NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — 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 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 August 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 dentistry under the trademark CompuDent®, and STA Single Tooth Anesthesia System® and in medicine under the trademark CompuMed®. CompuDent® is suitable for all dental procedures that require local anesthetic. CompuMed® is 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, Canada and in 60 other countries. Certain medical devices have obtained CE mark approval and can be marketed and sold in most European countries. In June 2017, Milestone Scientific received 510(k) marketing clearance from the U.S. Food and Drug Administration (FDA) on the CompuFlo® Epidural Computer Controlled Anesthesia System (“Epidural”).
We are in the process of meeting with medical facilities and device distributors within the United States, Middle East and Europe. To date there have been seventeen medical devices sold in the United States and limited amounts sold internationally. Certain of our medical instruments have obtained European CE mark approval and can be marketed and sold in most European countries.
In 2020 the Company received a Notice of Allowance from the United States Patent and Trademark Office (USPTO) related to its new CompuPulse System, which combines the benefits of our CompuWave technology with a manual syringe. The new CompuPulse System allows one to identify a pulsatile pressure waveform in a variety of applications, thereby improving the reliability and safety of a drug delivery procedure. Importantly, not all procedures require the sophistication of our CompuFlo system, which precisely controls the administration and flow rate of medication as it is being administered. This new technology provides an efficient and low-cost alternative for procedures where a manual syringe may suffice, while still providing the ability to verify needle and subsequent catheter placement.
NOTE B- LIQUIDITY AND UNCERTAINTIES
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 consolidated financial statements are issued. As of December 31, 2021, the Company had an accumulated deficit of $107.7 million and has incurred a net loss of approximately $6.8 million and $7.3 million for the year ended December 31, 2021, and 2020 respectively.
In the second quarter of 2020, the Company completed two public offerings. In April 2020, a Common Stock offering generating gross proceeds of approximately $5.1 million (5,420,000 common shares and 2,710,000 warrants). The combined price of the shares and warrants was $0.95 per share. The warrants are exercisable at a price of $1.20 per share and have an expiration of three (3) years from the issue date. In June 2020, the Company completed a second Common Stock offering generating gross proceeds of approximately $14.6 million (6,770,000 common shares and 3,749,000 warrants). The combined price of the shares and warrants was $2.15 per share. The warrants are exercisable at $2.60 and expire three (3) years from the issue date. Management believes the Company has sufficient liquidity to support operations beyond a year from the consolidated financial statements issue date.
The coronavirus (COVID-19) adversely impacted the Company's operations, our distributors and suppliers. As a result of the reduced hours, closings of dental offices, hospitals, and pain clinics throughout the country and the rest of the world, revenues for the years ended December 31, 2021, and 2020 were adversely affected. Business interruptions, resulting from COVID-19, or new strain could significantly disrupt our operations and could have a material adverse impact on our business into 2022.
In addition to its employees, the Company relies on (i) distributors, agents, and third-party logistics providers in connection with product sales and distribution and (ii) raw material and component suppliers in the U.S., Europe, and China. If the Company, or any of these entities encounter any disruptions to its or their respective operations or facilities, or if the Company or any of these third-party partners were to shut down for any reason, including by fire, natural disaster, such as a hurricane, tornado or severe storm, power outage, systems failure, labor dispute, pandemic or other public health crises, or other unforeseen disruption, then the Company or they may be prevented or delayed from effectively operating its or their business, respectively.
In addition, it is uncertain as to what effect the continuing spread of COVID-19 will have on the commercialization efforts of our CompuFlo Epidural and CathCheck systems. Such future developments could have a material adverse effect on the Company financial results and its ability to conduct business as expected.
NOTE C — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The accompanying 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), and Milestone Medical (majority owned). All significant, intra-entity transactions and balances have been eliminated in the consolidation.
2. Use of Estimates
The preparation of consolidated 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 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, stock compensation expense, and valuation allowances on deferred tax assets. Actual results could differ from those estimates.
3. 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, 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. 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 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
The Company's 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
The Company operates in two operating segments: dental and medical. Therefore, results of the Company operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. See Note M for revenues by geographical market, based on the customer’s location, and product category for the years ended December 31, 2021 and 2020.
4. 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. Milestone Scientific has completed the VIE analysis relating to Milestone China and Anhui Maishida Medical Technology, Co. Ltd. (“Anhui”).
Milestone Scientific has determined that due to the loss of equity investment in Anhui, the company no longer has significant influence of Anhui and therefore Anhui is not a variable interest. 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 of Milestone China who 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 F
5. 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. As of December 31, 2021, and 2020 Milestone Scientific has approximately $13.9 million and $13.1 million of investments with short term maturities classified as cash equivalents. At times, such cash, may be more than the Federal Deposit Insurance Corporation insurance limit.
6. Accounts Receivable
Milestone Scientific sells a significant amount of its product on credit terms to its major distributors. Milestone Scientific estimates losses from the ability or 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 December 31, 2021 and 2020, accounts receivable was recorded, net of allowance for doubtful accounts of $10,000.
7. 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.
8. 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 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 provision for income tax on the 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.
9. 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 three to seven years. The costs of maintenance and repairs are charged to operations as incurred.
10. 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 recorded at acquisition cost and be amortized at the estimated useful life. Patent defense costs, to the extent applicable, are expensed as incurred.
11. 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.
12. Note Payable
On April 27, 2020, the Company received 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 Company received forgiveness for the Loan during the year ended December 31, 2021 and recorded a gain on debt extinguishment of $276,180.
13. 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.
14. 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 December 31, 2021 and 2020, we had no uncertain tax positions that required recognition in the consolidated financial statements. Milestone Scientific's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations. No interest and penalties are present for periods open. Tax returns for the 2018, 2019 and 2020 years are subject to audit by federal and state jurisdictions.
