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

Commission File Number:1-10986

MISONIX, INC.

(Exact name of registrant as specified in its charter)

(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.

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

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.

PART I —– FINANCIAL INFORMATION

Item 1. Financial Statements

Misonix, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See Accompanying Notes to Condensed Consolidated Financial Statements.

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations
(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Unaudited)

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

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:

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

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:

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:

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:

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

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

Inventories are summarized as follows:

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

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

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:

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:

The following is a schedule of estimated future intangible asset amortization expense by fiscal year as of December 31, 2019:

8. Accrued Expenses and Other Current Liabilities

The following summarizes accrued expenses and other current liabilities:

9. 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:

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:

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.

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:

Maturities of lease liabilities as of December 31, 2017.2019 were as follows:

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.

Note payable consists of the following as of June 30, 2019 and December 31, 2019:

Following are the scheduled maturities of the notes payable for the twelve-month period ending June 30:

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

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:

12. 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: