MLSS Milestone Scientific Inc

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 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 ®; CathCheckTM; 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 is suitable for all dental procedures that require local anesthetic. 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. 

In May 2022, the Company initiated a Corrective Action Preventative Action (CAPA) investigation of the Epidural Disposable Kit, Part # 6100-01, lot HC 51, the scope of the voluntary market withdrawal needed to be expanded to include Part # 6100-03, lot HC 50. A new non-conformance was initiated, and Lot HC 50 was added to the scope of the CAPA initiated above. The investigation via the CAPA identified that there is an issue with the id adaptors used in both lot’s HC 51 and HC 50. However, the health hazard evaluation shows that there is no risk to the patient or the user, thus management has determined there are no potential impacts to patients or users. Lot’s HC 51 and HC 50 are worth approximately $22,000 and $10,000 respectively. Management has determined that no other lots were affected.

In May 2022, the Company was notified that Wand STA handpieces, reference # STA—5050-2725, lot B210113 were packaged incorrectly. The Company initiated a Corrective Action Preventative Action (CAPA) investigation to determine the root cause and implement corrective actions. The Health Hazard Evaluation (HHE) was completed and showed that there is no risk to the patient or the user due to this discrepancy, thus management has determined there are no potential impacts to patients or users. However, to provide the highest quality products to the market, Milestone Scientific decided to initiate a voluntary market withdrawal on May 13, 2022. Lot B210113 is worth approximately $25,000. 

NOTE 2 - LIQUIDITY AND UNCERTAINTIES  

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.

The coronavirus (COVID-19) adversely impacted the Company's operations, our distributors and suppliers in recent years. In spite of the reopening of dental offices, hospitals, and pain clinics throughout the country and the rest of the world, revenues for the three and nine months ended September 30, 2022, and 2021 were adversely affected in particular for the medical business. However, any business interruptions, resulting from COVID-19, or new variant, could significantly disrupt our operations further and could have a material adverse impact on our business in the future.  

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.

Sanctions imposed by the United States and other western democracies, against Russia because of Ukraine conflict, and any expansion of the conflict, 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. The conflict has already 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 to Ukraine and halted all sales to Russia, as 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.

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.  Principles of Consolidation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Milestone Scientific and its wholly owned and majority owned subsidiaries, including, Wand Dental (wholly owned), and Milestone Medical (majority owned).  All significant, intra-entity transactions and balances have been eliminated in the consolidation.

2. Basis of Presentation

The unaudited condensed consolidated financial statements of Milestone Scientific have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated 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 consolidated financial statements and notes thereto for the year ended December 31, 2021, included in Milestone Scientific's Annual Report on Form 10-K

3.  Use of Estimates

The preparation of the unaudited condensed 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.

4.  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:

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 10 for revenues by geographical market, based on the customer’s location, and product category for the three and nine months ended September 30, 2022, and 2021.

5.  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 entity. Milestone Scientific has a variable interest in Milestone China, it considered the guidance in ASC 810, “Consolidation” as it relates to determining whether Milestone China is a VIE and, if so, identifying the primary beneficiary. Milestone Scientific would be considered the primary beneficiary of the VIE if it has both of the following characteristics:

Milestone Scientific does 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 has 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.

6.  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 September 30, 2022 and December 31, 2021, Milestone Scientific had approximately $9.7 million and $13.9 million, respectively, 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.  

7.  Accounts Receivable

Milestone Scientific sells a significant amount of its products 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 September 30, 2022 and December 31, 2021, accounts receivable and accounts receivable, related party was recorded, net of allowance for doubtful accounts of $110,000 and $10,000, respectively.

8.  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.

9.  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 unaudited 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 provision for income tax on the unaudited Condensed Consolidated Statements of Operations. Milestone Scientific evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.

10.  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:

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.

11.  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.

12.  Income Taxes

Milestone Scientific accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed for temporary differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

On September 30, 2022 and December 31, 2021, we had no uncertain tax positions that required recognition in the unaudited condensed consolidated financial statements. Milestone Scientific's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the unaudited condensed 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. The 2021 tax returns were filed subsequent to September 30, 2022.

