MILESTONE SCIENTIFIC INC. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussions of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements. See "Risk Factors" elsewhere in this Form 10-K. OVERVIEW Our common stock was listed on the NYSE American on June 1, 2015 and trades under the symbol “MLSS”. We have developed a proprietary, computer-controlled anesthetic delivery instrument, using The Wand , a single use disposable handpiece. The instrument 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 several other disciplines. The dental instruments are sold in the United States, US territories, Canada, and in over 58 other countries abroad. In June 2017, the FDA approved our 510(k) applications for marketing clearance in the United States of our CompuFlo Epidural System. We are in the process of introductory meetings with medical device distributors within the United States and Europe. There have been 27 medical instruments sold in the United States through December 2020, and limited amounts sold internationally as of the reporting date. Certain of our medical instruments have obtained European CE mark approval and can be marketed and sold in most European countries. Milestone Scientific remains focused on advancing efforts to achieve the following four primary objectives: ● Establishing Milestone DPS Dynamic pressure sensing technology platform as the standard -of -care in painless and precise drug delivery, providing for the first time objective visual and audible in-tissue pressure feedback and continuing to expand platform application; ● Following obtaining successful FDA clearance of our first medical device in June 2017, Milestone Scientific is transitioning from a research and development organization to a commercially focused medical device company. ● Expanding the global footprint of our CompuFlo Epidural device by partnering with distribution companies worldwide’ and ● Continuing the development of our proprietary cosmetic injection device or delivery of botulinum toxin (such as Botox® and Dysport®) Wand STA Dental Instrument Growth Since its market introduction in early 2007, the Wand/STA Instrument and prior C-CLAD products have been used to deliver over 66 million safe, effective, and comfortable injections. The instrument has also been favorably evaluated in numerous peer-reviewed, published clinical studies and associated articles. Moreover, there appears to be a growing consensus among users that the STA Instrument is proving to be a valuable and beneficial instrument that is positively impacting the practice of dentistry worldwide. Global Distribution Network Beginning January 1, 2016, Milestone Scientific entered into a non-exclusive distribution agreement with Henry Schein, Inc. (“Henry Schein”). In June 2016, that agreement was replaced with an exclusive distribution arrangement for our dental products for the United States and Canada with Henry Schein. Under this arrangement we have a semi-dedicated independent sales force visiting dentists. In December 2020, the Henry Schein Exclusive Distribution Agreement was replaced with a non-exclusive distribution agreement in the USA and Canada. Beginning in January 2021, the Company began enrollment of new dental non-exclusive regional distributors throughout the USA and Canada. As of this report date the Company has signed non-exclusive distributor agreements with eight regional dental distributors. On the global front, we have granted exclusive marketing and distribution rights for the Wand/STA Instrument to select dental suppliers in various international regions in Asia, Africa, South America, and Europe. They include FM Produkty Dla Stomatologii in Poland and Unident AB in the countries of Denmark, Sweden, Norway, and Iceland. 28 The following table shows a breakdown of Milestone Scientific’s product sales (net), domestically and internationally, by business segment product category: 2020 Domestic: US Dental Medical Grand Total Instruments $ 191,133 $ - $ 191,133 Handpieces 1,877,039 2,000 1,879,039 Accessories 50,014 - 50,014 Grand Total $ 2,118,186 $ 2,000 $ 2,120,186 International: Rest of World Dental Medical Grand Total Instruments $ 803,190 $ 7,600 $ 810,790 Handpieces 2,373,736 6,200 2,379,936 Accessories 48,924 - 48,924 Grand Total $ 3,225,850 $ 13,800 $ 3,239,650 International: China Dental Medical Grand Total Instruments $ 75,000 $ - $ 75,000 Handpieces - - - Accessories 2,400 - 2,400 Grand Total $ 77,400 $ - $ 77,400 Total Product Sales $ 5,421,436 $ 15,800 $ 5,437,236 2019 Domestic: US/Canada Dental Medical Grand Total Instruments $ 693,767 $ 10,800 $ 704,567 Handpieces 3,733,208 2,900 3,736,108 Accessories 85,930 - 85,930 Grand Total $ 4,512,905 $ 13,700 $ 4,526,605 International: Rest of World Dental Medical Grand Total Instruments $ 1,241,860 $ 8,000 $ 1,249,860 Handpieces 2,360,178 15,900 2,376,078 Accessories 63,308 - 63,308 Grand Total $ 3,665,346 $ 23,900 $ 3,689,246 International: China Dental Medical Grand Total Instruments $ 45,750 $ - $ 45,750 Handpieces 112,900 - 112,900 Accessories - - - Grand Total 158,650 - 158,650 Total Product Sales $ 8,336,901 $ 37,600 $ 8,374,501 Current Product Platform 29 See Item 1. Description of Business. Summary of Critical Accounting Policies and Significant Judgments and Estimates The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Milestone Scientific evaluates its estimates, including those related to accounts receivable, inventories, stock-based compensation, and contingencies. Milestone Scientific bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not clear from other sources. Actual results may differ from those estimates under different assumptions or conditions. While significant accounting policies are more fully described in Note C to the consolidated financial statements included elsewhere in this report, Milestone Scientific believes that the following accounting policies and significant judgment and estimates are most critical in understanding and evaluating the reported financial results. Principles of Consolidation Milestone Scientific's discussion and analysis of the financial condition and results of operations is based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of its wholly-owned and majority-owned subsidiaries including, Wand Dental, Milestone Advanced Cosmetic and Milestone Medical. All significant, intra-entity transactions and balances are eliminated in the consolidation. Variable Interest Entities A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. Because Milestone Scientific has a variable interest in Milestone China it considered the guidance in ASC 810, “Consolidation” as it relates to determining whether Milestone China is a VIE and, if so, identifying the primary beneficiary. Milestone Scientific would be considered the primary beneficiary of the VIE if it has both of the following characteristics: ● Power Criterion: The power to direct the activities that most significantly impact the entity’s economic performance; and ● Losses/Benefits Criterion: The obligation to absorb losses that could potentially be significant or the right to receive benefits that could potentially be significant to the VIE. In first quarter 2020, Milestone China and certain marketing affiliates entered into a plan to merge (the Transaction) into an affiliated manufacturing company, Anhui Maishida Medical Technology, Co. Ltd. (Anhui). Anhui will be the surviving entity after the merger and will have complete responsibility for sales, marketing, and distribution for the Company’s dental products in China. However, as of the filing date of this Quarterly Report, due to the COVID-19 Pandemic, the regulatory documentation for the planned merger has been placed in suspense since applicable government offices are still closed in China and Hong Kong. After completion of the Transaction, Milestone Scientific is expected to have an approximate 28.4% direct ownership in Anhui. Milestone China and certain marketing affiliates are expected to be dissolved upon completion of the merger and upon the required regulatory filings in China and Hong Kong. 30 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, 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 continues to be accounted for under the equity method. See Note F. Assessment of our Ability to Continue as a Going Concern In accordance with Accounting Standard Codification (“ASC”) 205-40, “Presentation of Financial Statements – Going Concern”, the Company continually evaluates 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. Milestone Scientific has incurred operating losses and negative cash flows from operating activities in virtually each year since its inception. In the second quarter of 2020, the Company was successful in raising approximately $19.7 million in public offerings. Based on the expected cash needed for operating activities, the Company’s current cash and liquidity is sufficient to finance the operating requirements for at least the next 12 months from the filing date of this annual report. Other Uncertainties The coronavirus (COVID-19) that was reported to have surfaced in Wuhan, China in December 2019 and that has now spread to other countries throughout the world has adversely impact our operations and those of our third-party partners. As a result of the reduced hours and closings of dental offices throughout the country and the rest of the world due to the continuing spread of COVID-19, revenues for the year ended December 31, 2020 was adversely affected. There has been a slow pick up in dental instrument and disposable sell through to dentists beginning in the third quarter. In addition, it is uncertain as to what the effect will be on the anticipated commercialization of our CompuFlo Epidural and CathCheck system as a medical device . The extent to which the coronavirus impacts our operations, our third-party partners, the dental offices and hospital operations and demand depends on future developments which are still highly uncertain. Such future developments could have a material adverse effect on our financial results and our ability to conduct business as expected. 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 of credit sales are due within ninety days from invoicing. 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 and obsolete inventory is recorded if required based on past and expected future sales, potential technological obsolescence and product expiration requirement and regulations. Impairment of Long-Lived Assets Milestone Scientific reviews long-lived assets for impairment whenever events or circumstances (i.e. a triggering event) indicate that the carrying amounts may not be recoverable. The Company’s impairment review process is based upon an estimate of future undiscounted cash flow. Factors the Company considers that could trigger an impairment review include the following: • significant under performance relative to expected historical or projected future operating results, • significant changes in the manner of our use of the acquired assets or the strategy for our overall business, • significant negative industry or economic trends, and • significant technological changes, which would render the technology obsolete 31 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. 