Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Summary of Significant Accounting Policies

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Note 3 - Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
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 was a variable interest entity of which Milestone Scientific is the primary beneficiary and is consolidated into Milestone Scientific's financial statements.  Milestone Scientific purchased the remaining
50%
of Milestone Education in
September 2018,
increasing its ownership of Milestone Education to
100%.
 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 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 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
nine
months ended
September 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 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. 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 a group of significant shareholders of Milestone China 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.
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 
September 30, 2018, 
and
December 31, 2017, 
accounts receivable was recorded, net of allowance for doubtful accounts of
$10,000.
 
8.
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.
 
9.
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.
 
10.
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. 
 
11.
Impairment of Long-Lived Assets
 
As of
September 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. At
September 30, 2018,
Milestone Scientific identified that the APAD Patents purchased in
2017,
will
not
be further developed (due to lack of financial resources) for commercial launch before their estimated useful life expires and have therefore been impaired. The amount of the charge for the
three
and
nine
months ended
September 30, 2018
was approximately 
$1,500,000.
 There were
no
impairment charges recorded during the
three
and
nine
months ended
September 30, 2017. 
 
12.
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.
 
13.
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.
 
14.
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
September 30, 2018
and
December 31, 2017,
respectively.
 
 
15.
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
.
 
16.
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
September 30, 2018
and
2017,
Milestone Scientific recognized approximately
$72,500
 and
$300,000
 of expense related to employee options, respectively. For the
nine
months ended
September 30, 2018
and
2017,
Milestone Scientific recognized approximately
$236,000
  and
$543,000
of expense related to employee options, respectively. For the
three
months ended
September 30, 2018
and
2017,
Milestone Scientific recognized approximately
$4,000
 of expense and
$6,000
 of income related to non-employee options, respectively. For the
nine
months ended
September 30, 2018
and
2017,
Milestone Scientific recognized approximately
$11,000
 of expense and
$12,000
 of income related to non-employee options, respectively
 
17.
Recent Accounting Pronouncements
 
In
February 2016,
the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (“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 with a term longer than
12
months, Under Topic
842,
a modified retrospective transition approach is required, and the new standard is applied to all leases existing at the date of initial application. An entity
may
choose to use either (
1
) its effective date or (
2
) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. We expect to adopt the new standard on
January 1, 2019
and use the effective date as our date of initial application. Consequently, prior period financial information will
not
be updated, and the disclosures required under the new standard will
not
be provided for dates and periods before
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 FASB issued ASU
2018
-
07
to simplify the accounting for share-based payments to non-employees 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 non-employees 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
September 30, 2018
and there was
no
material impact on the Company’s condensed consolidated financial statements.