NOTE – 4 CONSOLIDATION OF VARIABLE INTEREST ENTITY

Milestone Medical

Milestone Medical is 49.98% owned by Milestone Scientific as of March 31, 2016. Milestone Scientific has been established to develop and commercialize intra-articular and epidural drug delivery instruments, utilizing an exclusive royalty-free license to Milestone Scientific’s CompuFlo technology. The license was contributed by Milestone Scientific for our initial ownership in Milestone Medical.

Since our initial investment in Milestone Medical we have accounted for the investment in accordance with the equity method of accounting. However, during 2015, Milestone Scientific provided short term bridge financing to Milestone Medical in anticipation of the completion of a secondary stock offering in the Polish Market. In December 2015, Milestone Medical suspended their capital raise efforts meriting re-consideration of the initial accounting for the investment as an equity method investment. In April 2016, Milestone Medical cancelled the uplisting of its shares to the Poland Warsaw Stock Exchange.

As a result of the change in circumstances around the proposed offering in December 2015 by Milestone Medical, we reevaluated the relationship between the two entities and the status of Milestone Medical as a VIE. We have concluded that Milestone Medical does not have sufficient capital at risk to support its activities without additional financial support from Milestone Scientific. As a result of these factors, we have concluded that the line of credit extended to Milestone Medical constitutes a variable interest in Milestone Medical and therefore Milestone Medical is consolidated at March 31, 2016.

Since the factors giving rise to concluding that Milestone Medical is a VIE happened so close to the end of fiscal year 2015, the acquisition date for measuring the consolidation of Milestone Medical has been deemed to be December 31, 2015.

Subsequent to March 31, 2016 Milestone Scientific acquired equity and voting control of Milestone Medical as a result of the acquisition of an additional 37% of the outstanding common stock of Milestone Medical by exchanging Milestone Medical shares for shares of Milestone Scientific common stock at a rate of two shares of Milestone Medical for one share of Milestone Scientific.

Milestone Education LLC

Milestone Education is a 50% owned subsidiary of Milestone Scientific which began operations in 2013 to provide training and education to our dentists throughout the world. Milestone Scientific accounts for its investment in Milestone Education using the equity method of accounting through December 31, 2015. Approximately 80% of the revenue earned by Milestone Education is from services performed for Milestone Scientific. As a result of this relationship, we concluded that we have the power to direct the activities that most significantly impact Milestone Education’s economic performance, and that it is a variable interest entity and should be consolidated in the financials of Milestone Scientific. As of December 31, 2015, the impact of the consolidation was deemed not to be material to the consolidated financial statements.

The financial statements of Milestone Medical, and Milestone Education are included in the accompanying consolidated financial statements as of March 31, 2016.

The financial information in the table below summarizes the combined results of operations of Milestone Scientific, and its subsidiaries including Milestone Medical and Milestone Education (each a variable interest entity) on a pro forma basis as though the companies had been combined as of the beginning of the earliest period presented. The pro forma financial information is presented for informational purposes only and is not indicative of the result of operations that would have been achieved if the consolidation had taken place at the beginning of the period presented.

	March 31, 2015 Pro Forma
Total revenue	$	2,791,103
Cost of products sold		933,148
Gross Profit		1,857,955
Selling, general and administrative expenses		2,683,757
Research and development expenses		143,685
Operating expenses		2,827,442
Loss from operations		(969,643	)
Other expenses		-
Interest expense		(369	)
Interest income		1,213
Loss before Provision for Income Tax		(968,643	)
Provision for Income Tax		-
Loss before equity in net earnings of equity investments		(968,643	)
Loss on earnings from Milestone Medical Inc.		(450,160	)
Loss on earnings from Education Joint Venture		(4,215	)
Gain on earnings from China Joint Venture		96,674
Loss in equity investments		(357,701	)
Net loss		(1,326,344	)
Less: Net loss attributable to the noncontrolling interests		(457,436	)
Net loss attributable to Milestone Scientific Inc.	$	(868,908	)