15. 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 common shares of 68,829,860 and 63,061,358 during the year ended December 31, 2021 and 2020. 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 year ended December 31, 2021 and 2020, the assumed effects of the exercise of potentially dilutive outstanding stock options, unissued restricted stock awards (“RSA”) and warrants, were not included in the calculation as their effect would have been anti-dilutive. Such outstanding options, RSA and warrants totaled 7,291,800 and 8,397,836 on December 31, 2021 and 2020, respectively.
16. 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). The Company 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 Company 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 December 31, 2021 and 2020 the Company does not have any assets or liabilities that were measured at fair value on a recurring basis.
17. Stock-Based Compensation
Milestone Scientific accounts for stock-based compensation under ASC Topic 718, Share-Based Payment. ASC Topic 718 requires all share-based payments to employees, non-employees, directors, and officers, including grants of employee stock options, to be recognized in the consolidated statements of operations over the service period, as an operating expense, based on the grant-date fair values.
18. Recent Accounting Pronouncements
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 did not have a material effect on consolidated 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. The company is analyzing the impact of the adoption of this standard is not expected to have a material effect on consolidated financial statement presentation.
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.
In October 2021, FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which provides guidance on accounting for contract assets and contract liabilities acquired in a business combination in accordance with Topic ASC 606, Revenue Recognition from Contracts with Customers (“ASC 606”). To achieve this, an acquirer may assess how the acquiree applied ASC 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. The amendments of ASU 2021-08 are for fiscal years beginning after December 15, 2022, including interim periods. Early adoption is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company will evaluate the impact of ASU 2021-08 on any future business combinations the Company may enter in the future.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on measuring credit losses for certain financial assets measured at amortized cost, including trade receivables. The FASB has subsequently issued several updates to the standard, providing additional guidance on certain topics covered by the standard. This update requires entities to recognize an allowance for credit losses using a forward-looking expected loss impairment model, taking into consideration historical experience, current conditions, and supportable forecasts that impact collectibility. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic, 326), Derivatives and hedging (Topic 815), and Leases (Topic 842): Effective dates, which deferred the effective date of ASU 2016-13 for the Company. AS a result of ASu 2019-10, ASU 2016-13 is effective for all entities with fiscal years beginning after December 15, 2022, including interim periods. The adoption of this update is not expected to have a material impact on the Company's consolidated financial statements.
NOTE D — INVENTORIES
Inventories, net consist of the following: | | December 31, 2021 | | | December 31, 2020 | |
| | | | | | | | |
Dental finished goods, net | | $ | 342,465 | | | $ | 1,888,141 | |
Medical finished goods, net | | | 1,119,709 | | | | 200,327 | |
Component parts and other materials | | | 79,339 | | | | 331,711 | |
Total inventories | | $ | 1,541,513 | | | $ | 2,420,179 | |
The Company recorded an allowance on slow moving Medical finished goods of approximately $450,000 as of December 31, 2021 and 2020. The Company recorded an allowance on slow moving Dental finished goods of approximately $- and $3,000 as of December 31, 2021 and 2020, respectively. The reserve for the Medical finished goods was provided due to the delay in commercialization of intra-articular medical instruments.
NOTE E — ADVANCES ON CONTRACTS
The advances on contracts represent funding of future dental STA, and epidural inventory purchases and epidural replacements parts. The balance of the advances as of December 31, 2021 and 2020 is $1,309,260 and $414,202 respectively.
NOTE F – INVESTMENT IN AND TRANSACTIONS WITH EQUITY INVESTEES
Milestone China Ltd.
Ownership
In June 2014, Milestone Scientific invested $1 million in Milestone China Ltd. (“Milestone China”), by contributing dental instruments to Milestone China for a 40% ownership interest. Milestone China owns approximately 75% of Milestone Beijing Medical Equipment Company, Ltd (“Milestone Beijing”). Milestone Beijing has primary responsibility for the sales, marketing, and distribution of the Company’s dental products in China. Milestone Scientific recorded its investment in Milestone China under the equity method of accounting.
In first quarter of 2020, Milestone China and certain manufacturing/marketing affiliates entered into a reorganization agreement (the “Transaction”) pursuant to which Milestone China was to merge into an affiliated manufacturing company, Anhui Maishida Medical Technology, Co. Ltd. (“Anhui”), with Anhui as the surviving entity and to have complete responsibility for sales, marketing, and distribution for the Company’s dental products in China. After completion of the Transaction, Milestone Scientific was expected to have an approximate 28.4% direct ownership in Anhui. Due to the COVID-19 pandemic, the regulatory approval of the planned Transaction was delayed while applicable government offices were closed in China and Hong Kong. Until the completion of the transaction Milestone Scientific's 28.4 % in Anhui was held by Milestone China.
On November 23, 2021, management of Milestone Scientific became aware that on October 8, 2021, without approval from Milestone Scientific, (i) Milestone China entered into an Equity Transfer Agreement whereby Milestone China’s 28.4% equity stake in Anhui was transferred to Lidong Zhang, the CEO of Milestone China and Anhui, in exchange for RMB 2,840 million (approximately $440,351) of which no amounts have been or are expected to be received, see below, and (ii) Anhui held a shareholders’ meeting at which the Equity Transfer Agreement was approved by the shareholders of Anhui, eliminating Milestone China’s equity interest in Anhui and Milestone Scientific’s indirect equity interest in Anhui. Based on a review of the minutes of the Anhui shareholders’ meeting, Milestone China was not listed as a shareholder in such meeting due to the executed Equity Transfer Agreement between Lidong Zhang and Milestone China.
