from invoicing. There have not been any significant credit losses incurred to date. As of  June 30, 2018, and December 31, 2017, accounts receivable was recorded, net of allowance for doubtful accounts of $10,000. See Note 8 for related party receivables with China affiliate.

 

8. Note Receivable

 

Milestone Scientific values note receivable at historic cost less amount paid against principle. Milestone Scientific estimates losses on the note-based payments and credit quality of the debtor. 

 

 

 9. Inventories

 

Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or net realizable value. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess, slow moving, and obsolete inventory is recorded based on past and expected future sales, potential technological obsolescence and product expiration requirements.

 

10. Equity Method Investments

 

Investments in which Milestone Scientific can exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in the noncurrent assets on the Condensed Consolidated Balance Sheets. Under this method of accounting, Milestone Scientific's share of the net earnings or losses of the investee is presented below the income tax line on the Condensed Consolidated Statements of Operations. Milestone Scientific evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.

 

11.  Intangible Assets – Patents and Developed Technology

 

Patents are recorded at cost to prepare and file the applicable documents with the U.S. Patent and Trademark Office, or internationally with the applicable governmental office in the respective country. The costs related to these patents are being amortized using the straight-line method over the estimated useful life of the patent. Patents and other developed technology acquired from another business entity will be amortized at the estimated average useful life of the patent. These patents and developed technology are recorded at the acquisition cost. See Note 9.

 

Patent defense costs, to the extent applicable, are expensed as incurred.  Patent applications filed, and patents obtained in foreign countries are subject to the laws and procedures that differ from those in the United States. Patent protection in foreign countries may be different from patent protection under United States laws and may not be favorable to Milestone Scientific. Milestone Scientific also attempts to protect the proprietary information using confidentiality agreements and by limiting access to its facilities. There can be no assurance that the program of patents, confidentiality agreements and restricted access to the facilities will be sufficient to protect the proprietary technology.                     

12. Impairment of Long-Lived Assets

As of June 30, 2018, Milestone Scientific has reviewed long-lived assets for any impairments. The carrying value of the assets is evaluated in relation to the operating performance and future undiscounted cash flows of the underlying assets when an impairment indicator or triggering event occurs. Milestone Scientific adjusts the net book value of an underlying asset if its fair value is determined to be less than its net book value. There have been no impairment indicators or triggering events and therefore, there were no impairments as of June 30, 2018 and December 31, 2017.

 

13. Research and Development

 

Research and development costs, which consist principally of new product development costs payable to third parties, are expensed as incurred. Advance payments for the research are amortized to expense either as services are performed or over the relevant service period using the straight-line method.

 

14. Income Taxes

 

Milestone Scientific 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 basis 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.

 

 

15. Basic and diluted net loss per common share

 

Milestone Scientific presents “basic” earnings (loss) per common share applicable to common stockholders and, if applicable, “diluted” earnings (loss) per common share applicable to common stockholders pursuant to the provisions of ASC 260, “Earnings per Share”. Basic earnings (loss) per common share is calculated by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding and to be issued during each period. The calculation of diluted earnings per common share is like 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 debt were issued during the period.

 

Since Milestone Scientific had net losses for 2018 and 2017, the assumed effects of the exercise of potentially dilutive outstanding stock options and warrants were not included in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled 3,518,668 and 3,710,335 at June 30, 2018 and December 31, 2017, respectively. 

 

16. Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, inventory valuation, and cash flow assumptions regarding evaluations for impairment of long-lived assets and going concern considerations, and valuation allowances on deferred tax assets. Actual results could differ from those estimates.

 

17. Stock-Based Compensation

 

Milestone Scientific accounts for stock-based compensation under ASC 718, “Compensation – Stock Compensation”. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense over the requisite service period as an operating expense, based on the grant-date fair values.

 

The fair value of the employee and non-employee options was estimated on the date of grant using the Black Scholes option-pricing model. For the three months ended June 30, 2018 and 2017, Milestone Scientific recognized approximately $82,000  and $110,000 of expense related to employee options, respectively. For the six months ended June 30, 2018 and 2017, Milestone Scientific recognized approximately $164,000 of expense and $244,000 of expense related to employee options, respectively. For the three months ended June 30, 2018 and 2017, Milestone Scientific recognized approximately $3,000 and $11,000 of expense related to non-employee options, respectively. For the six months ended June 30, 2018 and 2017, Milestone Scientific recognized approximately $7,000 of expense and $6,000 of income related to non-employee options, respectively.

 

18. Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, except for short-term leases. The Company will adopt this standard on January 1, 2019. We are currently evaluating the impact of adopting this guidance on our consolidated balance sheets, results of operations and financial condition.

