Note 3 - Summary of Significant Accounting Policies
|3 Months Ended|
Mar. 31, 2019
|Notes to Financial Statements|
|Significant Accounting Policies [Text Block]||
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), 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
8of Regulation S-
X.Accordingly, they do
notinclude 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
notnecessarily indicative of the results of operations which
maybe 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, 2018,included in Milestone Scientific's Annual Report on Form
Certain reclassifications have been made to the
2018financial statements to conform to the condensed consolidated
2019financial statement presentation. These reclassifications had
noeffect 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
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
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
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
noobligation 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.
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
notconsumed by patients 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
Financing and Payment
Our payment terms differ by geography and customer, but payment is generally required within
90days from the date of shipment or delivery.
Disaggregation of Revenue
We operate in
twooperating 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
10for revenues by geographical market and operating results by segment for
March 31, 2019and
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.
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. Milestone Scientific would be considered the primary beneficiary of the VIE if it has both of the following characteristics:
Milestone Scientific does
nothave the ability to control the activities that most significantly impact Milestone China's economics and, therefore, the power criterion has
notbeen 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, 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
notthe primary beneficiary under ASC
810.Accordingly, Milestone China has
notbeen consolidated into the financial statements of Milestone Scientific and continues to be accounted for under the equity method. See Note
7.Cash and Cash Equivalents
Milestone Scientific considers all highly liquid investments purchased with an original maturity of
threemonths or less to be cash equivalents.
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
90days from invoicing. There have
notbeen any significant credit losses incurred to date. As of
March 31, 2019and
December 31, 2018,accounts receivable was recorded, net of allowance for doubtful accounts of
9.Product Return and Warranty
Milestone Scientific generally does
notaccept non-defective returns from its customers, except for certain customers that can return factory sealed purchases (inventory) that still remain in their locations at the time of termination of their Distributor Agreement. Product returns under warranty are accepted, evaluated and repaired or replaced in accordance with the Warranty Policy. Returns
notwithin the Warranty Policy are evaluated and the customer is charged for the repair.
Inventories principally consist of finished goods and component parts stated at the lower of cost (
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. As of
March 31, 2019and
December 31, 2018,inventory was recorded net of a valuation allowance for slow moving and defective inventory of approximately
11.Equity Method Investments
Investments in which Milestone Scientific can exercise significant influence, but do
notcontrol, 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 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
maybe 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.
12.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
sevenyears. The costs of maintenance and repairs are charged to operations as incurred.
13.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 are amortized over the remaining estimated useful life of the patent. These patents and developed technology are recorded at the acquisition cost. Patent defense costs, to the extent applicable, are expensed as incurred.
14.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
notbe 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:
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.
15.Research and Development
Research and development costs, which consist principally of new product development costs payable to
thirdparties, 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.
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.
March 31, 2019and
December 31, 2018,we had
nouncertain 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.
Nointerest and penalties are present for periods open. Tax returns for the
2017years are subject to audit by federal and state jurisdictions.
17.Basic and diluted net loss per common share
Basic earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. In periods where there is net income, we apply the
two-class method to calculate basic and diluted net income (loss) per share of common stock, as our Series A Convertible Preferred Stock is a participating security. The
two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. In periods where there is a net loss, the
two-class method of computing earnings per share does
notapply as our Series A Convertible Preferred Stock does
contractually participate in our losses. We compute diluted net income (loss) per common share using net income (loss) as the “control number” in determining whether potential common shares are dilutive, after giving consideration to all potentially dilutive common shares, including stock options, warrants, during the period and potential issuance of stock upon the conversion of our Series A Convertible Preferred Stock issued and outstanding during the period, except where the effect of such securities would be antidilutive.
The Company did
notinclude any portion of outstanding options, warrants or convertible preferred stock in the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. The application of the
two-class method of computing earnings per share under general accounting principles for participating securities is
notapplicable during these periods because those securities do
notcontractually participate in its losses.
Since Milestone Scientific had net losses for
2018,the assumed effects of the exercise of potentially dilutive outstanding stock options, warrants and convertible preferred stock were
notincluded in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled
March 31, 2019and
December 31, 2018,respectively.
18.Fair Value of Financial Instruments
Fair Value Measurements: 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
oneof the following categories:
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
mayaffect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following table provides the carrying value and fair value of the Company’s financial assets measured at fair value on a recurring basis as of
March 31, 2019.
The following additional disclosures relate to the changes in fair value of the Company’s Level
3instruments during the
March 31, 2019:
The Company does
notuse derivative instruments to hedge exposures to cash flow, market or foreign currency risks; however, the Company has certain financial instruments that qualify as derivatives and are classified as liabilities on the balance sheet. 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 the derivative liability to be reclassified to equity, the derivative liability is revalued to fair value at that date.
Share-based payments to employees, including grants of employee stock options, is recognized in the condensed consolidated statements of operations over the service period, as an operating expense, based on the grant-date fair values.
21.Recent Accounting Pronouncements
January 1, 2019,we adopted Accounting Standards Update
02), as amended, which supersedes the lease accounting guidance under Topic
840,and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and
notrestating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. In
July 2018,the FASB issued ASU
Targeted Improvements, (“ASU
11”), which contains certain amendments to ASU
02intended to provide relief in implementing the new standard. ASU
11provided companies with an option to
notrestate comparative periods presented in the financial statements. For information regarding the impact of Topic
Significant Accounting Policies – Leasesand Note
June 2016,the FASB issued a new standard ASU
13,“Financial Instruments – Credit Losses” (Topic
326).: 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 entities for fiscal years and interim periods, beginning after
2019.Weare currently evaluating the impact of adopting this guidance on our consolidated balance sheets, results of operations, and financial condition.
Milestone Scientific adopted this standard on
January 1, 2019and the ASU had an immaterial effect on its financial position, results of operations and cash flows. In
July 2017,the FASB issued a new standard ASU
11,“Earnings Per Share” (Topic
260), “Distinguishing Liabilities from Equity” (Topic
480), “Derivatives and Hedging” (Topic
815). The new standard provides guidance relating to equity-linked instruments that include certain features.
January 1, 2019,we adopted Topic
842using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after
January 1, 2019are presented under Topic
842,while prior period amounts have
notbeen adjusted and continue to be reported in accordance with our historical accounting under Topic
In adopting the new standard, the Company elected to utilize the available package of practical expedients permitted under the transition guidance, which does
notrequire the reassessment of the following: i) whether existing or expired arrangements are or contain a lease, ii) the lease classification of existing or expired leases, and iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. As of the adoption date, the Company identified
threeoperating lease arrangements in which it is a lessee. The adoption of this standard resulted in the recognition of operating lease liabilities and right-of-use assets of
$129thousand on the Company’s condensed consolidated balance sheets. The adoption of the standard did
nothave a material effect on the Company’s statements of operations or statements of cash flows. See Note
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef