NOTE

— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Basis of Presentation

The unaudited condensed consolidated financial statements of Milestone Scientific have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information with the instructions for Form

10Q

and Article

of Regulation S-

Accordingly, they do

not

include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are

not

necessarily indicative of the results of operations which

may

be expected for a full year or any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the year ended

December 31, 2019,

included in Milestone Scientific's Annual Report on Form

-K.

Reclassifications

Certain reclassification has been made to the

2019

financial statements to conform to the condensed consolidated

2020

financial statement presentation. These reclassifications had

effect on net loss or cash flows as previously reported.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, inventory valuation, and cash flow assumptions regarding evaluations for impairment of long-lived assets and going concern considerations, and valuation allowances on deferred tax assets. Actual results could differ from those estimates.

Revenue Recognition

Under ASC

606,

the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC

606,

the Company performs the following

five

steps:

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

recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC

606.

The Company derives its revenues from the sale of its products, primarily dental instruments, handpieces, and other related products. The Company sells its products through a global distribution network and that includes both exclusive and non-exclusive distribution agreements with related and

third

parties.

Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon date of shipment. For certain arrangements where the shipping terms are FOB destination, revenue is recognized upon delivery. The Company has

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

Our payment terms differ by geography and customer, but payment is generally required within

days from the date of shipment or delivery.

Disaggregation of Revenue

We operate in

two

operating segments: dental and medical. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. See Note

for revenues by geographical market, and product category for the

three

months ended

March 31, 2020

and

2019.

Variable Interest Entities

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

If Milestone Scientific determines that it has operating power and the obligation to absorb losses or receive benefits, Milestone Scientific consolidates the VIE as the primary beneficiary. Milestone Scientific’s involvement constitutes power that is most significant to the entity when it has unconstrained decision-making ability over key operational functions within the entity.

Because Milestone Scientific has a variable interest in Milestone China it considered the guidance in ASC

810,

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

●

Power Criterion: The power to direct the activities that most significantly impact the entity’s economic performance; and

●

Losses/Benefits Criterion: The obligation to absorb losses that could potentially be significant or the right to receive benefits that could potentially be significant to the VIE.

Milestone Scientific does

not

have the ability to control the activities that most significantly impact Milestone China's economics and, therefore, the power criterion has

not

been met. Management placed the most weight on the relationship and significance of activities of Milestone China to the CEO and a group of significant shareholders, including the Milestone China CEO, which have the power to direct the activities that most significantly impact the economic performance of Milestone China. Management has concluded that Milestone Scientific is

not

the primary beneficiary under ASC

810.

See Note

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.

Accounts Receivable

Milestone Scientific sells a significant amount of its product on credit terms to its major distributors. Milestone Scientific estimates losses from the inability of its customers to make payments on amounts billed. Most credit sales are due within

days from invoicing. There have

not

been any significant credit losses incurred to date. As of

March 31, 2020,

and

December 31, 2019,

accounts receivable was recorded, net of allowance for doubtful accounts of

$10,000

Inventories

Inventories principally consist of finished goods and component parts stated at the lower of cost (

first

-in,

first

-out method) or net realizable value. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess, slow moving, defective, and obsolete inventory is recorded if required based on past and expected future sales, potential technological obsolescence and product expiration requirements. As of

March 31, 2020,

and

December 31, 2019 ,

inventory was recorded net of a valuation allowance for slow moving and defective inventory of approximately

$768,000

respectively.

10.

Equity Method Investments

Investments in which Milestone Scientific can exercise significant influence, but do

not

control, are accounted for under the equity method of accounting and are included in the long-term assets on the Condensed Consolidated Balance Sheets. Under this method of accounting, Milestone Scientific's share of the net earnings or losses of the investee is presented below the income tax line on the Condensed Consolidated Statements of Operations. Milestone Scientific evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments

may

be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.

11.

Furniture, Fixture and Equipment

Equipment is recorded at cost, less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, which range from

two

seven

years. The costs of maintenance and repairs are charged to operations as incurred.

12.

Intangible Assets – Patents and Developed Technology

Patents are recorded at cost to prepare and file the applicable documents with the US Patent Office, or internationally with the applicable governmental office in the respective country. The costs related to these patents are being amortized using the straight-line method over the estimated useful life of the patent. Patents and other developed technology acquired from another business entity will be amortized at the estimated useful life of the patent. These patents and developed technology are recorded at the acquisition cost.

13.

Impairment of Long-Lived Assets

Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. The Company’s impairment review process is based upon an estimate of future undiscounted cash flow. Factors the Company considers that could trigger an impairment review include the following:

●

significant under performance relative to expected historical or projected future operating results,

●

significant changes in the manner of our use of the acquired assets or the strategy for our overall business

●

significant negative industry or economic trends

●

significant technological changes, which would render the technology obsolete

Recoverability of assets that will continue to be used in the Company's operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs.

14.