Though management believes that this conveyance by Milestone China to LiDong Zhang is outside of the laws of Hong Kong and/or China, as may be applicable, at this juncture Milestone Scientific has no ownership in Anhui and Milestone China has no assets or operations. After considering taking action to assert our rights in the matter, and based on the acknowledgement that such course of action is not without its procedural and substantive challenges in Hong Kong and/or China and, importantly, in view of Michelle Zhang dba Solee Science & Technology USA (“Solee”) (see below), a company located in New Jersey, who became the independent distributor, former agent, for Milestone China and its subsidiaries, and due to the good working relationship developing between Milestone Scientific and Solee and reduction of Milestone Scientific’s credit exposure to a Chinese entity, management is not pursuing any legal action at this time to recover our equity interest.
However, management has determined to pursue an investigation of whether the above-described consideration payable by LiDong Zhang to Milestone China was actually paid to Milestone China and, if so, its recovery. Nevertheless, at this time, Milestone Scientific has not received any consideration, does not know if any of such consideration promised to Milestone China for its interest in Anhui has been paid and, if paid, whether it can recover its share of such consideration. As a result, Milestone Scientific has not recorded a gain or receivable related to the transfer of Anhui. See Note C(4) to the Consolidated Financial Statements. As a result, at this time, Milestone Scientific has not received any consideration and does not know if any of the consideration promised to Milestone China for its interest in Anhui has been paid and, if paid, unless circumstances change, Milestone Scientific does not expect it will receive any of the consideration received by Milestone China for its assets without pursuing legal action. As a result, Milestone Scientific has not recorded a gain or receivable related to the transfer of Anhui. See Note C(4) to the Consolidated Financial Statements. As of December 31, 2021 and 2020 the investment in Milestone China was zero.
Related Party Transactions
Milestone China Distribution Agreement
Milestone China has been 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 its agents which amounted to $2.8 million at the time of the payment arrangement. Milestone Scientific collected $950,000 under this arrangement, until Milestone China defaulted on the payment arrangements.
During the year ended December 31, 2021, Milestone Scientific shipped instruments and handpieces to Solee for the sale to Anhui and recognized revenue of $2.1 million, of which approximately $270,000 at December 31, 2021, was included in account receivable related party (and has since been paid). As of December 31, 2021, the Company has approximately $89,000 of deposits from Solee for future shipment of goods included in accrued expenses on the accompanying consolidated balance sheet. During the year ended December 31, 2020 Milestone Scientific shipped 100 instruments to Milestone China and its agents Solee for the sale to Anhui and recognized revenue of $75,000. As of December 31, 2020, the Company has approximately $183,000 of deposits from Solee for future shipment of goods included in accrued expenses, related party on the accompanying consolidated balance sheet.
Beginning in mid- November 2021, Milestone Scientific entered into discussions with Michelle Zhang dba Solee Science & Technology USA (“Solee”), a company located in New Jersey, to become Milestone Scientific’s independent distributor for China,the former agent, for Milestone China and its subsidiaries. On November 22, 2021, Wand Dental, Inc., a United States subsidiary of Milestone Scientific, entered into a Buy and Sell Agreement with Solee, pursuant to which Milestone Scientific granted Solee the right to sell Milestone Scientific’s STA instruments, associated handpieces, and spare parts in China to Anhui. As of December 31, 2021 there have been no shipment under the new agreement to Solee.
United Systems, Inc. Agreement
In April of 2020, the Company entered into an agreement with United Systems, Inc., a related party, (see Note O) regarding certain handpieces supplied to Milestone China in 2018, that were billed and shipped to Milestone China by United Systems, as well as STA instruments billed to United Systems and delivered to Milestone China, and not paid by Milestone China. United Systems sold its entire accounts receivable due from Milestone China for the above- described handpieces and STA instruments for $370,260 to Milestone Scientific. Milestone Scientific paid United Systems as follows; $100,000 in cash paid in April 2020, $170,260 in shares of the Company’s Common Stock (priced as of the close of business on April 23, 2020, $1.59 ) issued in June 2020, and $100,000 in cash paid in July 2020. The Company is entitled to the cash collections, if and when received, on the accounts receivable due to United Systems prior to this agreement up to approximately $1.4 million. The Company has recorded a charge to the consolidated statement of operations for $370,260 during the twelve months ended December 31, 2020. For the years ended December 31, 2021 and 2020, the Company has not received any collections in relation to this agreement.
Advanced Cosmetics Systems Agreement
In May 2020, Milestone Scientific finalized an agreement for the purchase of Milestone China’s 50% interest in Advanced Cosmetic Systems Inc., for the forgiveness of $900,000 in accounts receivable owed by Milestone China to Milestone Scientific (and previously fully reserved for), resulting in a noncash transaction. As a result of the purchase, Milestone Scientific now owns 100% of Advanced Cosmetic Systems Inc. Milestone China had the option to repurchase the 50% interest in Advanced Cosmetic Systems within one year from the sale date for $900,000 in cash. On May 18, 2021, the repurchase option expired.
Gross Profit Deferral
Due to timing differences of when the inventory sold to Milestone China, Anhui or their agent is recognized and when Milestone China and Anhui sells the acquired inventory to third parties, an elimination of the recorded profit is required as of the balance sheet date. In accordance with ASC 323 Investment Equity Method and Joint Ventures, Milestone Scientific has deferred its ownership percentage of the gross profit associated with recognized revenue from sales to Milestone China, Solee as an agent, and Anhui until that product is sold to third parties.
The Company deferred profits on sales to Anhui and Milestone China due to its equity investment in the Companies, pursuant to ASC 323. Investments – Equity Method and Joint Ventures. Due to the Equity Transfer Agreement discussed above, the Company no longer has any equity interest and/or significant influence in Anhui via Milestone China and, as such, all previously deferred profit of $407,000 has been recognized in the accompanying statement of operations at the date of the Equity Transfer Agreement.
At December 31, 2021 and 2020, the deferred profit was approximately $0 and $242,000, respectively, which is included in deferred profit, related party in the consolidated balance sheets, For the year ending December 31, 2021 and 2020 Milestone Scientific recorded income from gross profit deferral of approximately $242,000 and $98,000, respectively, in relation to gross profit previously deferred on product sold to Milestone China, Anhui, and Solee recorded as deferred profit and divesture-equity investment on the accompanying consolidated statement of operations.
