NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — ORGANIZATION AND BUSINESS
All references in this report to “Milestone Scientific,” “us,” “our,” “we,” the “Company” or “Milestone” refer to Milestone Scientific Inc., and its consolidated subsidiaries, Wand Dental, Inc., Milestone Advanced Cosmetic Systems, Inc., Milestone Medical, Inc. and Milestone Education LLC (all described below), 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 ®; the Milestone logo ®; SafetyWand®; STA Single Tooth Anesthesia System®; and The Wand ®.
Milestone Scientific was incorporated in the State of Delaware in November 1989. 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® has regulatory approval for epidural medical procedures, and is expected to be suitable, 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, US territories, 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 introductory meetings 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 five 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, we 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. Following consultation with the FDA’s Office of Device Evaluation, we intend to file a new 510(k) application for the device when the Company secures additional funding.
In November 2018, Milestone Scientific received a letter from NYSE American LLC (the “Exchange”) stating that the Company was not in compliance with the continued listing standards as set forth in Section(s) 1003(a)(i), (ii), and (iii) of the NYSE American Company Guide (the “Company Guide”).On December 20, 2018, the Company submitted a plan of compliance (the “Plan”) to the Exchange addressing how it intends to regain compliance with Section(s) 1003(a)(i), (ii) and (iii) of the Company Guide by May 20, 2020. On January 24, 2019, the Company received a letter from the Exchange stating that the Company’s Plan has been accepted. The Company is still not in compliance with Section(s) 1003(a)(i), (ii) and (iii) of the Company Guide and its listing on the Exchange is being continued pursuant to an extension granted by the Exchange.
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 terms are 5 years and they 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 and as well as 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 aforementioned public offering. Bp4’s CEO is a director of Milestone Scientific and also Chief Executive Officer and Director of Wand Dental, a wholly owned subsidiary of Milestone Scientific. The warrants terms are 5 years and they are exercisable at $0.50 per share.
NOTE 2- GOING CONCERN AND LIQUIDITY
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 condensed consolidated financial statements are issued. Milestone Scientific has incurred operating losses and negative cash flows from operating activities in virtually each year since its inception. At September 30, 2019 cash on hand was $1.7 million. Based on the expected cash needed for operating activities, the Company’s current cash and liquidity is not sufficient to finance the operating requirements for at least the next 12 months from the filing date. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
Milestone Scientific is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue from its dental business worldwide, the generation of revenue from its medical devices and disposables business in the United States and worldwide, and a reduction in operating expenses. However, the Company’s continued operations will depend on its ability to raise additional capital through various potential sources (See Note 8 Shares and warrants in excess of authorized shares) until it achieves profitability, if ever. Management is actively pursuing financing or other strategic plans but can provide no assurances that such financing or other strategic plans will be available on acceptable terms, or at all.
These condensed consolidated financial statements have been prepared with the assumption that the Company will continue as a going concern and will be able to realize its assets and discharge its liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recover ability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.
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, valuation of derivative liabilities, 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 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 Revenue
See Note 10 for disaggregated revenue information
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 the Company 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, 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 is 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. As of September 30, 2019 and December 31, 2018, accounts receivable (non- related party) 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. As of September 30, 2019 and December 31, 2018, inventory was recorded net of a valuation allowance for slow moving and defective inventory of approximately $752,000 and $763,000, respectively.
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 Condensed Consolidated Statements of Operations.
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 are amortized over the remaining estimated useful life of the patent.
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:
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●
|
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. 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.
15. 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 September 30, 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, 2017, and 2018 years are subject to audit by federal and state jurisdictions.
16. 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 applied the two-class method to calculate basic and diluted net income (loss) per share of common stock, as our Series A Convertible Preferred Stock (which automatically converted in full into Common Stock on May 2019 – see Note 8) was 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 would not apply as our Series A Convertible Preferred Stock did not contractually participate in our losses.
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. Such outstanding options and warrants totaled 5,004,415 and 6,703,553 at September 30, 2019 and December 31, 2018, respectively. 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.
17. 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.
