MILESTONE SCIENTIFIC INC. - Quarter Report: 2020 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarter ended September 30, 2020

 

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

For the transition period from                      to

 

Commission file number 001-14053 

Milestone Scientific Inc.

(Exact name of registrant as specified in its charter)  

Delaware	13-3545623
State or other jurisdiction of Incorporation or organization	(I.R.S. Employer Identification No.)

 

425 Eagle Rock Avenue Suite 403, Roseland, NJ 07068

(Address of principal executive offices)

Registrant’s telephone number, including area code: 973-535-2717

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Name of each exchange on which registered
Common Stock, par value $.001 per share	NYSE American

 

Securities registered pursuant to section 12(g) of the Act:                    NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☑ Yes    ☐   No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☑ Yes   ☐ No

 

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

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑
Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of Exchange on which registered
Common Stock	MLSS	NYSE American

 

As of  November 16, 2020, the registrant has a total of 63,693,469 shares of Common Stock, $0.001 par value outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None  

 

 

 

MILESTONE SCIENTIFIC INC.

Form 10-Q 

TABLE OF CONTENTS

 

	PART I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Balance Sheets as of September 30, 2020  and December 31, 2019	4
	Statements of Operations for the three and nine months ended September 30, 2020 and 2019	5
	Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	6
	Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37

 

 

 

		September 30, 2020				December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	14,448,903			$	1,516,272
Accounts receivable, net			962,983				1,710,665
Prepaid expenses and other current assets			527,059				519,063
Inventories, net			2,229,760				1,620,509
Advances on contracts			723,084				710,662
Total current assets			18,891,789				6,077,171
Furniture, fixtures and equipment, net			31,311				44,976
Patents, net			342,501				382,260
Right of use assets			655,870				15,977
Other assets			24,150				35,905
Total assets		$	19,945,621			$	6,556,289
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	666,094				1,379,425
Accounts payable, related party			393,090				1,358,752
Accrued expenses and other payables			1,147,698				775,055
Accrued expenses, related party			593,625				1,057,958
Current portion of finance leases			7,903				3,904
Current operating lease right-of-use liabilities			68,934				12,072
Note payable			276,180				-
Deferred profit, related party			340,476				340,476
Total current liabilities			3,494,000				4,927,642
Finance lease liabilities, non-current			30,624				-
Operating lease right-of-use liabilities			576,407				-
Total liabilities		$	4,101,031			$	4,927,642
Commitments and contingencies
Stockholders’ equity
Common stock, par value $.001; authorized 75,000,000 shares; 63,605,119 shares issued and 63,571,786 shares outstanding as of September 30, 2020; 49,410,176 shares issued and 49,376,843 shares outstanding as of December 31, 2019;			63,605				49,410
Additional paid in capital			116,577,241				96,082,324
Accumulated deficit			(99,806,352	)			(93,524,297	)
Treasury stock, at cost, 33,333 shares			(911,516	)			(911,516	)
Total Milestone Scientific Inc. stockholders' equity			15,922,978				1,695,921
Noncontrolling interest			(78,388	)			(67,274	)
Total stockholders’ equity			15,844,590				1,628,647
Total liabilities and stockholders’ equity		$	19,945,621			$	6,556,289

 

		For the three months ended September 30, 2020				For the three months ended September 30, 2019				For the Nine months ended September 30, 2020				For the Nine months ended September 30, 2019
Product sales, net		$	1,246,110			$	1,899,821			$	3,225,170			$	6,073,580
Cost of products sold			409,621				523,672				1,024,947				1,894,550
Gross profit			836,489				1,376,149				2,200,223				4,179,030
Selling, general and administrative expenses			2,291,779				2,314,943				8,221,359				6,941,964
Research and development expenses			21,438				7,940				237,089				109,815
Total operating expenses			2,313,217				2,322,883				8,458,448				7,051,779
Loss from operations			(1,476,728	)			(946,734	)			(6,258,225	)			(2,872,749	)
Interest expense			(569	)			(2,449	)			(8,727	)			(6,067	)
Change in fair value of derivative liability			-				(1,899,484	)			-				(1,846,761	)
Loss before provision for income taxes and net of equity investments			(1,477,297	)			(2,848,667	)			(6,266,952	)			(4,725,577	)
Provision for income taxes			(24,717	)			(1,250	)			(26,217	)			(19,877	)
Loss before equity in net earnings (losses) of equity investments			(1,502,014	)			(2,849,917	)			(6,293,169	)			(4,745,454	)
Earnings from China Joint Venture			-				-				-				49,099
Net loss			(1,502,014	)			(2,849,917	)			(6,293,169	)			(4,696,355	)
Net loss attributable to noncontrolling interests			11,025				12,941				35,501				35,343
Net loss attributable to Milestone Scientific Inc.		$	(1,490,989	)		$	(2,836,976	)		$	(6,257,668	)		$	(4,661,012	)
Net loss per share applicable to common stockholders—
Basic			(0.02	)			(0.06	)			(0.11	)			(0.11	)
Diluted			(0.02	)			(0.06	)			(0.11	)			(0.11	)
Weighted average shares outstanding and to be issued—
Basic			65,817,132				47,721,732				56,478,151				43,311,984
Diluted			65,817,132				47,721,732				56,478,151				43,311,984

 

		Preferred Stock Shares				Preferred Stock				Common Stock Share				Common Stock Amount				Additional Paid in Capital				Accumulated Deficit				Noncontrolling Interest				Treasury Stock				Total
Balance, January 1, 2020			-				-				49,410,176			$	49,410			$	96,082,324			$	(93,524,297	)		$	(67,274	)		$	(911,516	)		$	1,628,647
Stock based compensation			-				-				-				-				30,715				-				-				-				30,715
Common stock issued to employee for compensation			-				-				22,633				23				14,989				-				-				-				15,012
Common stock to be issued for payment of consulting services			-				-				-				-				25,000				-				-				-				25,000
Common stock to be issued to employees for bonuses			-				-				-				-				171,046				-				-				-				171,046
Common stock issued for warrants			-				-				460,725				460				229,902				-				-				-				230,362
Net loss			-				-				-				-								(1,600,215	)			(12,738	)			-				(1,612,953	)
Balance, March 31, 2020			-				-				49,893,534			$	49,893			$	96,553,976			$	(95,124,512	)		$	(80,012	)		$	(911,516	)		$	487,829
Stock based compensation			-				-				-				-				23,946				-				-				-				23,946
Common stock issued to employee for compensation			-				-				11,450				11				14,989				-				-				-				15,000
Common stock issued for payment of consulting services			-				-				278,581				279				381,520				-				-				-				381,799
Common stock issued to board of directors for services			-				-				39,233				39				53,967				-				-				-				54,006
Common stock issued to employees for bonuses			-				-				202,617				203				(203	)			-				-				-				-
Common stock to be issued to employees for bonuses			-				-												462,504				-				-				-				462,504
Common stock issued in public offering April 6,2020			-				-				5,420,000				5,420				4,621,022				-				-				-				4,626,442
Common stock issued in public offering-June 30, 2020			-				-				6,770,000				6,770				13,410,074				-				-				-				13,416,844
Acquired controlling interest in Milestone Advanced Cosmetic Systems			-				-																(24,387	)			24,387				-				-
Common stock issued for warrants			-				-				620,750				621				718,029				-				-				-				718,650
Net loss			-																				(3,166,464	)			(11,738	)			-				(3,178,202	)
Balance, June 30, 2020			-				-				63,236,165			$	63,236			$	116,239,824			$	(98,315,363	)		$	(67,363	)		$	(911,516	)		$	17,008,818
Stock based compensation			-				-												18,392				-				-				-				18,392
Common stock issued to employee for compensation			-				-				7,692				8				14,992				-				-				-				15,000
Common stock issued for payment of consulting services			-				-				112,140				113				227,928				-				-				-				228,041
Common stock issued to board of directors for services			-				-				16,350				16				29,984				-				-				-				30,000
Common stock issued to employees for bonuses			-				-				180,272				180				9,422				-				-				-				9,602
Common stock issued for warrants			-				-				52,500				52				36,699				-				-				-				36,751
Net loss			-																				(1,490,989	)			(11,025	)			-				(1,502,014	)
Balance, September 30, 2020			-				-				63,605,119			$	63,605			$	116,577,241			$	(99,806,352	)		$	(78,388	)		$	(911,516	)		$	15,844,590

		Preferred Stock Shares				Preferred Stock				Common Stock Share				Common Stock Amount				Additional Paid in Capital				Accumulated Deficit				Noncontrolling Interest				Treasury Stock				Total
Balance, January 1, 2019			7,000			$	7				36,329,600			$	36,330			$	88,414,718			$	(85,999,929	)		$	(11,402	)		$	(911,516	)		$	1,528,208
Stock based compensation			-				-				-				-				56,988				-				-				-				56,988
Common stock to be issued to employees for bonuses			-				-				175,715				175				61,325				-				-				-				61,500
Common stock to be issued for payment of consulting services			-				-				118,115				118				39,882				-				-				-				40,000
Common stock to be issued to employee for compensation			-				-				22,727				23				7,477				-				-				-				7,500
Common stock to be issued to board of directors for services rendered			-				-				20,588				21				6,979				-				-				-				7,000
Common stock issued in public offering			-				-				6,282,400				6,281				1,968,265				-				-				-				1,974,546
Common stock issued in private offering			-				-				714,286				714				249,286				-				-				-				250,000
Reclassification of warrants and Shares to be issued to derivative liability (Note 9)			-				-				-				-				(406,045	)			-				-				-				(406,045	)
Net loss			-				-				-				-				-				(782,752	)			(10,443	)			-				(793,195	)
Balance, March 31, 2019			7,000			$	7				43,663,431			$	43,662			$	90,398,875			$	(86,782,681	)		$	(21,845	)		$	(911,516	)		$	2,726,502
Stock based compensation			-				-				-				-				44,712				-				-				-				44,712
Common stock issued for payment of consulting services			-				-				265,140				265				139,735				-				-				-				140,000
Common stock to be issued to employee for compensation			-				-				41,667				42				14,958				-				-				-				15,000
Common stock to be issued to board of directors for services rendered			-				-				82,442				82				29,918				-				-				-				30,000
Conversion of Preferred Shares to Common Stock (Mandatory)			(7,000	)			(7	)			5,982,906				5,983				(5,976	)			-				-				-				-
Reclassification of warrants and Shares to be issued to derivative liability (Note 9)			-				-				(2,903,366	)			(2,902	)			(1,062,637	)			-				-				-				(1,065,539	)
Net loss			-				-				-				-				-				(1,041,284	)			(11,959	)			-				(1,053,243	)
Balance, June 30, 2019			-			$	-				47,132,220			$	47,132			$	89,559,585			$	(87,823,965	)		$	(33,804	)		$	(911,516	)		$	837,432
Stock based compensation			-				-				-				-				45,147				-				-				-				45,147
Common stock to issued for payment of consulting services			-				-				316,824				317				122,683				-				-				-				123,000
Common stock to issued for payment of consulting services			-				-				202,325				202				113,298				-				-				-				113,500
Common stock to be issued to employees for bonuses			-				-				170,454				170				149,830				-				-				-				150,000
Common stock to be issued to employee for compensation			-				-				18,072				18				14,982				-				-				-				15,000
Common stock to be issued to board of directors for services rendered			-				-				44,408				44				29,956				-				-				-				30,000
Common stock issued for warrants exercised			-				-				57,750				58				28,817				-				-				-				28,875
Shares issued previously classified as derivative liability (Note 9)			-				-				692,281				693				410,026				-				-				-				410,719
Reclassification of warrants and Shares to be issued to derivative liability (Note 9)			-				-				(435,260	)			(435	)			(308,065	)			-				-				-				(308,500	)
Net loss			-				-				-				-				-				(2,836,976	)			(12,941	)			-				(2,849,917	)
Balance, September 30, 2019			-				-				48,199,074			$	48,199			$	90,166,259			$	(90,660,941	)		$	(46,745	)		$	(911,516	)		$	(1,404,744	)