NOTE G— FURNITURE, FIXTURES AND EQUIPMENT
| | December 31, 2021 | | | December 31, 2020 | |
Furniture, Fixtures and Equipment consist of the following: | | | | | | | | |
| | | | | | | | |
Leasehold improvements | | | 24,734 | | | | 24,734 | |
Office furniture and equipment | | | 174,147 | | | | 174,147 | |
Molds | | | 7,200 | | | | 7,200 | |
Trade show displays | | | 151,462 | | | | 151,462 | |
Computers and software | | | 275,364 | | | | 262,290 | |
Tooling Safety Wand | | | 125,022 | | | | 125,022 | |
Tooling equipment-STA & Wand | | | 11,100 | | | | 11,100 | |
EPI and IA Instruments | | | 82,363 | | | | 82,363 | |
STA Trials Instruments | | | 63,752 | | | | 63,752 | |
Total | | | 915,144 | | | | 902,070 | |
Less accumulated depreciation | | | (891,431 | ) | | | (871,341 | ) |
Total | | | 23,713 | | | | 30,729 | |
Depreciation expense was $22,205 and $42,937 for the years ended December 31, 2021, and 2020, respectively.
NOTE H — PATENTS
| | December 31, 2021 | |
| | Cost | | | Accumulated Amortization | | | Net | |
Patents-foundation intellectual property | | $ | 1,377,863 | | | $ | (1,100,244 | ) | | $ | 277,619 | |
Total | | $ | 1,377,863 | | | $ | (1,100,244 | ) | | $ | 277,619 | |
| | December 31, 2020 | |
| | Cost | | | Accumulated Amortization | | | Net | |
Patents-foundation intellectual property | | $ | 1,377,863 | | | $ | (1,048,614 | ) | | $ | 329,249 | |
Total | | $ | 1,377,863 | | | $ | (1,048,614 | ) | | $ | 329,249 | |
Patents are amortized utilizing the straight-line method over estimated useful lives ranging from 3 to 20 years. Amortization expense was $51,630 and $53,011 for the years ended December 31, 2021 and 2020, respectively. The annual amortization expense expected to be recorded for existing intangibles assets for the years 2022 through 2026 is approximately $53,000, $52,000, $34,000, $28,000 and $28,000.
NOTE I — STOCKHOLDERS’ EQUITY
In 2021, at the annual shareholder meeting the Company received approval to increase its authorized shares of common stock from 85,000,000 to 100,000,000.
PUBLIC OFFERING AND PRIVATE PLACEMENT
In the second quarter of 2020, the Company completed two public offerings. In April 2020, a Common Stock offering generating gross proceeds of approximately $5.1 million (5,420,000 common shares and 2,710,000 warrants). The combined price of the shares and warrants was $0.95 per share. The warrants are exercisable at a price of $1.20 per share and have an expiration of three (3) years from the issue date. In June 2020, the Company completed a second Common Stock offering generating gross proceeds of approximately $14.6 million (6,770,000 common shares and 3,749,000 warrants). The combined price of the shares and warrants was $2.15 per share. The warrants are exercisable at $2.60 and expire three (3) years from the issue date.
WARRANTS
The following table summarizes information about shares issuable under warrants outstanding at December 31, 2021:
| | Warrant shares outstanding | | | Weighted Average exercise price | | | Weighted Average remaining life | | | Intrinsic value | |
Outstanding and exercisable at January 1, 2021 | | | 6,369,396 | | | | 1.97 | | | | 2.48 | | | $ | 2,784,117 | |
Issued | | | - | | | | - | | | | - | | | | - | |
Exercised | | | (2,101,175 | ) | | | 1.50 | | | | - | | | | 4,231,079 | |
Expired or cancelled | | | | | | | - | | | | - | | | | - | |
Outstanding and exercisable at December 31, 2021 | | | 4,268,221 | | | $ | 2.18 | | | $ | 1.50 | | | $ | 1,187,546 | |
SHARES TO BE ISSUED
As of December 31, 2021, and 2020, there were 1,891,979 and 2,256,844, shares to be issued whose issuance has been deferred under the terms of an employment agreements with the former Interim Chief Executive Officer, former Chief Financial Officer, and other employees of Milestone Scientific. Such shares will be issued to each party upon termination of their employment.
As of December 31, 2021, and 2020, there were 174,364 and 171,485 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.
The following table summarizes information about shares to be issue at December 31, 2021 and 2020.
| | December 31, 2021 | | | December 31, 2020 | |
| | | | | | | | |
Shares-to-be-issued, outstanding January 1, 2021 and 2020, respectively | | | 2,428,329 | | | | 2,375,760 | |
Granted in current period | | | 93,918 | | | | 642,667 | |
Issued in current period | | | (455,904 | ) | | | (590,098 | ) |
Shares-to be issued outstanding December 31, 2021 and 2020, respectively | | | 2,066,343 | | | | 2,428,329 | |
NOTE J — STOCK OPTION PLANS
In June 2011, the stockholders of Milestone Scientific approved the 2011 Stock Option Plan (the "2011 Plan") which originally provided for stock options to our employees, directors and consultants and incentive and non-qualified stock options to purchase up to 2,000,000 shares of common stock and was later amended in 2016 to increase the maximum number of shares reserved for grant to 4,000,000. Generally, options become exercisable over a three-year period from the grant date and expire five years after the date of grant. As of December 31, 2021 and 2020 the Company had 811,597, and 424,425, respectively, remaining options available for grants under the Plan.