The following table provides the carrying value and fair value of the Company’s financial assets or liabilities (see Note 8 ) measured at fair value on a recurring basis as of September 30, 2019.
|
|
Carrying Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Warrants
|
|
$
|
1,016,639
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,016,639
|
|
Shares to be issued-liability
|
|
|
2,199,488
|
|
|
|
2,199,488
|
|
|
|
-
|
|
|
|
-
|
|
Total September 30, 2019
|
|
$
|
3,216,127
|
|
|
$
|
2,199,488
|
|
|
$
|
-
|
|
|
$
|
1,016,639
|
|
The following additional disclosures relate to the changes in fair value of the Company’s Level 3 instruments during the nine months ended September 30, 2019 :
|
|
September 30, 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
|
|
|
674,792
|
|
Exercise of liability classified warrants
|
|
|
(34,650
|
)
|
Balance at end of period
|
|
$
|
1,016,639
|
|
The Company had no assets or liabilities that were measured in the fair value on a recurring basis as of December 31, 2018.
18. 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. See Note 8.
19. 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.
20. Recent Accounting Pronouncements
On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), by ASU 2018-11, 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 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 $166,292 in 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. For information regarding the impact of Topic 842 adoption, see Note 13 – Commitments.
On November 28, 2018, the Financial Accounting Standards Board (“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. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Company is currently evaluating the impact of adopting this standard.
In June 2016, the FASB issued a new standard ASU 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 January 15, 2020. We are currently evaluating the impact of adopting this guidance on our consolidated balance sheet, results of operation and financial condition.
NOTE 4 — INVENTORIES
Inventories consist of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Dental finished goods, net
|
|
$
|
1,338,193
|
|
|
$
|
1,609,000
|
|
Medical finished goods, net
|
|
|
196,958
|
|
|
|
188,133
|
|
Component parts and other materials
|
|
|
81,911
|
|
|
|
123,918
|
|
Total inventories
|
|
$
|
1,617,062
|
|
|
$
|
1,921,051
|
|
At September 30, 2019 and December 31, 2018, there is a reserve for slow moving medical finished goods of $450,039 and $454,183, respectively, and damaged or slow moving dental finished goods of $302,073 and $309,196, respectively. The reserve for the medical finished goods was primarily related to the delay in commercialization of the intra-articular medical instrument.
NOTE 5 — ADVANCES ON CONTRACTS
The advances on contracts represent funding of future STA, Epidural instruments, and epidural replacements parts. The balance of the advances as of September 30, 2019 and December 31, 2018 is approximately $628,000 and $649,000 respectively. The advance is classified as current based on the estimated annual usage of the underlying inventory.
NOTE 6 – INVESTMENT IN AND TRANSACTIONS WITH UNCONSOLIDATED SUBSIDIARIES
Milestone China Ltd.
Ownership
In June 2014, Milestone Scientific invested $1 million in Milestone China Ltd. (“Milestone China”) by contributing 772 STA Instruments to Milestone China for a 40% ownership interest. Milestone Scientific recorded this investment under the equity method of accounting.
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 it’s agents which amounted to $2.8 million at the time of the payment arrangement. The payment terms required payments of $200,000 per month beginning in July 2018 through November 2018 and a balloon payment of approximately $1,425,000 during December 2018. Milestone Scientific collected $950,000 under the payment arrangement which resulted in a deferred revenue and deferred cost balance of $1.8 million and $1.25 million, respectively. Due to the default on the arrangement and Milestone China’s liquidity constraints, 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 reserve against the related deferred cost of $1.25 million during the fourth quarter of 2018.
Milestone Scientific recognized revenue associated with sales to Milestone China and it’s agents of zero and $100,000 For the three and nine months ended September 30, 2019, respectively. Milestone Scientific recognized $300,000 related party revenue from Milestone China and it’s agents during the three and nine months ended September 30, 2018.
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 previously recognized revenue from sales to Milestone China until that product is sold to third parties.
At September 30, 2019 and December 31, 2018 , the deferred profit was $372,700 and $421,800, respectively, which is included in deferred profit, related party in the condensed consolidated balance sheets. For the three and nine months ended September 30, 2019, Milestone Scientific recorded income on equity investment of $0 and $49,100 respectively, for product sold by Milestone China to third parties. For the three and nine months ended September 30, 2018, Milestone Scientific recorded an earnings and loss on its investment of $143,242, and $258,616 respectively, for product sold by Milestone China to third parties.
Equity Method Disclosures
At September 30, 2019 and December 31, 2018, Milestone Scientific's investment in Milestone China was $0. As of September 30, 2019 and December 31, 2018, Milestone Scientific’s share of cumulative losses of Milestone China were $4,361,103 and $3,380,388, respectively, which have been suspended.
