Quarterly report pursuant to Section 13 or 15(d)

Note 6 - Investment in and Transactions with Unconsolidated Subsidiaries

v3.19.1
Note 6 - Investment in and Transactions with Unconsolidated Subsidiaries
3 Months Ended
Mar. 31, 2019
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
772
STA Instruments to Milestone China for a
40%
ownership interest. Milestone Scientific recorded this investment under the equity method of accounting. 
 
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 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.
Milestone Scientific only 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. 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.
 
As of
March 31, 2019,
Milestone Scientific has deferred revenues and deferred costs associated with sales to Milestone China and it’s agents of
$50,000
and
$24,602,
respectively. As of
December 31, 2018,
Milestone Scientific had deferred revenues and deferred costs associated with sales to Milestone China and it’s agents of
$100,000
and
$50,000,
respectively. Milestone Scientific recognized
$50,000
of related party sales of handpieces to Milestone China and its agent for the
three
months ended
March 31, 2019.
For the
three
months ending Mach
31,
2018,
Milestone recognized
no
sales to Milestone China and its agent.
 
 
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, 2019 
and
December 31, 2018 ,
the deferred profit was
$431,364
 and
$421,800,
respectively, which is included in deferred profit, related party in the condensed consolidated balance sheets. For the
three
months ended
March 31, 2019
and
2018,
  Milestone Scientific recorded a loss and income on equity investment of  
$9,564
 and
$36,783,
respectively, for product sold by Milestone China to
third
parties.
 
Equity Method Disclosures
 
As
March
31,2019
and 
December 31, 2018,
Milestone Scientific's investment in Milestone China was
$0.
 As of
March
31,2019
and
December 31, 2018,
Milestone Scientific’s share of cumulative losses of Milestone China were
$3,984,177
 and
$3,380,388,
respectively, which have been suspended.
    
The following table includes summarized financial information (unaudited) of Milestone China:
 
 
   
March 31, 2019
   
December 31, 2018
 
Assets:
 
(unaudited)
   
(unaudited)
 
Current assets
  $
12,989,534
    $
10,587,648
 
Non-current assets
   
4,604,255
     
4,603,485
 
Total assets:
  $
17,593,789
    $
15,191,133
 
                 
Liabilities:
               
Current liabilities
   
21,914,957
     
17,696,033
 
Stockholders' equity (deficit)
   
(4,321,168
)    
(2,504,900
)
Total liabilities and stockholders’ deficit
  $
17,593,789
    $
15,191,133
 
                 
 
   
March 31, 2019
   
March 31, 2018
 
   
(unaudited)
   
(unaudited)
 
Net sales
  $
604,328
    $
756,956
 
Cost of goods sold
   
235,100
     
447,611
 
Gross profit
   
369,228
     
309,345
 
Other expenses
   
(1,878,704
)    
(1,252,213
)
Net loss
  $
(1,509,476
)   $
(942,868
)