 

		For the Nine months ended September 30, 2020				For the Nine months ended September 30, 2019
Cash flows from operating activities:
Net loss		$	(6,293,169	)		$	(4,696,355	)
Adjustments to reconcile net loss to net cash used in operating activities:			-
Depreciation expense			35,103				37,159
Amortization of patents			39,759				39,760
Stock compensation			76,611				146,847
Employees paid in stock			768,463				315,425
Expense paid in stock			644,865				292,915
Non-cash operating lease expense			30,175				-
Earnings on China joint venture			-				(49,100	)
Change in fair value of derivative liability			-				1,846,761
Changes in operating assets and liabilities:
Decrease in accounts receivable			747,682				739,195
Decrease in accounts receivable, related party			-				100,000
Decrease in other assets			11,755				(9,027	)
(Increase) decrease in inventories			(609,251	)			303,989
(Increase) decrease in advances on contracts			(12,422	)			20,289
Decrease (Increase) in prepaid expenses and other current assets			(7,996	)			(90,362	)
(Decrease) in accounts payable			(713,331	)			(465,670	)
(Decrease) in accounts payable, related party			(965,662	)			(109,989	)
Decrease in deferred cost, related party			-				50,000
Increase (decrease) in accrued expenses			431,917				(50,428	)
(Decrease) increase in accrued expenses, related party			(530,659	)			402,905
(Decrease) in deferred revenue, related party			-				(100,000	)
Net cash used in operating activities			(6,346,160	)			(1,275,686	)
Cash flows from investing activities:
Purchase of property and equipment			(21,438	)			(9,916	)
Net cash used in investing activities		$	(21,438	)		$	(9,916	)
Cash flows from financing activities:
Proceeds from exercise of warrants			985,763				28,875
Payments finance lease obligations			(4,998	)			-
Net proceeds from note payable			276,180				-
Net proceeds from Public Placement Offering			18,043,284				1,974,547
Net proceeds from Private Placement Offering			-				250,000
Net cash provided by financing activities		$	19,300,229			$	2,253,422
Net increase in cash and cash equivalents			12,932,631				967,820
Cash and cash equivalents at beginning of period			1,516,272				743,429
Cash and cash equivalents at end of period		$	14,448,903			$	1,711,249
Supplemental non-cash disclosure of cash flow information:
Shares issued to board of directors			-				67,000
Shares issued to employees for compensation			-				37,500
Shares issued to consultants in lieu of cash payments			-				416,500
Shares issued to employee for bonuses			-				211,500
Credit from United Systems for defective handpieces							(151,562	)
Initial recognition of operating lease-right of use assets			(706,071	)			(166,292	)
Initial recognition of operating lease right to used liabilities			706,071				166,292

 

NOTE 1 — ORGANIZATION AND BUSINESS

 

All references in this report to “Milestone Scientific, Inc.,” “us,” “our,” “we,” the “Company “or “Milestone” refer to Milestone Scientific Inc., and its consolidated subsidiaries, Wand Dental, Inc., Milestone Advanced Cosmetic Inc. and Milestone Medical Inc. and affiliate, Milestone Education LLC, 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® CathCheck™, the Milestone logo® Safety Wand® STA Single Tooth Anesthesia System® and The Wand®. 

 

Milestone Scientific was incorporated in the State of Delaware in August 1989. Milestone Scientific is a medical technology research and development company that patents, designs, develops and commercializes innovative diagnostic and therapeutic injection technologies and devices for medical, dental, cosmetic, and veterinary applications. Since our inception, we have engaged in pioneering proprietary, innovative, computer-controlled injection technologies, and solutions for the medical and dental markets. Milestone Scientific has developed a proprietary, computer-controlled anesthetic delivery device, using The Wand®, a single use disposable handpiece. The device is marketed in the dental market under the trademark CompuDent®, and STA Single Tooth Anesthesia System® and in the medical market under the trademark CompuMed®. CompuDent® is suitable, for all dental procedures that require local anesthetic. CompuMed® is suitable upon regulatory approval, as required, 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 60 other 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.  In June 2017, the FDA approved the CompuFlo® Epidural Computer Controlled Anesthesia System for epidural injections. Milestone Scientific is in the process of meeting 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. To date there have been eleven medical devices sold in the United States and limited amounts sold internationally, although certain medical devices have obtained CE mark approval and can be marketed and sold in most European countries.

 

In December 2016, the Company 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. The Company provided an additional data submission to the FDA in April 2017, in support of a resubmission 510(k) application for the device. The 510(k) original application filed with FDA lapsed in January 2019. Following consultation with the FDA Office of Device Evaluation, we intended to file a new 510(k) application for the device during 2020. As of September  30, 2020, the Company has suspended the pursuit of an intra-articular 510(k) application due to the COVID-19 Pandemic. The company will revisit this project in 2021.

 

On April 21, 2020, Milestone Scientific announced that it had validated and integrated the new CathCheck™ feature into the CompuFlo® Epidural System. Using CathCheck™, physicians and nurses can monitor the placement of a catheter to determine the presence or absence of a pulsatile waveform (heartbeat) providing new information that can be used to determine if the catheter is in place or has become dislodged from the epidural space.

 

On October 13, 2020, Milestone Medical announced a Group Purchasing Agreement with Premier, a leading healthcare improvement company, utilizing an alliance of approximately 4,100 U.S. hospitals and 200,000 other providers to transform healthcare. The Agreement, which was effective November 1, 2020, allows Premier members, at their discretion, to utilize  pricing and terms pre-negotiated by Premier for the CompuFlo® Epidural System and CathCheck™. The Agreement expires on February 28, 2022.

 

NOTE 2-  LIQUIDITY  AND UNCERTAINTIES      

 

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.

In the second quarter of 2020 the Company completed two capital raises. In April and June of 2020, the Company completed Common Stock Offerings generating net proceeds of approximately $4.6 million and $13.4 million, respectively (see Note 9). As of September 30, 2020, cash on hand was approximately $14.4 million, an increase of $13 million from December 31, 2019. With the combination of these two Common Stock Offerings, the Company has sufficient liquidity to support operations beyond a year after the condensed consolidated financial statements issue date.

 

The coronavirus (COVID-19) that was reported to have surfaced in Wuhan, China in December 2019 and that has now spread to other countries throughout the world has  adversely impact our operations and those of our third-party partners.  As a result of the reduced hours and closings of dental offices throughout the country and the rest of the world due to the continuing spread of COVID-19, revenues for the three and the nine months ended September 30, 2020 was adversely affected.

 

Although there has been  a slow pick up in dental instrument and disposable sell  through to dentists beginning in the third quarter, it is  too early to determine  what  the continuing effect COVID-19 may have on our fourth quarter revenue. In addition, it is uncertain as to  what the effect will be on the anticipated commercialization of our CompuFlo Epidural and CathCheck system as a medical device . The extent to which the coronavirus impacts our operations,  our third-party partners, the dental offices and hospital operations and demand  depends on future developments which are still highly uncertain. Such future developments could have a material adverse effect on our financial results and our ability to conduct business as expected.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

1.  Principles of Consolidation

 

The unaudited 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), Milestone Education (wholly owned) and Milestone Medical (majority owned). All significant, intra-entity transactions and balances have been eliminated in 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 10-Q and Article 8 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, 2019, included in Milestone Scientific's Annual Report on Form 10-K.  

 

3.  Reclassifications

 

Certain reclassification has been made to the 2019 financial statements to conform to the unaudited condensed consolidated 2020 financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

4.  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.

 

5.  Revenue Recognition

 

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 customer arrangements 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 related and 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 transfer of control, except for specific contracts and arrangements  that provide for  customer right to return provisions, is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period. 

 

Sales Returns

 

The Company records allowances for product returns as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required, including the customers’ return rights and the Company’s historical experience with returns and the amount of product in the distribution channel not consumed by end users and subject to return. The Company relies on historical return rates to estimate returns. In the future, if any of these factors and/or the history of product returns change, adjustments to the allowance for product returns may be required.

 

 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 11 for revenues by geographical market, and product category for the  three and nine months ended September 30, 2020 and 2019.

 

6.  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. 

 

Because Milestone Scientific has a 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. 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 a group of significant shareholders, including the Milestone China CEO, which have 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. See Note 6.

 

7.  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. The Company maintains its cash and cash equivalents in bank deposit and other interest-bearing accounts, the balances of which, at times, may exceed federally insured limits.

 

8.  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 September 30, 2020, and December 31, 2019, accounts receivable was recorded, net of allowance for doubtful accounts of $10,000.

 

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, defective, and obsolete inventory is recorded if required based on past and expected future sales, potential technological obsolescence, and product expiration requirements. The valuation allowance creates a new cost basis for the inventory, and it is not subsequently marked up through a reduction in the valuation allowance based on any changes in the underlying facts and circumstances. When the valuation allowance is initially recorded, the increase to the allowance is recognized as an increase in cost of sales. The valuation allowance is only reduced if or when the underlying inventory is sold or destroyed, at which time cost of sales recognized would include the previous adjusted cost basis. 

 

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 long-term 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  unaudited 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.  Furniture, Fixture and Equipment  

 

Equipment is recorded at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from two to seven years. The costs of maintenance and repairs are charged to operations as incurred. 

  

12.  Intangible Assets – Patents and Developed Technology

 

Patents are recorded at cost to prepare and file the applicable documents with the US Patent 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 based on the estimated useful life of the patent. These patents and developed technology are recorded at the acquisition cost.         

                       

13.  Impairment of Long-Lived Assets

 

Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s impairment review process is based upon an estimate of future undiscounted cash flow. Factors the Company considers that could trigger an impairment review include the following: 

 

 

	●	significant under performance relative to expected historical or projected future operating results,
	●	significant changes in the manner of our use of the acquired assets or the strategy for our overall business
	●	significant negative industry or economic trends; and
	●	significant technological changes, which would render the technology obsolete

 

Recoverability of assets that will continue to be used in the Company's operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs.

 

14. Note Payable

 

On April 27, 2020, the Company, was granted a loan (the “Loan”) from Savoy Bank. in the aggregate amount of approximately $276,000, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

 

The Loan, which was in the form of a Note dated April 27, 2020, matures on April 27, 2022, and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 26, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

 

15.  Research and Development

 

Research and development costs, which consist principally of new product development costs payable to third parties, are expense 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.

 

16.  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.       

 

On September 30, 2020 and December 31, 2019, we had no uncertain tax positions that required recognition in the condensed consolidated financial statements. Milestone Scientific's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the condensed consolidated statements of operations. No interest and penalties are present for periods open. Tax returns for the 2016, 2017, and 2018 years are subject to audit by federal and state jurisdictions. 

 

17.  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 and warrants were issued during the period.

  

Since Milestone Scientific had net losses in the three and nine months ended September 30, 2020 and 2019, 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 7,477,171 and 5,004,415 on September 30, 2020 and 2019, respectively. 

 

 

18.  Fair Value of Financial Instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). We are required to classify fair value measurements in one of the following categories:

 

	●	Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
	●	Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.
	●	Level 3 inputs are defined as unobservable inputs for the assets or liabilities.

 

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of an input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. As of September 30, 2020 the Company does not have any assets or liabilities that were measured at fair value on a recurring basis. The carrying amounts reported in the accompanying unaudited condensed consolidated financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial instruments. 

 

19. Derivative Liability

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks; however, the Company had certain financial instruments that qualified as derivatives and were classified as liabilities on the balance sheet during the year ended December 31, 2019. The Company evaluates all its financial instruments to determine if those instruments or any potential embedded components of those instruments qualify as derivatives that need to be separately accounted for in accordance with FASB ASC 815, “Derivatives and Hedging”. Derivatives satisfying certain criteria are recorded at fair value at issuance and marked-to-market at each balance sheet date with the change in the fair value recorded as income or expense. In addition, upon the occurrence of an event that requires a derivative liability to be reclassified to equity, the derivative liability is revalued to fair value at that date. See Note 9, Outstanding Equity Instruments in Excess of Authorized Shares.   