13.  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 70,975,420 and 69,573,795 for the three months ended September 30, 2022 and 2021 respectively. 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 70,480,706 and 68,609,143 for the nine months ended September 30, 2022 and 2021 respectively. 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. The Company also includes shares to be issued to employees in the calculation of basic earnings per share because the shares to be issued settle a compensation obligation in a fixed number of shares.

Since Milestone Scientific had net losses in the three and nine months ended September 30, 2022 and 2021, 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 8,135,704 and 7,674,239 for the nine months ended on September 30, 2022 and 2021, respectively.

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: 

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of an input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. As of September 30, 2022 and December 31, 2021, the Company did not have any assets or liabilities that were measured at fair value on a recurring basis.

14. 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 unaudited condensed consolidated statements of operations over the service period, as an operating expense, based on the grant-date fair values. 

15.  Recent Accounting Pronouncements

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 adoption of this standard did not have an impact on the Company's condensed consolidated financial statement.

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 did not have an impact on the Company's condensed consolidated financial statement.

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 collectability.

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 condensed consolidated financial statements

The Company maintains an allowance for doubtful accounts on slow moving Medical finished goods of approximately $880,000 and $450,000 as of September 30, 2022 and December 31, 2021, respectively.

NOTE 5 — ADVANCES ON CONTRACTS

The advances on contracts represent funding of future STA Single Tooth Anesthesia System inventory purchases, epidural instruments, and epidural replacements parts. The balance of the advances as of September 30, 2022 and December 31, 2021, is approximately $1.6 million and $1.3 million, respectively. The advance is classified as current based on the estimated annual usage of the underlying inventory.     

NOTE 6 – 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”). At the time, Milestone Beijing had 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, then becoming the independent distributor for Milestone China and its subsidiaries, and due to the good working relationship then developing between Milestone Scientific and Solee and to the 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. Given the significant deterioration of the economy in China, caused by in large part the actions of the Chinese central government in dealing with COVID-19, the crash of the real estate market and the moves against independent companies, the Company does not believe it is prudent at this time to continue to pursue its investigation of any options it may have regarding its Chinese distributor, and therefore, in order to preserve cash the Company is for the time being suspending its investigation. 

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. 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. As of September 30, 2022 and December 31, 2021, the investment in Milestone China was zero.

Related Party Transactions 

Milestone China Distribution Agreement

Milestone China had 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.

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, replacing its former distributor 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. For the three months ended September 30, 2022, Milestone Scientific shipped no instruments or handpieces to Solee. For the nine months ended September 30, 2022, Milestone Scientific shipped handpieces to Solee for sale to Anhui and recognized revenue of approximately $370,000. As of September 30, 2022, approximately $100,000 was included in account receivable related party, however management has recorded a reserve against this receivable. For the three and nine months ended September 30, 2021, Milestone Scientific shipped instruments, and handpieces to Solee for the sale to Anhui and recognized revenue of $360,000 and $1.4 million, respectively. As of December 31, 2021, the Company had approximately $89,000 of deposits from Solee for future shipment of goods included in accrued expenses on the accompanying condensed consolidated balance sheet. As of September 30, 2022, the Company had no deposits from Solee for future shipment of goods included in accrued expenses on the accompanying condensed consolidated balance sheet.  

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.

As of September 30, 2022 and December 31, 2021, the Company had no deferred profit in the unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, Milestone Scientific did not record any loss on equity investment in relation to gross profit on product sold to Milestone China, Anhui, and Solee. For the three and nine months ended September 30, 2021, Milestone Scientific recorded loss on equity investment of approximately $70,000 and $164,000, 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 unaudited condensed consolidated statement of operations. 

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, 2022, respectively. Amortization expense was approximately $11,000 and $34,000 for the three and nine months ended September 30, 2021, respectively. The annual amortization expense expected to be recorded for existing intangibles assets for the years 2022 through 2026 and thereafter, is approximately $13,000, $52,000, $34,000, $28,000, and $111,000, respectively.   

Shares to Be Issued

As of September 30, 2022 and 2021, there were 1,852,789 and 1,861,639 shares, respectively, to be issued whose issuance has been deferred by certain employees of Milestone Scientific.  As of September 30, 2022 and 2021, there were 174,364 and 144,024 shares, respectively, to be issued to non-employees, that will be issued 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 issued on:

Stock Options Plans

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. 