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220)”, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act (the “Act”), to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for fiscal years beginning after December 15, 2018 and allows for early adoption. The Company does not anticipate that the adoption of this standard will have a material impact on the Company’s consolidated balance sheet.

 

 

In June 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of Accounting Standards Codification, or ASC, 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50. The guidance is effective for public business entities in annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including in an interim period for which financial statements have not been issued, but not before an entity adopts ASC 606. The Company adopted this standard during the quarter ended June 30, 2018 and there was no material impact on the Company’s condensed consolidated financial statements.

 

 

NOTE 4 — NOTES RECEIVABLE, RELATED PARTY

 

In June 2017, Milestone Scientific entered into an agreement for the sale of its forty percent (40%) interest in Milestone China (the “Milestone China Shares”) to an unaffiliated United States domiciled purchaser and a 10-year option agreement to repurchase the Milestone China Shares. The purchase price for the Milestone China Shares was $1,400,000 of which $125,000 was paid in cash and $1,275,000 was paid by delivery of a non-interest bearing secured promissory note. The note was payable in quarterly installments of $125,000 and was secured by the Milestone China Shares until full repayment.  In addition, the purchaser was precluded from selling all or substantially all its assets prior to repayment of the note. The 10-year option agreement provides Milestone Scientific an option to repurchase the Milestone China Shares at $1,400,000 within the first two years and at fair market value (as defined in such agreement) for the remainder of the 10-year term.

 

The transaction was accounted for as a secured financing and Milestone Scientific continued to account for its relationship with Milestone China under the equity method of accounting. A note receivable was presented on the Company’s condensed consolidated balance sheet along with a deferred gain from financing transaction of $1,400,000. The carrying value of the forty (40%) percent investment in Milestone China at the transaction date was zero.

 

As of March 2, 2018, the promissory note was in default. In April 2018, Milestone Scientific entered into a Release, Assignment and Termination Agreement (the “Termination Agreement”) with the issuer of the promissory note, pursuant to which, Milestone Scientific repaid the $250,000 payment made by the issuer and the issuer returned the  shares of Milestone China’s common stock to Milestone Scientific and cancelled the promissory note. Because of the Termination Agreement and related repayment made by Milestone Scientific, the Company derecognized the outstanding note receivable balance of $1,150,000 and the related deferred gain from financing transaction of $1,400,000 during the three months ended June 30, 2018. No gain or loss was recognized on the transaction.

 

NOTE 5 — INVENTORIES

 

Inventories at June 30, 2018 and December 31, 2017 consist of the following:

 

 

As of June 30, 2018, and December 31, 2017, inventory was recorded net of allowance for slow moving inventory of approximately $510,000 and $220,000, respectively.  

 

 

NOTE 6 — ADVANCES ON CONTRACTS

 

The advances on contracts represent funding of future STA inventory purchases and Epidural replacements parts. The balance of the advances as of June 30, 2018 and December 31, 2017 was $861,782 and $697,192 respectively. The advance is classified as current based on the estimated annual usage of the underlying inventory.     

 

 

 NOTE 7 – CONSOLIDATION OF VARIABLE INTEREST ENTITY

 

Milestone Education is a 50% owned subsidiary of Milestone Scientific which began operations in 2013 to provide training and education to dentists throughout the world. As of June 30, 2018, and 2017, approximately 73% and 81%, respectively, of the

 

revenue earned by Milestone Education is from services performed for Milestone Scientific. Because of this dependency and relationship, we determined that Milestone Scientific had the power to direct the activities that most significantly impact Milestone Education's economic performance, and therefore Milestone Education is consolidated in our financial statements.   

 

 

NOTE 8 – INVESTMENT IN UNCONSOLIDATED AFFILIATE

  

Milestone China Ltd.           

 

In June 2014, Milestone Scientific invested $1 million in Milestone China Ltd. (“Milestone China”) by contributing 772 STA Instruments to Milestone China for a 40% ownership interest. Milestone Scientific recorded this investment under the equity method of accounting. As of June 30, 2018, and December 31, 2017, Milestone Scientific's investment in Milestone China was $0. As of June 30, 2018, and December 31, 2017, Milestone Scientific’s share of cumulative losses of Milestone China were $3,701,498 and $3,147,470, respectively, which have been suspended.