 

20.  Stock-Based Compensation

 

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

 

21. Leases

 

At the inception of an arrangement, we determine whether an arrangement is, or contains, a lease. An arrangement is, or contains, a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with a term greater than one year are generally recognized on the balance sheet as right-of-use assets and current and non-current lease liabilities, as applicable. We have elected not to recognize on the balance sheet leases with terms of 12 months or less. We typically only include the initial lease term in our assessment of a lease arrangement. Options to extend a lease are not included in our assessment unless there is reasonable certainty that we will renew.

 

Finance and operating lease right-of-use assets represent the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. The interest rate implicit in our leases is typically not readily determinable. As a result, we utilize our incremental borrowing rate, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

  

We evaluate the classification of our leases as either finance leases or operating leases. Leases that are economically similar to the purchase of assets are generally classified as finance leases; otherwise, the leases are classified as operating leases. Lease cost for our operating leases is recognized on a straight-line basis over the lease term. Included in lease cost are any variable lease payments incurred in the period that are not included in the initial lease liability and lease payments incurred in the period for any leases with an initial term of 12 months or less.  

 

 

22.  Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard ASU No. 2016-13, “Financial Instruments – Credit Losses” (Topic 326), and subsequently amended. The new standard is intended to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. It will be effective for all smaller reporting entities for fiscal years and interim periods, beginning after December 15, 2022.  The adoption of this standard is not expected to have a material effect on financial statement presentation. 

 

In August 2018, FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of transfers between the levels. This ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level 3 fair value measurements and the range and weighted average of unobservable inputs used in Level 3 fair value measurements. ASU 2018-13 is effective for all entities with fiscal years beginning after December 15, 2019, including interim periods therein. The adoption of this standard did not have a material effect on financial statement presentation. 

 

In August 2018, FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which provides guidance for the accounting treatment for the software arrangements used by companies. ASU 2018-15 is effective for all entities with fiscal years beginning after December 15, 2019, including interim periods therein. The adoption of this standard did not have a material effect on financial statement presentation. 

 

In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which clarifies for the accounting treatment for the accounting tax aspects relating, in part, to the intraperiod allocations and foreign subsidiaries. ASU 2019-12 is effective for all entities with fiscal years beginning after December 15, 2020. The adoption of this standard is not expected to have a material effect on financial statement presentation.

 

In January 2020, FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which, generally, provides guidance for investments in entities accounted for under the equity method of accounting . ASU 2020-01 is effective for all entities with fiscal years beginning after December 15, 2021, including interim periods therein.  We are currently evaluating the impact of adopting this guidance on our consolidated balance sheets, results of operations, and financial condition.

 

In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity; which, generally, provides guidance for accounting regarding derivatives relating to entities common stock and earnings per share. ASU 2020-06 is effective for all entities with fiscal years beginning after December 15, 2021, including interim periods therein. The adoption of this standard is not expected to have a material effect on financial statement presentation

 

NOTE 4 — INVENTORIES

 

Inventories consist of the following:

 

 

 

On September 30, 2020, there is a reserve for slow moving medical finished goods of approximately $450,000 and damaged or slow moving dental finished goods of approximately $7,000. The reserve for the medical finished goods was primarily related to the delay in regulatory approval and commercialization of the intra-articular medical instrument. As of December 31, 2019, there is a reserve for slow moving medical finished goods of approximately $450,000 and damaged or slow moving dental finished goods of approximately $318,000. Approximately $311,000 of the dental finished inventory reserved at December 31, 2019 was destroyed during the nine months ended September 30, 2020.

 

 

NOTE 5 — ADVANCES ON CONTRACTS

 

The advances on contracts represent funding of future STA inventory purchases, epidural instruments, and epidural replacements parts. The balance of the advances as of September 30, 2020 and December 31, 2019 is approximately $723,000 and $710,000, respectively. The advance is classified as current based on the estimated annual usage of the underlying inventory.  

 

NOTE 6 – INVESTMENT IN AND TRANSACTIONS WITH EQUITY INVESTEES

 

Milestone China Ltd.

           

Ownership

 

In June 2014, Milestone Scientific invested $1 million in Milestone China Ltd. (“Milestone China”), by contributing dental instruments to Milestone China for a forty (40%) ownership interest. Milestone China owns approximately 75% of Milestone Beijing Medical Equipment Company, Ltd (“Milestone Beijing”). Milestone Beijing has primary responsibility for the sales, marketing, and distribution of the Company’s dental products in China. Milestone Scientific recorded their investment in Milestone China under the equity method of accounting. 

 

In first quarter 2020, Milestone China and certain marketing affiliates entered into a plan to merge (the Transaction) into an affiliated manufacturing company, Anhui Maishida Medical Technology, Co. Ltd. (Anhui). Anhui will be the surviving entity after the merger and will have complete responsibility for sales, marketing, and distribution for the Company’s dental products in China. However, as of the filing date of this Quarterly Report,  due to the COVID-19 Pandemic, the regulatory documentation for the planned merger has been placed in suspense since applicable government offices are still closed in China and Hong Kong. After completion of the Transaction, Milestone Scientific is expected to have an approximate 28.4% direct ownership in Anhui. Milestone China and certain marketing affiliates are expected to be dissolved upon completion of the merger and upon the required regulatory filings in China and Hong Kong.

 

Related Party Transactions 

 

Milestone China is Milestone Scientific’s exclusive distributor in China.  During 2017 and prior to the payment default during 2018, Milestone Scientific agreed to sell inventory to Milestone China and its agent. During 2018, Milestone Scientific entered into a payment arrangement with Milestone China to satisfy past due receivables from Milestone China and its agents which amounted to $2.8 million at the time of the payment arrangement. Milestone Scientific collected $950,000 under this arrangement, until Milestone China defaulted on the payment arrangements. Milestone Scientific halted shipments to Milestone China and the Company has adjusted the accounts receivable related party and the deferred revenue related party based on the expected payment realization and recorded a charge for  deferred cost associated with these transactions of $1.25 million during the fourth quarter of 2018.