The Milestone Scientific Inc. 2020 Equity Compensation Plan, as amended and restated (the "2020 Plan"), provides for awards of restricted common, stock restricted stock units, options to purchase and other awards, up to a maximum 4,000,000 shares of common stock and expires in June 2031. Options may be granted to employees, directors, and consultants of Milestone Scientific for the purchase of shares of common stock at a price not less than the fair market value of common stock on the date of grant. In general, options become exercisable over a three-year period from the grant date and expire five years after the date of grant.
On April 8, 2021, as part of its Succession Plan going into effect on April 23, 2021, the Company announced that Leonard Osser, the Interim Chief Executive Officer, would be accepting the role of Vice Chairman of the Board of Directors. As part of accepting this role, he would be granted options to purchase 2,000,000 shares of common stock, exercisable at the fair market value of the common stock on the date of grant, vesting over the five-year period after he steps down as Interim Chief Executive Officer of the Company or ten years from the date of grant, whichever shall end first. The options were issued pursuant to the 2020 Plan.
Milestone Scientific recognizes compensation expense over the requisite service period and in the case of performance-based options over the period of the expected performance. For the twelve months ended December 31, 2021 and 2020, Milestone Scientific recognized approximately $763,000, and $537,000 of total employee compensation cost, respectively, recorded in general and administrative expenses on the statement of operations.
As of December 31, 2021, and 2020, there was $3.2 million and $0.9 million of total unrecognized compensation cost related to non- vested options, respectively. Milestone Scientific expects to recognize these costs over a weighted average period of 3.49 and 2.98 years as of December 31, 2021, and 2020, respectively.
A summary of option activity for employees under the plans and changes during the years ended December 31, 2021 is presented below:
| | Number of Options | | | Weighted Averaged Exercise Price $ | | | Weighted Average Remaining Contractual Life (Years) | | | Aggregate Intrinsic Options Value $ | |
Options outstanding January 1, 2021 | | | 1,953,443 | | | $ | 1.88 | | | | 3.09 | | | $ | 476,964 | |
Granted during 2021 | | | 2,140,175 | | | | 2.46 | | | | 8.92 | | | | - | |
Exercised during 2021 | | | (818,166 | ) | | | 1.70 | | | | - | | | | - | |
Forfeited or expired during 2021 | | | (431,759 | ) | | | 2.02 | | | | - | | | | - | |
Options outstanding December 31, 2021 | | | 2,843,693 | | | $ | 2.39 | | | | 7.69 | | | | 49,246 | |
Exercisable, December 31, 2021 | | | 522,157 | | | | 2.19 | | | | 3.90 | | | | 32,831 | |
The weighted-average grant date fair value per share of options granted to employees during the year ended December 31, 2021, and 2020 was $1.56 and $1.25, respectively. The aggregate intrinsic value of options granted to employees exercised was $290,688 and $330,231 for the years ended December 31, 2021, and 2020, respectively.
The Company used the following assumptions to calculate the fair value of the stock option grants using the Black-Scholes option pricing model on the measurement date during the year ended December 31, 2021, risk free interest rate of .19% to 1.15%, Volatility of 69.10% to 95.16% (which is based on the Company’s historical volatility over the expected term), expected term of 3 to 6.5 years, 0% dividend rate and closing price of the stock of $2.13 to $3.79.
A summary of option activity for non-employees under the plans and changes during the years ended December 31, 2021 and 2020, is presented below:
| | Number of Options | | | Weighted Averaged Exercise Price $ | | | Weighted Average Remaining Contractual Life (Years) | | | Aggregate Intrinsic Options Value $ | |
Options outstanding January 1, 2021 | | | 74,997 | | | $ | 1.41 | | | | 3.18 | | | $ | 54,748 | |
Granted | | | 24,999 | | | | 3.28 | | | | 4.43 | | | | - | |
Exercised | | | (8,333 | ) | | | 1.70 | | | | - | | | | - | |
Forfeited | | | (8,333 | ) | | | 2.34 | | | | - | | | | - | |
Options outstanding December 31, 2021 | | | 83,330 | | | | 1.85 | | | | 3.33 | | | | 49,748 | |
Exercisable, December 31, 2021 | | | 55,546 | | | | 1.45 | | | | 2.97 | | | | 45,079 | |
The fair value of the non-employee options was estimated on the date of grant using the Black Scholes option-pricing model at the date of grant. For the twelve months ended December 31, 2021 and 2020, Milestone Scientific recognized approximately $27,600 and $13,600 expense related to non-employee options, respectively.
The Company used the following assumptions to calculate the fair value of the stock option grants using the Black-Scholes option pricing model on the measurement date during the year ended December 31, 2021, risk free interest rate of 0.2%-0.5 %, Volatility of 86.97% to 94.05%, expected term of 5 years, 0% dividend rate and closing price of the stock of $1.65 to $1.75.
The information below summarizes the restricted stock award activity for year ended December 31, 2021
Restricted Stock Awards | | Shares | | | Weighted Average Grant-Date Fair Value per Award | |
| | | | | | | | |
Non-vested as January 31, 2021 | | | - | | | | - | |
Granted | | | 116,399 | | | | 2.36 | |
Vested | | | - | | | | - | |
Cancelled | | | (19,842 | ) | | | 2.52 | |
Non-vested as December 31, 2021 | | | 96,557 | | | | 2.33 | |
As of December 31, 2021, there were 96,551 restricted shares granted and deferred under the terms of an employment agreements with the Territory Manager of Milestone Scientific. Such shares will be issued to each party upon completion of 2 years of employment. For the years ended December 31, 2021, the Company recognized stock compensation expense of approximately $70,000. As of December 31, 2021, the total unrecognized compensation expense was $159,375 related to unvested restricted stock awards, which the Company expects to recognize over an estimated weighted-average period of 1.38 years. No restricted stock awards were granted during the year ended December 31, 2020.
NOTE K–EMPLOYMENT CONTRACT AND CONSULTING AGREEMENTS
Employment Contracts
In August 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 $100,000 for years ended December 31, 2021, and 2020, respectively.