 

Due to timing differences of when the inventory sold to Milestone China is recognized and when Milestone China sells the acquired inventory to third parties, an elimination of the intra-entity profit is required as of the balance sheet date. In accordance with ASC 323, “Investments – Equity Method and Joint Ventures”, Milestone Scientific has deferred 40% of the gross profit associated with recognized revenue from Milestone China that has not been sold to third parties by Milestone China. At June 30, 2018 and December 31, 2017, deferred profit was $636,126 and $751,500, respectively, which is included in deferred profit, related party in the condensed consolidated balance sheets. Milestone Scientific recorded earnings and loss on its investment in Milestone China of $78,591 and $115,374, for the three and six months ended June 30, 2018, respectively, and $15,460 and ($28,941) for the three and six months ended June 30, 2017, respectively, inclusive of the intra-entity deferral of profit.

 

Milestone Scientific defers the total revenue and costs of goods sold when devices and handpieces are shipped to Milestone China and Milestone China’s agents due to market conditions and Milestone China liquidity concerns, until a payment is received. As of June 30, 2018, Milestone Scientific had deferred revenues and deferred costs associated with sales to Milestone China and its agents was approximately $2.8 million and $1.8 million. As of December 31, 2017, Milestone Scientific had deferred revenues and deferred costs associated with sales to Milestone China and its agents was approximately $1.7 million and $1.1 million, respectively. Milestone Scientific recognized no related party revenue from Milestone China and it’s agents for three and six months ended June 30, 2018.  Milestone Scientific recognized $356,400 and $1.7 million of related party revenue for the three and six months ended June 30, 2017. See Note 14 for  related party transactions.

 

The following table includes summarized financial information (unaudited) of Milestone China:

   

 

 

 

 

 NOTE 9 — PATENTS

 

Patents at June 30, 2018 and December 31, 2017 are comprised of the following:

 

 

Patents are amortized utilizing the straight-line method over estimated useful lives ranging from 3 to 20 years.

 

Amortization expense was $231,990 and $17,682 for the three months ended June 30, 2018 and 2017, respectively. Amortization expense was $469,356 and $35,364 for the six months ended June 30, 2018 and 2017, respectively. The annual amortization expense expected to be recorded for existing intangibles assets for the next five years from the balance sheet date of June 30, 2018 are approximately: $920,000, $919,000, $39,000, $39,000 and $29,000, respectively.

 

 

NOTE 10 — STOCKHOLDERS’ EQUITY

 

Shares to be Issued 

 

As of June 30, 2018, and December 31, 2017, there were 1,912,503 and 1,401,247 shares of common stock, respectively, whose issuance has been deferred under the terms of an employment agreements with the Chief Executive Officer, Chief Financial Officer and other employees of Milestone Scientific. Such shares will be issued to each such person upon termination of their employment. The number of shares was fixed at the date of grant and were fully vested upon grant date.

  

Shares Reserved for Future Issuance

 

As of June 30, 2018, and December 31, 2017 there were 5,431,171 and 5,111,582 shares reserved for future issuance and 3,518,668, and 3,710,335 shares underlying other stock options and warrants outstanding, respectively. At June 30, 2018 and December 31, 2017, there were 1,912,503 shares and 1,401,247 shares, respectively, reserved for issuance in settlement of deferred compensation to officers of Milestone Scientific.

 

 

NOTE 11 — INCOME TAXES

 

The utilization of Milestone Scientific'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 carry forwards before their utilization. Milestone Scientific has established a 100% valuation allowance for all its deferred tax assets due to uncertainty as to their future realization.  

Accounting for uncertainties in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. At June 30, 2018, and December 31, 2017, we had no uncertain tax positions that required recognition in the consolidated financial statements Tax returns for the 2014, 2015, 2016 and 2017 years are subject to audit by federal and state jurisdictions.

 

 

NOTE 12 — SEGMENT AND GEOGRAPHIC DATA

 

We conduct our business through two reportable segments dental and medical.  These segments offer different products to different customer base.

 

The following tables present information about our reportable and operating segments:

 

 

 

The following table presents information about our operations by geographic area as June 30, 2018 and 2017.  Net sales by geographic area are based on the respective locations of our subsidiaries

  

 

 

NOTE 13 -- CONCENTRATION

 

Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent® and CompuMed® devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. Consequently, advances on contracts have been classified as current at June 30, 2018 and December 31, 2017, respectively.  The termination of the manufacturing relationship with any of these manufacturers could have a material adverse effect on Milestone Scientific’s ability to produce and sell its products. Although alternate sources of supply exist, and new manufacturing relationships could be established, Milestone Scientific 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 because of termination of such a relationship, would have a material adverse effect on Milestone Scientific’s financial condition, business and results of operations.