 

For the three and nine months ended September 30, 2020 Milestone Scientific did not ship nor recognize any deferred revenue or net revenue for Milestone China and its agents. For the three and nine months ended September 30, 2019 Milestone Scientific did not ship nor recognize any deferred revenues, but did recognize revenue of zero, and $100,000 for Milestone China and its agents, respectively, that was previously deferred as a result of additional cash collected.

 

United System Agreement

 

In April of 2020, the Company entered into an agreement with United Systems, Inc., related party (see Note 13) regarding certain handpieces supplied to Milestone China in 2018, that were billed and shipped to Milestone China by United Systems, as well as STA instruments billed to United Systems and delivered to Milestone China, and not paid by Milestone China. United Systems sold their entire accounts receivable due from Milestone China for the above described handpieces and STA instruments for $370,260 to Milestone Scientific. Milestone Scientific paid United Systems the sale price as follows; $100,000 in cash paid in April 2020, $170,260 in shares of the Company’s  Common Stock (priced as of the close of business on April 23, 2020, $1.59 ) issued in June 2020, and $100,000 in cash paid in July 2020. The Company is entitled to the cash collections, if and when received, on the accounts receivable due to United Systems prior to this agreement up to approximately $1.4 million. 

 

 

 

 The Company has recorded a charge to the unaudited condensed consolidated statement of operations for $370,260 during the nine months ended September 30, 2020.

 

Milestone Advanced Cosmetic Systems Inc. Transaction

 

In May 2020,  Milestone Scientific finalized an agreement for the purchase of Milestone China’s 50% interest in Advanced Cosmetic Systems Inc., for the forgiveness of $900,000 in accounts receivable owed by Milestone China to Milestone Scientific (and previously fully reserved for), resulting in a noncash transaction. Milestone China will have the option to repurchase the 50% interest in Advanced Cosmetic Systems within one year from the sale date for $900,000 in cash. As a result of the purchase Milestone Scientific will own 100% of Advanced Cosmetic Systems Inc. at the expiration of the option period.

 

Gross Profit Deferral

 

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 profit is required as of the balance sheet date. In accordance with ASC 323 Equity Method and Joint Ventures, Milestone Scientific has deferred 40% of the gross profit associated with recognized revenue from sales to Milestone China until that product is sold to third parties.

 

At September 30, 2020 and December 31, 2019, the deferred profit was $340,476, which is included in deferred profit, related party in the condensed consolidated balance sheets. For the three and nine months ended September 30, 2020 and 2019 Milestone Scientific recorded earnings on equity investment of $0 and $0 and $0 and $49,099 respectively, for product sold by Milestone China to third parties.

 

Equity Method Disclosures 

 

As a result of the COVID-19 Pandemic, as previously noted, Milestone China, Milestone Beijing and Anhui have not legally finalized the Transaction. Further, Milestone China and Milestone Beijing have not completed the financial accounting and reporting as of and for the three and nine months ended September 30, 2020. Consequently, the summarized financial information (unaudited) for Milestone China, Milestone Beijing are not available and therefore not included herein.

 

Milestone Scientific, in previous years, reduced its investment in Milestone China to zero and had accumulated losses over the investment balance of approximately $4.3 million as of December 31, 2019, which have been suspended. Milestone Scientific believes that its equity method portion of Milestone China’s expected losses for the three- and nine-months ending September 30, 2020 do not have a significant impact on and are not material to the consolidated financial statements of the Company.  

 

 

NOTE 7 — PATENTS    

 

 

 

Patents are amortized utilizing the straight-line method over estimated useful lives ranging from 3 to 20 years. Amortization expense was approximately $13,000 and $40,000 for the three and nine months ended September 30, 2020, respectively. Amortization expense was approximately $13,000 and $40,000 for the three and nine months ended September 30, 2019, respectively.

 

NOTE 8 — NOTE PAYABLE   

 

On April 27, 2020, the Company, was granted a loan (the “Loan”) from Savoy Bank in the aggregate amount of approximately $276,000, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after seven weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
 
The Loan matures on April 27, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 26, 2020. The Note payable principal is due April 27, 2022 in a balloon payment if the loan is not forgiven. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations originating before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot be assured that certain actions taken that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

 

NOTE 9— STOCKHOLDERS’ EQUITY

 

PUBLIC OFFERING AND PRIVATE PLACEMENT

In February 2019, Milestone Scientific consummated a public offering and a private placement of Common Stock. The public offering generated gross proceeds of approximately $2.0 million for the issuance of 5,715,000 shares of common stock and warrants to purchase 1,428,750 shares of common stock. The warrants have a term of 5 years and are exercisable at $0.50 per share. Subsequent, to the public offering the underwriter exercised its over-allotment option and paid approximately $198,000 for 567,400 additional shares of common stock and 141,850 warrants.  

 

Also, in February 2019, the Company generated gross proceeds from a private placement of approximately $250,000 for 714,286 shares of common stock and warrants to purchase 178,571 shares of common stock from Bp4 S.p.A., a principal stockholder of Milestone Scientific that exercised its right to participate on a pro-rata basis on the recent public offering. Bp4’s CEO is a director of Milestone Scientific and at the time also Chief Executive Officer and Director of Wand Dental, a wholly owned subsidiary of Milestone Scientific. The warrants have a term of 5 years and are exercisable at $0.50 per share.

 

In the second quarter of 2020, the Company completed two public offerings. In April 2020, a Common Stock offering generating gross proceeds of approximately $5.1 million (5,420,000 common shares and 2,710,000 warrants). The combined price of the shares and warrants was $0.95 per share. The warrants are exercisable at a price of $1.20 per share and have an expiration of three (3) years from the issue date. In June 2020, the Company completed a second Common Stock offering generating gross proceeds of approximately $14.6 million (6,770,000 common shares and 3,749,000 warrants). The combined price of the shares and warrants was $2.15 per share. The warrants are exercisable at $2.60 and expire three (3) years from the issue date.