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. For certain arrangements where the shipping terms are FOB destination, revenue is recognized upon delivery. The Company has no obligation on product sales for any installation, set-up, or maintenance, these being the responsibility of the buyer. Milestone Scientific's only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period. Results of Operations. The following table sets forth the consolidated results of operations for the year ended December 31, 2020 compared to 2019 . The trends suggested by this table may not be indicative of future operating results: 2020 2019 Operating results: Product sales, net $ 5,437,236 $ 8,374,501 Cost of products sold 1,815,924 2,656,142 Gross profit 3,621,312 5,718,359 Operating expenses: Selling, general and administrative expenses 10,766,580 9,527,429 Research and development expenses 307,850 189,923 Loss from operations (7,453,118 ) (3,998,993 ) Other income, and loss net 64,306 54,333 Change in fair value of derivative liability - (3,635,580 ) Net loss (7,388,812 ) (7,580,240 ) Net loss attributable to noncontrolling interests (51,539 ) (55,872 ) Net loss attributable to Milestone Scientific Inc. $ (7,337,273 ) $ (7,524,368 ) Cash flow: December 31, 2020 December 31, 2019 Net cash used in operating activities $ (6,984,928 ) $ (1,779,292 ) Net cash used in investing activities (21,438 ) (9,916 ) Net cash provided by financing activities 19,714,011 2,562,047 32 Year ended December 31, 2020 compared to year ended December 31, 2019. Net sales for 2020 and 2019 were as follows: 2020 2019 Increase Decrease % Dental $ 5,421,436 $ 8,336,901 $ (2,915,465 ) -35 % Medical 15,800 37,600 $ (21,800 ) -58 % Total sales, net $ 5,437,236 $ 8,374,501 $ (2,937,265 ) -35 % Consolidated revenue for the twelve months ended December 31, 2020 and 2019 were approximately $5.4 million and $8.3 million, respectively. Dental revenue for the twelve months ended December 31, 2020 and 2019 were approximately $5.4 million and $8.4 million, respectively. Dental revenues decreased by approximately $2.9 million, which is related to COVID-19 pandemic affecting the Company’s customers and other business partners. As a result of the reduced hours and closings of dental offices throughout the country and the rest of the world due to the continuing spread of COVID-19, our revenue for the year ending December 31,2020 was materially and adversely affected. In December 2020, the Exclusive Distribution Arrangement with Henry Schein was replaced with a non-exclusive distribution arrangement. Under the non-exclusive arrangement, Henry Schein will purchase dental instruments and handpieces in the United States and Canada. Beginning in January 2021, the Company began a process of signing non-exclusive dental distribution arrangements with dental distributors in specific geographical locations in the United States and Canada. To date there are eight (8) new non-exclusive dental distributors engaged in the USA and Canada. The goal is to add additional non-exclusive distributors in three main cities in the USA. The goal of changing our marketing plan from a sole exclusive distributor in the USA and Canada, to a large number of non-exclusive distributors is to increase placement of our Wand/STA instrument and thus the expansion of our dental disposables. Medical revenue for the twelve months ended December 31, 2020 and 2019, were approximately $16,000 and $38,000, respectively. In June 2017, the Company announced that the CompuFlo Epidural System received 510(k) marketing clearances from the U.S. Food and Drug Administration (FDA). Milestone is in the process of attending virtual medical device trade shows and attending introductory meetings with medical facilities and medical device distributors within the United States and European markets. The Company is focusing the marketing its Epidural devices principally in the United States. In 2020, the Company began to build an internal sales force to market the Epidural devices to hospitals and medical center throughout the United States. The 2020 COVID - 19 Pandemic has substantially reduced access to many medical facilities for further research projects and as such, trade shows were cancelled through 2020. The Company is now in the process of re-energizing its direct sales efforts with select hospitals and end user meetings as the Pandemic surge has slowed in the USA. The Company’s focus will be on marketing the Epidural medical instruments in the United States. Gross Profit for 2020 and 2019 were as follows: 2020 2019 Increase Decrease % Dental $ 3,656,522 $ 5,706,658 $ (2,050,136 ) -36 % Medical (35,210 ) 11,701 $ (46,911 ) -401 % Total gross profit $ 3,621,312 $ 5,718,359 $ (2,097,047 ) -37 % Consolidated gross profit for the twelve months ended December 31, 2020 and 2019 were approximately 67% and 68%, respectively. Selling, general and administrative expenses for 2020 and 2019 were as follows: 2020 2019 Increase Decrease % Dental $ 2,840,912 $ 2,930,928 $ (90,016 ) -3 % Medical 2,999,256 2,171,881 827,375 38 % Corporate 4,926,412 4,424,620 501,792 11 % Total selling, general and administrative expenses $ 10,766,580 $ 9,527,429 $ 1,239,151 13 % 33 Consolidated selling, general and administrative expenses for the twelve months ended December 31, 2020 and 2019 were approximately $10.7 million and $9.5 million, respectively. This increase of approximately $1.2 million is categorized in several areas. Employee salaries, and benefits expenses increased approximately $1.0 million for twelve months s ended December 31, 2020, as the Company hired additional employees to work on the commercialization of the CompuFl o® Epidural System. During the twelve months ended December 31, 2020 D&O insurance increased approximately $169,000 due to the increase of premiums. The Company expensed approximately $370,000 of bad debt related to a settlement with United Systems, see Note F. Office expense increased approximately $143,000 for the relocation of the Company's office and other related costs. Due to Covid-19 Pandemic, the Company's travel expenses, marketing, trade shows, quality control, and general expenses decreased approximately $560,000 while professional and consulting expense increased approximately $75,000. Research and Development for 2020 and 2019 were as follows: 2020 2019 Increase Decrease % Dental $ - $ - $ - 0 % Medical 303,945 189,923 114,022 60 % Corporate 3,905 - 3,905 0 % Total research and development $ 307,850 $ 189,923 $ 117,927 62 % Consolidated research and development expenses for the twelve months ended December 31, 2020 and 2019, were approximately $308,000 and $190,000, respectively. The increase approximately $118,000 is associated with the Company developing software upgrades and enhancement for the CompuFlo ® Epidural System and handpieces. Profit (Loss) from Operations for 2020 and 2019 were as follows: 2020 2019 Increase Decrease % Dental $ 817,355 $ 2,775,716 $ (1,958,361 ) -71 % Medical (3,338,411 ) (2,350,103 ) (988,308 ) 42 % Corporate (4,932,062 ) (4,424,606 ) (507,456 ) 11 % Total loss from operations $ (7,453,118 ) $ (3,998,993 ) $ (3,454,125 ) 86 % The loss from operations was approximately $7.4 million and $4.0 million for the twelve months ended December 31, 2020 and 2019, respectively, an increase of $3.4 million. The increase is the result of decreased dental revenue, due to reduced hours and closings of dental and medical offices throughout the country and the rest of the world due to the continuing spread of COVID-19. Change in Derivative Liability In 2019, the Company incurred a non-cash expense of approximately $3.65 million due to the shares and warrants issued in the public and private offerings as well as other issuance of common stock during 2019 for which the Company did not have a sufficient number of authorized shares of common stock to cover the exercise and issuance of approximately 5,850,000 outstanding equity instruments. All warrants issued in the public and private placements during 2019 and 2016, all shares-to-be-issued, and certain employee options were classified as liabilities during part of year ended December 31, 2019. The Company received shareholder approval to increase the number of authorized shares of common stock on December 17, 2019. At that time, the Company extinguished the liability for insufficient number of authorized shares of common stock. At December 31, 2019, all outstanding warrants, shares to be issued and options are not classified as a liability. Liquidity and Capital Resources Milestone Scientific has incurred annual operating losses and negative cash flows from operating activities since its inception. Milestone Scientific is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue from its dental business and the medical business worldwide, and a reduction in operating expenses. 34 In the second quarter of 2020 the Company completed two capital raises. In April 2020, the Company completed 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 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 shares and warrants of was $2.15 per share. The warrants are exercisable at a of $2.60 and expire three years from the issue date. See Note I. With the combination of these two Common Stock Offerings, the Company has sufficient liquidity to support operations for at least a year after the consolidated financial statements issue date. Management believes that the Company has sufficient cash, along with the current cash flow and support from the dental business to mitigate the expected selling expenditures for commercialization of the Epidural medical device, as well as other operating expenditures and planned new product development programs, over the next twelve months from the filing date of this report. Dental offices in the USA and world-wide are in the process of reopening to near pre Covid-19 volumes. For the medical sector, hospitals in the USA are opening for elective procedures and as such we ae looking for new and innovative medical solutions. The positive movement in the hospitals will be a benefit step to our sales efforts for the Epidural instrument. Off-Balance Sheet Arrangements Milestone Scientific does not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to the financial position or results of operations. Contractual Obligations The impact of the consolidated contractual obligations at December 31, 2020 , expected on the liquidity and cash flows in future periods, is as follows: Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years Operating lease obligations $ 653,889 $ 124,823 $ 257,993 $ 271,074 Purchase obligations (1) $ 2,620,607 $ 2,620,607 $ - $ - Total $ 3,274,496 $ 2,745,430 $ 257,993 $ 271,074 (1) Purchase obligations include agreements for the purchase of dental and medical devices, including purchase obligations entered into post year end, which will require payment in during the year ended 2021. Recent Accounting Pronouncements See “Note C - Summary of Significant Accounting Policies” to the consolidated financial statements for explanation of recent accounting pronouncements impacting Milestone Scientific. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Milestone Scientific is a “smaller reporting company” as defined by Regulation S-K and, as such, is not required to provide the information required by this item. Item 8. Financial Statements The financial statements of Milestone Scientific required by this Item are set forth beginning on page F-1. Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. 35