             

For the three months ended June 30, 2018, an aggregate of approximately 44% of Milestone Scientific's net product sales were to one customer/distributor. For the six months ended June 30, 2018, an aggregate of approximately 43% of Milestone Scientific's net product sales were to one customer/distributor. For the three months ended June 30, 2017, an aggregate of approximately 69% of Milestone Scientific's net product sales were to two customer/distributors (one of which, Milestone China, is a related party), 55%, and 14%, respectively. For the six months ended June 30, 2017, an aggregate of approximately 75% of Milestone Scientific's net product sales were to two customer/distributors (one of which, Milestone China, is a related party), 53%, and 22%, respectively.

 

Accounts receivable for the major customer/distributors, (one of which, Milestone China, is a related party), amounted to an aggregate of approximately $3,926,759, or 84% of Milestone Scientific's accounts receivable as of June 30, 2018. Accounts receivable, including related party accounts receivable, for the major customer/distributors(one of which, Milestone China, is a related party), amounted to an aggregate of approximately $2,555,476, or 78% of Milestone Scientific's accounts receivable, as of December 31, 2017.

 

 

NOTE 14 -- RELATED PARTY TRANSACTIONS

        

United Systems

 

Milestone Scientific has a manufacturing agreement with United Systems (whose controlling shareholder, Tom Cheng, is a significant stockholder of Milestone Scientific), the principal manufacturers of its handpieces, pursuant to which it manufactures products under specific purchase orders, but without minimum purchase commitments. Purchases from this manufacturer were $222,408 and $573,688 for the three and six months ended June 30, 2018, respectively. Purchases from this manufacturer were $584,792 and $1,037,144 for the three and six months ended June 30, 2017, respectively.  As of June 30, 2018, and December 31, 2017, Milestone Scientific owed this manufacturer $1,096,861 and $985,678, respectively, which is included in accounts payable, related party on the condensed consolidated balance sheet.

 

During the three months ended June 30, 2018 Milestone Scientific through its wholly owned subsidiary, Wand Dental, entered into an agreement with United Systems, a related party. The agreement was a Royalty Agreement for handpieces sold to Milestone China by United Systems. United Systems will pay Wand Dental a royalty equal to the net profit that Wand Dental would have received if the handpieces were sold directly to Milestone China or its Agent. As of June 30, 2018, Wand Dental has deferred royalty income of $342,540 which will be recognized at the earlier of when payment of the royalties is received from United Systems or when collectability is deemed to be assured. As of June 30, 2018, $342,540 related to this transaction is included in accounts receivable, related party and deferred revenue, related party from Milestone China disclosed below.

 

A second agreement represents a Distribution agreement between Wand Dental and United Systems.  United Systems purchased 1000 STA instruments in June 2018, for delivery to Milestone China. Due to the related party nature and collectability concerns Wand Dental has deferred the sale. Milestone Scientific had approximately $750,000 of related party sales of devices to Milestone China  under the agreement with United Systems for three and six months ended June 30, 2018. As of June 30, 2018 Milestone, Scientific recorded accounts receivable, related party and deferred revenue, related party of $750,000 and deferred cost, related of  $686,365, respectively. The deferred revenue, accounts receivable and deferred cost from this transaction are included in accounts receivable, deferred revenue and deferred cost related to Milestone China disclosed below.

 

Milestone China

 

As of March 2, 2018, the promissory note (See note 4) was in default. In April 2018, Milestone Scientific entered into a Release, Assignment and Termination Agreement (the “Termination Agreement”) with the issuer of the promissory note, pursuant to which, Milestone Scientific repaid the $250,000 payment made by the issuer and the issuer returned the  shares of Milestone China’s common stock to Milestone Scientific and cancelled the promissory note.

 

Milestone Scientific defers the total revenue and costs of goods sold when instruments and handpieces are shipped to Milestone China and Milestone China’s agents due to market conditions, and Milestone China liquidity concerns until a payment is received. As of  June 30, 2018, Milestone Scientific had accounts receivable and deferred revenues of $2.8 million and deferred costs of $1.8 million associated with sales to Milestone China and its agents. As of December 31, 2017,  Milestone Scientific had deferred revenues and accounts receivable  of approximately $1.7 million and deferred costs of approximately $1.1 million associated with sales to Milestone China and its agents. Milestone Scientific recognized no related party revenue from Milestone China and it’s agents for three and six months ended June 30, 2018.  Milestone Scientific recognized $356,400 and $1.7 million of related party revenue for the three and six months ended June 30, 2017.

 

 Other

 

In August 2016, K. Tucker Andersen, a significant stockholder of Milestone Scientific, entered into a three-year agreement with Milestone Scientific to provide financial and business strategic services. Expenses recognized on this agreement were $25,000 and $50,000 for the three and six months ended June 30, 2018 and 2017, respectively.

