UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission File Number:1-10986
MISONIX, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-1856018 | |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification No.) |
1938 New Highway
| 11735 | |
(Address of principal executive offices) |
| (Zip code) |
(631) 694-9555
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | Non-accelerated filer ☐ | Smaller reporting company |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑☒ No
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $.0001 par value | MSON | Nasdaq Global Market |
Indicate the number of shares outstanding of the issuer’s common stock as of the latest practicable date: As of January 24, 2019,February 5, 2020, there were 9,587,30317,360,310 shares of the registrant’s common stock, $0.01$.0001 par value, outstanding.
MISONIX, INC.
i
PART I —– FINANCIAL INFORMATION
Misonix, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, | June 30, | |||||||
2019 | 2019 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,403,843 | $ | 7,842,403 | ||||
Accounts receivable, less allowance for doubtful accounts of $100,000 and $100,000, respectively | 12,938,009 | 5,360,454 | ||||||
Inventories, net | 11,185,903 | 7,353,562 | ||||||
Prepaid expenses and other current assets | 1,655,724 | 835,044 | ||||||
Total current assets | 40,183,479 | 21,391,463 | ||||||
Property, plant and equipment, net of accumulated amortization and depreciation of $11,423,223 and $10,545,810, respectively | 6,047,483 | 4,198,721 | ||||||
Patents, net of accumulated amortization of $1,267,978 and $1,204,589, respectively | 787,605 | 779,100 | ||||||
Goodwill | 110,534,259 | 1,701,094 | ||||||
Contract assets | - | 960,000 | ||||||
Intangible assets | 20,013,333 | - | ||||||
Lease right of use and other assets | 1,621,743 | 920,921 | ||||||
Total assets | $ | 179,187,902 | $ | 29,951,299 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,856,835 | $ | 5,357,736 | ||||
Accrued expenses and other current liabilities | 5,165,208 | 2,488,514 | ||||||
Current portion of lease liabilities | 418,163 | - | ||||||
Total current liabilities | 11,440,206 | 7,846,250 | ||||||
Non-current liabilities: | ||||||||
Notes payable | 38,845,761 | - | ||||||
Lease right of use liabilities | 810,842 | - | ||||||
Other non-current liabilities | 472,388 | 401,000 | ||||||
Total liabilities | 51,569,197 | 8,247,250 | ||||||
Commitments and contingencies | - | - | ||||||
Shareholders’ equity: | ||||||||
Common stock, $.0001 and $.01 par value-shares authorized 40,000,000; 15,491,560 and 9,646,728 shares issued and outstanding in each period | 1,549 | 96,468 | ||||||
Additional paid-in capital | 152,802,535 | 43,500,478 | ||||||
Accumulated deficit | (25,185,379 | ) | (21,892,897 | ) | ||||
Total shareholders’ equity | 127,618,705 | 21,704,049 | ||||||
Total liabilities and shareholders’ equity | $ | 179,187,902 | $ | 29,951,299 |
December 31, | June 30, | |||||||
2018 | 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 10,173,286 | $ | 10,979,455 | ||||
Accounts receivable, less allowance for doubtful accounts of $250,000 and $200,000, respectively | 5,709,298 | 5,245,549 | ||||||
Inventories, net | 5,711,528 | 5,019,886 | ||||||
Prepaid expenses and other current assets | 601,752 | 611,647 | ||||||
Total current assets | 22,195,864 | 21,856,537 | ||||||
Property, plant and equipment, net of accumulated amortization and depreciation of $9,720,862 and $9,023,235, respectively | 4,473,859 | 4,188,378 | ||||||
Patents, net of accumulated amortization of $1,132,901 and $1,063,393, respectively | 763,044 | 757,447 | ||||||
Goodwill | 1,701,094 | 1,701,094 | ||||||
Contract assets | 960,000 | — | ||||||
Intangible and other assets | 451,315 | 517,295 | ||||||
Total assets | $ | 30,545,176 | $ | 29,020,751 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,592,287 | $ | 1,794,098 | ||||
Accrued expenses and other current liabilities | 2,264,112 | 2,411,172 | ||||||
Deferred income | $ | 5,993 | 13,303 | |||||
Total current liabilities | 5,862,392 | 4,218,573 | ||||||
Non current liabilities | 401,000 | 401,000 | ||||||
Total liabilities | $ | 6,263,392 | $ | 4,619,573 | ||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Common stock, $.01 par value-shares authorized 40,000,000; 9,584,178 and 9,430,466 shares issued and outstanding in each period | 95,842 | 94,305 | ||||||
Additional paid-in capital | 42,143,359 | 39,772,973 | ||||||
Accumulated deficit | (17,957,417 | ) | (15,466,100 | ) | ||||
Total shareholders' equity | 24,281,784 | 24,401,178 | ||||||
Total liabilities and shareholders' equity | $ | 30,545,176 | $ | 29,020,751 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
Misonix, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended | For the six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
Product | $ | 19,721,986 | $ | 10,176,453 | $ | 30,867,908 | $ | 19,537,617 | ||||||||
Total revenue | 19,721,986 | 10,176,453 | 30,867,908 | 19,537,617 | ||||||||||||
Cost of revenue | 5,945,108 | 3,048,079 | 9,181,755 | 5,798,622 | ||||||||||||
Gross profit | 13,776,878 | 7,128,374 | 21,686,153 | 13,738,995 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 11,800,565 | 4,800,643 | 17,001,147 | 9,535,648 | ||||||||||||
General and administrative expenses | 5,149,715 | 2,347,184 | 9,357,522 | 5,530,568 | ||||||||||||
Research and development expenses | 1,087,449 | 839,219 | 1,858,860 | 2,143,984 | ||||||||||||
Total operating expenses | 18,037,729 | 7,987,046 | 28,217,529 | 17,210,200 | ||||||||||||
Loss from operations | (4,260,851 | ) | (858,672 | ) | (6,531,376 | ) | (3,471,205 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 5,293 | 17,242 | 24,170 | 37,056 | ||||||||||||
Interest expense | (833,035 | ) | - | (869,132 | ) | - | ||||||||||
Other | (380 | ) | 1,097 | (1,143 | ) | (17,168 | ) | |||||||||
Total other income (expense) | (828,122 | ) | 18,339 | (846,105 | ) | 19,888 | ||||||||||
Loss from operations before income taxes | (5,088,973 | ) | (840,333 | ) | (7,377,481 | ) | (3,451,317 | ) | ||||||||
Income tax benefit | - | - | 4,085,000 | - | ||||||||||||
Net loss | $ | (5,088,973 | ) | $ | (840,333 | ) | $ | (3,292,481 | ) | $ | (3,451,317 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.33 | ) | $ | (0.09 | ) | $ | (0.26 | ) | $ | (0.37 | ) | ||||
Diluted | $ | (0.33 | ) | $ | (0.09 | ) | $ | (0.26 | ) | $ | (0.37 | ) | ||||
Weighted average shares - Basic | 15,222,870 | 9,322,237 | 12,439,860 | 9,210,031 | ||||||||||||
Weighted average shares - Diluted | 15,222,870 | 9,322,237 | 12,439,860 | 9,210,031 |
For the three months ended | For the six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
Product | $ | 10,176,453 | $ | 8,323,845 | $ | 19,537,617 | $ | 15,604,568 | ||||||||
Total revenue | 10,176,453 | 8,323,845 | 19,537,617 | 15,604,568 | ||||||||||||
Cost of goods sold | 3,048,079 | 2,465,826 | 5,798,622 | 4,643,181 | ||||||||||||
Gross profit | 7,128,374 | 5,858,019 | 13,738,995 | 10,961,387 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 4,800,643 | 3,919,515 | 9,535,648 | 7,490,228 | ||||||||||||
General and administrative expenses | 2,347,184 | 2,380,860 | 5,530,568 | 4,953,991 | ||||||||||||
Research and development expenses | 839,219 | 957,204 | 2,143,984 | 1,858,478 | ||||||||||||
Total operating expenses | 7,987,046 | 7,257,579 | 17,210,200 | 14,302,697 | ||||||||||||
Loss from operations | (858,672 | ) | (1,399,560 | ) | (3,471,205 | ) | (3,341,310 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income | 17,242 | 45 | 37,056 | 58 | ||||||||||||
Royalty income | 1,105 | 71,550 | 1,105 | 524,521 | ||||||||||||
Other | (8 | ) | (4,387 | ) | (18,273 | ) | (8,845 | ) | ||||||||
Total other income | 18,339 | 67,208 | 19,888 | 515,734 | ||||||||||||
Loss from operations before income taxes | (840,333 | ) | (1,332,352 | ) | (3,451,317 | ) | (2,825,576 | ) | ||||||||
Income tax expense | — | 5,524,422 | — | 5,243,422 | ||||||||||||
Net loss | $ | (840,333 | ) | $ | (6,856,774 | ) | $ | (3,451,317 | ) | $ | (8,068,998 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.09 | ) | $ | (0.76 | ) | $ | (0.37 | ) | $ | (0.90 | ) | ||||
Diluted | $ | (0.09 | ) | $ | (0.76 | ) | $ | (0.37 | ) | $ | (0.90 | ) | ||||
Weighted average shares - Basic | 9,322,237 | 8,977,984 | 9,210,031 | 8,968,195 | ||||||||||||
Weighted average shares - Diluted | 9,322,237 | 8,977,984 | 9,210,031 | 8,968,195 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
Misonix, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
Common Stock, | ||||||||||||||||||||
$.01 Par Value | Additional | Total | ||||||||||||||||||
Number | paid-in | Accumulated | shareholders’ | |||||||||||||||||
of shares | Amount | capital | deficit | equity | ||||||||||||||||
Balance, June 30, 2018 | 9,430,466 | $ | 94,305 | $ | 39,772,973 | $ | (15,466,100 | ) | $ | 24,401,178 | ||||||||||
Cumulative effect of the adoption of ASC 606 - revenue recognition | — | $ | — | $ | — | $ | 960,000 | 960,000 | ||||||||||||
Net loss | — | — | — | (3,451,317 | ) | (3,451,317 | ) | |||||||||||||
Proceeds from exercise of stock options | 153,712 | 1,537 | 865,800 | — | 867,337 | |||||||||||||||
Stock-based compensation | — | — | 1,504,586 | — | 1,504,586 | |||||||||||||||
Balance, December 31, 2018 | 9,584,178 | $ | 95,842 | $ | 42,143,359 | $ | (17,957,417 | ) | $ | 24,281,784 |
Common Stock | Additional | Total | ||||||||||||||||||
Number | paid-in | Accumulated | shareholders’ | |||||||||||||||||
of shares | Amount | capital | deficit | equity | ||||||||||||||||
Balance, September 30, 2018 | 9,482,126 | $ | 94,822 | $ | 41,192,701 | $ | (17,117,086 | ) | $ | 24,170,437 | ||||||||||
Cumulative effect of the adoption of ASC 606 - revenue recognition | - | - | - | - | - | |||||||||||||||
Net loss | - | - | - | (840,331 | ) | (840,331 | ) | |||||||||||||
Proceeds from exercise of stock options | 102,052 | 1,020 | 450,570 | - | 451,590 | |||||||||||||||
Stock-based compensation | - | - | 500,088 | - | 500,088 | |||||||||||||||
Balance, December 31, 2018 | 9,584,178 | $ | 95,842 | $ | 42,143,359 | $ | (17,957,417 | ) | $ | 24,281,784 | ||||||||||
Balance, June 30, 2018 | 9,430,466 | $ | 94,305 | $ | 39,772,973 | $ | (15,466,100 | ) | $ | 24,401,178 | ||||||||||
Cumulative effect of the adoption of ASC 606 - revenue recognition | - | - | - | 960,000 | 960,000 | |||||||||||||||
Net loss | - | - | - | (3,451,317 | ) | (3,451,317 | ) | |||||||||||||
Proceeds from exercise of stock options | 153,712 | 1,537 | 865,800 | - | 867,337 | |||||||||||||||
Stock-based compensation | - | - | 1,504,586 | - | 1,504,586 | |||||||||||||||
Balance, December 31, 2018 | 9,584,178 | $ | 95,842 | $ | 42,143,359 | $ | (17,957,417 | ) | $ | 24,281,784 | ||||||||||
Balance, September 30, 2019 | 15,353,185 | $ | 1,535 | $ | 151,308,485 | $ | (20,096,406 | ) | $ | 131,213,615 | ||||||||||
Net loss | - | - | - | (5,088,973 | ) | (5,088,973 | ) | |||||||||||||
Proceeds from exercise of stock options | 138,375 | 14 | 1,164,234 | - | 1,164,248 | |||||||||||||||
Equity restructuring in current period | - | - | - | - | - | |||||||||||||||
Issuance of shares for acquisition of Solsys | - | - | - | - | - | |||||||||||||||
Stock registration fees | - | - | (74,836 | ) | - | (74,836 | ) | |||||||||||||
Stock-based compensation | - | - | 404,652 | - | 404,652 | |||||||||||||||
Balance, December 31, 2019 | 15,491,560 | $ | 1,549 | $ | 152,802,535 | $ | (25,185,379 | ) | $ | 127,618,705 | ||||||||||
Balance, June 30, 2019 | 9,646,728 | $ | 96,468 | $ | 43,500,478 | $ | (21,892,897 | ) | $ | 21,704,049 | ||||||||||
Net loss | - | - | - | (3,292,482 | ) | (3,292,482 | ) | |||||||||||||
Proceeds from exercise of stock options | 141,750 | 14 | 1,175,070 | - | 1,175,084 | |||||||||||||||
Equity restructuring in current period | - | (151,964 | ) | 151,964 | - | - | ||||||||||||||
Issuance of shares for acquisition of Solsys | 5,703,082 | 57,031 | 108,586,679 | - | 108,643,710 | |||||||||||||||
Stock registration fees | - | - | (1,361,392 | ) | - | (1,361,392 | ) | |||||||||||||
Stock-based compensation | - | - | 749,736 | - | 749,736 | |||||||||||||||
Balance, December 31, 2019 | 15,491,560 | $ | 1,549 | $ | 152,802,535 | $ | (25,185,379 | ) | $ | 127,618,705 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
Misonix, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended | ||||||||||||||||
December 31, | ||||||||||||||||
For the six months ended | 2019 | 2018 | ||||||||||||||
December 31, | ||||||||||||||||
Operating activities | 2018 | 2017 | ||||||||||||||
Net loss | $ | (3,451,317 | ) | $ | (8,068,998 | ) | $ | (3,292,481 | ) | $ | (3,451,317 | ) | ||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | ||||||||||||||||
Depreciation and amortization | 767,135 | 677,292 | 1,426,172 | 767,135 | ||||||||||||
Disposals of property, plant and equipment | — | 128,746 | ||||||||||||||
Bad debt expense | 50,000 | — | - | 50,000 | ||||||||||||
Deferred income tax | — | 5,243,422 | ||||||||||||||
Reserve for contract asset | 960,000 | - | ||||||||||||||
Stock-based compensation | 1,504,586 | 1,469,894 | 749,736 | 1,504,586 | ||||||||||||
Deferred lease liability | (7,310 | ) | (4,677 | ) | ||||||||||||
Release of valuation allowance on deferred tax assets | (4,085,000 | ) | - | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (513,749 | ) | 807,010 | (2,096,665 | ) | (513,749 | ) | |||||||||
Inventories | (1,189,559 | ) | (839,361 | ) | (5,673,609 | ) | (1,189,559 | ) | ||||||||
Prepaid expenses and other current assets | 9,895 | 610,890 | (481,817 | ) | 9,895 | |||||||||||
Deferred income | — | 2,152,906 | ||||||||||||||
Intangible, contract and other assets | 65,980 | — | ||||||||||||||
Lease and other assets | 77,689 | (7,310 | ) | |||||||||||||
Intangible assets | - | 65,980 | ||||||||||||||
Accounts payable, accrued expenses and other current liabilities | 1,651,129 | (1,680,241 | ) | (1,008,698 | ) | 1,651,129 | ||||||||||