The following table includes summarized financial information (unaudited) of Milestone China:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Assets:
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Current assets
|
|
$
|
14,186,280
|
|
|
$
|
10,587,648
|
|
Non-current assets
|
|
|
4,756,043
|
|
|
|
4,603,845
|
|
Total assets:
|
|
$
|
18,942,323
|
|
|
$
|
15,191,493
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
23,477,542
|
|
|
$
|
17,696,033
|
|
Stockholders' equity (deficit)
|
|
|
(4,535,219
|
)
|
|
|
(2,504,900
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
18,942,323
|
|
|
$
|
15,191,133
|
|
|
|
For the three months ended September 30, 2019
|
|
|
For the three months ended September 30, 2018
|
|
|
For the nine months ended September 30, 2019
|
|
|
For the nine months ended September 30, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
678,140
|
|
|
$
|
1,710,473
|
|
|
$
|
2,431,942
|
|
|
$
|
3,795,507
|
|
Cost of goods sold
|
|
|
423,948
|
|
|
|
789,957
|
|
|
|
983,348
|
|
|
|
1,888,409
|
|
Gross profit
|
|
|
254,192
|
|
|
|
920,516
|
|
|
|
1,448,594
|
|
|
|
1,907,098
|
|
Other expenses
|
|
|
(598,324
|
)
|
|
|
(1,371,085
|
)
|
|
|
(3,900,382
|
)
|
|
|
(3,742,737
|
)
|
Net loss
|
|
$
|
(344,132
|
)
|
|
$
|
(450,569
|
)
|
|
$
|
(2,451,788
|
)
|
|
$
|
(1,835,639
|
)
|
NOTE 7 — PATENTS
|
|
September 30, 2019
|
|
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Patents-foundation intellectual property
|
|
$
|
1,377,863
|
|
|
$
|
-
|
|
|
$
|
(982,349
|
)
|
|
$
|
395,514
|
|
Total
|
|
$
|
1,377,863
|
|
|
$
|
-
|
|
|
$
|
(982,349
|
)
|
|
$
|
395,514
|
|
|
|
December 31, 2018
|
|
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Patents-foundation intellectual property
|
|
$
|
1,377,863
|
|
|
$
|
-
|
|
|
$
|
(942,590
|
)
|
|
$
|
435,273
|
|
Epidural-Apad acquired patents
|
|
|
2,639,647
|
|
|
|
(1,539,794
|
)
|
|
|
(1,099,853
|
)
|
|
|
-
|
|
Total
|
|
$
|
4,017,510
|
|
|
$
|
(1,539,794
|
)
|
|
$
|
(2,042,443
|
)
|
|
$
|
435,273
|
|
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, 2019, respectively. Amortization expense was approximately $332,000 and $801,000 for the three and nine months ended September 30, 2018, respectively.
During 2018, the Company determined that the APAD Patents purchased in 2017 will not be further developed or commercialized before their estimated useful life expires. As such, management determined that these assets were impaired and a charge of approximately $1.5 million was recorded.
NOTE 8— 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’ term is 5 years and they 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 also Chief Executive Officer and Director of Wand Dental, a wholly owned subsidiary of Milestone Scientific. The warrants’ terms are 5 years and they are exercisable at $0.50 per share.
WARRANTS
The following table summarizes information about shares issuable under warrants outstanding at September 30, 2019 :
|
|
Warrant shares outstanding
|
|
|
Weighted Average exercise price
|
|
|
Weighted Average remaining life
|
|
|
Intrinsic value
|
|
Outstanding at January 1, 2019
|
|
|
1,592,775
|
|
|
$
|
2.55
|
|
|
$
|
0.21
|
|
|
|
-
|
|
Issued
|
|
|
1,749,171
|
|
|
$
|
0.50
|
|
|
$
|
4.35
|
|
|
|
560,199
|
|
Exercised
|
|
|
(57,750
|
)
|
|
$
|
0.50
|
|
|
|
-
|
|
|
|
-
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2019
|
|
|
3,284,196
|
|
|
$
|
1.49
|
|
|
$
|
2.30
|
|
|
|
560,199
|
|
See below for shares and warrants issued in excess of authorized shares for 2019 accounting treatment.
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, 2019, there were 2,294,734 shares to be issued whose issuance has been deferred under the terms of an employment agreements with the Chief Executive Officer, Chief Financial Officer and other employees of Milestone Scientific. As of December 31, 2018, there were 1,908,813 shares, whose issuance has been deferred under the terms of an employment agreements with the Chief Executive Officer, Chief Financial Officer and other employees of Milestone Scientific. Such shares will be issued to each party upon termination of their employment.