 

In January 2017, Milestone Scientific entered into a twelve-month agreement with Innovest S.p.A. to provide consulting services. This agreement will renew for successive twelve-month terms unless terminated by Innovest S.p.A or Milestone Scientific. Expenses recognized on this agreement were $20,000 and $40,000 for the three and six months ended June 30, 2018 and 2017, respectively.

 

 

 

NOTE 15 — COMMITMENTS 

 

(1)  Contract Manufacturing Agreement

 

Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent® and CompuMed® devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. In January 2017, Milestone Scientific entered into a purchase commitment for the delivery of 2,000 instruments beginning in the 4th quarter of 2017. At June 30, 2018, Milestone Scientific’s purchase commitment for this purchase order was $28,147. In January 2018, Wand Dental entered into a new purchase commitment for the delivery of 2,000 devices beginning in the third quarter of 2018, Milestone Scientific’s purchase commitment for this purchase order was $1,397,440. An advance of  $861,782 and $697,192 was recorded at June 30, 2018 and December 31, 2017, respectively.  

 

(2)  Other Commitments

 

In February 2018, Milestone Scientific and Daniel Goldberger, the Company’s former President and Chief Executive Officer, who resigned effective October 2, 2017, signed a Settlement and Release Agreement with respect to Mr. Goldberger’s leaving the Company. The gross settlement was $175,000, $113,889 was paid through June 2018. The remainder of the settlement will be paid over the next five-month period ending in November 2018. 

 

The technology underlying the Safety Wand® and CompuFlo®, and an improvement to the controls for CompuDent® were developed by the Director of Clinical Affairs and assigned to Milestone Scientific. Milestone Scientific purchased this technology pursuant to an agreement dated January 1, 2005. The Director of Clinical Affairs will receive additional payments of 2.5% of the total sales of products using certain of these technologies, and 5% of the total sales of products using certain other of the technologies until the expiration of the last patent covering these technologies. The Director of Clinical Affairs was granted, pursuant to the agreement, an option to purchase, at fair market value on the date of the grant, 8,333 shares of common stock upon the issuance of each additional patent relating to these technologies. If products produced by third parties use any of these technologies (under license from us) then the Director of Clinical Affairs will receive the corresponding percentage of the consideration received by Milestone Scientific for such sale or license. 

 

The Director of Clinical Affairs’ royalty fee was $116,956 and $202,481 for three and six months ended June 30, 2018, respectively. The Director of Clinical Affairs’ royalty fee was $123,764 and $305,672 for three and six months ended June 30, 2017, respectively. Additionally, Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $39,000 and $107,751 for three and six months ended June 30, 2018, respectively, and $68,751 and $137,502 for three and six months ended June 30, 2017, respectively. As of June 30, 2018, and December 31, 2017 Milestone Scientific owes the Director Clinical Affairs for royalties of approximately $255,000 and $123,000, respectively which is included in accounts payable, related party.

 

In January 2017, Milestone Scientific entered into a twelve-month agreement with Innovest S.p.A. to provide consulting services. This agreement will renew for successive twelve-month terms unless terminated by Innovest S.p.A or Milestone Scientific. Expenses recognized on this agreement were $20,000 and $40,000 for the three and six months ended June 30, 2018 and 2017, respectively.

   

In May 2018, the Company entered a twelve-month Consulting Agreement to provide corporate finance advice, assisting the Company to establish corporate financing goals, and creating public awareness in European markets. The Company shall grant to the Consultant, upon fulfillment of the Condition Precedent (as set forth below), an option to buy from the Company 500,000 shares of newly issued common stock at the price of $1.00; such option being exercisable any time up to the first anniversary year of the Consulting Agreement.

 

The Condition Precedent is the purchase by the Consultant of at least 400,000 shares of the Company’s common stock from the secondary market within 30 days of signing the Consulting Agreement. If the Consultant purchases up to additional 400,000 shares of the Company’s common stock in the secondary market in the period between 30 to 60 days from the date of the Consulting Agreement, the option will increase up to an additional 500,000 shares of newly issued common stock at a price of $1.00 per share, the proportion shall be on a 4 to 5 ratio (e.g., 400,000 shares purchased equals 500,000 shares option). This Consulting Agreement was terminated in July 2018, on basis that the consultant did not fulfill the condition precedent.

 

 

 

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Our condensed consolidated balance sheets included in this Quarterly Report reflect a decrease of approximately $1 million in current assets from December 31, 2017 to June 30, 2018. This decrease in current assets was primarily due to a reduction in cash, notes receivable, and inventory of approximately $3.3 million. This was offset by increases in accounts receivable and advances on contracts of an aggregate of approximately $2.2 million.

 

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