Net cash provided by (used in) operating activities | (1,113,210 | ) | 496,883 | |||||||||||||
Net cash used in operating activities | (13,424,673 | ) | (1,113,210 | ) | ||||||||||||
Investing activities | ||||||||||||||||
Acquisition of property, plant and equipment | (485,191 | ) | (117,897 | ) | (211,347 | ) | (485,191 | ) | ||||||||
Additional patents | (75,105 | ) | (58,179 | ) | (71,893 | ) | (75,105 | ) | ||||||||
Net cash used in investing activities | (560,296 | ) | (176,076 | ) | ||||||||||||
Cash from acquisition of Solsys Medical, LLC | 5,525,601 | - | ||||||||||||||
Net cash provided by (used in) investing activities | 5,242,361 | (560,296 | ) | |||||||||||||
Financing activities | ||||||||||||||||
Proceeds from notes payable | 18,750,000 | - | ||||||||||||||
Repayments of notes payable | (3,819,940 | ) | - | |||||||||||||
Stock registration fees | (1,361,392 | ) | - | |||||||||||||
Proceeds from exercise of stock options | 867,337 | 224,552 | 1,175,084 | 867,337 | ||||||||||||
Net cash provided by financing activities | 867,337 | 224,552 | 14,743,752 | 867,337 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (806,169 | ) | 545,359 | 6,561,440 | (806,169 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 10,979,455 | 11,557,071 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 10,173,286 | $ | 12,102,430 | ||||||||||||
Cash and cash equivalents at beginning of year | 7,842,403 | 10,979,455 | ||||||||||||||
Cash and cash equivalents at end of year | $ | 14,403,843 | $ | 10,173,286 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for: | ||||||||||||||||
Interest | $ | 814,577 | $ | - | ||||||||||||
Income taxes | $ | 13,273 | $ | 895 | $ | 550 | $ | 13,273 | ||||||||
Transfer of inventory to property, plant and equipmment for consignment of product | $ | 497,917 | $ | 782,920 | $ | 1,940,179 | $ | 497,917 | ||||||||
Adoption of new accounting standard on deferred taxes | $ | — | $ | 908,875 | ||||||||||||
Stock issued for the acquisition of Solsys Medical, LLC | $ | 108,643,710 | $ | - |
See Accompanying Notes to Condensed Consolidated Financial Statements.
Misonix, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Six Months Ended December 31, 2019 and 2018 and 2017 (unaudited)
1. | Basis of Presentation, Organization and Business and Summary of Significant Accounting Policies |
1.
Basis of Presentation Organization and Business and Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements of Misonix, Inc. (“Misonix” or the “Company”) include the accounts of Misonix and its subsidiaries, each of which is 100% owned subsidiaries.owned. All significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. As such, they should be read with reference to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018,2019 (the “2019 Form 10-K”), which provides a more complete explanation of the Company’s accounting policies, financial position, operating results, business properties and other matters. In the opinion of management, these financial statements reflect all adjustments considered necessary for a fair statement of interim results.
Organization and Business
Misonix designs, manufactures and markets minimally invasive therapeuticsurgical ultrasonic medical devices and markets, sells and distributes TheraSkin® (“TheraSkin”), a biologically active human skin allograft used to support healing of wounds which complements Misonix’s ultrasonic medical devices. TheseMisonix’s ultrasonic products are used for precise bone sculpting, removal of soft and hard tumors and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery.
The Company strives to help proprietary procedural solutions become the standard of care and enhance patient outcomes throughout the world. Misonix intends to accomplish this, in part, by utilizing its best in class surgical ultrasonic technology to change patient outcomes in the areas of spinal surgery, neurosurgery and wound care. Misonix is currently developing proprietary procedural solutions around its recently U.S. Food and Drug Administration (“FDA”) cleared Nexus ultrasonic generator (“Nexus”), which combines the capabilities of the Company’s three existing products, namely BoneScalpel® Surgical System (“BoneScalpel”), SonaStar® Surgical Aspirator (“SonaStar”) and SonicOne® Wound Cleansing and Debridement System (“SonicOne”), into a single system that can be used to perform soft and hard tissue resections. The Nexus platform is driven by Misonix’s proprietary ultrasonic digital algorithm and additionally integrates the delivery of radio frequency energy for use in general surgical procedures. In addition, through its acquisition of Solsys Medical, LLC (“Solsys”), Misonix completed its first procedural expansion of its ultrasonic surgical technology in September 2019, adding the TheraSkin product, a leading cellular skin substitute indicated for all wounds, to its product portfolio.
BoneScalpel is a state of the art, ultrasonic bone cutting and sculpting system capable of making precise cuts with minimal necrosis, minimal burn artifact, minimal inflammation and minimal bone loss. The device is also capable of preserving surrounding soft tissue structures because of its unique ability to differentiate soft tissue from rigid bone. This device can make precise linear or curved cuts, on any plane, with precision not normally associated with powered instrumentation. BoneScalpel offers the speed and convenience of a powered instrument without the dangers associated with conventional rotary devices. The effect on surrounding soft tissue is minimal due to the elastic and flexible structure of healthy tissue. This is a significant advantage in anatomical regions like the spine where patient safety is of primary concern. In addition, the linear motion of the blunt, tissue-impacting tips avoids accidental ‘trapping’ of soft tissue while largely eliminating the high-speed spinning and tearing associated with rotary power instruments. BoneScalpel allows surgeons to improve on existing surgical techniques by creating new approaches to bone cutting and sculpting and removal, leading to substantial time savings and increased operation efficiencies. BoneScalpel is now recognized by many surgeons globally as a critical surgical tool enabling improved patient outcomes in the spinal arena.
SonicOne is an innovative, tissue specific approach for the effective removal of devitalized or necrotic tissue and fibrin deposits while sparing viable, surrounding cellular structures. The tissue specific capability is, in part, due to the fact that healthy and viable tissue structures have a higher elasticity and flexibility than necrotic tissue and are more resistant to destruction from the impact effects of ultrasound. The ultrasonic debridement process separates devitalized tissue from viable tissue layers, allowing for a more defined treatment and, usually, a reduced pain sensation. The Company believes SonicOne establishes a new standard in wound and burn bed preparation, the essential first step in the healing process, while contributing to a faster patient healing.
SonaStar is used to emulsify and remove soft and hard tumors. Specifically, SonaStar provides powerful precise aspiration following the ultrasonic ablation of hard or soft tissue. SonaStar has been used for a wide variety of surgical procedures applying both open and minimally invasive approaches, including neurosurgery and general surgery.
Nexus is a next-generation integrated ultrasonic surgical platform that combines all the features of BoneScalpel, SonicOne and SonaStar into a single fully integrated platform that will also serve to power future solutions. The Nexus platform is driven by a new proprietary digital algorithm that results in more power, efficiency and control. Nexus uniquely integrates radio frequency capabilities, allowing for use in general surgery procedures. Nexus’ increased power improves tissue resection rates for both soft and hard tissue removal making it a unique surgical platform for a variety of different surgical specialties. In addition, Nexus’ easy setup and use enables physicians to fully leverage Nexus’ impressive set of capabilities via its digital touchscreen display and smart system technology. Because BoneScalpel, SonaStar and SonicOne all work on the Nexus generator, hospitals have access to all of the Company’s product offerings on the all in one Nexus platform. Nexus received FDA 510(k) clearance in June 2019 and received its CE mark approval in July 2019 for sale in Europe.
In the United States, ourthe Company sells its products are marketed primarily through a hybrid sales approach. This includesits direct sales representatives, managedforce, in addition to a network of commissioned agents assisted by regional sales managers, along with independent distributors.Misonix personnel. Outside of the United States, we sell BoneScalpel and SonaStarthe Company generally sells to specialty distributors who purchasethen resell the products from us to resell to their clinical customer bases. We sell to all major markets in the Americas, Europe, Middle East, Asia Pacifichospitals. The Company’s sales force operates as two groups, Surgical (neurosurgery and Africa.spinal surgery applications) and Wound Care. The Company operates aswith one business segment.
Acquisition of Solsys Medical, LLC
On September 27, 2019, the Company completed the acquisition (the “Solsys Acquisition”) of Solsys Medical, LLC (“Solsys”), a privately held regenerative medical company, in an all-stock transaction valued at approximately $109 million. Solsys is the exclusive marketer and distributor of TheraSkin in the United States, through an agreement with LifeNet Health (“LifeNet”). Solsys owns the TheraSkin® brand name, which was commercially launched in January 2010. TheraSkin is a biologically active human skin allograft which has all of the relevant characteristics of human skin, including living cells, growth factors, and a collagen matrix, needed to heal wounds. TheraSkin is derived from human skin tissue from consenting and highly screened donors and is manufactured by LifeNet Health. As a result of the Solsys Acquisition, the Company became the parent public-reporting company of the combined company; Misonix, Inc., a New York corporation, now known as Misonix Opco, Inc., and Solsys became direct, wholly owned subsidiaries of the Company. The acquisition of Solsys is expected to broaden the Company’s addressable market through wound care solutions that are complementary to its existing products. After the completion of the Solsys Acquisition, the Company’s shareholders immediately prior to the closing owned 64% of the combined entity, and Solsys unitholders immediately prior to the closing owned 36%. The Company issued 5,703,082 shares in connection with this transaction. Transaction fees were approximately $4.5 million, of which $1.4 million were capitalized as additional paid in capital in connection with the registration of these shares. The Solsys assets, liabilities and results of operations are included in the Company’s financial statements from the acquisition date.
The Company’s common stock was created with a par value per share of $.0001, whereas the par value of Misonix Opco, Inc. is $.01. Accordingly, the Company recorded a reclassification of $151,997 between common stock and additional paid in capital during the three months ended September 30, 2019 to account for this change.
High Intensity Focused Ultrasound Technology
The Company sold its rights to its former the high intensity focused ultrasound technology to SonaCare Medical, LLC (“SonaCare”) in May 2010. The Company may receive up to approximately $5.8 million in payment for the sale. SonaCare is obligatedrequired to pay the Company 7% of the gross revenues received from its sales of the (i) prostate product in Europe and (ii) kidney and liver products worldwide, until the Company has received payments of $3 million, and thereafter 5% of the gross revenues, up to an aggregate payment of $5.8 million, all subject to a minimum annual royalty of $250,000. NoCumulative payments through December 31, 2019 were approximately $2.5 million. Currently, SonaCare is in default of its royalty payment due March 31, 2019. Although the Company is in discussions with SonaCare regarding this default, there can be no assurance that the payments will be received foron a timely basis or at all. Due to this default, the Company has not recorded any income relating to this payment.
Major Customers and Concentration of Credit Risk
For the six months ended December 31, 2019 and 2018, and 2017. Cumulative royalties through December 31, 2018 were $2,542,579.the Company did not have any customers exceeding 10% of total revenue.
Major Customers and Concentration of Credit Risk
Included in revenues are sales to the Company distributor of Bone Scalpel in China of approximately $2,976,000 and $0, for the six months ended December 31, 2018 and 2017, respectively. Accounts receivable from this customer were $300,000 and $0 at December 31, 2018 and June 30, 2018, respectively.
Total royalties from Medtronic Minimally Invasive Therapies (“MMIT”) related to their sales of the Company’s ultrasonic cutting and sculpting products, which use high frequency sound waves to coagulate and divide tissue for both open and laparoscopic surgery, were $0 and $524,000 for both the three and six months ended December 31, 2018 and 2017, respectively. Accounts receivable from MMIT royalties were $0 at December 31, 2018 and June 30, 2018. The license agreement with MMIT expired in August 2017.
At December 31, 2018 and June 30, 2018, the Company’s accounts receivable with customers outside the United Sates were approximately $1,715,000 and $1,630,000, respectively, $72,000 of which is over 90 days at December 31, 2018.
Earnings Per Share
Earnings per share (“EPS”) is calculated using the two classtwo-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity’s capital structure includes either two or more classes of common stock or common stock and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. As such, unvested restricted stock awards of the Company are considered participating securities. The dilutive effect of options and their equivalents (including non-vested stock issued under stock basedstock-based compensation plans), is computed using the “treasury” method.
Basic income per common share is based on the weighted average number of common shares outstanding during the period. Diluted income per common share includes the dilutive effect of potential common shares outstanding. The following table sets forth the reconciliation of weighted average shares outstandingthe Company’s basic and diluted weighted average shares outstanding:earnings per share calculation:
For the three months ended | For the six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Basic weighted average shares outstanding | 9,322,237 | 8,977,984 | 9,210,031 | 8,968,195 | ||||||||||||
Dilutive effect of resticted stock awards (participating securities) | — | — | — | — | ||||||||||||
Denominator for basic earnings per share | 9,322,237 | 8,977,984 | 9,210,031 | 8,968,195 | ||||||||||||
Dilutive effect of stock options | — | — | — | — | ||||||||||||
Diluted weighted average shares outstanding | 9,322,237 | 8,977,984 | 9,210,031 | 8,968,195 |
For the three months ended | For the six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic weighted average shares outstanding | 15,222,870 | 9,322,237 | 12,439,860 | 9,210,031 | ||||||||||||
Dilutive effect of restricted stock awards (participating securities) | - | - | - | - | ||||||||||||
Denominator for basic earnings per share | 15,222,870 | 9,322,237 | 12,439,860 | 9,210,031 | ||||||||||||
Dilutive effect of stock options | - | - | - | - | ||||||||||||
Diluted weighted average shares outstanding | 15,222,870 | 9,322,237 | 12,439,860 | 9,210,031 |
Diluted EPS for the three months and six months ended December 31, 20182019 and 20172018 as presented is the same as basic EPS as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive. Accordingly, excluded from the calculation of diluted EPS are the dilutive effect of options to purchase 530,978408,926 and 375,000530,978 shares of common stock for the three months ended December 31, 20182019 and 2017,2018, respectively, and the dilutive effect of options to purchase 544,143466,412 and 1,366,736544,143 shares of common stock for the six months ended December 31, 20182019 and 2017,2018, respectively. Also excluded from the calculation of earnings per share for the three and six months ended December 31, 20182019 and 20172018 are the unvested restricted stock awards whichthat were issued in December 2016.
Recent Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued ASCAccounting Standards Update No. 2014-09, Revenue from Contracts with Customers(“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 606), which was subsequently updated. The purpose326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the updated standard is to provide enhancements to the quality and consistency of revenue recognition between companies usingincurred loss impairment methodology in current U.S. GAAP and International Financial Reporting Standards. The new five-step recognition model introduces the core principle of recognizing revenue in an amountwith a methodology that reflects theexpected credit losses and requires consideration of a broader range of reasonable and supportable information to which the entity expects to be entitled in exchange for the promised goods or services, which includes additional footnote disclosures to describe the nature, amount, timing and uncertainty of revenue, certain costs and cash flow arising from customers.
As amended,inform credit loss estimates. ASU 2014-09 requires the Company to use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. This standard became effective for the Company on July 1, 2018 and the Company adopted the new pronouncement under the modified retrospective approach.
In February 2016, the FASB issued guidance on lease accounting requiring lessees to recognize a right-of-use asset and a lease liability for long-term leases. The liability will be equal to the present value of lease payments. This guidance must be applied using a modified retrospective transition approach to all annual and interim periods presented and2016-13 is effective for the Company beginning inSEC small business filers for fiscal 2020. The Company is currently in the early stages of evaluating this guidance to determine the impact it will have on its consolidated financial statements.
In August 2016, the FASB issued guidance on the Statement of Cash Flows Classification of certain cash receipts and cash payments (a consensus of the Emerging Issues Task Force). This guidance addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance became effective for the Company beginning in fiscal 2019. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,Business Combinations: Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periodsyears beginning after December 15, 2017, and early adoption2022. Management is permitted. The Company’s adoption ofcurrently assessing the impact ASU 2017-01 did not2016-13 will have a material effect on the Company’s consolidated financial statements.Company.
There are no other recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and has since issued amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company adopted ASC 842 on July 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Entities have the option to continue to apply historical accounting under Topic 840, including its disclosure requirements, in comparative periods presented in the year of adoption. An entity that elects this option recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of the earliest period presented. The Company adopted the optional ASC 842 transition provisions beginning on July 1, 2019. Accordingly, the Company will continue to apply Topic 840 prior to July 1, 2019, including Topic 840 disclosure requirements, in the comparative periods presented. The Company elected the package of practical expedients for all its leases that commenced before July 1, 2019. The Company has evaluated its real estate lease, its copier leases and its generator rental agreements. The adoption of ASC 842 did not materially impact the Company’s balance sheet and had an immaterial impact on its results of operations. Based on the Company’s current agreements, upon the adoption of ASC 842 on July 1, 2019, the Company recorded an operating lease liability of approximately $436,000 and corresponding ROU assets based on the present value of the remaining minimum rental payments associated with the Company’s leases. As the Company’s leases do not provide an implicit rate, nor is one readily available, the Company used its incremental borrowing rate based on information available at July 1, 2019 to determine the present value of its future minimum rental payments.
Critical Accounting Policies and Use of Estimates
Use ofEstimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for but not limited to establishing the allowance for doubtful accounts, valuation of inventory, depreciation, valuation of assets acquired and liabilities assumed in business combinations, asset impairment evaluations and establishing deferred tax assets and related valuation allowances, and stock-based compensation. Actual results could differ from those estimates.
2. Revenue Recognition
2. | Revenue Recognition |
On July 1, 2018 the Company adopted Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers, as amended” (“ASC Topic 606”), using the modified retrospective method applied to those contracts which werethat had not been completed as of the adoption date. The Company’s reported results for the quarteryear ended December 31, 2018June 30, 2019 reflect the application of ASC Topic 606 guidance while the Company’s reported results for fiscal year 2018 were prepared under the guidance of ASC Topic 605, “Revenue Recognition”. The Company’s adoption of ASC Topic 606 resulted in a cumulative prior period adjustment in the amount of $960,000 related to the Company’s Licenselicense and manufacturing agreement dated October 19, 2017, under which the Company licensed to its Chinese partner certain manufacturing and distribution rights to its SonaStar product line in China, Hong Kong and Macau (the “License and Exclusive Manufacturing Agreement described below,Agreement”), but the remainder of the adoption did not have a material impact on the timing or amount of revenue recognized.
The impacts of adopting ASC Topic 606 on the Company’s consolidated balance sheets as of July 1, 2018 were as follows:
As | ||||||||||||
Adjusted | ||||||||||||
As | ASC 606 | Under | ||||||||||
Reported | Adjustments | ASC 606 | ||||||||||
Contract assets | $ | — | $ | 960,000 | $ | 960,000 | ||||||
Total Shareholders’ equity | $ | 24,401,178 | $ | 960,000 | $ | 25,361,178 |
The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC Topic 606: 1) the Company accounts for amounts collected from customers for sales and other taxes net of related amounts remitted to tax authorities; 2) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; 3) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs fall within selling, general and administrative expenses; 4) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; 5) the Company will utilize the right-to-invoice practical expedient with regard to the recognition of revenue upon the purchase of consumable goods in connection with a product placement/consignment arrangement.
The Company determines revenue recognition through the following steps:
Contracts and Performance ObligationsRecognition of Revenue
The Company accounts for a contract with a customer when there is an approvalgenerates revenue from the sale and commitmentleasing of medical equipment, from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the consideration is probable. The Company’s performance obligations consist mainly of transferring control of products and related services identified in the contracts, purchase orders or invoices. For each contract, the Company considers the obligation to transfer products or bundled products and services to the customer, of which each is distinct in the context of the contract, to be performance obligations. The Company historically has not made provisions for returns and allowances as they have not been material to the operations of the Company.
Transaction Price and Allocation to Performance Obligations
Transaction prices of products are typically based upon contracted rates as specified on the purchase order for the purchase of consumables which represents the standalone selling price as determined through the sale of consumable products used with medical equipment in surgical procedures, from the sale of TheraSkin, a regenerative skin product, and or bundledfrom product licensing arrangements. In the United States, the Company’s products or services separately in similar circumstancesare marketed primarily through a hybrid sales approach that includes direct sales representatives, managed by regional sales managers, along with independent distributors. Outside the United States, the Company sells BoneScalpel and SonaStar to similar customers.specialty distributors who purchase products to resell to their clinical customer bases. The Company determinessells to all major markets in the effectsAmericas, Europe, Middle East, Asia Pacific, and Africa. Revenue is disaggregated from contracts between products under ship and bill arrangements and licensing agreements, and by geography, which the Company believes best depicts how the nature, amount, timing and uncertainty of variable consideration, inclusiverevenues and cash flows are affected by economic factors. The Company also provides an immaterial amount of any constraints, in determiningservice revenue that is recognized over time, but not stated separately because the transaction price with regard to their contracts with customers.
Recognition of Revenueamounts are immaterial.
The Company satisfies performance obligations either over time, or at a point in time, upon which control of a product shipped transfers to the customer.
Revenue derived by the Company from the shipping and billing of product is recorded upon shipment, when transfer of control occurs for products shipped freight on board (“F.O.B.”) shipping point. Products shipped F.O.B. destination point are recorded as revenue when received at the point of destination when the transfer of control is completed. Shipments under agreements with distributors are not subject to return, and payment for these shipments is not contingent on sales by the distributor. Accordingly, the Company recognizes revenue on shipments to distributors in the same manner as with other customers under the ship and bill process.
Revenue derived from the rental of equipment is recorded on a monthly basis over the term of the lease. Shipments of consumable products to these rental customers is recorded as orders are received and shipments are made F.O.B. destination or F.O.B. shipping point.
Revenue derived from consignment agreements is earned as consumables product orders are fulfilled. Therefore, revenue is recognized as shipments are made F.O BF.O.B. shipping point or F.O.B destination.
Revenue derived from service and maintenance contracts is recognized evenly over the life of the service agreement as the services are performed.
Contract Specific Performance Obligations and Significant Judgements
Product Placement/Consignment Agreements
The Company’s product placement/consignment agreements include the placement of a generator at the customer’s place of business and pricing related to the purchase of consumables for use in conjunction with the generator. These agreements have no stated minimum consumable purchase quantities nor a stated term. The Company considers the transaction price in these arrangements to be fully constrained variable consideration because it is dependent on future sales of consumables to the customer. The Company has determined that the pattern of purchase of consumables by a customer is consistent with the benefit received by the customer for the use of the generator and therefore the Company has a right to consideration based upon the pattern of consumable purchases placed through purchase orders by the customer. The Company’s invoices to these customers have short-term payment terms and are aligned with the transfer of goods and services to the customer and the Company recognizes revenue based upon their right to invoice customers.
License and Manufacturing Agreement
On October 19, 2017, the Company entered into a License and Exclusive Manufacturing Agreement (the “Agreement”) with Hunan Xing Hang Rui Kang Bio-technologies Co., Ltd, a Chinese corporation (the “Licensee”) under which Misonix has licensed certain manufacturing and distribution rights to its SonaStar product line in China, Hong Kong and Macau in exchange for payments consisting of initial payments totaling $5,000,000 for the transfer of functional intellectual property and initial stocking orders of product, and minimum royalty payments of $2,000,000 per calendar year for three years beginning in 2019, based upon the manufacture of products by the Licensee. $5,000,000 of initial revenue was collected and recorded for the quarter ended March 31, 2018 under ASC 605. Upon the adoption of Topic 606, the Company evaluated this contract under the provisions of the new revenue standard. The Company determined that the satisfied performance obligations and allocation of the transaction price related to the $5,000,000 received prior to adoption was consistent with the provisions of ASC 606 and also recorded a transitional adjustment to accumulated deficit in the amount of $960,000 as follows:
Minimum royalty revenue provided by the contract | $ | 6,000,000 | ||
Implicit price concession | (5,040,000 | ) | ||
Adoption adjustment to accumulated deficit under ASC 606 | $ | 960,000 |
Although the contract includes minimum royalties, the Company concluded that a significant portion of those guaranteed minimums are actually variable consideration subject to the constraint because the Company has provided an implicit price concession. Specifically, the fact that production of the product in China is not assured and the Licensee must develop a manufacturing process, coupled with the fact that new technology related to this product is expected to be available for sale domestically, may result in the Licensee not earning sufficient revenue in order to pay the minimum royalties. Therefore, the Company has determined variable consideration through utilization of the most likely method based upon forecasts and projections of shipment of products.
The Company will monitor facts and circumstances over time and adjust management’s most likely estimate of variable consideration on a quarterly basis.
Disaggregation of Revenue
The Company generates revenue from the sale and leasing of medical equipment and from the sale of consumable products used with such equipment in surgical procedures as well as through product licensing arrangements. In the United States, the Company’s products are marketed primarily through a hybrid sales approach which includes direct sales representatives, managed by regional sales managers, along with independent distributors. Outside the United States, the Company sells BoneScalpel and SonaStar to specialty distributors who purchase products to resell to their clinical customer bases. The Company sells to all major markets in the Americas, Europe, Middle East, Asia Pacific, and Africa. Revenue is disaggregated from contracts between products under ship and bill arrangements and licensing agreements, and by geography, which the Company believes best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. The Company also provides an immaterial amount of service revenue which is recognized over time, but not stated separately because the amounts are immaterial.
The following table disaggregates the Company’s product revenue by classification and geographic location:
For the three months ended | For the six months ended | ||||||||||||||||||||||||||||||||
For the three months ended December 31, | For the six months ended December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||
Total | |||||||||||||||||||||||||||||||||
Consumables | $ | 7,570,395 | $ | 6,162,064 | $ | 13,915,047 | $ | 11,505,826 | |||||||||||||||||||||||||
Equipment | 2,606,058 | 2,161,781 | 5,622,570 | 4,098,742 | |||||||||||||||||||||||||||||
Surgical | $ | 9,988,559 | $ | 8,628,587 | $ | 19,599,856 | $ | 16,771,546 | |||||||||||||||||||||||||
Wound | 9,733,427 | 1,547,866 | 11,268,052 | 2,766,071 | |||||||||||||||||||||||||||||
Total | $ | 10,176,453 | $ | 8,323,845 | $ | 19,537,617 | $ | 15,604,568 | $ | 19,721,986 | $ | 10,176,453 | $ | 30,867,908 | $ | 19,537,617 | |||||||||||||||||
Domestic: | |||||||||||||||||||||||||||||||||
Consumables | $ | 5,477,995 | $ | 4,623,545 | $ | 10,308,167 | $ | 8,722,636 | |||||||||||||||||||||||||
Equipment | 600,559 | 776,878 | 1,179,711 | 1,329,930 | |||||||||||||||||||||||||||||
Surgical | $ | 5,652,381 | $ | 4,706,926 | $ | 10,767,402 | $ | 8,953,194 | |||||||||||||||||||||||||
Wound | 9,606,332 | 1,371,628 | 11,036,219 | 2,534,683 | |||||||||||||||||||||||||||||
Total | $ | 6,078,554 | $ | 5,400,423 | $ | 11,487,878 | $ | 10,052,566 | $ | 15,258,713 | $ | 6,078,554 | $ | 21,803,621 | $ | 11,487,877 | |||||||||||||||||
International: | |||||||||||||||||||||||||||||||||
Consumables | $ | 2,092,400 | $ | 1,538,519 | $ | 3,606,880 | $ | 2,783,190 | |||||||||||||||||||||||||
Equipment | 2,005,499 | 1,384,903 | 4,442,859 | 2,768,812 | |||||||||||||||||||||||||||||
Surgical | $ | 4,336,178 | $ | 3,921,661 | $ | 8,832,454 | $ | 7,818,351 | |||||||||||||||||||||||||
Wound | 127,095 | 176,238 | 231,833 | 231,388 | |||||||||||||||||||||||||||||
Total | $ | 4,097,899 | $ | 2,923,422 | $ | 8,049,739 | $ | 5,552,002 | $ | 4,463,273 | $ | 4,097,899 | $ | 9,064,287 | $ | 8,049,739 |
There wasBeginning with the fiscal first quarter of 2020, Misonix adopted certain changes in its quarterly financial results related to the presentation of its sales performance supplemental data to more accurately reflect the Company’s two separate sales channels - its Surgical and Wound product divisions. The Surgical division includes the Company’s Nexus, BoneScalpel and SonaStar product lines, and the Wound division includes the Company’s SonicOne and TheraSkin product lines. As a result, the Company presents total, domestic and international sales performance supplemental data for its Surgical and Wound divisions and no license revenue for the periods presented.longer presents total, domestic and international sales performance supplemental data based on its consumables and equipment products.
Contract Assets
The timing of revenue recognition, customer invoicing, and collections produces accounts receivable and contract assets on the Company’s consolidated balance sheet. Contract liabilities are not material to the operations of the Company as of December 31, 2018.2019. The Company invoices in accordance with contract payment terms. Customer invoicesInvoices to customers represent an unconditional right of the Company to receive consideration. When revenue is recognized in advance of customer invoicing a contract asset is recorded. Unpaid customer invoices are reflected as accounts receivable.
TheUpon the adoption of ASC Topic 606 on July 1, 2018, the Company recorded a contract asset represents anfor $960,000 relating to royalties to be received from its Chinese partner relating to its License and Exclusive Manufacturing Agreement. This resulted in a cumulative prior period adjustment in the amount of $960,000 which was charged to accumulated deficit. When this contract asset in conjunction withwas established, the value of such asset was determined based upon the Company’s License and Manufacturing Agreement related toassessment of the most likely variable consideration associated withto be received by the Company as a result of the royalty provisions in the contract. The asset is recorded as a long-term asset as the Company believes that payment will be made on this asset in a duration to exceed one year. Contract assets asAs of December 31, 20182019, the Company’s Chinese partner has defaulted on its initial royalty payment obligations. Management has determined that collection of this contract is unlikely, and June 30, 2018 wereaccordingly, has recorded a full $960,000 reserve against such asset, and $0, respectively.has charged this reserve to bad debt expense, classified as general and administrative expenses.
Selling Costs
Incremental direct costs of obtaining a contract primarily include sales commissions paid to sales personnel and outside sales representatives in connection with sales of products under ship and bill scenarios or through product placement scenarios. The expected period of benefit of these costs is one year or less and therefore the Company has elected the practical expedient to expense such costs in the period in which they are incurred. Typically, these costs represent shipping and handling costs and the Company accounts for these costs as fulfillment costs and are expensed as incurred. Costs in fulfilling a contract are only capitalized as an asset if they relate directly to an existing contract or specific anticipated contract, they generate or enhance resources of the entity that will be used to satisfy performance obligations in the future, and they are expected to be recovered. The Company has not identified any such costs.
3. Fair Value of Financial Instruments
3. | Fair Value of Financial Instruments |
The Company follows a three-level fair value hierarchy that prioritizes the inputs to measure the fair value.value of the Company’s financial instruments. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs usedthat the Company uses to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
At December 31, 20182019 and June 30, 2018,2019, all of the Company’s cash and cash equivalents, trade accounts receivable and trade accounts payable were short term in nature, and their carrying amounts approximate fair value.
4. Inventories
4. | Inventories |
Inventories are summarized as follows:
December 31, | June 30, | |||||||
2018 | 2018 | |||||||
Raw material | $ | 3,416,547 | $ | 3,540,205 | ||||
Work-in-process | 324,932 | 180,442 | ||||||
Finished goods | 2,414,307 | 1,743,497 | ||||||
6,155,786 | 5,464,144 | |||||||
Less valuation reserve | (444,258 | ) | (444,258 | ) | ||||
$ | 5,711,528 | $ | 5,019,886 |
December 31, | June 30, | |||||||
2019 | 2019 | |||||||
Raw material | $ | 5,991,584 | $ | 4,830,207 | ||||
Work-in-process | 462,383 | 224,252 | ||||||
Finished goods | 5,176,194 | 2,743,361 | ||||||
11,630,161 | 7,797,820 | |||||||
Less valuation reserve | (444,258 | ) | (444,258 | ) | ||||
$ | 11,185,903 | $ | 7,353,562 |
5. Property, Plant and Equipment
5. | Property, Plant and Equipment |
Depreciation and amortization of property, plant and equipment was $698,000$977,000 and $615,000$698,000 for the six months ended December 31, 20182019 and 2017,2018, respectively. Inventory items used for demonstration purposes, subject to a rental agreement or provided on consignment are included in property, plant and equipment and are depreciated using the straight linestraight-line method over estimated useful lives of 3 to 5 years. Depreciation of generators whichthat are consigned to customers is expensed over a 5-year period, and depreciation is charged to selling expenses.
6. Goodwill
6. | Goodwill |
The excess of the cost over the fair value of net assets of acquired businesses is recorded as goodwill. GoodwillUnder accounting guidelines, goodwill is not subject to amortization,amortized, but is reviewedmust be tested for impairment at the reporting unit level annually, or more frequently if impairment indicators arise. The Company’s assessmentan event occurs or circumstances change that would more likely than not reduce the fair value of the recoverability ofreporting unit below the carrying amount. The Company reviews goodwill is based upon a comparison offor impairment annually and whenever events or changes indicate that the carrying value of goodwill with its estimated fair value andan asset may not be recoverable. These events or circumstances could include a significant change in the valuebusiness climate, legal factors, operating performance indicators, competition, or sale or disposition of the Company at the measurement date.
significant assets or products. Application of these impairment tests requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts, estimation of the long termlong-term rate of growth for ourthe Company’s business, the useful lives over which cash flows will occur and determination of ourthe Company’s weighted average cost of capital. The Company primarily utilizes the Company’s market capitalization exceedsand a discounted cash flow model in determining the fair value, which consists of Level 3 inputs. Changes in the goodwill.projected cash flows and discount rate estimates and assumptions underlying the valuation of goodwill could materially affect the determination of fair value at acquisition or during subsequent periods when tested for impairment. The Company concluded that there was nocompleted its annual goodwill impairment to goodwill at June 30,tests for fiscal 2019 and 2018 and June 30, 2017.as of March 31 of each year. There were no triggering events identified during the quarter ended December 31, 2018.2019 that would result in an impairment of goodwill. Goodwill decreased by $253,517 during the three months ended December 31, 2019 as a result of refinements relating to the purchase price valuation of Solsys.
7. Patents
7. | Patents |
The costs of acquiring or processing patents are capitalized at cost. These amounts are being amortized using the straight-line method over the estimated useful lives of the underlying assets, which is approximately 17 years. Patents, net of accumulated amortization, totaled $763,044$787,605 and $757,447$779,100 at December 31, 20182019 and June 30, 2018,2019, respectively. Amortization expense for the six months ended December 31, 2019 and 2018 was $63,000 and 2017 was $70,000, and $61,000, respectively. The following is a schedule of estimated future patent amortization expenses by fiscal year as of December 31, 2018:2019:
2020 | $ | 64,146 | ||
2021 | 123,028 | |||
2022 | 81,093 | |||
2023 | 80,002 | |||
2024 | 72,173 | |||
Thereafter | 367,163 | |||
$ | 787,605 |
2019 | $ | 67,325 | ||
2020 | 109,566 | |||
2021 | 102,374 | |||
2022 | 68,695 | |||
2023 | 67,625 | |||
Thereafter | 347,459 | |||
$ | 763,044 |
8. | Intangible Assets |
In connection with the Solsys Acquisition, the Company acquired intangible assets primarily consisting of customer relationships, trade names and non-competition agreements. The table below summarizes the intangible assets acquired:
December 31, | June 30, | Amortization | ||||||||
2019 | 2019 | Period | ||||||||
Customer relationships | $ | 7,400,000 | $ | - | 15 years | |||||
Trade names | 12,800,000 | - | 15 years | |||||||
Non-competition agreements | 200,000 | - | 1 year | |||||||
Total | 20,400,000 | - | ||||||||
Less accumulated amortization | (386,667 | ) | - | |||||||
Net intangible assets | $ | 20,013,333 | $ | - |
The following is a schedule of estimated future intangible asset amortization expense by fiscal year as of December 31, 2019:
2020 | $ | 1,160,000 | ||
2021 | 1,396,667 | |||
2022 | 1,346,667 | |||
2023 | 1,346,667 | |||
2024 | 1,346,667 | |||
Thereafter | 13,803,332 | |||
$ | 20,400,000 |
8. Accrued Expenses and Other Current Liabilities
9. | Accrued Expenses and Other Current Liabilities |
The following summarizes accrued expenses and other current liabilities:
December 31, | June 30, | December 31, | June 30, | |||||||||||||
2018 | 2018 | 2019 | 2019 | |||||||||||||
Accrued payroll, payroll taxes and vacation | $ | 576,674 | $ | 351,435 | $ | 820,060 | $ | 488,339 | ||||||||
Accrued bonus | 309,995 | 552,988 | 761,791 | 622,115 | ||||||||||||
Accrued commissions | 678,002 | 742,807 | 1,831,815 | 662,007 | ||||||||||||
Professional fees | 166,385 | 102,065 | 471,257 | 181,313 | ||||||||||||
Vendor, tax and other accruals | 533,056 | 661,877 | 1,280,285 | 534,740 | ||||||||||||
$ | 2,264,112 | $ | 2,411,172 | $ | 5,165,208 | $ | 2,488,514 |
9. Stock-Based Compensation Plans
10. | Stock-Based Compensation Plans |
Stock Option Awards
For the three and six months ended December 31, 20182019 and 2017,2018, the compensation cost relating to stock option awards that has been charged against income for the Company’s stock option plans, excluding the compensation cost for restricted stock, was $281,023 and $502,358, and $500,087 and $844,601, and $1,504,586 and $1,016,026, respectively. As of December 31, 2018,2019, there was $2,928,738approximately $3.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 2.73.1 years.
Stock options typically expire 10 years from the date of grant and vest over service periods, which typically are 4 years. All options are granted at fair market value, as defined in the applicable plans.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. The expected volatility represents the historical price changes of the Company’s stock over a period equal to that of the expected term of the option. The Company uses the simplified method for determining the option term. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based upon historical and projected dividends. The Company has historically not paid dividends, and isit does not expectedexpect to do so in the near term.
The weighted average fair value per share at date of grant for options granted during the six months ended December 31, 2018 was $8.51. There were options to purchase 182,000185,500 and 305,500182,000 shares granted during the six months ended December 31, 20182019 and 2017,2018, respectively. The fair value was estimated based on the weighted average assumptions of:
For six months ended | ||||||||
December 31, 2018 | ||||||||
2018 | 2017 | |||||||
Risk-free interest rates | 2.90 | % | 1.98 | % | ||||
Expected option life in years | 6.25 | 5.95 | ||||||
Expected stock price volatility | 55.87 | % | 57.42 | % | ||||
Expected dividend yield | 0 | % | 0 | % |
For the six months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Risk-free interest rates | 1.67 | % | 2.90 | % | ||||
Expected option life in years | 6.25 | 6.25 | ||||||
Expected stock price volatility | 54.69 | % | 55.87 | % | ||||
Expected dividend yield | 0 | % | 0 | % |
A summary of option activity under the Company’s equity plans as of December 31, 2018,2019, and changes during the six months ended December 31, 20182019 is presented below:
Outstanding Shares | Average Exercise Price | Aggregate Intrinsic Value | |||||||||
Outstanding at June 30, 2018 | 1,330,193 | $ | 8.47 | $ | 5,369,557 | ||||||
Granted | 182,000 | 15.40 | |||||||||
Exercised | (183,285 | ) | 7.81 | ||||||||
Forfeited | (73,752 | ) | 9.01 | ||||||||
Expired | (15,000 | ) | 2.66 | ||||||||
Outstanding as of December 31, 2018 | 1,240,156 | $ | 9.69 | $ | 7,835,881 | ||||||
Vested and exercisable at December 31, 2018 | 676,780 | $ | 8.24 | $ | 5,258,285 |
Options | ||||||||||||
Weighted | ||||||||||||
Average | Aggregate | |||||||||||
Outstanding | Exercise | Intrinsic | ||||||||||
Shares | Price | Value | ||||||||||
Vested and exercisable at June 30, 2019 | 1,163,856 | $ | 10.28 | $ | 19,409,569 | |||||||
Granted | 185,500 | 21.41 | ||||||||||
Exercised | (141,750 | ) | 8.29 | |||||||||
Forfeited | (47,500 | ) | 13.99 | |||||||||
Expired | - | - | ||||||||||
Outstanding as of December 31, 2019 | 1,160,106 | $ | 12.15 | $ | 8,084,272 | |||||||
Vested and exercisable at December 31, 2019 | 663,979 | $ | 8.94 | $ | 6,420,769 |
The total fair value of stock options vested during the six months ended December 31, 20182019 was $999,195.$863,924. The number and weighted-average grant-date fair value of non-vested stock options at the beginning of fiscal 2018December 31, 2019 was 648,877496,127 and $5.08,$8.93, respectively. The number and weighted-average grant-date fair value of stock options which vested during the six months ended December 31, 20182019 was 194,374148,999 and $5.14,$5.80, respectively.
Restricted Stock Awards
On December 15, 2016, the Company issued 400,000 shares of restricted stock to its Chief Executive Officer. These awards vest over a period of up to five years, subject to meeting certain service, performance and market conditions. These awards were valued at approximately $3.6 million. Compensation expense recorded in the three and six months ended December 31, 20182019 and 20172018 related to these awards was $871,329$123,629 and $453,868$144,953, and $247,378 and $871,329, respectively. As of December 31, 2018,2019, there was approximately $1,377,319$886,365 of total unrecognized compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average period of 2.811.82 years. The awards contain a combination of vesting terms whichthat include time vesting, performance vesting relating to revenue achievement, and market vesting related to obtaining certain levels of Company stock prices. At December 31, 2018,2019, the Company has estimated that it is probable that the performance conditions will be met. The awards were valued using a Monte Carlo valuation model using a stock price at the date of grant of $9.60, a term of 3 to 5 years, a risk freerisk-free interest rate of 1.6% to 2.1% and a volatility factor of 66.5%. As of December 31, 2018,2019, 186,600 shares from this set of awards have vested.
During the six months ended December 31, 2018, the performance conditions of one of these restricted stock awards were met, resulting in the full amortization of this award during the period, totaling $475,286 of additional amortization during the first quarter of the current fiscal year. The number of restricted stock awards which vested was 133,333.
11. | Commitments and Contingencies |
10. Commitments and Contingencies
Leases
The Company has entered into several non-cancellable operating leases primarily for real estate and office copiers. These leases generally have terms that range from 1 year to 6 years. These operating leases are included in “Prepaid expenses and other current assets” and “Lease right of use and other assets” on the Company’s December 31, 2019 consolidated balance sheet and represent the Company’s right to use the underlying asset for the rentallease term. The Company’s obligation to make lease payments are included in “Current portion of certain manufacturinglease liabilities” and office space, equipment and automobiles expiring in various years through 2021. The principal building“Lease right of use liabilities” on the Company’s December 31, 2019 consolidated balance sheet. Based on the present value of the lease providespayments for a monthly rentalthe remaining lease term of the Company’s existing leases, the Company recognized right-of-use assets of approximately $28,000.
Class Action Securities Litigation
On September 19, 2016, Richard Scalfani, an individual shareholder$0.5 million and lease liabilities for operating leases of Misonix, filed a lawsuit againstapproximately $0.5 million on July 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at their commencement date based on the Companypresent value of lease payments over the lease term. As of December 31, 2019, total right-of-use assets and its former CEOoperating lease liabilities were approximately $1.2 million and CFO in the U.S. District Court for the Eastern District of New York, alleging violations of the federal securities laws. The complaint alleges that the Company’s stock price was artificially inflated between November 5, 2015 and September 14, 2016 as a result of alleged false and misleading statements in the Company’s securities filings concerning the Company’s business, operations, and prospects and the Company’s internal control over financial reporting. Scalfani filed the action seeking to represent a putative class of all persons (other than defendants, officers and directors of the Company, and their affiliates) who purchased publicly traded Misonix securities between November 5, 2015 and September 14, 2016. Scalfani was seeking an unspecified amount of damages for himself and for the putative class under the federal securities laws. On March 24, 2017, the Court appointed Scalfani and another individual Misonix shareholder, Tracey Angiuoli, as lead plaintiffs for purposes of pursuing the action on behalf of the putative class. The lead plaintiffs, on behalf of the putative class, and the Company reached a settlement in principle under which the Company would pay $500,000 to resolve the matter. The district court approved the settlement and dismissed the lawsuit with prejudice in an order dated December 16, 2017.$1.2 million, respectively. The Company has paid its $250,000, representing its insurance retention. The balance was paid by the Company’s insurance carrier.
Former Chinese Distributor - FCPA
With the assistance of outside counsel, the Company conducted a voluntary investigation into the business practices of the independent Chinese entity that previously distributed its products in China and the Company’s knowledge of those business practices, which may have implications under the FCPA, as well asentered into various internal controls issues identified during the investigation (the “Investigation”). On September 27, 2016 and September 28, 2016, the Company voluntarily contacted the SEC and the DOJ, respectively, to advise both agenciesshort-term operating leases with an initial term of these potential issues. The Company has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating fully with these agencies in their ongoing investigations of these matters. Although the Company’s Investigation is complete, additional issuestwelve months or facts could arise which may expand the scope or severity of the potential violations. The Company has no current information derived from the Investigation or otherwise to suggest that its previously reported financial statements and results are incorrect.
At this stage, the Company is unable to predict what, if any, action the DOJ or the SEC may take or what, if any, penalties or remedial measures these agencies may seek. Nor can the Company predict the impact on the Company as a result of these matters, which may include the imposition of fines, civil and criminal penalties, whichless. These leases are not currently estimable, as well as equitable remedies, including disgorgement of any profits earned from improper conduct and injunctive relief, limitationsrecorded on the Company’s conduct, andbalance sheet. All operating lease expense is recognized on a straight-line basis over the imposition of a compliance monitor. The DOJ andlease term. During the SEC periodically have based the amount of a penalty or disgorgement in connection with an FCPA action, at least in part, on the amount of profits that a company obtained from the business in which the violations of the FCPA occurred. During its distributorship relationship with the prior Chinese distributor from 2010 through 2016, the Company generated revenues of approximately $8 million.
Further, the Company may suffer other civil penalties or adverse impacts, including lawsuits by private litigants in addition to the lawsuits that already have been filed, or investigations and fines imposed by local authorities. The investigative costs to date are approximately $3.4 million, of which approximately $0.3 million and $0.4 million was charged to general and administrative expenses during the three and six months ended December 31, 2018, respectively, compared with $0.1 million2019, the Company recognized approximately $153,000 in total lease costs, which was composed operating lease costs for right-of-use assets.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company’s right-of-use assets and $0.3 million for the three and six months endedrelated lease liabilities were as follows:
Six months ended | ||||
December 31, 2019 | ||||
Cash paid for operating lease liabilities | $ | 203,449 | ||
Right of use assets obtained in exchange for new operating lease obligations | $ | 1,301,009 |
As of | ||||
December 31, 2019 | ||||
Weighted-average remaining lease term | 4.0 years | |||
Weighted-average discount rate | 10.5 | % |
Maturities of lease liabilities as of December 31, 2017.2019 were as follows:
2020 | $ | 303,863 | ||
2021 | 348,252 | |||
2022 | 247,359 | |||
2023 | 254,199 | |||
2024 | 254,794 | |||
Thereafter | 109,493 | |||
1,517,960 | ||||
Less imputed interest | (288,955 | ) | ||
Total lease liabilities | $ | 1,229,005 |
Former Chinese Distributor –- Litigation
On April 5,March 23, 2017, the Company’s former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against the Company and certain of its officers and directors of the Company in the United States District Court for the Eastern District of New York, alleging that the Company improperly terminated its contract with the former distributor. The complaint sought various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On October 7, 2017, the court granted the Company’s motion to dismiss alleach of the tort claims asserted against it,us, and also granted the individual defendants’ motion to dismiss all claims asserted against them. The only claim currently remaining inOn January 23, 2020, the case is for breach of contract against the Company; the plaintiff has movedCourt granted Cicel’s motion to amend its complaint, to add tortinclude claims whichfor alleged defamation and theft of trade secrets in addition to the Company has opposed.breach of contract claim. The Company believes that it has various legal and factual defenses to the allegations in the complaint and intends to vigorously defend the action. Theaction vigorously. Fact discovery in the case is at its earliest stages; discovery is just beginningongoing, and there is no trial date.date currently set.
12. | Financing Arrangements |
Note payable consists of the following as of June 30, 2019 and December 31, 2019:
December 31, | June 30, | |||||||
2019 | 2019 | |||||||
Revolving credit facility | $ | 8,750,000 | $ | - | ||||
Notes payable | 30,095,761 | - | ||||||
$ | 38,845,761 | $ | - |
Following are the scheduled maturities of the notes payable for the twelve-month period ending June 30:
2020 | $ | - | ||
2021 | 2,500,000 | |||
2022 | 5,000,000 | |||
2023 | 31,345,761 | |||
2024 | - | |||
$ | 38,845,761 |
Revolving Credit Facility
Through the Solsys acquisition, the Company became party to a $5 million revolving line of credit loan agreement with Silicon Valley Bank, originally effective January 22, 2019 (as amended and supplemented, the “Prior Solsys Credit Agreement”). The line of credit had an original maturity date of January 22, 2021.
On December 26, 2019 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “New Loan and Security Agreement”) among the Company, Misonix OpCo, Inc. and Solsys, as borrowers, and Silicon Valley Bank. The New Loan and Security Agreement provides for a revolving credit facility (the “New Credit Facility”) in an aggregate principal amount of $20 million, including borrowings and letters of credit. The New Loan and Security Agreement replaces the $5 million Prior Solsys Credit Agreement, dated as of January 22, 2019, among Solsys, as borrower, and Silicon Valley Bank. The Company did not incur any early termination penalties in connection with the termination of the Prior Solsys Credit Agreement.
Borrowings of $8,750,000 under the New Credit Facility were used in part to repay the amount of $3,750,000 outstanding under the Prior Solsys Credit Agreement, and the balance may be used by the Company for general corporate purposes and working capital. The New Credit Facility matures on December 26, 2022. Interest on outstanding indebtedness under the New Credit Facility accrues at a rate equal to the greater of the “Prime Rate” and 5.25%. In addition, on each year anniversary of the Effective Date, the Company is required to pay an anniversary fee of $100,000.
The New Loan and Security Agreement contains representations and warranties and covenants that the Company believes are customary for agreements of this type, including covenants applicable to the Company and its subsidiaries limiting indebtedness, liens, substantial asset sales and mergers as well as financial maintenance covenants and other provisions. The New Loan and Security Agreement contains customary events of default. Upon the occurrence of an event of default, the lender may accelerate the indebtedness under the New Credit Facility, provided, that in the case of certain bankruptcy or insolvency events of default, the indebtedness under the New Credit Facility will automatically accelerate. If the New Credit Facility or the New Loan and Security Agreement terminates before the maturity date of December 26, 2022, then the Company must pay the then-owing amounts, in addition to a termination fee equal to 1% of the New Credit Facility at that time. The termination fee would not apply if the New Credit Facility or the New Loan and Security Agreement terminates before the maturity date for either of the following reasons: (1) the New Credit Facility is replaced with another new credit facility from Silicon Valley Bank or (2) Silicon Valley Bank sells, transfers, assigns or negotiates its obligations, rights and benefits under the New Loan and Security Agreement and related loan documentation to another person or entity that is not an affiliate of Silicon Valley Bank and the Company terminates the New Loan and Security Agreement or the New Credit Facility within sixty days thereof (unless the Company consented to that sale, transfer, assignment or negotiation).
Stockholder Derivative LitigationNotes Payable
On September 27, 2019, the Company entered into an amended and restated credit agreement (“SWK Credit Agreement”) with SWK Holdings Corporation (“SWK”) pursuant to a commitment letter whereby SWK (a) consented to the transactions contemplated by the Solsys merger agreement and (b) agreed to provide financing to the Company. Through the Solsys acquisition, the Company became party to a $20.2 million note payable to SWK. The SWK credit facility originally provided an additional $5 million in financing, totaling approximately $25.1 million and a maturity date of June 6, 2017, Irving Feldbaum,30, 2023. Prior to the Amendment Date (as defined below), the interest rate applicable to the loans made under the SWK Credit Agreement varied between LIBOR plus 7.00% and LIBOR plus 10.25%, depending on the Company’s consolidated EBITDA or market capitalization. On December 23, 2019 (the “Amendment Date”) the parties amended the SWK Credit Agreement (as so amended, the “Amended SWK Credit Agreement”) to, among other things, provide an individual shareholderadditional $5 million of Misonix, filedterm loans, for total aggregate borrowings of up to approximately $30.1 million, to modify the interest payable thereunder, which now varies between LIBOR plus 7.50% and LIBOR plus 10.25%, depending on the Company’s consolidated EBITDA or market capitalization, and to amend the financial covenants thereunder. The maturity date of the Amended SWK Credit Agreement remains June 30, 2023. As of December 31, 2019, the outstanding principal balance of the term loans under the Amended SWK Credit Agreement is approximately $30.1 million.
Under the Amended SWK Credit Agreement, the Company and Solsys are required to make quarterly aggregate principal payments beginning in March 2021 of $1.25 million. The Company and Solsys are also obligated to begin making cash payments of accrued interest in March 2021.
The Company may not prepay the loans under the SWK Credit Agreement until September 27, 2020. On and after September 27, 2020, the Company may prepay the loans subject to a lawsuit inprepayment fee of (a) $800,000 if such prepayment is made prior to September 27, 2021, (b) 1.00% of the U.S. District Courtamount prepaid if such prepayment is on or after September 27, 2021 and prior to September 27, 2022 and (c) $0 if such prepayment is made on or after September 27, 2022.
Under the terms of the Amended SWK Credit Agreement, the Company is required to meet certain additional financial covenants requiring, among other things, (a) a minimum amount of unencumbered liquid assets that will vary based on the Company’s market capitalization, (b) minimum aggregate revenue of specified amounts for the Eastern Districtnine month period ending March 31, 2020, and for the twelve month period ending on the last day of New York. The complaint alleges claims againstthe subsequent fiscal quarters and (c) minimum EBITDA at levels that will vary based on the Company’s board of directors, its former CEOmarket capitalization. The Company’s obligations under the Amended SWK Credit Agreement are (i) guaranteed by Misonix OpCo, Inc., and CFO, certain of its former directors, and the Company as(ii) secured by a nominal defendant for alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and state law claims for breach of fiduciary duty, waste of corporatefirst lien on substantially all assets and unjust enrichment. The complaint alleges that the Company incurred damages as a result of alleged false and misleading statements in the Company’s securities filings concerning the Company’s business, operations, and prospects and the Company’s internal control over financial reporting. The complaint also alleges that the Company’s February 4, 2016 Proxy Statement contained false and misleading statements regarding executive compensation. The complaint seeks the recovery of damages on behalf of the Company, Solsys and the implementationMisonix OpCo, Inc. and a second lien position on accounts receivable and inventory of changes to corporate governance procedures. On June 16, 2017, Michael Rubin, another individual shareholder of Misonix, filed a case alleging similar claims in the same district court. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 16, 2018, the Company and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in principle. There are aspects of the settlement that remain to be negotiated and documented, and the settlement is subject to approval by the District Court after notice to the Company’s shareholders.entities.
11. Related Party Transactions
13. | Related Party Transactions |
OrthoXact Proprietary LimitedMinoan Medical (Pty) Ltd. (“OrthoXact”Minoan”) (formerly Applied BioSurgical) is an independent distributor for the Company in South Africa. The chief executive officer of OrthoXactMinoan is also the brother of Stavros G. Vizirgianakis, the CEO of Misonix, Inc.Company’s Chief Executive Officer.
Set forth below is a table showing the Company’s net revenues for the six months ended December 31, 2019 and 2018 and accounts receivable at December 31, for the indicated time period below2019 and 2018 with OrthoXact:Minoan:
For the six months ended December 31, | ||||||||
2018 | 2017 | |||||||
Sales | $ | 573,953 | $ | 436,551 | ||||
Accounts receivable | $ | 260,222 | $ | 172,292 |
12. Income Taxes
For the six months ended and | ||||||||
as of December 31, | ||||||||
2019 | 2018 | |||||||
Sales | $ | 1,060,248 | $ | 573,953 | ||||
Accounts Receivable | $ | 367,132 | $ | 260,222 |
14. | Income Taxes |
For the three and six months ended December 31, 20182019 and 2017,2018, the Company recorded an income tax expense (benefit), as follows:
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Income tax benefit | $ | (228,000 | ) | $ | (228,149 | ) | $ | (655,000 | ) | $ | (509,149 | ) | ||||
Reduction of deferred tax assetsrelating to Tax Legislation | — | 1,764,039 | — | 1,764,039 | ||||||||||||
Valuation allowance on deferred tax assets | 228,000 | 3,988,532 | 655,000 | 3,988,532 | ||||||||||||
Net income tax expense | $ | — | $ | 5,524,422 | $ | — | $ | 5,243,422 |
For the three months ended | For the six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Income tax benefit | $ | (1,255,000 | ) | $ | (228,000 | ) | $ | (1,770,000 | ) | $ | (655,000 | ) | ||||
Income tax benefit - Solsys Acquisition | - | - | (4,085,000 | ) | - | |||||||||||
Valuation allowance on deferred tax assets | 1,255,000 | 228,000 | 1,770,000 | 655,000 | ||||||||||||
Net income tax benefit | $ | - | $ | - | $ | (4,085,000 | ) | $ | - |
For the six months ended December 31, 2019 and 2018, the Company recorded an income tax expense (benefit) of $4.1 million and 2017,$0, respectively. For the six months ended December 31, 2019 and 2018, the effective rate of 0%55% and 185.6%, respectively,0% varied from the U.S. federal statutory rate primarily due to the recording of a full valuation allowance on the remaining deferred tax assets, permanent book tax differences relating principally to stock compensation expense and tax credits, and the impact ofbusiness combination related to the Tax Cuts and Jobs Act of 2017.
Tax Cuts and Jobs Act of 2017Solsys Acquisition.
The Tax Cutsacquisition of Solsys resulted in the recognition of deferred tax liabilities of approximately $4.1 million, related primarily to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its deferred tax assets. The deferred tax liabilities generated from the business combination is netted against the Company’s pre-existing deferred tax assets. Consequently, this resulted in a release of $4.1 million of the pre-existing valuation allowance against the deferred tax assets and Jobs Act of 2017, enacted on December 22, 2017, contains significant changes to U.S.corresponding deferred tax law, including lowering the U.S. corporate income tax rate to 21%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries.benefit.
Valuation Allowance on Deferred Tax Assets
Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income.
In accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. The guidance requires entities to evaluate all available positive and negative evidence, including cumulative results in recent periods, weighted based on its objectivity, in determining whether its deferred tax assets are more likely than not realizable.
The Company regularly assesses its ability to realize its deferred tax assets. While the Company had positive cumulative pretax income as of June 30, 2017, based on actual results for fiscal 2018 and the Company’s current forecast for fiscal 2019 theThe Company is in a three-year cumulative loss position at December 31, 2018,June 30, 2019, and it expects to be in a cumulative pretax loss position as of June 30, 2019.2020. Management evaluated available positive evidence, including the continued growth of the Company’s revenues and gross profit margins, the completion of the development of its recentnext generation Nexus product, its SonaStar technology license to its Chinese partner and the reduction in investigative and professional fees, recognized in fiscal 2017, along with available negative evidence, including the Company’s continuing investment in building its next generation Nexus platform and its continuing investment in building a direct sales force while atand payment of transaction fees for the same time paying commissions to its domestic sales distributors.Company’s Solsys Acquisition. After weighing both the positive and negative evidence, management concluded that the Company’s deferred tax assets are not more likely-than-not realizable. Accordingly, the Company recorded a fullan increase in the valuation allowance for the three months ended December 31, 2019 of approximately $1.3 million against its remaining deferred tax assets.assets at December 31, 2019. As a result of the Solsys Acquisition, the Company recorded a valuation allowance release of approximately $4.1 million. The remaining cumulative valuation allowance at December 31, 2019 is approximately $3.1 million. The Company will continue to assess its ability to utilize its net operating loss carryforwards, and will reverse this valuation allowance when sufficient evidence is achieved to allow the realizability of such deferred tax assets.
As of December 31, 20182019 and June 30, 2018,2019, the Company had no material unrecognized tax benefits or accrued interest and penalties.
13. Segment Reporting
15. | Segment Reporting |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that its Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized by the CODM as the Company’s current product offering primarily consists of minimally invasive therapeutic ultrasonic medical devices.devices and wound care products. The Company’s products are relatively consistent and manufacturing is centralized and consistent across product offerings. BasedHowever, based on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as suchSolsys Acquisition, the Company has concluded thatis currently evaluating its business to conclude as to whether it operates asin more than one segment.
Worldwide revenue for the Company’s products and licenseproduct revenue is categorized as follows:
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Domestic | $ | 6,078,554 | $ | 5,400,423 | $ | 11,487,878 | $ | 10,052,566 | ||||||||
International | 4,097,899 | 2,923,422 | 8,049,739 | 5,552,002 | ||||||||||||
Total | $ | 10,176,453 | $ | 8,323,845 | $ | 19,537,617 | $ | 15,604,568 |
For the three months ended | For the six months ended | |||||||||||||||
December 31 | December 31 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Domestic | $ | 15,258,713 | $ | 6,078,554 | $ | 21,803,621 | $ | 11,487,878 | ||||||||
International | 4,463,273 | 4,097,899 | 9,064,287 | 8,049,739 | ||||||||||||
Total | $ | 19,721,986 | $ | 10,176,453 | $ | 30,867,908 | $ | 19,537,617 |
Substantially all of the Company’s long-lived assets are located in the United States.
16. | Acquisitions |
Solsys Medical, LLC
On September 27, 2019, the Company completed the Solsys Acquisition. The purchase price was approximately $108.6 million, based on the Company’s issuance of 5,703,082 shares of Misonix common stock as acquisition consideration, valued at $19.05 per share. In addition, business transaction costs incurred in connection with the acquisition were $4.5 million, of which $1.8 million and were incurred in the six months ended December 31, 2019. These fees were charged to general and administrative expenses on the Statement of Operations. In addition, approximately $1.4 million of the transaction costs were capitalized to additional paid in capital, in connection with the registration of the underlying stock issued in the transaction.
The transaction was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805. U.S. GAAP requires that one of the companies in the transactions be designated as the acquirer for accounting purposes based on the evidence available. Misonix was treated as the acquiring entity for accounting purposes.
The preliminary Solsys purchase price allocation as of September 27, 2019, is shown in the following table:
Cash | $ | 5,525,601 | ||
Accounts receivable | 5,480,890 | |||
Inventory | 98,911 | |||
Prepaid expenses | 88,863 | |||
Property and equipment | 673,353 | |||
Lease assets | 946,617 | |||
Indemnified assets | 250,000 | |||
Customer relationships | 7,400,000 | |||
Trade names | 12,800,000 | |||
Non-competition agreements | 200,000 | |||
Accounts payable and other current liabilities | (4,794,878 | ) | ||
Lease liabilities | (858,111 | ) | ||
Deferred tax liability | (4,085,000 | ) | ||
Notes payable | (23,915,701 | ) | ||
Total identifiable net assets | (189,455 | ) | ||
Goodwill | 108,833,165 | |||
Total consideration | $ | 108,643,710 |
The fair values of the Solsys assets and liabilities are provisional and were determined based on preliminary estimates and assumptions that management believes are reasonable. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to certain short-term assets, intangible assets, and certain liabilities. The final determination of the fair value of certain assets and liabilities will be completed as soon as the necessary information is available, including the completion of a valuation of the tangible and intangible assets, but no later than one year from the acquisition date.
The goodwill from the acquisition of Solsys, which is fully deductible for tax purposes, consists largely of synergies and economies of scale expected from combining the operations of Solsys and the Company’s existing business.
The estimate of fair value of the Solsys identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table summarizes key information underlying intangible assets related to the Solsys Acquisition:
December 31, | June 30, | Amortization | ||||||||
2019 | 2019 | Period | ||||||||
Customer relationships | $ | 7,400,000 | $ | - | 15 years | |||||
Trade names | 12,800,000 | - | 15 years | |||||||
Non-competition agreements | 200,000 | - | 1 year | |||||||
Total | $ | 20,400,000 | $ | - |
Solsys’ operations were consolidated with those of the Company for the period September 27, 2019 through December 31, 2019. Had the acquisition occurred as of the beginning of fiscal 2018, revenue and net loss, on a pro forma basis excluding transaction fees and the one time tax benefit, for the combined company would have been as follows:
For the six months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Revenue | $ | 39,212,703 | $ | 21,890,347 | ||||
Net loss | $ | (9,246,809 | ) | $ | (5,161,602 | ) |
17. Subsequent Events
On January 27, 2020, the Company completed an offering of its equity securities, resulting in net proceeds to the Company of $32.5 million. The Company issued 1,868,750 shares of its common stock at a price of $18.50 per share.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations of Misonix and its subsidiaries, which we refer to as the “Company”, “Misonix”, “we”, “our” and “us”, should be read in conjunction with the accompanying unaudited financial statements included in Part I –- Item 1 “Financial Statements” of this Report and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on September 13, 2018,5, 2019, for the fiscal year ended June 30, 20182019 (“20182019 Form 10-K”). Item 7 of the 20182019 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes during the three months ended December 31, 2018.2019.
Forward Looking Statements
With the exception of historical information contained in this Form 10-Q, content herein may contain “forward looking“forward-looking statements” that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee that any forward lookingforward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. These factors include general economic conditions, delays and risks associated with the performance of contracts, risks associated with international sales and currency fluctuations, uncertainties as a result of research and development, acceptable results from clinical studies, including publication of results and patient/procedure data with varying levels of statistical relevance, risks involved in introducing and marketing new products, regulatory compliance, potential acquisitions, consumer and industry acceptance, litigation and/or contemplated 510(k) filings, the ability to achieve and maintain profitability in our business lines, the pending FCPA investigation and other factors discussed in the 20182019 Form 10-K, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We disclaim any obligation to update any forward-looking statements.statements, except as we are required by law to do so.
OverviewEquity Financing
On January 27, 2020, the Company completed an offering of its equity securities, resulting in net proceeds to the Company of $32.5 million. The Company issued 1,868,750 shares of its common stock at a price of $18.50 per share.
Acquisition of Solsys Medical, LLC
On September 27, 2019, we completed our acquisition of Solsys, a medical technology company focused on the regeneration and healing of soft-tissue associated with chronic wounds and surgical procedures. Solsys’ primary product is TheraSkin, a living cell wound therapy indicated to treat all external wounds from head-to-toe. The purchase was approximately $109 million, representing 5,703,082 shares of Misonix designs, manufacturescommon stock, valued at $19.05 per share. In addition, business transaction costs incurred in connection with the acquisition of $4.5 million, of which $1.8 million were incurred in the six months ended December 31, 2019. These fees were charged to general and marketsadministrative expenses on the Statement of Operations. In addition, approximately $1.4 million of the transaction costs were capitalized to additional paid in capital, in connection with the registration of the underlying stock issued in the transaction. The results of operations of Solsys are included in our consolidated statement of operations.
Overview
We design, manufacture and market minimally invasive therapeuticsurgical ultrasonic medical devices. These products are used for precise bone sculpting, removal of soft and hard tumors, and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery. We also market, sell and distribute TheraSkin in the United States, through an agreement with LifeNet. TheraSkin is a biologically active human skin allograft that has all of the relevant characteristics of human skin, including living cells, growth factors, and a collagen matrix, needed to heal wounds which complements our ultrasonic medical devices. TheraSkin is derived from human skin tissue from consenting and highly screened donors and is manufactured by LifeNet.
We strive to help proprietary procedural solutions become the standard of care and enhance patient outcomes throughout the world. We intend to accomplish this, in part, by utilizing our best in class surgical ultrasonic technology to change patient outcomes in spinal surgery, neurosurgery and wound care. We are currently developing proprietary procedural solutions around our recently FDA cleared Nexus ultrasonic generator. In addition, through the acquisition of Solsys, we completed our first procedural expansion of our ultrasonic offering, adding the TheraSkin product, a leading cellular skin substitute indicated for all wounds, to our product portfolio.
In the United States, the Company sells itswe sell our products through itsour direct sales force, in addition to a network of commissioned agents assisted by CompanyMisonix personnel. Outside of the United States, the Companywe generally sellssell to distributors who then resell the products to hospitals. The CompanyOur sales force operates as two groups, Surgical (neurosurgery and spinal surgery) and Wound Care. We operate with one business segment.
In the United States, the Company is taking a more aggressive approach to taking market share, expanding the market and increasing its share of recurring disposable revenue by using a consignment model, whereby the Company will consign the equipment (which is defined as a generator, hand units and accessories) (the “Equipment”) and sell to customers higher margin disposable, single use items (the “Consumables”) on a recurring basis. Title remains with the Company with respect to consigned Equipment, which is depreciated and charged to selling expenses over a five year period. The Company’s overall goal is to increase the utilization rate of Equipment which will increase the total number of procedures and maximize the sale of Consumables to our customers, with the goal of becoming the standard of care in the medical procedures we focus on.
Results of Operations
The following discussion and analysis provides information which the Company’sthat our management believes is relevant to an assessment and understanding of the Company’sour results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. Unless otherwise specified, this discussion relates solely to the Company’s operations.
All of the Company’s revenues have been derived from the sale of medical device products, which include manufacture and distribution of ultrasonic medical device products.
Three months ended December 31, 20182019 and 20172018
Our revenues by category for the three months ended December 31, 20182019 and 20172018 are as follows:
For the three months ended December 31, | Net change | ||||||||||||||
2018 | 2017 | $ | % | ||||||||||||
Total | |||||||||||||||
Consumables | $ | 7,570,395 | $ | 6,162,064 | $ | 1,408,331 | 22.9 | % | |||||||
Equipment | 2,606,058 | 2,161,781 | 444,277 | 20.6 | % | ||||||||||
Total | $ | 10,176,453 | $ | 8,323,845 | $ | 1,852,608 | 22.3 | % | |||||||
Domestic: | |||||||||||||||
Consumables | $ | 5,477,995 | $ | 4,623,545 | $ | 854,450 | 18.5 | % | |||||||
Equipment | 600,559 | 776,878 | (176,319 | ) | -22.7 | % | |||||||||
Total | $ | 6,078,554 | $ | 5,400,423 | $ | 678,131 | 12.6 | % | |||||||
International: | |||||||||||||||
Consumables | $ | 2,092,400 | $ | 1,538,519 | $ | 553,881 | 36.0 | % | |||||||
Equipment | 2,005,499 | 1,384,903 | 620,596 | 44.8 | % | ||||||||||
Total | $ | 4,097,899 | $ | 2,923,422 | $ | 1,174,477 | 40.2 | % |
For the three months ended | ||||||||||||||||
December 31, | Net change | |||||||||||||||
2019 | 2018 | $ | % | |||||||||||||
Total | ||||||||||||||||
Surgical | $ | 9,988,559 | $ | 8,628,587 | $ | 1,359,972 | 15.8 | % | ||||||||
Wound | 9,733,427 | 1,547,866 | 8,185,561 | 528.8 | % | |||||||||||
Total | $ | 19,721,986 | $ | 10,176,453 | $ | 9,545,533 | 93.8 | % | ||||||||
Domestic: | ||||||||||||||||
Surgical | $ | 5,652,381 | $ | 4,706,926 | $ | 945,455 | 20.1 | % | ||||||||
Wound | 9,606,332 | 1,371,628 | 8,234,704 | 600.4 | % | |||||||||||
Total | $ | 15,258,713 | $ | 6,078,554 | $ | 9,180,159 | 151.0 | % | ||||||||
International: | ||||||||||||||||
Surgical | $ | 4,336,178 | $ | 3,921,661 | $ | 414,517 | 10.6 | % | ||||||||
Wound | 127,095 | 176,238 | (49,143 | ) | -27.9 | % | ||||||||||
Total | $ | 4,463,273 | $ | 4,097,899 | $ | 365,374 | 8.9 | % |
Revenues
Total revenue increased 22.3%93.8% or $1.9$9.5 million to $19.7 million in the second quarter of fiscal 2020, from $10.2 million in the second quarter of fiscal 2019, from $8.3 million in the second quarter of fiscal 2018. The largest portion of the revenue increase was due to the continued growth of consumables in the domestic and international markets as expected. Domestic sales of BoneScalpel and SonicOne were strong, and the exceptional growth is in the wound franchise continued.
Domestic equipment revenues were below expectations due to timing issues with customers, while international equipment revenues were above expectations with continued momentum in China and other key markets.2019.
The revenue increase is principally attributable to a 22.9% or $1.4the addition of $8.6 million increase in consumablesof domestic wound product sales of TheraSkin resulting from the Solsys Acquisition, with no TheraSkin revenue in addition to a 20.6% or $0.4 million increase in equipment revenue.the prior year quarter. Domestic surgical revenue increased by 20.1% based on continued demand for the Company’s BoneScalpel product line. International surgical sales grew by 10.6%.
There was noWe did not receive any license revenue during the second quarter of fiscal 20192020 or fiscal 2018.2019.
Gross profit
Gross profit from product revenue in the second quarter of fiscal 20192020 was 70.0%69.9% of revenue, compared withapproximately the same as the 70.0% gross profit margin of 70.4%recorded in the second quarter of fiscal 2018.2019. The gross profit margin on TheraSkin sales is about the same as the Company’s legacy products.
Selling expenses
Selling expenses increased by $0.9$7.0 million, or 22.5%146% to $4.8$11.8 million in the second quarter of fiscal 20192020 from $3.9$4.8 million in the prior year period. The increase is primarily due to the acquisition of Solsys on September 27, 2019, which added $6.3 million of expenses for the period. The remaining increase of $0.7 million is principally related to higher compensation costs, trade show and travel related expenses resulting from the continued buildout of our direct sales force and increased freight expense on higher sales, offset by lower commissions to distributors resulting from the Company’stransition of accounts from distributors to the direct sales force.
General and administrative expenses
General and administrative expenses were $2.3increased by $2.8 million, roughly flat with $2.4or 119% to $5.1 million in the second quarter of fiscal 2018. Higher salaries and benefits were largely offset by lower2020 from $2.3 million in the prior year period. The increase is primarily due to the acquisition of Solsys on September 27, 2019, which added $1.7 million of expenses for the period. In addition, the Company recorded a $960,000 non-cash compensation costs.reserve relating to the contract asset on its balance sheet. This asset relates to future royalty payments from our Chinese distributor of SonaStar, which we believe will be uncollectible.
Research and development expenses
Research and development expenses decreasedincreased by $0.1$0.3 million or 12%29.6% to $0.8$1.1 million in the second quarter of fiscal 20192020 from $1.0$0.8 million in the prior year period. The Companyincrease is investing inprimarily due to the design and developmentacquisition of its next generation platform product, Nexus,Solsys on September 27, 2019, which is expected to be available in fiscal 2019. Duringadded $0.4 million of expenses for the second quarter of fiscal 2019 and fiscal 2018, approximately $0.3 million and $0.6 million, respectively, was charged to research and development expenses related to this product.period.
Other income (expense)
Other income was $18,339 in the second quarter of fiscal 2019 compared with $67,208 in the prior year period. This decrease related to lower royalty income.
Income taxes
For the three months ended December 31, 2019 and 2018, and 2017, the Companywe recorded an income tax expense of $0 and $5.5 million,$0, respectively. For the three months ended December 31, 20182019 and 2017,2018, the effective rate of 0% and 414.6%0%, respectively, varied from the U.S. federal statutory rate primarily due to changes in the Company’s projected pretax book income.
The income tax expense for the second quarterour recording of fiscal 2018 included a one-time charge of $1,764,039 to revalue the Company’s deferred tax assets as of December 31, 2017 to give effect to the reduction in corporate tax rates to 21% effective January 1, 2018, as a result of the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017. Income tax expense also included a $3,988,532 charge to record a full valuation allowance against the Company’s remainingon our deferred tax assets. In accordance with the guidance of ASC Topic 740, management concluded that in its judgment, the Company’s deferred tax assets at December 31, 2017 are not more likely-than-not realizable.
Income tax expense for the quarter ended December 31, 20182019 includes a $228,000$1.3 million valuation allowance against the Company’sour deferred tax assets recorded in the quarter. In accordance with the guidance of ASC Topic 740, management concluded that in its judgment, the Company’sour deferred tax assets at December 31, 20182019 are not more likely-than-not realizable. The components of the tax provision are as follows:
For the three months ended December 31, | ||||||||
2018 | 2017 | |||||||
Income tax benefit | $ | (228,000 | ) | $ | (228,149 | ) | ||
Reduction of deferred tax assetsrelating to Tax Legislation | — | 1,764,039 | ||||||
Valuation allowance on deferred tax assets | 228,000 | 3,988,532 | ||||||
Net income tax expense | $ | — | $ | 5,524,422 |
For the three months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Income tax (benefit) | $ | (1,255,000 | ) | $ | (228,000 | ) | ||
Valuation allowance on deferred tax assets | 1,255,000 | 228,000 | ||||||
Net income tax expense (benefit) | $ | - | $ | - |
Six months ended December 31, 20182019 and 20172018
Our revenues by category for the six months ended December 31, 20182019 and 20172018 are as follows:
For the six months ended December 31, | Net change | |||||||||||||||
2018 | 2017 | $ | % | |||||||||||||
Total | ||||||||||||||||
Consumables | $ | 13,915,047 | $ | 11,505,826 | $ | 2,409,221 | 20.9 | % | ||||||||
Equipment | 5,622,570 | 4,098,742 | 1,523,828 | 37.2 | % | |||||||||||
Total | $ | 19,537,617 | $ | 15,604,568 | $ | 3,933,049 | 25.2 | % | ||||||||
Domestic: | ||||||||||||||||
Consumables | $ | 10,308,167 | $ | 8,722,636 | $ | 1,585,531 | 18.2 | % | ||||||||
Equipment | 1,179,711 | 1,329,930 | (150,219 | ) | -11.3 | % | ||||||||||
Total | $ | 11,487,878 | $ | 10,052,566 | $ | 1,435,312 | 14.3 | % | ||||||||
International: | ||||||||||||||||
Consumables | $ | 3,606,880 | $ | 2,783,190 | $ | 823,690 | 29.6 | % | ||||||||
Equipment | 4,442,859 | 2,768,812 | 1,674,047 | 60.5 | % | |||||||||||
Total | $ | 8,049,739 | $ | 5,552,002 | $ | 2,497,737 | 45.0 | % |
For the six months ended | ||||||||||||||||
December 31, | Net change | |||||||||||||||
2019 | 2018 | $ | % | |||||||||||||
Total | ||||||||||||||||
Surgical | $ | 19,599,856 | $ | 16,771,546 | $ | 2,828,310 | 16.9 | % | ||||||||
Wound | 11,268,052 | 2,766,071 | 8,501,981 | 307.4 | % | |||||||||||
Total | $ | 30,867,908 | $ | 19,537,617 | $ | 11,330,291 | 58.0 | % | ||||||||
Domestic: | ||||||||||||||||
Surgical | $ | 10,767,402 | $ | 8,953,195 | $ | 1,814,207 | 20.3 | % | ||||||||
Wound | 11,036,219 | 2,534,683 | 8,501,536 | 335.4 | % | |||||||||||
Total | $ | 21,803,621 | $ | 11,487,878 | $ | 10,315,743 | 89.8 | % | ||||||||
International: | ||||||||||||||||
Surgical | $ | 8,832,454 | $ | 7,818,351 | $ | 1,014,103 | 13.0 | % | ||||||||
Wound | 231,833 | 231,388 | 445 | 0.2 | % | |||||||||||
Total | $ | 9,064,287 | $ | 8,049,739 | $ | 1,014,548 | 12.6 | % |
Revenues
Total revenue increased 25.2%58.0% or $3.9$11.3 million to $19.5$30.9 million duringin the first half of fiscal 2019,2020, from $15.6$19.5 million in the prior year period. The largest portioncorresponding period of the revenue increase was due to the continued growth of consumables in the domestic and international markets as expected. Domestic sales of BoneScalpel and SonicOne were strong, and the exceptional growth is in the wound franchise continued.
Domestic equipment revenues were below expectations due to timing issues with customers, while international equipment revenues were above expectations with continued momentum in China and other key markets.fiscal 2019.
The revenue increase is principally attributable to a 20.9% or $2.4the addition of $8.9 million increase in consumablesof domestic wound product sales of TheraSkin resulting from the Solsys Acquisition, with no TheraSkin revenue in addition to a 37.2% or $1.5 million increase in equipment revenue.the prior year quarter. Domestic surgical revenue increased by 20.3% based on continued demand for the Company’s BoneScalpel product line. International surgical sales grew by 13.0%.
There was noWe did not receive any license revenue during the first halfsecond quarter of fiscal 20192020 or fiscal 2018.2019.
Gross profit
Gross profit from product revenue in the first half of fiscal 20192020 was 70.3% of revenue, compared with the gross profit margin of 70.2%70.3% in the first half of fiscal 2018.2019.
Selling expenses
Selling expenses increased by $2.0$7.5 million, or 27.3%78.3% to $9.5$17.0 million in the first half of fiscal 20192020 from $7.5$9.5 million in the prior year period. The increase is primarily due to the acquisition of Solsys on September 27, 2019, which added $6.5 million of expenses for the period. The remaining increase of $1.0 million is principally related to higher compensation costs, consulting, Nexus product launch costs, and travel related expenses resulting from the continued buildout of the Company’sour direct sales force along withand increased freight expense on higher trade show and sales, training expenses.offset by lower commissions to distributors resulting from the transition of accounts from distributors to the direct sales force.
General and administrative expenses
General and administrative expenses increased by $0.6$3.8 million, or 11.6%69.2% to $5.5$9.4 million in the first half of fiscal 20192020 from $5.0$5.5 million in the prior year period. ThisThe increase is principally related higher compensation and benefitprimarily due to the acquisition of Solsys on September 27, 2019, which added $1.8 million of expenses andfor the period. In addition, the Company recorded a $150,000 severance charge.$960,000 non-cash reserve relating to the contract asset on its balance sheet. This asset relates to future royalty payments from our Chinese distributor of SonaStar, which we believe will be uncollectible.
Research and development expenses
Research and development expenses increaseddecreased by 13.3% or $0.3 million or 15% to $2.1$1.9 million in the first half of fiscal 20192020 from $1.9$2.1 million in the prior year period. The Companydecrease is investing in the design and development of its next generation platform product, Nexus, which is expected to be available in fiscal 2019. During the first half of fiscal 2019 and 2018, approximately $1.0 million and $ $1.1 million, respectively, was charged to research and development expensesprimarily related to this product.the completion of the Company’s Nexus product development, offset by a $0.4 million increase resulting from the acquisition of Solsys on September 27, 2019.
Other income (expense)
Other income was $19,888 in the first half of fiscal 2019 compared with $0.5 million in the prior year period. This decrease related to the royalty income from MMIT in the prior year. This royalty agreement expired in August 2017.
Income taxes
For the six months ended December 31, 2019 and 2018, and 2017, the Companywe recorded an income tax expense of $0$4.1 million and 5,243,422,$0, respectively. For the six months ended December 31, 2018 and 2017,2019, the effective tax rate of 0% and 185.6%, respectively,55% varied from the U.S. federal statutory rate primarily due to changesour business combination related to the Solsys Acquisition, which resulted in the Company’s projected pretax book income.
The income tax expense for the first halfa recognition of fiscal 2018 included a one-time charge of $1,764,039 to revalue the Company’s deferred tax assets as of December 31, 2017 to give effect to the reduction in corporate tax rates to 21% effective January 1, 2018, as a result of the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017. Income tax expense also includes a $3,988,532 charge to record a full valuation allowance against the Company’s remaining deferred tax assets. In accordance with the guidance of ASC Topic 740, management concluded that in its judgment, the Company’s deferred tax assets at December 31, 2017 are not more likely-than-not realizable.
Income tax expense forliabilities. For the six months ended December 31, 2018, includesthe effective tax rate of 0% varied from the U.S. federal statutory rate primarily due our recording a $655,000full valuation allowance on our deferred tax assets.
The acquisition of Solsys resulted in the recognition of deferred tax liabilities of approximately $4.1 million, related primarily to intangible assets. Prior to the business combination, we had a full valuation allowance on our deferred tax assets. Upon completion of the business combination, we netted the deferred tax liabilities generated from the business combination against our pre-existing deferred tax assets which resulted in a release of $4.1 million of the pre-existing valuation allowance against our deferred tax assets and corresponding deferred tax benefit.
Income tax expense (benefit) for the Company’squarter ended December 31, 2019 includes a $1.8 million valuation allowance against our remaining deferred tax assets recorded in the quarter. In accordance with the guidance of ASC Topic 740, management concluded that in its judgment, the Company’sour deferred tax assets at December 31, 20182019 are not more likely-than-not realizable. The components of the tax provision are as follows:
For the six months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Income tax (benefit) | $ | (1,770,000 | ) | $ | (655,000 | ) | ||
Income tax (benefit) - Solsys Acquisition | (4,085,000 | ) | - | |||||
Valuation allowance on deferred tax assets | 1,770,000 | 655,000 | ||||||
Net income tax benefit | $ | (4,085,000 | ) | $ | - |
For the six months ended December 31, | ||||||||
2018 | 2017 | |||||||
Income tax benefit | $ | (655,000 | ) | $ | (509,149 | ) | ||
Reduction of deferred tax assets relating to Tax Legislation | — | 1,764,039 | ||||||
Valuation allowance on deferred tax assets | 655,000 | 3,988,532 | ||||||
Net income tax expense | $ | — | $ | 5,243,422 |
Liquidity and Capital Resources
On January 27, 2020, the Company completed an equity offering of its securities, netting proceeds to the Company of approximately $32.5 million.
Working capital at December 31, 20182019 was $16.3$28.7 million. For the six months ended December 31, 2018,2019, cash used in operations was $1.1$13.4 million, mainly due to an increase in inventory of $5.7 million, and an increase in accounts receivable of $2.1 million and from the Company’s loss from operations duringfor the period.
Cash used inprovided by investing activities duringwas $5.3 million, principally from the six months ended December 31, 2018 was $0.6$5.5 million primarily consisting of cash acquired in the purchase of property, plant and equipment along with filing for additional patents.Solsys Acquisition.
Cash provided by financing activities duringwas $14.7 million, principally from additional borrowings on the six months endedCompany’s term loan and revolving credit facility.
We have no debt principal payments prior to December 31, 2018 was $0.92020. We estimate that we will make approximately $3.1 million resultingin debt interest payments from stock option exercises.December 31, 2019 through December 31, 2020.
As of December 31, 2018, the Company2019, we had cash and cash equivalents of approximately $10.2 million and believes it has sufficient$14.4 million. Although our cash to financeflows from operations for at least the next 12 months.
Relating to the internal investigation described herein, the Company has incurred approximately $3.4 million in investigative costs through December 31, 2018. Further, the Company could beare subject to fines or penalties related to potential violationsa number of risks and uncertainties, we anticipate that our cash on hand, the FCPA.
The Company is investing in the designproceeds of our equity offering, and development of its next generation platform product, Nexus, which isfuture cash expected to be available in fiscal 2019generated from operations will be sufficient to fund any debt service obligations and estimated capital expenditures. Any future potential equity or debt financing would depend upon, among other things, the costs and availability of which $1.0 million in development costs have been incurred duringsuch financing at the six months ended December 31, 2018.appropriate time.
Off-Balance Sheet Arrangements
The Company hasWe have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’sour financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to the Company.us.
Other
In the opinion of management, inflation has not had a material effect on the operations of the Company.our operations.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements included herein.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our accounting policies relating to goodwill, intangible assets and income taxes to be critical policies that require judgments or estimations in their application where variances in those judgments or estimations could make a significant difference to future reported results. These critical accounting policies and estimates are more fully discussed in our 2019 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk:
The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company iswe are exposed are interest rates on cash and cash equivalents.
Interest Rate Risk:
The Company earnsWe earn interest on cash balances and payspay interest on any debt incurred. In light of the Company’sour existing cash, results of operations and projected borrowing requirements, the Company doeswe do not believe that a 10% change in interest rates would have a significant impact on itsour consolidated financial position.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
All internal control systems, no matter how well designed and tested, have inherent limitations, including, among other things, the possibility of human error, circumvention or disregard. Therefore, even those systems of internal control that have been determined to be effective can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We carried out an evaluation, under the supervision and with the participation of management, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018.2019. Based on that evaluation, and having concluded that the material weakness in our internal control over financial reporting initially reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 20182019 and in our subsequent Quarterly Report on Form 10-Q for the quarter ended September 30, 2018,2019, has been remediated (as described below), our CEOChief Executive Officer and CFOChief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2018.2019.
Remediation of Previous Material Weaknesses in Internal Control Over Financial Reporting
Our annual reportAnnual Report on Form 10-K for the fiscal year ended June 30, 20182019 and subsequent quarterly reportQuarterly Report on Form 10-Q for the fiscal quarter ended September 30, 20182019 (collectively, the “Prior Reports”) disclosed and described in detail material weaknesses in internal control with respect to the approval of journal entries.identifying errors in entering invoices in an incorrect accounting period. As a result, the foregoing Prior Reports contained conclusions by our CEOChief Executive Officer and CFOChief Financial Officer that our disclosure controls and procedures and internal control over financial reporting were not effective, as of the respective dates of such Prior Reports. As further described in the Prior Reports, we have implemented a series of remedial actions to address these control deficiencies. We have since successfully completed the testing of these remediated controls and our conclusions with respect to disclosure controls and procedures and internal control at December 31, 20182019 are provided above.
Changes in Internal Control over Financial Reporting
Other than the remediation of the material weakness in internal control described above, thereThere were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 20182019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting, other than the changes discussed previously to remediate the material weakness.
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Former Chinese Distributor - FCPA
With the assistance of outside counsel, the Company conducted a voluntary investigation into the business practices of the independent Chinese entity that previously distributed its products in China and the Company’s knowledge of those business practices, which may have implications under the FCPA, as well as into various internal controls issues identified during the investigation (the “Investigation”).Litigation
On September 27, 2016 and September 28, 2016, the Company voluntarily contacted the SEC and the DOJ, respectively, to advise both agencies of these potential issues. The Company has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating fully with these agencies in their ongoing investigations of these matters.
Although the Company’s Investigation is complete, additional issues or facts could arise which may expand the scope or severity of the potential violations. The Company has no current information derived from the Investigation or otherwise to suggest that its previously reported financial statements and results are incorrect.
At this stage, the Company is unable to predict what, if any, action the DOJ or the SEC may take or what, if any, penalties or remedial measures these agencies may seek. Nor can the Company predict the impact on the Company as a result of these matters, which may include the imposition of fines, civil and criminal penalties, which are not currently estimable, as well as equitable remedies, including disgorgement of any profits earned from improper conduct and injunctive relief, limitations on the Company’s conduct, and the imposition of a compliance monitor. The DOJ and the SEC periodically have based the amount of a penalty or disgorgement in connection with an FCPA action, at least in part, on the amount of profits that a company obtained from the business in which the violations of the FCPA occurred. During its distributorship relationship with the prior Chinese distributor from 2010 through 2016, the Company generated revenues of approximately $8 million.
Further, the Company may suffer other civil penalties or adverse impacts, including lawsuits by private litigants in addition to the lawsuits that already have been filed, or investigations and fines imposed by local authorities. The investigative costs to date are approximately $3.4 million, of which approximately $0.3 million and $0.4 million was charged to general and administrative expenses during the three and six months ended December 31, 2018, respectively, compared with $0.1 million and $0.3 million for the three and six months ended December 31, 2017.
Former Chinese Distributor – Litigation
On April 5,March 23, 2017, the Company’sour former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against the Companyus and certain of our officers and directors of the Company in the United States District Court for the Eastern District of New York, alleging that the Companywe improperly terminated itsour contract with the former distributor. The complaint sought various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On October 7, 2017, the court granted the Company’sour motion to dismiss all of the tort claims asserted against it,us, and also granted the individual defendants’ motion to dismiss all claims asserted against them. The only claim currently remaining inOn January 23, 2020, the case is for breach of contract against the Company; the plaintiff has movedCourt granted Cicel’s motion to amend its complaint, to add tortinclude claims whichfor alleged defamation and theft of trade secrets in addition to the Company has opposed. The Company believes it hasbreach of contract claim. We believe that we have various legal and factual defenses to the allegations in the complaint, and intendsintend to vigorously defend the action. Theaction vigorously. Fact discovery in the case is at its earliest stages; discovery is just beginningongoing, and there is no trial date.date currently set.
Stockholder Derivative Litigation
On June 6, 2017, Irving Feldbaum, an individual shareholder of Misonix, filed a lawsuit in the U.S. District Court for the Eastern District of New York. The complaint alleges claims against the Company’s board of directors, its former CEO and CFO, certain of its former directors, and the Company as a nominal defendant for alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that the Company incurred damages as a result of alleged false and misleading statements in the Company’s securities filings concerning the Company’s business, operations, and prospects and the Company’s internal control over financial reporting. The complaint also alleges that the Company’s February 4, 2016 Proxy Statement contained false and misleading statements regarding executive compensation. The complaint seeks the recovery of damages on behalf of the Company and the implementation of changes to corporate governance procedures. On June 16, 2017, Michael Rubin, another individual shareholder of Misonix, filed a case alleging similar claims in the same district court. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 16, 2018, the Company and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in principle. There are aspects of the settlement that remain to be negotiated and documented, and the settlement is subject to approval by the District Court after notice to the Company’s shareholders.
Risks
Please refer to the information set out under the heading “Risk Factors” in Amendment No. 2 to our Current Report on Form 8-K12B filed with the SEC on January 22, 2019, for a description of risk factors that we determined to be most material to our financial condition and uncertaintiesresults of operations. We do not believe there have been any material changes in these risk factors. Additional risks not currently known to us or that if they were to occur, couldwe do not currently consider material may also materially adversely affect our business or that could cause our actualfinancial condition and results to differ materially from the results contemplated by the forward-looking statements contained in this Report and other public statements were set forthof operations in the Item 1A. – “Risk Factors” section of our Form 10-K for the fiscal year ended June 30, 2018. There have been no material changes from the risk factors disclosed in that Form 10-K.future.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MISONIX, INC. | ||
Dated: February | By: | /s/ Stavros G. Vizirgianakis |
Stavros G. Vizirgianakis | ||
Chief Executive Officer | ||
By: | /s/ Joseph P. Dwyer | |
Joseph P. Dwyer | ||
Chief Financial Officer |
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