Quarterly report pursuant to Section 13 or 15(d)

Note 6 - Investment in and Transactions with Equity Investees

v3.20.2
Note 6 - Investment in and Transactions with Equity Investees
9 Months Ended
Sep. 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 the filing date of this Quarterly Report,  due to the COVID-
19
Pandemic, the regulatory documentation for the planned merger has 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 its 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 charge for  deferred cost associated with these transactions of
$1.25
million during the
fourth
quarter of
2018.
 
For the
three
and
nine
months ended
September 30, 2020
Milestone Scientific did
not
ship nor recognize any deferred revenue or net revenue for Milestone China and its agents. For the
three
and
nine
months ended
September 30, 2019 
Milestone Scientific did
not
ship nor recognize any deferred revenues, but did recognize revenue of
zero
, and
$100,000
for Milestone China and its agents, respectively, that was previously deferred as a result of additional cash collected.
 
United System Agreement
 
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 to Milestone China 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 paid United Systems the sale price as follows;
$100,000
in cash paid in
April 2020,
$170,260
in shares of the Company's  Common Stock (priced as of the close of business on
April 23, 2020,
$1.59
) issued in
June 2020,
and
$100,000
in cash paid in
July 2020.
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 unaudited condensed consolidated statement of operations for
$370,260
during the
nine
months ended
September 30, 2020.
 
Milestone Advanced Cosmetic Systems Inc. Transaction
 
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.
 
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
September 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
nine
months ended
September 30, 2020
and
2019
Milestone Scientific recorded earnings on equity investment of 
$0
and
$0
and
$0
and
$49,099
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. Further, Milestone China and Milestone Beijing have
not
completed the financial accounting and reporting as of and for the
three
and
nine
months ended 
September 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
nine
-months ending
September 30, 2020
do
not
have a significant impact on and are
not
material to the consolidated financial statements of the Company.