Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Summary of Significant Accounting Policies

v3.20.2
Note 3 - Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2020
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
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