NOTE

– INVESTMENT IN AND TRANSACTIONS WITH UNCONSOLIDATED SUBSIDIARIES

Milestone China Ltd.

Ownership

June 2014,

Milestone Scientific invested

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 amounted to

$2.8

million at the time of the payment arrangement. The payment terms required payments of

$200,000

per month beginning in

July 2018

through

November 2018

and a balloon payment of approximately

$1,425,000

during

December 2018.

Milestone Scientific 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, respectively. Due to the default on the arrangement and Milestone China’s liquidity constraints, 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.

Milestone Scientific recognized revenue associated with sales to Milestone China and it’s agents of

zero

and

$100,000

For the

three

and

nine

months ended

September 30, 2019,

respectively. Milestone Scientific recognized

$300,000

related party revenue from Milestone China and it’s agents during the

three

and

nine

months ended

September 30, 2018.

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 previously recognized revenue from sales to Milestone China until that product is sold to

third

parties.

September 30, 2019

and

December 31, 2018 ,

the deferred profit was

$372,700

and

$421,800,

respectively, which is included in deferred profit, related party in the condensed consolidated balance sheets. For the

three

and

nine

months ended

September 30, 2019,

Milestone Scientific recorded income on equity investment of

and

$49,100

respectively, for product sold by Milestone China to

third

parties. For the

three

and

nine

months ended

September 30, 2018,

Milestone Scientific recorded an earnings and loss on its investment of

$143,242,

and

$258,616

respectively, for product sold by Milestone China to

third

parties.

Equity Method Disclosures

September 30, 2019

and

December 31, 2018,

Milestone Scientific's investment in Milestone China was

$0.

As of

September 30, 2019

and

December 31, 2018,

Milestone Scientific’s share of cumulative losses of Milestone China were

$4,361,103

and

$3,380,388,

respectively, which have been suspended.

The following table includes summarized financial information (unaudited) of Milestone China:

	September 30, 2019			December 31, 2018
Assets:	(unaudited)			(unaudited)
Current assets	$	14,186,280		$	10,587,648
Non-current assets		4,756,043			4,603,845
Total assets:	$	18,942,323		$	15,191,493

Liabilities:
Current liabilities	$	23,477,542		$	17,696,033
Stockholders' equity (deficit)		(4,535,219	)		(2,504,900	)
Total liabilities and stockholders’ deficit	$	18,942,323		$	15,191,133

	For the three months ended September 30, 2019			For the three months ended September 30, 2018			For the nine months ended September 30, 2019			For the nine months ended September 30, 2018
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net sales	$	678,140		$	1,710,473		$	2,431,942		$	3,795,507
Cost of goods sold		423,948			789,957			983,348			1,888,409
Gross profit		254,192			920,516			1,448,594			1,907,098
Other expenses		(598,324	)		(1,371,085	)		(3,900,382	)		(3,742,737	)
Net loss	$	(344,132	)	$	(450,569	)	$	(2,451,788	)	$	(1,835,639	)