As of September 30, 2019 and December 31, 2018, there were 351,612 and 561,752 shares to be issued to non-employees, respectively, that will be issued to non-employees for services rendered. The number of shares was fixed at the date of grant and were fully vested upon grant date.
See below for shares and warrants issued in excess of authorized shares for 2019 accounting treatment.
SHARES AND WARRANTS 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 does not have a sufficient number of authorized shares of common stock to cover the exercise and issue of approximately 5,850,000 outstanding equity instruments. Therefore, the warrants issued in the public and private placements during 2019 and 2016 are classified as liabilities and will continue to be liability-classified until there are sufficient number of authorized shares of common stock to cover the shares issuable upon exercise of the warrants. As long as the warrants are liability-classified, 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.
The fair value of the warrants is determined using a Black-Scholes option pricing model. The following assumptions were used to value the warrants at the reclassification to liability date:
|
|
2016 Warrants
|
|
|
2019 Warrants
|
|
Fair Value of Common Stock
|
|
|
$.36-$.83
|
|
|
$
|
0.33
|
|
Expected Term
|
|
.2-.5 years
|
|
|
4.9 years
|
|
Volatility
|
|
|
86%-100%
|
|
|
|
83
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Exercise Price
|
|
$
|
2.55
|
|
|
$
|
0.50
|
|
Risk-free interest rate
|
|
|
1.88%-2.09%
|
|
|
|
2.30
|
%
|
Weighted average fair value of warrants granted
|
|
$
|
-
|
|
|
$
|
0.19
|
|
Number of shares underlying warrants granted
|
|
|
1,512,067
|
|
|
|
1,749,171
|
|
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 at September 30, 2019 using the following assumptions:
|
|
2016 Warrants
|
|
|
2019 Warrants
|
|
Fair Value of Common Stock
|
|
$
|
0.83
|
|
|
$
|
0.08
|
|
Expected Term
|
|
0.2 years
|
|
|
4.4 years
|
|
Volatility
|
|
|
86
|
%
|
|
|
86
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Exercise Price
|
|
$
|
2.55
|
|
|
$
|
0.50
|
|
Risk-free interest rate
|
|
|
1.88
|
%
|
|
|
1.55
|
%
|
Weighted average fair value of warrants granted
|
|
$
|
-
|
|
|
$
|
0.61
|
|
Number of shares underlying warrants granted
|
|
|
1,512,067
|
|
|
|
1,691,421
|
|
As of September 30, 2019 the fair value of the warrants was approximately $1,017,000. 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. The value of the shares to be issued liability is approximately $2.2 million as of September 30 , 2019.
The Company plans to seek shareholder approval to increase the number of authorized shares of Common Stock at the next Shareholder’s meeting, which has been scheduled for December 17, 2019.
NOTE 9 — INCOME TAXES
Due to Milestone Scientific's history of operating losses, full valuation allowances have been provided for all of Milestone Scientific's deferred tax assets at September 30, 2019 and December 31, 2018 due to uncertainty as to their future realization.
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.