The Director of Clinical Affairs’ royalty fee was approximately $446,000 and $267,000 for the year ended December 31, 2021, and 2020, respectively. Additionally, Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $158,000 and $156,000 for the year ended December 31, 2021, and 2020, respectively. As of December 31, 2021, and 2020, Milestone Scientific owed the Director Clinical Affairs for royalties of approximately $123,000 and $127,000, respectively, which is included in accounts payable, related party and accrued expense, related party, in the consolidated balance sheet. See Note O below for additional information about the royalty agreement.
On March 2, 2021, Milestone Scientific entered into a Royalty Sharing Agreement with Leonard Osser, the Company’s then Interim Chief Executive Officer, pursuant to which Mr. Osser sold, transferred and assigned to the Company all of his rights in and to a certain patent application as to which he is a co-inventor with Dr. Hochman, and the Company agreed to pay to Mr. Osser, beginning May 9, 2027, half of the royalty (2.5%) on net sales that would otherwise be payable to Dr. Hochman and his wife under their Technology Sale Agreement with the Company, the Hochman's having agreed with the Company pursuant to an addendum to such Technology Sale Agreement dated February 25, 2021 to reduce from 5% to 2.5% the payments due to them on May 9, 2027 and thereafter, with respect to dental products.
Pursuant to a Succession Agreement dated April 6, 2021 between Mr. Osser and the Company: (i) the Employment Agreement dated as of July 10, 2017 between Mr. Osser and the Company, pursuant to which upon Mr. Osser stepping down as Interim Chief Executive Officer of the Company, the Company agreed to employ him as Managing Director, China Operations of the Company (the “China Operations Agreement”), and (ii) the Consulting Agreement dated as of July 10, 2017 (the “Consulting Agreement”) between the Company and U.S. Asian Consulting Group, LLC, a company of which Mr. Osser is a principal, the compensation under the China Operations Agreement was modified to reduce the overall compensation by $100,000 to $200,000, split equally between a cash amount and an amount in shares, and the compensation under the Consulting Agreement is increased by $100,000 to $200,000, equally split between a cash amount and an amount in shares, which shares were formerly payable under the China Operations Agreement. Compensation under the China Operations Agreement and the Consulting Agreement are payable for 9.5 years from May 19, 2021.
NOTE L — INCOME TAXES
Due to Milestone Scientific's history of operating losses, a full valuation allowances have been provided for all of Milestone Scientific's deferred tax assets. At December 31, 2021 and 2020, no recognition was given to the utilization of the remaining net operating loss carry forwards in each of these periods.
Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at December 31, 2021 and 2020 are as follows:
| | 2021 | | | 2020 | |
| | | | | | | | |
Allowance for Doubtful Accounts | | $ | 2,000 | | | $ | 2,000 | |
Warranty Reserve | | | 3,000 | | | | 5,000 | |
Impaired Assets | | | | | | | - | |
Inventory Reserve | | | 108,000 | | | | 110,000 | |
Deferred Officer's Compensation | | | 439,000 | | | | 816,000 | |
Depreciation and Amortization | | | (52,000 | ) | | | (67,000 | ) |
Net Operating Loss Carryforwards | | | 18,895,000 | | | | 17,993,000 | |
Tax Credits | | | 660,000 | | | | 416,000 | |
Other | | | 45,000 | | | | 10,000 | |
Subtotal | | | 20,100,000 | | | | 19,285,000 | |
Valuation allowance | | | (20,100,000 | ) | | | (19,285,000 | ) |
Non-current deferred tax asset | | | - | | | | - | |
As of December 31, 2021 and 2020, federal net operating loss carry-forwards are approximately $68,300,000 and $66,000,000, respectively. As of December 31, 2021, Milestone Scientific has net operating losses generated before December 31, 2017 will be available to offset future income, if any, through December 2037. Net operating losses generated in 2018 or after can be carried forward indefinitely.
State net operating losses were approximately $63,400,000 and $56,300,000 for the periods ended December 31, 2021 and 2020, respectively. Net operating losses will be available to offset future taxable income, if any, through December 2041.
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. Milestone Scientific has established a 100% valuation allowance for all its deferred tax assets due to uncertainty as to their future realization. As of December 31, 2021, and 2020, state tax liability was approximately $300 and $24,000 respectively. Such expense was recognized in the accompanying consolidated financial statements.
Accounting for uncertainties in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure, and transition. At December 31, 2021 and 2020, we had no uncertain tax positions that required recognition in the consolidated financial statements. Milestone Scientific's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Statements of Operations. No interest and penalties are present for periods open. Tax returns for the 2018, 2019, and 2020 years are subject to audit by federal and state jurisdictions.
A reconciliation of the statutory tax rates for the years ended December 31, is as follows:
| | 2021 | | | 2020 | |
Statutory rate | | | 21.00 | % | | | 21.00 | % |
State income tax-all states | | | 7.44 | % | | | 1.00 | % |
NOL Expiration | | | -9.13 | % | | | -11.00 | % |
Other | | | -7.79 | % | | | 8.00 | % |
Subtotal | | | 11.52 | % | | | 19.00 | % |
Valuation allowance | | | -11.52 | % | | | -19.00 | % |
Effective tax rate | | | 0 | % | | | 0 | % |
NOTE M — SEGMENT AND GEOGRAPHIC DATA
The Company conducts its business through two reportable segments: Dental and Medical. These segments offer different products and services to different customer base. The Company provides general corporate services to its segments; however, these services are not considered when making operating decisions and assessing segment performance. These services are reported under “Corporate Services” below and these include costs associated with executive management, investor relations, patents, trademarks, licensing agreements, new instruments developments, financing activities and public company compliance.