Research and Development

Research and development costs, which consist principally of new product development costs payable to

third

parties, are expense as incurred. Advance payments for the research are amortized to expense either as services are performed or over the relevant service period using the straight-line method.

15.

Income Taxes

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

March 31, 2020

and

December 31, 2019 ,

we had

uncertain tax positions that required recognition in the condensed consolidated financial statements. Milestone Scientific's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the condensed consolidated statements of operations.

interest and penalties are present for periods open. Tax returns for the

2016,

2017,

and

2018

years are subject to audit by federal and state jurisdictions.

16.

Basic and diluted net loss per common share

Basic earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. In periods where there is net income, we applied the

two

-class method to calculate basic and diluted net income (loss) per share of common stock, as our Series A Convertible Preferred Stock was a participating security. The

two

-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. In periods where there is a net loss, the

two

-class method of computing earnings per share does

not

apply as our Series A Convertible Preferred Stock did

not

contractually participate in our losses.

The Company did

not

include any portion of outstanding options, warrants or convertible preferred stock in the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented.

Since Milestone Scientific had net losses in the

three

months ended

March 31, 2020

and

2019,

the assumed effects of the exercise of potentially dilutive outstanding stock options, warrants, and convertible preferred stock were

not

included in the calculation as their effect would have been anti-dilutive. Such outstanding options, warrants, and convertible preferred stock totaled

1,875,886

and

10,942,963

March 31, 2020

and

March 31, 2019,

respectively.

17.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). We are required to classify fair value measurements in

one

of the following categories:

	●	Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
	●	Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.
	●	Level 3 inputs are defined as unobservable inputs for the assets or liabilities.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of an input to the fair value measurement requires judgment and

may

affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. As of

March 31, 2020

the Company does

not

have any assets or liabilities that were measured at fair value on a recurring basis.

18.

Derivative Liability

The Company does

not

use derivative instruments to hedge exposures to cash flow, market or foreign currency risks; however, the Company had certain financial instruments that qualified as derivatives and were classified as liabilities on the balance sheet during the year ended

December 31, 2019.

The Company evaluates all its financial instruments to determine if those instruments or any potential embedded components of those instruments qualify as derivatives that need to be separately accounted for in accordance with FASB ASC

815,

“Derivatives and Hedging”. Derivatives satisfying certain criteria are recorded at fair value at issuance and marked-to-market at each balance sheet date with the change in the fair value recorded as income or expense. In addition, upon the occurrence of an event that requires a derivative liability to be reclassified to equity, the derivative liability is revalued to fair value at that date. See Note

Outstanding Equity Instruments in Excess of Authorized Shares.

19.

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, including grants of employee stock options, to be recognized in the Statements of Operations over the service period, as an operating expense, based on the grant-date fair values.

. Leases

At the inception of an arrangement, we determine whether an arrangement is, or contains, a lease. An arrangement is, or contains, a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with a term greater than

one

year are generally recognized on the balance sheet as right-of-use assets and current and non-current lease liabilities, as applicable. We have elected

not

to recognize on the balance sheet leases with terms of

months or less. We typically only include the initial lease term in our assessment of a lease arrangement. Options to extend a lease are

not

included in our assessment unless there is reasonable certainty that we will renew.

Finance and operating lease right-of-use assets represent the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. The interest rate implicit in our leases is typically

not

readily determinable. As a result, we utilize our incremental borrowing rate, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

We evaluate the classification of our leases as either finance leases or operating leases. Leases that are economically similar to the purchase of assets are generally classified as finance leases; otherwise, the leases are classified as operating leases. Lease cost for our operating leases is recognized on a straight-line basis over the lease term. Included in lease cost are any variable lease payments incurred in the period that are

not

included in the initial lease liability and lease payments incurred in the period for any leases with an initial term of

months or less. See Note

13.

. Recent Accounting Pronouncements

June 2016,

the FASB issued a new standard ASU

No.2016

13,

“Financial Instruments – Credit Losses” (Topic

326

). The new standard is intended to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. It will be effective for all smaller reporting entities for fiscal years and interim periods, beginning after

December 15, 2022.

November 2016,

the FASB issued a new standard ASU

No.2016

18,

“Statement of Cash Flows – Restricted Cash” (Topic

230

). The new standard provides guidance as to address the diversity of treatment of restricted cash on the statement of cash flows. The adoption of this standard did

not

have a material effect on presentation within the statement of cash flows.

November 28, 2018,

the Financial Accounting Standards Board (“FASB”) issued ASU

2018

13,

Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic

820

), which changes the fair value measurement disclosure requirements of ASC

820.

This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level

and Level

of the fair value hierarchy and the policy for timing of transfers between the levels. This ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level

fair value measurements and the range and weighted average of unobservable inputs used in Level

fair value measurements. ASU

2018

is effective for all entities with fiscal years beginning after

December 15, 2019,

including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU

2018

13.

The adoption of this standard did

not

have a material effect on financial statement presentation.