NOTE 10 — 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 following tables present information about our reportable and operating segments:
|
|
Three months ended September 30
|
|
|
Nine months ended September 30
|
|
Net Sales:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Dental
|
|
$
|
1,884,321
|
|
|
$
|
1,622,246
|
|
|
$
|
6,042,580
|
|
|
$
|
5,780,251
|
|
Medical
|
|
|
15,500
|
|
|
|
-
|
|
|
|
31,000
|
|
|
|
76,100
|
|
Total net sales
|
|
$
|
1,899,821
|
|
|
$
|
1,622,246
|
|
|
$
|
6,073,580
|
|
|
$
|
5,856,351
|
|
Operating Income (Loss):
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Dental
|
|
$
|
644,650
|
|
|
$
|
(893,148
|
)
|
|
$
|
1,766,087
|
|
|
$
|
119,613
|
|
Medical
|
|
|
(554,843
|
)
|
|
|
(454,306
|
)
|
|
|
(1,711,184
|
)
|
|
|
(2,008,852
|
)
|
Corporate
|
|
|
(1,036,541
|
)
|
|
|
(3,200,126
|
)
|
|
|
(2,927,655
|
)
|
|
|
(6,084,685
|
)
|
Total operating loss
|
|
$
|
(946,734
|
)
|
|
$
|
(4,547,580
|
)
|
|
$
|
(2,872,752
|
)
|
|
$
|
(7,973,924
|
)
|
Depreciation and Amortization:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Dental
|
|
$
|
3,950
|
|
|
$
|
3,889
|
|
|
$
|
11,875
|
|
|
$
|
12,133
|
|
Medical
|
|
|
2,424
|
|
|
|
2,530
|
|
|
|
7,424
|
|
|
|
21,884
|
|
Corporate
|
|
|
19,044
|
|
|
|
338,565
|
|
|
|
57,620
|
|
|
|
821,084
|
|
Total depreciation and amortization
|
|
$
|
25,418
|
|
|
$
|
344,984
|
|
|
$
|
76,919
|
|
|
$
|
855,101
|
|
Income (loss) before taxes and equity in earnings of affiliates:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Dental
|
|
$
|
645,442
|
|
|
$
|
(959,095
|
)
|
|
$
|
1,765,475
|
|
|
$
|
125,734
|
|
Medical
|
|
|
(556,969
|
)
|
|
|
(454,906
|
)
|
|
|
(1,713,362
|
)
|
|
|
(2,010,595
|
)
|
Corporate
|
|
|
(2,937,140
|
)
|
|
|
(3,133,819
|
)
|
|
|
(4,777,693
|
)
|
|
|
(6,088,167
|
)
|
Total loss before taxes and equity in earnings of affiliate
|
|
$
|
(2,848,667
|
)
|
|
$
|
(4,547,820
|
)
|
|
$
|
(4,725,580
|
)
|
|
$
|
(7,973,028
|
)
|
Total Assets:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Dental
|
|
$
|
4,745,889
|
|
|
$
|
5,169,944
|
|
Medical
|
|
|
513,000
|
|
|
|
328,208
|
|
Corporate
|
|
|
983,631
|
|
|
|
902,816
|
|
Total assets
|
|
$
|
6,242,520
|
|
|
$
|
6,400,968
|
|
The following table presents information about our operations by geographic area for the three and nine months September 30, 2019 and 2018. Net sales by geographic area are based on the respective locations of our subsidiaries:
|
|
Three months ended September 30
|
|
|
Nine months ended September 30
|
|
Domestic-US & Canada
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Devices
|
|
$
|
216,076
|
|
|
$
|
119,190
|
|
|
$
|
486,360
|
|
|
$
|
251,743
|
|
Handpieces
|
|
|
812,655
|
|
|
|
369,027
|
|
|
|
2,632,199
|
|
|
|
2,296,533
|
|
Other
|
|
|
18,449
|
|
|
|
21,037
|
|
|
|
67,728
|
|
|
|
72,265
|
|
Total Domestic US & Canada
|
|
$
|
1,047,180
|
|
|
$
|
509,254
|
|
|
$
|
3,186,287
|
|
|
$
|
2,620,541
|
|
International ROW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices
|
|
|
391,768
|
|
|
$
|
299,872
|
|
|
$
|
1,016,683
|
|
|
$
|
952,390
|
|
Handpieces
|
|
|
451,631
|
|
|
|
506,880
|
|
|
|
1,714,471
|
|
|
|
1,924,901
|
|
Other
|
|
|
9,242
|
|
|
|
6,240
|
|
|
|
56,139
|
|
|
|
58,519
|
|
Total International-ROW
|
|
$
|
852,641
|
|
|
$
|
812,992
|
|
|
$
|
2,787,293
|
|
|
$
|
2,935,810
|
|
International-China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Handpieces
|
|
|
-
|
|
|
|
300,000
|
|
|
|
100,000
|
|
|
|
300,000
|
|
Other
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total International
|
|
$
|
-
|
|
|
$
|
300,000
|
|
|
$
|
100,000
|
|
|
$
|
300,000
|
|
Domestic. International Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-US & Canada
|
|
$
|
1,047,180
|
|
|
$
|
509,254
|
|
|
$
|
3,186,286
|
|
|
$
|
2,620,541
|
|
International -ROW
|
|
|
852,641
|
|
|
|
812,992
|
|
|
|
2,787,294
|
|
|
|
2,935,810
|
|
International -China
|
|
|
-
|
|
|
|
300,000
|
|
|
|
100,000
|
|
|
|
300,000
|
|
Total Product Sales
|
|
$
|
1,899,821
|
|
|
$
|
1,622,246
|
|
|
$
|
6,073,580
|
|
|
$
|
5,856,351
|
|
NOTE 11 – CONCENTRATIONS
Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent ,CompuMed devices and handpieces, 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 at September 30, 2019 and December 31, 2018. 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, 2019 an aggregate of approximately 54% and 51%, respectively, of Wand Dental’s net product sales were to one customer/distributor. For the three and nine months ended September 30, 2018 an aggregate of approximately 44% and 43%, respectively, of Wand Dental’s net product sales were to one customer/distributor. Accounts receivable for two customers/distributors amounted to approximately $2.7 million or 91%, or 59% and 32% of Milestone Scientific's gross accounts receivable as of September 30, 2019. Accounts receivable, including related party accounts receivable, for the major customer/distributor (i.e., Milestone China, a related party), amounted to approximately $3.1 million , or 82%, or 49% and 33% of Milestone Scientific's accounts receivable, as of December 31, 2018. As of September 30, 2019, Milestone China owed $1,817,990 to Milestone Scientific. Due to the delinquent nature of the scheduled payments and Milestone China’s further liquidity constraints, Milestone Scientific reduced accounts receivable, related party and deferred revenue, related party by $1,817,990 in 2018, this allowance remains recorded as of September 30, 2019 . Additionally, Milestone Scientific has a reserve of $1,250,928 at September 30, 2019 and December 31, 2018, against the associated deferred cost, related party which was recorded in 2018.
NOTE 12 -- 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 $549,000 and $1.1 million for the three and nine months ended September 30, 2019 , respectively. Purchases from this this manufacturer were approximately $361,727 and $900,000 for the three and nine months ended September 30, 2018 respectively. As September 30, 2019 and December 31,2018, Milestone Scientific owed this manufacturer approximately $1.1 million, 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 (controlling shareholder, Tom Cheng) 285,714 shares of stock at $0.35 or $100,000 for consulting services. These shares were issued July 2019.
During 2018 Milestone Scientific through its wholly owned subsidiary, Wand Dental, entered into an agreement with United Systems. The agreement was a Royalty Agreement for handpieces sold to Milestone China by United Systems. United Systems will pay Wand Dental a royalty equal to the net profit that Wand Dental would have received if the handpieces were sold directly to Milestone China or its Agent. As of September 30, 2019 and December 31, 2018, Wand Dental had deferred royalty income of $342,540 that will be recognized at the earlier of when payment of the royalties is received from United Systems or when collectability is deemed to be assured and is included in accounts receivable, related party and deferred revenue, related party on the condensed consolidated balance sheets.
Also, during the year ended December 31, 2018, a Distribution Agreement was executed between Wand Dental and United Systems. Under the Distribution Agreement United Systems purchased 1,000 STA
instruments in June 2018, for delivery to Milestone China. Due to the related party nature and collectability concerns Wand Dental has deferred the sale. During 2018, Milestone Scientific had recorded deferred revenues and deferred costs associated with the sale to United Systems of $750,000 and $686,365, respectively. Milestone Scientific entered into a payment arrangement with Milestone China to satisfy past due receivables from Milestone China and it’s agents which amounted to $ 2.8 million at the time of the payment arrangement. The payment terms required payments of $200,000 per month beginning in July 2018 through November 2018 and a balloon payment of approximately $1,425,000 during December 2018. Due to the default on the arrangement and Milestone China’s liquidity constraints, Milestone Scientific halted shipments to Milestone China. The Company has adjusted the accounts receivable related party and the deferred revenue related party based on the expected payment realization and recorded a reserve against the related deferred cost of $1.25 million which includes the sales to United Systems. The amounts due from United Systems described above are included in the adjustments and reserves for Milestone China. See Note 6.
In July 2019, United System issued a credit to the Company for approximately $151,000 for handpieces founded to be defective. The Company recorded the credit in cost of sales since the Company previously
recorded an allowance for against inventory during 2018.
Milestone China
Milestone Scientific owns a 40% interest in Milestone China. See Note 6.
Other
As of September 30, 2019 and December 31, 2018 Milestone Scientific recorded deferred compensation and accrued pension for Leonard Osser of approximately $222,000 and $387,000 respectively which is included accrued expenses related party.
As of September 30, 2019 and December 31, 2018 Milestone Scientific recorded deferred compensation for Joseph D'Agostino of $20,000, respectively which is included accrued expenses related party.
