Annual report pursuant to Section 13 and 15(d)

Note H - Investment in and Transactions with Unconsolidated Subsidiaries

v3.19.1
Note H - Investment in and Transactions with Unconsolidated Subsidiaries
12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Equity Method Investments and Joint Ventures Disclosure [Text Block]
NOTE H – 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
772
STA Instruments to Milestone China for a
40%
ownership interest. Milestone Scientific recorded this investment under the equity method of accounting. 
 
In
June 2017,
Milestone Scientific entered into an agreement for the sale of its interest in Milestone China (a
forty
(
40%
) percent interest) (the “Milestone China Shares”) to an unaffiliated United States domiciled purchaser and a
10
-year option agreement to repurchase the Milestone China Shares. The purchase price for the Milestone China Shares was
$1,400,000
of which
$125,000
was paid in cash and
$1,275,000
was paid by delivery of a non-interest bearing secured promissory note. The note was payable in quarterly installments of
$125,000
until paid in full and was secured by the Milestone China Shares until full repayment.  In addition, pursuant to such note, the purchaser was precluded from selling all or substantially all its assets prior to repayment of the note. The
10
-year option agreement provided Milestone Scientific an option to repurchase the Milestone China Shares at
$1,400,000
within the
first
two
years and at fair market value (as defined in such agreement) for the remainder of the
10
-year term. The transaction has been accounted for as a secured financing. A note receivable is presented on the Company’s balance sheet, along with a deferral from financing transaction (
$1,400,000
) as of
December 31, 2017.
The carrying value of the
forty
(
40%
) percent investment at the transaction date was zero.
 
As of
March 2, 2018,
the promissory note was in default. In
April 2018,
Milestone Scientific entered into a Release, Assignment and Termination Agreement (the “Termination Agreement”) with the issuer of the promissory note, pursuant to which, Milestone Scientific repaid the
$250,000
payment made by the issuer and the issuer returned the  Milestone China Shares to Milestone Scientific and cancelled the promissory note. Because of the Termination Agreement and related repayment made by Milestone Scientific, the Company derecognized the outstanding note receivable balance of
$1,150,000
and the related deferred gain from financing transaction of
$1,400,000.
No
gain or loss was recognized on the transaction.
 
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 recognized
$900,000
of related party sales of handpieces and instruments to Milestone China and its  agent. Milestone Scientific had
$2,071,000
of related party sales of handpieces and instruments to Milestone China and  its agent for
twelve
months ended
December 31, 2017.
 
As of
December 31, 2018,
Milestone Scientific had recorded deferred revenues and deferred costs associated with sales to Milestone China and it’s agents of
$0.1
million  and
$0.5
million , respectively. As of
December 31, 2017,
Milestone Scientific recorded deferred revenues and deferred costs associated with sales to Milestone China and it’s agents of $
1.7
million and
$1.1
million, respectively.
 
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 increased to $
2.8
million  at the time of the payment arrangement. The payment terms required
$200,000
payments per month beginning in
July 2018
through
November 2018
and a balloon payment of approximately
$1,425,000
during
December 2018. 
During
2018
Milestone Scientific only collected
$900,000
under the payment arrangement. Due to the default on the arrangement  and Milestone China’s liquidity constraints, Milestone Scientific  halted  shipments to Milestone China. 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.
 
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
December 31, 2018
and
2017,
the deferred profit was
$421,800
 and
$751,500,
respectively, which is included in deferred profit, related party in the consolidated balance sheets. For
twelve
months ended
December 31, 2018
and
2017,
Milestone Scientific recorded a loss and income on equity investment of  
$329,700
 and
$120,510,
respectively, for product sold by Milestone China to
third
parties.
 
Equity Method Disclosures
 
As of
December 31, 2018,
and 
December 31, 2017,
Milestone Scientific's investment in Milestone China was
$0.
 As of
December 31, 2018,
and
December 31, 2017,
Milestone Scientific’s share of cumulative losses of Milestone China were
$3,380,388
and
$3,147,470,
respectively, which have been suspended.
 
The following table includes summarized financial information (unaudited) of Milestone China:
 
 
   
December 31, 2018
   
December 31, 2017
 
Assets:    
(unaudited)
     
(unaudited)
 
Current assets
  $
10,587,648
    $
13,127,422
 
Non-current assets
   
4,603,485
     
3,213,520
 
Total assets:
  $
15,191,133
    $
16,340,942
 
                 
Liabilities:
               
Current liabilities
   
17,696,033
     
18,468,937
 
Stockholders' deficit
   
(2,504,900
)    
(2,127,995
)
Total liabilities and stockholders’ deficit
  $
15,191,133
    $
16,340,942
 
                 
 
   
December 31, 2018
   
December 31, 2017
 
   
(unaudited)
   
(unaudited)
 
Net sales
  $
7,598,998
    $
1,394,760
 
Cost of goods sold
   
3,539,138
     
477,200
 
Gross profit
   
4,059,860
     
917,560
 
Other expenses
   
(4,642,154
)    
(5,975,360
)
Net Losses
  $
(582,294
)   $
(5,057,800
)