The following tables present information about our reportable and operating segments:
| | Years Ended December 31, | |
Sales | | | | | | | | |
Net Sales: | | 2021 | | | 2020 | |
Dental | | $ | 10,152,511 | | | $ | 5,421,436 | |
Medical | | | 152,200 | | | | 15,800 | |
Total net sales | | $ | 10,304,711 | | | $ | 5,437,236 | |
Operating Income (Loss): | | 2021 | | | 2020 | |
Dental | | $ | 2,475,059 | | | $ | 817,355 | |
Medical | | | (4,105,854 | ) | | | (3,338,411 | ) |
Corporate | | | (5,747,713 | ) | | | (4,932,062 | ) |
Total operating loss | | $ | (7,378,508 | ) | | $ | (7,453,118 | ) |
Depreciation and Amortization: | | 2021 | | | 2020 | |
Dental | | $ | 4,351 | | | $ | 9,896 | |
Medical | | | 7,313 | | | | 5,693 | |
Corporate | | | 62,172 | | | | 80,360 | |
Total depreciation and amortization | | $ | 73,836 | | | $ | 95,949 | |
Income (loss) before taxes and equity in earnings of affiliates: | | 2021 | | | 2020 | |
Dental | | $ | 2,544,730 | | | $ | 807,770 | |
Medical | | | (4,111,159 | ) | | | (3,342,853 | ) |
Corporate | | | (5,552,259 | ) | | | (4,936,116 | ) |
Total loss before taxes and equity in earnings of affiliate | | $ | (7,118,688 | ) | | $ | (7,471,199 | ) |
Total Assets | | 2021 | | | 2020 | |
Dental | | $ | 6,163,169 | | | $ | 6,035,645 | |
Medical | | | 1,373,511 | | | | 923,658 | |
Corporate | | | 12,273,064 | | | | 12,612,147 | |
Total Assets | | $ | 19,809,744 | | | $ | 19,571,450 | |
The following table presents information about our operations by geographic area as December 31, 2021 and 2020. Net sales by geographic area are based on the respective locations of our subsidiaries.
Total Product Sales-Dental | | 2021 | | | 2020 | |
Domestic-US | | $ | 3,535,049 | | | $ | 2,118,186 | |
International Rest of World | | | 4,519,334 | | | | 3,225,850 | |
International-China | | | 2,098,128 | | | | 77,400 | |
Total Product Sales-Dental | | $ | 10,152,511 | | | $ | 5,421,436 | |
Total Product Sales-Medical | | | | | | | | |
Domestic-US | | $ | 36,500 | | | $ | 2,000 | |
International Rest of World | | | 115,700 | | | | 13,800 | |
International-China | | | - | | | | - | |
Total Product Sales-Medical | | $ | 152,200 | | | $ | 15,800 | |
| | | | | | | | |
Domestic-US | | $ | 3,571,549 | | | $ | 2,120,186 | |
International Rest of World | | | 4,635,034 | | | | 3,239,650 | |
International-China | | | 2,098,128 | | | | 77,400 | |
Total | | $ | 10,304,711 | | | $ | 5,437,236 | |
NOTE N-- CONCENTRATIONS
Milestone Scientific has informal arrangements with third-party US manufacturers of the STA, CompuDent and CompuMed devices, 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 December 31, 2021 and 2020. 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.
We had two customers that accounted for 20%, and 35% amount of revenue respectively for the year ended December 31, 2021. We had one customers that accounted for 39% amount of revenue respectively for the year ended December 31, 2020.
We had three customers that accounted for 13%, 28%, and 29% amount of AR respectively as of December 31, 2021. We had one customers that accounted for 70% amount of AR respectively as of December 31, 2020.
NOTE O -- 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 $1.7 million and $1.9 million for the twelve months ended December 31, 2021, and 2020, respectively. As December 31, 2021, and December 31, 2020, Milestone Scientific owed this manufacturer approximately $548,000 and $362,000, respectively, which is included in accounts payable and accrued expenses related party on the consolidated balance sheets. In June 2021, the Company signed a ten-year agreement with United Systems for manufacturing the handpieces.
On April 29, 2020, the Board of Directors approved the purchase of United Systems accounts receivable ($370,260) See Note F.
Milestone China
See Note F.
Other
In August 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 $100,000 for years ended December 31, 2021, and 2020, respectively.
The Company engaged Mr. Trombetta as a consultant for a period of twelve months (beginning October 1, 2020, and ending September 30, 2021), to provide international business dental information and business contacts to the Company and provide consulting services for new international business and dental segments. For the year ended December 31, 2021, and 2020 the Company expensed $45,000 and $15,000, respectively, for services rendered by Mr. Trombetta. Mr. Trombetta received shares of the company common stock. This agreement was terminated September 30, 2021.
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 $60,000 for the year ended December 31, 2020 . This agreement was terminated September 30, 2020.
The Director of Clinical Affairs’ royalty fee was approximately $446,000 and $267,000 for the year ended December 31, 2021, and 2020, respectively. Additionally, Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $158,000 and $156,000 for the year ended December 31, 2021, and 2020, respectively. As of December 31, 2021, and 2020, Milestone Scientific owed the Director Clinical Affairs for royalties of approximately $123,000 and $127,000, respectively, which is included in accounts payable, related party and accrued expense, related party, in the consolidated balance sheet. See Note K below for additional information about the royalty agreement.
On March 2, 2021, Milestone Scientific entered into a Royalty Sharing Agreement with Leonard Osser, the Company’s then Interim Chief Executive Officer, pursuant to which Mr. Osser sold, transferred and assigned to the Company all of his rights in and to a certain patent application as to which he is a co-inventor with Dr. Hochman, and the Company agreed to pay to Mr. Osser, beginning May 9, 2027, half of the royalty (2.5%) on net sales that would otherwise be payable to Dr. Hochman and his wife under their Technology Sale Agreement with the Company, the Hochman's having agreed with the Company pursuant to an addendum to such Technology Sale Agreement dated February 25, 2021 to reduce from 5% to 2.5% the payments due to them on May 9, 2027 and thereafter, with respect to dental products.