 

WARRANTS

 

The following table summarizes information about shares issuable under warrants outstanding as of September 30, 2020 :

 

 

 

The following table summarizes information about shares issuable under warrants outstanding as of September 30, 2019

 

 

PREFERRED STOCK 

 

In May 2014, Milestone completed a private placement, which raised gross proceeds of $10 million, from the sale of $3 million of Milestone Scientific common stock (two million shares at $1.50 per share) and $7 million of our Series A Convertible Preferred Stock ("Preferred Stock") (7,000 shares at $1,000 per share).  These shares were convertible, at the option of the holder, into the number of shares of common stock equal to the stated value divided by $2.545, subject to anti-dilution adjustments, at any time before May 14, 2019.

 

These shares were mandatory convertible on May 14, 2019, into the number of shares of common stock equal to the stated value divided by $2.54 per share or $1.50 per share if the common stock does not trade at $3.15 for period of time, as defined by the agreements, both subject to anti-dilution adjustment.

 

On May 14, 2019, the mandatory conversion date, the Preferred Stock was converted at a rate of $1.17 per common share resulting in the issuance of 5,982,906 shares of common stock.

 

SHARES TO BE ISSUED

 

As of September 30, 2020 and 2019, there were 2,202,229 and 2,294,734 shares to be issued whose issuance has been deferred to the Chief Executive Officer, Chief Financial Officer, and other employees of Milestone Scientific, respectively.  

 

As of September 30, 2020, and 2019, there were 149,498 and 351,612 shares, respectively, to be issued to non-employees,  that will be issued for services rendered. The number of shares was fixed at the date of grant and were fully vested upon grant date.

 

The following table summarizes information about shares to be issued on September 30, 2020 and 2019, respectively.

 

 

OUTSTANDING EQUITY INSTRUMENTS IN EXCESS OF AUTHORIZED SHARES

 

As a result of the shares and warrants issued in the public and private offerings as well as other issuance of common stock during 2019, the Company did not have a sufficient number of authorized shares of common stock to cover the exercise and issue of all outstanding equity instruments. Therefore, as of September 30, 2019, the warrants issued in the public and private placement were classified as liabilities. As long as the warrants remained liability-classified, they were continued to be re-measured each reporting period, with any increase or decrease in value recorded as a loss or gain in the condensed consolidated statement of operations. 

 

 

The initial fair value of the warrants was determined using a Black-Scholes option pricing model. The following assumptions were used to value the warrants at the reclassification date in 2019:

 

 

On the date of issuance and reclassification the fair value of the warrants was approximately $376,000.

 

As these warrants are liability-classified, they were revalued on September 30, 2019  using the following assumptions:

 

For the three and nine months ended September 30, 2019 the loss on the liability classified warrants was approximately $680,542 and $674,792, respectively.

 

Additionally, approximately 2.6 million of shares to be issued  are classified as liabilities until there are sufficient number of authorized shares of common stock to cover the issuance of such shares. These shares were valued at the trading price of a share of the Company’s common stock ($0.83 as of September 30, 2019 ) and they will continue to be re-measured each reporting period, with any increase or decrease in value recorded as a loss or gain in the condensed consolidated statement of operations. For the three and nine months ended September 30, 2019 the loss on the liability classified shares to be issued was approximately $1.2 million, respectively.  

 

On December 17, 2019, the Company’s shareholders approved an increase to the authorized share limit to 75,000,000. On December 17, 2019, the Company reclassified all derivative liabilities related to the insufficient number of authorized shares to stockholders’ equity. As such, there were no derivative liabilities during the nine months ended September 30, 2020.  

 

NOTE 10 — 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. 

 

NOTE 11 — SEGMENT AND GEOGRAPHIC DATA

       

We conduct our business through two reportable segments: Dental and Medical. These segments offer different products and services to different customer base. The Company provides general corporate services to its segments; however, these services are not considered when making operating decisions and assessing segment performance. These services are reported under “Corporate Services” below and these include costs associated with executive management, investor relations, patents, trademarks, licensing agreements, new instruments developments, financing activities and public company compliance.

 

 

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

 

 

 

 

 

 

 

 

The following table presents information about our operations by geographic area for three months ended September 30, 2020 and  2019.  Net sales by geographic area are based on the respective locations of our subsidiaries:

 

 

The following table presents information about our operations by geographic area for the nine months ended September 30, 2020 and 2019.  Net sales by geographic area are based on the respective locations of our subsidiaries:

 

 

 

 

NOTE 12 -- CONCENTRATIONS

 

Milestone Scientific has informal arrangements with third-party manufacturers of the STA, epidural, and intra-articular 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 on September 30, 2020 and December 31, 2019. 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, 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 and nine months ended September 30, 2020, approximately 40% and 45% of the Company’s net product sales were from the Company’s exclusive domestic dental distributor, respectively. For the three and nine months ended September 30, 2019 net product sales were 54% and 51%, respectively, to the Company’s exclusive domestic dental distributor. Accounts receivable for two customers/distributors amounted to approximately $720,000 or 74%, or 60% and 14% of Milestone Scientific's gross accounts receivable as of September 30, 2020, one of which was the Company’s exclusive domestic dental distributor.     Accounts receivable for the Company’s exclusive domestic dental distributor amounted to approximately or 77%, of Milestone Scientific's gross accounts receivable as of December 31, 2019. The Company’s exclusive domestic dental distributor exclusivity for the domestic dental market is subject to annual purchase requirements and other requirements, as defined in the agreement.

 

The COVID-19 pandemic affected the Company’s operations in the second quarter and third quarter and may continue to do so indefinitely thereafter. The Company is continuously monitoring its own operations and intends to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic to the best of its abilities, but there can be no assurances that the Company will be successful in doing so. To the extent the Company is able to obtain information about and maintain communications with its customers, suppliers, vendors, and other business partners, the Company will seek to minimize disruptions to its supply chain and distribution channels, but many circumstances will be beyond the Company’s control. Governmental action may further cause the Company to temporarily close its facilities and/or regional quarantines may result in labor shortages and work stoppages. All of these factors may have far reaching direct and indirect impacts on the Company’s business, operations, and financial results and condition. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments which cannot be predicted.