As of September 30, 2019 and December 31, 2018 Milestone Scientific recorded deferred compensation and accrued pension for Gian Trombetta of approximately of $455,000 and 280,000 respectively which is included accrued expenses related party.
In November 2016, K. Tucker Andersen, a significant stockholder of Milestone Scientific, entered into a three-year 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, 2019 and 2018, 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 the three and nine months ended September 30, 2019 and 2018, respectively.
The Director of Clinical Affairs’ royalty fee was approximately $92,831 and $291,024 for the three and nine months ended September 30, 2019, respectively. The Director of Clinical Affairs’ royalty fee was approximately $77,907 and $284,437 for the three and nine months ended September 30, 2018, 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, 2019 respectively. Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $39,000 and $146,751 for the three and nine months ended September 30, 2018 respectively. As of September 30, 2019 and December 31, 2018, Milestone Scientific owed the Director Clinical Affairs for royalties of approximately $416,000 and $364,000, respectively, which is included in accounts payable, related party and accrued expense, related party.
NOTE 13 — COMMITMENTS
(1) Contract Manufacturing Agreement
Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent® CompuFlo Epidural and CompuMed® devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. In January 2018, Wand Dental entered into a new purchase commitment for the delivery of 1,000 devices beginning in 2019. In July 2019, the open purchase order was modified ,as of September 30, 2019 we have an open purchase order of $1,149,560 for 1,500 instruments and have advanced $434,605 as of September 30, 2019 against this purchase commitment. In August 2019, Milestone Medical entered into a new purchase commitment for the delivery of 100 Epidural instruments beginning in 2020. As of September 30, 2019 we have an open purchase order of $299,000 for 100 Epidural instruments and have advanced $89,700 against this purchase commitment.
(2) Leases
Operating Leases
In June 2015, the Company amended its original office lease of approximately 6,851 square feet 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 has 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 existing office lease and instead signed a seven (7) year lease in a new facility (the “Roseland Facility”). The new facility is located in Roseland, New Jersey, the monthly lease payment is $9,275 commencing April 1, 2020.The Company is also responsible for electric charge equal to $2.00 per square foot which is equal to $11,130 annually, which shall be paid in equal monthly installments of $927.50. 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.
The Company identified and assessed the following significant assumptions in recognizing its right-of-use assets and corresponding lease liabilities:
|
●
|
As the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. The Company has utilized its incremental borrowing rate based on the long-term borrowing costs of comparable companies in the Medical Device industry.
|
|
●
|
Since the Company elected to account for each lease component and its associated non-lease components as a single combined lease component, all contract consideration was allocated to the combined lease component.
|
|
●
|
The expected lease terms include non-cancellable lease periods. Renewal option periods are not included in the determination of the lease terms as they were not reasonably certain to be exercised.
|
The components of lease expense as of September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
Lease cost
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
Operating lease cost
|
|
$
|
39,555
|
|
|
$
|
118,664
|
|
Total lease cost
|
|
$
|
39,555
|
|
|
$
|
118,664
|
|
Other information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
-
|
|
|
$
|
118,664
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
-
|
|
|
|
-
|
|
Weighted-average remaining lease term - operating leases
|
|
|
-
|
|
|
|
0.4 years
|
|
Weighted-average discount rate - operating leases
|
|
|
-
|
|
|
|
9.2
|
%
|
Maturities of lease liabilities due under these lease agreements as of September 30, 2019 are as follows:
2019 (excluding the 9 months ended September 30, 2019 )
|
|
Operating Leases
|
|
2020
|
|
$
|
39,555
|
|
2021
|
|
|
15,976
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total lease payments
|
|
$
|
55,531
|
|
Less: interest
|
|
$
|
(714
|
)
|
Total operating lease liabilities as of September 30, 2019
|
|
$
|
54,817
|
|
Total lease payments presented in the table above excludes legally binding minimum lease payments for operating leases signed for a the Roseland Facility that will commence April 1, 2020.
The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and operating lease commitments as of December 31, 2018 were as follows:
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
Operating Lease Obligations
|
|
$
|
175,557
|
|
|
$
|
159,138
|
|
|
$
|
16,419
|
|
|
$
|
-
|
|
(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-12- other.
NOTE 14— SUBSEQUENT EVENTS
Since the quarter ended September 30, 2019, the Company issued 239,629 shares of common stock for warrants exercised at $0.50 for proceeds of $119,813.