Note 6 - Investment in and Transactions with Unconsolidated Subsidiaries

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Equity Method Investments and Joint Ventures Disclosure [Text Block]

NOTE

6

 – INVESTMENT IN AND TRANSACTIONS WITH UNCONSOLIDATED SUBSIDIARIES

Milestone China Ltd.

Ownership

In

June 2014,

Milestone Scientific invested

$1

million in Milestone China Ltd. (“Milestone China”), by contributing dental instruments to Milestone China for a

forty

(

40%

) ownership interest. Milestone China owns approximately

75%

of Milestone Beijing Medical Equipment Company, Ltd (“Milestone Beijing”). Milestone Beijing has primary responsibility for the sales, marketing and distribution of the Company’s dental products in China. Milestone Scientific recorded their investment in Milestone China under the equity method of accounting. 

In

first

quarter

2020,

Milestone China  and Milestone Beijing 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, due to the COVID-

19

Pandemic, the regulatory documentation for the planned merger have been placed in suspense, since applicable government offices are 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 Milestone Beijing are expected to be dissolved upon completion of the merger and upon the required regulatory filings in Hong Kong and China.

Related Party Transactions

Milestone China is Milestone Scientific’s exclusive distributor in China.  During

2017

and prior to the payment default during 

2018,

Milestone Scientific agreed to sell inventory to Milestone China and its agent. During

2018

Milestone Scientific entered into a payment arrangement with Milestone China to satisfy past due receivables from Milestone China and it’s agents which amounted to

$2.8

million  at the time of the payment arrangement. The payment terms required payments of

$200,000

per month beginning in

July 2018

through

November 2018

and a balloon payment of approximately

$1,425,000

during

December 2018.

Milestone Scientific collected

$950,000

under the payment arrangement which resulted in a deferred revenue and deferred cost balance of

$1.8

million and

$1.25

million, respectively, prior to Milestone China’s default of the payment arrangement. Milestone China failed to make all the payments under the arrangement and due to the default on the arrangement and Milestone China’s liquidity constraints, Milestone Scientific  halted  shipments to Milestone China and the Company has adjusted the accounts receivable related party and the deferred revenue related party based on the expected payment realization and recorded a reserve against the related deferred cost of

$1.25

million during the

fourth

quarter of

2018.

As of

March 

31,

2020

and

2019

Milestone Scientific recognized gross revenue associated with

2018

delivered products to Milestone China and its agents of approximately 

zero

and 

$50,000

respectively.

Gross Profit Deferral

Due to timing differences of when the inventory sold to Milestone China is recognized and when Milestone China sells the acquired inventory to

third

parties, an elimination of the profit is required as of the balance sheet date. In accordance with ASC

323

Equity Method and Joint Ventures, Milestone Scientific has deferred

40%

of the gross profit associated with recognized revenue from sales to Milestone China until that product is sold to

third

parties.
 
At

March 31, 2020

and

December 31, 2019,

the deferred profit was

$340,476,

which is included in deferred profit, related party in the condensed consolidated balance sheets. For the

three

months ended

March 31, 2019

Milestone Scientific recorded earnings on equity investment of $- and

$9,564

respectively, for product sold by Milestone China to

third

parties.

 

Equity Method Disclosures 

As a result of the COVID-

19

Pandemic, as previously noted, Milestone China, Milestone Beijing and Anhui have

not

legally finalized the Transaction  and Milestone China and Milestone Beijing have

not

completed the financial accounting and reporting as of and for the

three

months ended

March 31, 2020.

Consequently, the summarized financial information (unaudited) for Milestone China, Milestone Beijing are

not

available and therefore

not

included herein.

Milestone Scientific, in previous years, reduced its investment in Milestone China to

zero

and had accumulated losses over the investment balance of approximately

$4.3

million as of

December 31, 2019,

which have been suspended. Milestone Scientific believes that its equity method portion of the expected losses for the

three

months ending

March 31, 2020

do

not

have a significant impact on the consolidated financial statements of the Company.