Milestone Scientific recognizes stock compensation expense over the requisite service period. For three and nine months ended September 30, 2022, Milestone Scientific recognized approximately $232,998 and $1.1 million of total employee stock compensation cost, respectively, recorded in general and administrative expenses on the statement of operations. For three and nine months ended September 30, 2021, Milestone Scientific recognized approximately $165,000 and $451,000 of total employee stock compensation cost, respectively, recorded in general and administrative expenses on the statement of operations.

As of September 30, 2022, there was approximately $2.7 million of total unrecognized compensation cost related to non-vested options. Milestone Scientific expects to recognize these costs over a weighted average period of 2.75 years. 

A summary of option activity for employees under the plans and changes during the nine months ended September 30, 2022 is presented below:        

A summary of option activity for non-employees under the plans and changes during the nine months ended September 30, 2022 is presented below:        

For the three and nine months ended  September 30, 2022, Milestone Scientific recognized approximately $5,000 and $15,000 expense related to non-employee options, respectively. For the three and nine months ended  September 30, 2021, Milestone Scientific recognized approximately $5,000 and $20,000 expense related to non-employee options, respectively.

The information below summarizes the restricted stock award activity for the nine months September 30, 2022.

As of September 30, 2022, there were 49,616 restricted shares granted and deferred under the terms of an employment agreement with the Territory Manager of Milestone Scientific, Inc. Such shares will be issued to him (or her) completion of 2 years of employment. For the three and nine months ended September 30, 2022, the Company recognized negative stock compensation of approximately $10,400 and $37,500, respectively, due to termination of non-vested employees in the current period. For the three and nine months ended September 30 2021, the Company recognized stock compensation expense of approximately $16,667 and $37,500, respectively. As of September 30, 2022, the total unrecognized stock compensation expense was $46,875 related to non-vested restricted stock awards, which the Company expects to recognize over an estimated weighted average period of 1.28 years.

As of September 30, 2022, the Company entered into restricted stock agreements with members of the Board of Directors of the Company. The Company granted 899,300 restricted stock awards with a fair market value of $0.82 per share. Such restricted stock vests as follows: 25% on the grant date, and 25% quarterly, on the first day of the following months:  October 2022, January 2023, and April 2023. These awards vest immediately upon a change of control as defined in the agreements. For the three and nine months ended September 30, 2022, the Company recognized approximately $167,000, and $381,000, respectively for restricted stock expenses recorded in general and administrative expenses on the statement of operation. As of September 30, 2022, the total unrecognized stock compensation expense was $356,000 related to non-vested restricted stock awards with the members of the Board of Directors, which the Company expects to recognize over an estimated weighted average period of 0.5 years.

NOTE 9 — INCOME TAXES

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. 

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 bases. 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:

The following table presents information about our operations by geographic area for the three and nine months ended September 30, 2022 and 2021.  Net sales by geographic area are based on the respective locations of our subsidiaries:

NOTE 11 -- CONCENTRATIONS

Milestone Scientific has informal arrangements with third-party U.S. 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 on September 30, 2022 and 2021.  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 nine months ended September 30, 2022, we had the four distributors that accounted for 13%, 15%, 18% and 36% of the aggregate accounts receivable.  As of December 31, 2021, we had three distributors that accounted for 13%, 28%, and 29% of the aggregate accounts receivable. 

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 manufacturer of its handpieces, pursuant to which it manufactures products under specific purchase orders, but without minimum purchase commitments. Purchases from this manufacturer were approximately $658,000 and $2.3 million, respectively for three and nine months ended September 30, 2022. Purchases from this manufacturer were approximately $417,000 and $1.3 million, respectively for three and nine months ended September 30, 2021. 

As of September 30, 2022 and December 31, 2021, Milestone Scientific owed this manufacturer approximately $904,000 and $548,000, respectively, which approximately $904,000 and $395,000 is included in accounts payable, related party, respectively, and $0 and approximately $153,000 is included in accrued expense, related party, respectively, on the unaudited condensed consolidated balance sheets. 

Milestone China

See Note 6 of the notes to the unaudited condensed consolidated financial statements.
 