 

NOTE 13 -- 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 approximately $373,000 and $549,000 for the three months ended September 30, 2020 and 2019, respectively. Purchases from this manufacturer were approximately $1,200,000 and $1,100,000 for the nine months ended September 30, 2020 and 2019, respectively.  As September 30, 2020 and December 31, 2019, Milestone Scientific owed this manufacturer approximately $365,000 and $943,000, respectively, which is included in accounts payable, related party on the condensed consolidated balance sheets. In February 2019, Milestone Scientific Board of Directors granted United Systems 285,714 shares of stock at $0.35 or $100,000 for consulting services. These shares were issued July 2019.

On April 29, 2020, the Board of Directors approved the purchase of United Systems accounts receivable ($370,260) See Note 6. 

 

Milestone China

 

As of September 30, 2020, Milestone Scientific owned a 40% interest in Milestone China. See Note 6. 
 
Other

 

As of September 30, 2020, and December 31, 2019, Milestone Scientific had deferred compensation for the previous Chief Executive Officer of Wand Dental of approximately of and $308,000 and $380,000, respectively which is included accrued expenses related party.

In August 2016, K. Tucker Andersen, a significant stockholder of Milestone Scientific, entered into an agreement with Milestone Scientific to provide financial and business strategic services. Expenses recognized on this agreement were $25,000, and $75,000 for the three and nine months ended September 30, 2020, and 2019, respectively.

 

 In January 2017, Milestone Scientific entered into a twelve-month agreement with Innovest S.p.A., a significant stockholder of Milestone Scientific, 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 $60,000 for both the three and nine months ended September 30, 2020, and 2019, respectively. This agreement was terminated September 30, 2020. 

The Director of Clinical Affairs’ royalty fee was approximately $61,000 and $92,000 for the three months ended September 30, 2020 and 2019, respectively. The Director of Clinical Affairs’ royalty fee was approximately $158,000 and $292,000 for the nine months ended September 30, 2020 and 2019, respectively. Additionally, Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $39,000 and $117,000 for the three and nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and December 31, 2019, Milestone Scientific owed the Director Clinical Affairs for royalties of approximately $80,000 and $390,000, respectively, which is included in accounts payable, related party and accrued expense, related party.

 

NOTE 14 — COMMITMENTS

 

(1)  Contract Manufacturing Agreement 

Milestone Scientific has informal arrangements with third-party manufacturers of the STA, epidural, and intra-articular devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. As of September 30, 2020, the purchase order commitment for dental instruments was $515,284 and advances of $350,311 are reported in inventory advances.
 

In August 2019, the company entered a new purchase commitment for the delivery of 100 Epidural instruments beginning in 2020. As of September 30, 2020, we have an open purchase order of $299,000 for 100 Epidural instruments and have advanced $161,000 against this purchase commitment. In July 2020, the company entered a new purchase commitment for the delivery of 110 cases of Epidural and Cathcheck disposable kits beginning in November 2020. As of September 30, 2020, we have an open purchase order of $30,395 for 110 cases of Epidural and Cathcheck disposable kits and have advanced $21,195 against this purchase commitment.

 

(2)  Leases

 

Operating Leases

 

In June 2015, the Company amended its original office lease for its headquarters in Livingston, New Jersey. Under the amendment, the Company leased an additional 774 square feet of rentable area of the building and extended the term of the lease through January 31, 2020 at a monthly cost of $12,522. The Company had an option to further extend the term of the lease, however, this option was not included in the determination of the lease’s right-of-use asset or lease liability. Per the terms of the lease agreement, the Company does not have a residual value guarantee. The Company will also be required to pay its proportionate share of certain operating costs and property taxes applicable to the leased premises in excess of new base year amounts. These costs are considered to be variable lease payments and are not included in the determination of the lease’s right-of-use asset or lease liability. 

 

In August 2019, the Company made the decision to not renew the its existing office lease for its corporate headquarters located in Livingston, New Jersey and instead signed a new seven (7) year lease in a new facility located in Roseland, New Jersey (the “Roseland Facility”), which commenced of January 8, 2020. Under the Roseland Facility lease, rent payments commence on April 1, 2020 and the monthly lease payments escalate annually on January 1 of each year, and range from $9,275 to $10,898 per month over the lease term. The Company is also required to pay a fixed electric charge equal to $2.00 per square foot which is  paid in equal monthly installments over the lease term or $11,130 annually. These fixed monthly payments have been included in the measurement of the operating lease liability and related operating lease right-of-use asset as the Company has elected the practical expedient to not separate lease and non-lease components for all leases. The Company is also required to pay its proportionate share of certain operating costs and property taxes applicable to the leased premises in excess of new base year amounts, which are accounted for as variable lease expenses. 

 

 

As of September 30, 2020, total operating lease right-of-use assets were $655,870 and total operating lease liabilities were $645,341, of which $68,934 and $576,407 were classified as current and non-current, respectively. As of December 31, 2019, total operating right-of-use assets were $15,977 and total operating lease liabilities (current) were $15,977. During the nine months ended September 30, 2020, the Company also entered into a five-year lease for copiers which resulted in the recognition of property and equipment and total finance lease liabilities of $43,242. As of September 30, 2020, total finance lease liabilities were $38,527, of which $7,903 and $30,624 were classified as current and non-current, respectively.

 

Cash flow information related to the Company's right-of-use assets and related lease liabilities were as follows:

 

 

(3)  Other Commitments

 

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. 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. See note  13 Other.

 

NOTE 15— SUBSEQUENT EVENTS

 

Since the quarter ended September 30, 2020, the Company issued 8,000 shares of common stock for warrants exercised at $1.20 for proceeds of $9,600.

 

The Company engaged Gian Domenico Trombetta, former CEO of Wand Dental Inc. as a consultant to Leonard Osser, Interim – Chief Executive Officer of Milestone Scientific for a period of twelve months (beginning October 1, 2020 and ending September 30, 2021). Gian Domenico Trombetta will provide historical International Business, Dental Segment information and business contacts to Mr. Osser and provide consulting services  for new International Business and Dental Segment concepts during this twelve month consulting period. Under this agreement, Mr. Trombetta is to receive $60,000 payable in Milestone Scientific shares.