Pursuant to a Succession Agreement dated April 6, 2021 between Mr. Osser and the Company: (i) the Employment Agreement dated as of July 10, 2017 between Mr. Osser and the Company, pursuant to which upon Mr. Osser stepping down as Interim Chief Executive Officer of the Company, the Company agreed to employ him as Managing Director, China Operations of the Company (the “China Operations Agreement”), and (ii) the Consulting Agreement dated as of July 10, 2017 (the “Consulting Agreement”) between the Company and U.S. Asian Consulting Group, LLC, a company of which Mr. Osser is a principal, the compensation under the China Operations Agreement was modified to reduce the overall compensation by $100,000 to $200,000, split equally between a cash amount and an amount in shares, and the compensation under the Consulting Agreement is increased by $100,000 to $200,000, equally split between a cash amount and an amount in shares, which shares were formerly payable under the China Operations Agreement. Compensation under the China Operations Agreement and the Consulting Agreement are payable for 9.5 years from May 19, 2021.
The Company recorded expense of $125,000 and $0 related to the Managing Director, China Operations for the year ended December 31, 2021, and 2020. The Company recorded expense of $125,000 and $0 related to the US Asian Consulting Group, LLC for the year ended December 31, 2021, and 2020.
NOTE P — COMMITMENTS
(1) Contract Manufacturing Agreement
Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent® and CompuMed® devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. The company entered a new purchase commitment for the delivery of 3,300 STA CompuDent® instruments. As of December 31, 2021, the purchase order commitment was approximately $2.6 million and advances of approximately $1.3 million are reported in advances on contracts in the consolidated balance sheet. As of December 31, 2020 the purchase order commitment was approximately $147,000 on and advances of approximately $100,000 are reported in advances on contracts in the consolidated balance sheet. As of December 31, 2020, we have an open purchase order of $607,735 Epidural instruments and have advanced $259,435 against this purchase commitment. As of December 31, 2021 and 2020 the company also has advances on an open purchase order for long lead items for a future purchase order for the manufacturing of Epidural instrument of approximately $34,000 and $55,000, respectively.
(2) Leases
Operating Leases
As of December 31, 2021, total operating lease and finance right-of-use assets were $550,511 and total operating lease and finance liabilities were $577,981, of which $81,001 and $476,980 were classified as current and non-current, respectively. As of December 31, 2021, total finance lease liabilities were $28,607, of which $8,545 and $20,062 were classified as current and non-current, respectively. As of December 31, 2020, total operating lease right-of-use assets were $632,453 and total operating lease liabilities were $630,012, of which $72,031 and $557,981 were classified as current and non-current, respectively. As of December 31, 2020, total finance lease liabilities were $36,403, of which $7,796 and $28,607 were classified as current and non-current, respectively.
In August 2019, the Company made the decision to not renew its existing office lease for its corporate headquarters located in Livingston, New Jersey and instead signed a new seven (7) year lease in a new facility located in Roseland, New Jersey (the “Roseland Facility”), which commenced of January 8, 2020. Under the Roseland Facility lease, rent payments commence on April 1, 2020, and the monthly lease payments escalate annually on January 1 of each year, and range from $9,275 to $10,898 per month over the lease term. The Company is also required to pay a fixed electric charge equal to $2.00 per square foot which is paid in equal monthly installments over the lease term or $11,130 annually. These fixed monthly payments have been included in the measurement of the operating lease liability and related operating lease right-of-use asset as the Company has elected the practical expedient to not separate lease and non-lease components for all leases. The Company is also required to pay its proportionate share of certain operating costs and property taxes applicable to the leased premises more than new base year amounts, which are accounted for as variable lease expenses.
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 were as follows:
| | Years Ended | |
| | 12/31/2021 | | | 12/31/2020 | |
Cash paid for operating lease liabilities | | | 234,866 | | | | 109,654 | |
Cash paid for finance lease liabilities | | | 21,047 | | | | 10,307 | |
Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | | 663,009 | | | | 663,009 | |
Property and equipment obtained in exchange for new finance lease liabilities | | | 43,242 | | | | 43,242 | |
| | | | | | | | |
Weighted Average Remaining Lease Term | | | | | | | | |
Finance leases (in years) | | 3.04 years | | | 4.04 years | |
Operating leases (in years) | | 5.25 years | | | | 6.25 years | |
Weighted-average discount rate - operating leases | | 9.2% | | | | 9.2% | |
Maturity of lease liabilities | | As of December 31, 2021 | |
2022 | | | 138,735 | |
2023 | | | 141,518 | |
2024 | | | 144,300 | |
2025 | | | 136,776 | |
2026 | | | 139,125 | |
Thereafter | | | 35,477 | |
Total lease payments | | | 735,931 | |
Less: interest | | | (149,342 | ) |
Present value of lease liabilities | | | 586,589 | |
NOTE Q — BENEFIT PLAN
Milestone Scientific has a Defined Contribution Plan that allows eligible employees to contribute part of their salary through payroll deductions. Milestone Scientific does not contribute to this plan, but does pay the administrative costs of the plan, which were not significant.
NOTE R — SUBSEQUENT EVENTS
Subsequent to December 31, 2021, the Ukrainian-Russian conflict, sanctions imposed by the United States and other western democracies, and any expansion is likely to have unpredictable and wide-ranging effects on the domestic and global economy and financial markets, which could have an adverse effect on our business and results of operations. Already the conflict has caused market volatility, a sharp increase in certain commodity prices, such as wheat and oil, and an increasing number and frequency of cybersecurity threats. So far, we have experienced a decrease in international sales from Ukrainian and Russia, a direct impact from the conflict. We will continue to monitor the situation carefully and, if necessary, take action to protect our business, operations and financial condition.