Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Summary of Significant Accounting Policies

v3.19.1
Note 3 - Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
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), 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
10Q
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, 2018,
included in Milestone Scientific's Annual Report on Form
10
-K.
 
3.
  Reclassifications
 
Certain reclassifications have been made to the
2018
 financial statements to conform to the condensed  consolidated
2019
 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
 
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
 
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 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
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 Rev
enue
 
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
10
 for revenues by geographical market  and operating results by segment for 
three
months ended
March 31, 2019
and
2018.
 
 
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:
 
 
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, 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
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.
 
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
March 31, 2019
and
December 31, 2018, 
accounts receivable was recorded, net of allowance for doubtful accounts of
$10,000.
 
9.
Product Return and Warranty
 
Milestone Scientific generally does
not
accept 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
not
within the Warranty Policy are evaluated and the customer is charged for the repair.
 
10.
  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. As of
March 31, 2019
and
December 31, 2018,
inventory was recorded net of a valuation allowance for slow moving and defective inventory of approximately
$756,000
and
$763,000,
  respectively. 
 
11.
  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 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.
 
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
two
to
seven
years. 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
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
 
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.
 
15.
  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.
 
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.
 
At
March 31, 2019 
and
December 31, 2018,
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
2015,
2016,
and
2017
 years 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
not
apply as our Series A Convertible Preferred Stock does
not
 
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
not
include 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
not
applicable during these periods because those securities do
not
contractually participate in its losses.
  
Since Milestone Scientific had net losses for
2019
 and
2018,
the assumed effects of the exercise of potentially dilutive outstanding stock options, warrants and convertible preferred stock were
not
included in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled 
8,461,057
and
6,703,553
at
March 31, 2019
and
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
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.
 
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.
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
                                 
Derivative Warrants
  $
336,237
    $
-
    $
-
    $
336,237
 
Shares to be issued-liability
   
29,548
     
29,548
     
-
     
-
 
Total March 31, 2019
  $
365,785
    $
29,548
    $
-
    $
336,237
 
 
The following additional disclosures relate to the changes in fair value of the Company’s Level
3
instruments during the
three
months ended
March 31, 2019:
 
   
March 31, 2019
 
   
 
 
Balance at beginning of year
  $
-
 
Warrants issued in connection with public offering (See Note 8)
   
376,497
 
Change in fair value of derivative liability
   
(40,260
)
Balance at end of period
  $
336,237
 
 
19.
Derivative Liability
 
The Company does
not
use 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.  
 
20.
  Stock-Based Compensation
 
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
 
On
January 1, 2019,
we adopted Accounting Standards Update
No.
2016
-
02,
Leases (Topic
842
) (ASU
2016
-
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
not
restating 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
2018
-
11,
Leases,
Targeted Improvements
, (“ASU
2018
-
11”
), which contains certain amendments to ASU
2016
-
02
intended to provide relief in implementing the new standard. ASU
2018
-
11
provided companies with an option to
not
restate comparative periods presented in the financial statements. For information regarding the impact of Topic
842
adoption, see
Significant Accounting Policies – Leases
and Note
13
– Commitments.
 
In
June 2016,
the FASB issued a new standard ASU
No.2016
-
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
December 15,
2019.We
are 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, 2019
and 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
No.2017
-
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.
  
22.
Leases
 
On
January 1, 2019,
we adopted Topic
842
using 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, 2019
are presented under Topic
842,
while prior period amounts have
not
been adjusted and continue to be reported in accordance with our historical accounting under Topic
840.
 
In adopting the new standard, the Company elected to utilize the available package of practical expedients permitted under the transition guidance, which does
not
require 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
three
operating 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
$129
thousand on the Company’s condensed consolidated balance sheets. The adoption of the standard did
not
have a material effect on the Company’s statements of operations or statements of cash flows. See Note
13.