Note 6 - Investment in and Transactions with Equity Investees

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Equity Method Investments and Joint Ventures Disclosure [Text Block]

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

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 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

June 30, 2020,

due to the COVID-

19

Pandemic, the regulatory documentation for the planned merger have 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.

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 is 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. 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.

For the

three

and

six

months ended

June 30, 2020

Milestone Scientific did

not

ship and recognize any deferred revenue or net revenue for  Milestone China and its agents, respectively. For the

three

and

six

months ended

June 30, 2019

Milestone Scientific did

not

ship and recognize any deferred revenue but recognized revenue of

$50,000

and

$100,000

for Milestone China and its agents, respectively.

United System transaction

In

April

of

2020,

the Company entered into an agreement with United Systems, Inc., related party (see Note

13

) regarding certain handpieces supplied to Milestone China in

2018,

that were billed and shipped by United Systems, as well as STA instruments billed to United Systems and delivered to Milestone China, and

not

paid by Milestone China. United Systems sold their entire accounts receivable due from Milestone China for the above described handpieces and STA instruments for

$370,260

to Milestone Scientific. Milestone Scientific will pay United Systems the sale price as follows;

$100,000

in cash paid in

April 2020,

$170,260

in shares of the Corporation's Common Stock (priced as of the close of business on

April 23, 2020,

$1.59,

as negotiated and agreed by all parties ) issued in

June 2020,

and

$100,000

in cash due

July 2020.

All payment have been paid. The Company is entitled to the cash collections, if and when received,  on the accounts receivable  due to United Systems prior to this agreement up to approximately

$1.4

million. The Company has recorded a charge to the condensed consolidated statement of operations for

$370,260

during the

three

months ended

June 30, 2020.  

 

Milestone Advanced Cosmetic Systems Inc.

In

May 2020,  

Milestone Scientific finalized an agreement for the purchase of Milestone China's

50%

interest in Advanced Cosmetic Systems Inc., for the forgiveness of

$900,000

in accounts receivable  owed by Milestone China to Milestone Scientific (and previously fully reserved for), resulting in a noncash transaction. Milestone China will have the option to repurchase the

50%

interest in Advanced Cosmetic Systems within

one

year from the sale date for

$900,000

in cash. As a result of the purchase Milestone Scientific will own

100%

of Advanced Cosmetic Systems Inc at the expiration of the option period. Due to Milestone Scientific controlling financial interest both before and after the transaction the transaction has been accounted for as an equity transaction.  

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

June 30, 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

and

six

months ended

June 30, 2020

and

2019

Milestone Scientific recorded earnings on equity investment of $- and $- and

$9,564

and

$58,664

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, previously noted. Further, Milestone China and Milestone Beijing have

not

completed the financial accounting and reporting as of and for the

three

and

six

months ended 

June 30, 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 Milestone China's expected losses for the

three

and

six

months ending

June 30, 2020

do

not

have a significant impact on and are

not

material to the consolidated financial statements of the Company.