Other

K. Tucker Andersen, a significant stockholder of Milestone Scientific provides financial and business strategic services to the Company. Expenses recognized were $25,000 and $75,000 for each of the three and nine months ended September 30, 2022 and 2021, 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 three and nine months ended September 30, 2021, the Company expensed $15,000 and $45,000, respectively, for services rendered by Mr. Trombetta. Mr. Trombetta received shares of the Company’s common stock in lieu of the cash under this agreement. This agreement was terminated September 30, 2021, and therefore, no expenses were incurred for services rendered by Mr. Trombetta for the three and nine months ended September 30, 2022. 

The Director of Clinical Affairs’ royalty fee was approximately $108,000 and $322,000 for three and nine months ended September 30, 2022, respectively. The Director of Clinical Affairs’ royalty fee was approximately $74,000 and $322,000 for three and nine months ended September 30, 2021, respectively. Additionally, Milestone Scientific expensed consulting fees to the Director of Clinical Affairs of $39,000 and $115,000 for each of the three and nine months ended September 30, 2022, and 2021, respectively. As of September 30, 2022, and December 31, 2021, Milestone Scientific owed the Director Clinical Affairs for royalties of approximately $108,000 and $123,000, respectively, which is included in accrued expense, related party, in the condensed consolidated balance sheet.

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 $50,000 and $150,000 which is included SG&A expenses and accrued expense, related party, respectively, related to the Managing Director, China Operations for three and nine months ended September 30, 2022, respectively. The Company recorded expense of $50,000 and $75,000 which is included SG&A expenses and accrued expense, related party, respectively, related to the Managing Director, China Operations for the three and nine months ended September 30, 2021, respectively. The Company recorded expense of $50,000 and $150,000 which includes consultant expenses and accrued expenses, related party, respectively, related to the US Asian Consulting Group, LLC for the three and nine months ended September 30, 2022. The Company recorded expense of $50,000 and $75,000 which is included consultant expenses and accrued expense, related party, respectively, related to the US Asian Consulting Group, LLC for each of the three and nine months ended September 30, 2021.  As of September 30, 2022, and December 31, 2021, the Company owed Mr. Osser approximately $166,000 and $0, respectively, which is included accrued expense, related party in the condensed consolidated balance sheet.     

NOTE 13 — COMMITMENTS

(1)  Contract Manufacturing Agreement 

Milestone Scientific has informal arrangements with third-party manufacturers of the STA, CompuDent® devices, pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. The Company has an open purchase commitment for the delivery of 2,410 STA CompuDent® instruments. 

As of September 30, 2022, the purchase order commitment was approximately $1.9 million and advances of approximately $1.5 million are reported in advances on contracts in the condensed consolidated balance sheet. As of September 30, 2022, the Company made advanced payments of approximately $1.3 million for a purchase commitment for STA instruments, sound chips for future instruments of approximately $191,000 and advanced to customers for handpiece replacement of approximately $23,000 from market withdrawal in May 2022 are reported in advances on contracts in the condensed consolidated balance sheet. 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 condensed consolidated balance sheet. 

As of September 30, 2022, the company also had advances on an open purchase order for long lead items for a future purchase order for the manufacturing of Epidural instrument of approximately $41,000 and advanced to customers for handpiece replacement of $34,000 from market withdrawal in  May 2022 a reported in advances on contracts in the condensed consolidated balance sheet. The advance is classified as current based on the estimated annual usage of the underlying inventory. As of December 31, 2021, 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 reported in advances on contracts in the condensed consolidated balance sheet. The advance is classified as current based on the estimated annual usage of the underlying inventory.

(2)  Leases

Operating Leases

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 commenced 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. 

As of September 30, 2022, total operating lease and finance right-of-use assets were $484,327 and total operating lease and finance liabilities were $497,931, of which $88,933 and $408,998 were classified as current and non-current, respectively. As of September 30, 2022, total finance lease liabilities were $22,273 of which $9,153 and $13,120 were classified as current and non-current, respectively. 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. 

The components of lease expense were as follows:

(3) Other Commitments

On March 2, 2021, Milestone Scientific entered into a Royalty Sharing Agreement with Leonard Osser, the Company’s  then that would otherwise be payable to Mr. Hochman and his wife under the Technology Sale Agreement referred to above, 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.