Notes
to Condensed Consolidated Financial Statements
For
the Three and Nine Months Ended March 31, 2019 and 2018 (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 100% owned subsidiaries. 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, 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 therapeutic 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. In the United States, our products are marketed primarily through a hybrid
sales approach. This includes direct sales representatives, managed by regional sales managers, along with independent distributors.
Outside the United States, we sell BoneScalpel and SonaStar to specialty distributors who purchase products from us to resell
to their clinical customer bases. We sell to all major markets in the Americas, Europe, Middle East, Asia Pacific and Africa.
The Company operates as one business segment.
Pending
Merger with Solsys Medical, LLC
On
May 2, 2019, the Company announced that it has entered into a definitive agreement with Solsys Medical, LLC (“Solsys”),
a privately held regenerative medical company, to acquire Solsys in an all-stock transaction valued at approximately $97 million.
The planned acquisition of Solsys is expected to substantially broaden Misonix’s addressable market through wound care solutions
that are complementary to its existing products. The transaction has been approved by both the Company’s Board of Directors
and the Solsys Board of Managers. After the completion of the transaction, it is expected that Misonix shareholders immediately
prior to the closing will own 64% of the combined entity, and Solsys unitholders will own 36%. The completion of the acquisition
and the issuance of shares in connection with the proposed transaction is subject to the approval by Misonix shareholders and
the completion of the transaction is subject to approval by 55% of Solsys’ Series E unitholders and a majority of its Common
unitholders, Series A unitholders, Series B unitholders, Series C unitholders and Series D unitholders, voting as a single class,
as well as the satisfaction of certain customary closing conditions. The Company will convene a special shareholder meeting to
vote on the transaction. The Company anticipates that the transaction will close in the third quarter of calendar year 2019. Professional
fees incurred during the quarter ended March 31, 2019 with respect to this matter were $98,000.
High
Intensity Focused Ultrasound Technology
The
Company sold its rights to 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 obligated 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. No payments were received for the nine months ended
March 31, 2019 and 2018. Cumulative royalties paid to the Company through March 31, 2019 were $2,542,579.
Major
Customers and Concentration of Credit Risk
Included
in revenues are sales to the Company’s distributor of Bone Scalpel in China of
approximately $4 million and $0, for the nine months ended March 31, 2019 and 2018, respectively. Accounts receivable from
this customer were $1 million and $0 at March 31, 2019 and June 30, 2018, respectively.
Total
royalties from Medtronic Minimally Invasive Therapies (“MMIT”) related to its 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 nine months ended March 31, 2019 and 2018, respectively. Accounts receivable
from MMIT royalties were $0 at March 31, 2019 and June 30, 2018. The license agreement with MMIT expired in August 2018.
At
March 31, 2019 and June 30, 2018, the Company’s accounts receivable with customers outside the United Sates were approximately
$2,500,000 and $1,630,000, respectively, $152,000 of which is over 90 days at March 31, 2019.
Earnings
Per Share
Earnings
per share (“EPS”) is calculated using the two 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 shares of restricted stock of the Company are considered participating securities. The dilutive effect of options and
their equivalents (including non-vested stock issued under stock 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 outstanding and diluted weighted average shares outstanding:
|
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
9,390,665
|
|
|
|
9,028,506
|
|
|
|
9,245,879
|
|
|
|
8,999,938
|
|
|
Dilutive effect of resticted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(participating securities)
|
|
|
—
|
|
|
|
373,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
9,390,665
|
|
|
|
9,401,706
|
|
|
|
9,245,879
|
|
|
|
8,999,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
174,238
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
9,390,665
|
|
|
|
9,575,944
|
|
|
|
9,245,879
|
|
|
|
8,999,938
|
|
Diluted
EPS for the three and nine months ended March 31, 2019 and the nine months ended March 31, 2018 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 484,966 and 0 shares of common stock for the
three months ended March 31, 2019 and 2018, respectively, and the dilutive effect of options to purchase 491,212 and 482,093 shares
of common stock for the nine months ended March 31, 2019 and 2018, respectively. Also excluded from the calculation of earnings
per share for the three and nine months ended March 31, 2019 and 2018 are the unvested restricted stock awards which were issued
in December 2016.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASC Update No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which was subsequently updated (“ASU 2014-09”). The purpose of the updated standard is
to provide enhancements to the quality and consistency of revenue recognition between companies using U.S. GAAP and International
Financial Reporting Standards. The new five-step recognition model introduces the core principle of recognizing revenue in an
amount that reflects the consideration 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, 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, Accounting Standards Update (“ASU”) 2016-02 – Leases (Topic 842). 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 and is effective for the Company beginning in fiscal 2020. The Company is currently 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) ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-150”).
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 2018, the FASB issued ASU No. 2018-01,
Business Combinations: Clarifying the Definition of a Business
(“ASU
2018-01”). ASU 2018-01 clarifies the definition of a business for determining whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. ASU 2018-01 is effective for annual periods and interim periods within
those annual periods beginning after December 15, 2018, and early adoption is permitted. The Company’s adoption of ASU 2018-01
did not have a material effect on the Company’s consolidated financial statements.
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.
Critical
Accounting Policies and Use of Estimates
Use
of Estimates
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, 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 were not completed as of the adoption date. The reported results for the nine months ended March 31, 2019 reflect the application
of Topic 606 guidance while the reported results for fiscal year 2018 were prepared under the guidance of ASC Topic 605, “Revenue
Recognition”. The adoption of ASC Topic 606 resulted in a cumulative prior period adjustment in the amount of $960,000 related
to the Company’s License and Exclusive Manufacturing Agreement described below, 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:
|
|
●
|
Identification
of the contract, or contracts, with a customer
|
|
|
●
|
Identification of
the performance obligations in the contract
|
|
|
●
|
Determination of
the transaction price
|
|
|
●
|
Allocation of the
transaction price to the performance obligations in the contract
|
|
|
●
|
Recognition of revenue
when, or as, a performance obligation is satisfied
|
Contracts
and Performance Obligations
The
Company accounts for a contract with a customer when there is an approval and commitment 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.
The Company’s contracted rates represent the standalone selling price of a consumable which is generally determined through
the sale of products and/or bundled products or services separately in similar circumstances to similar customers. The Company
determines the effects of variable consideration, inclusive of any constraints, in determining the transaction price with regard
to its contracts with customers.
Recognition
of Revenue
The
Company satisfies performance obligations either over time, or at a point in time, upon which control transfers to the customer.
Revenue
derived 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 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 provide for the placement of a generator at the customer’s place
of business and set pricing related to the purchase of consumables for use in conjunction with the generator. These agreements
do not require any minimum consumable purchase quantities and do not have 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 its right to invoice customers.
License
and Manufacturing Agreement
On
October 19, 2018, the Company entered into a License and Exclusive Manufacturing Agreement (the “L&M 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. The Licensee
was obligated to make an initial payment of $5,000,000 for the transfer of functional intellectual property and initial stocking
orders of product. In addition, the Licensee is required to make 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. The Company collected $5,000,000 of initial
revenue for the quarter ended March 31, 2018 under ASC 605. Upon the adoption of ASC 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 Topic
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 Topic 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 the 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 medical
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 nine months ended
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
6,870,398
|
|
|
$
|
5,898,937
|
|
|
$
|
20,785,446
|
|
|
$
|
17,404,539
|
|
|
Equipment
|
|
|
2,686,192
|
|
|
|
2,530,195
|
|
|
|
8,308,762
|
|
|
|
6,629,161
|
|
|
Total Product
|
|
|
9,556,590
|
|
|
|
8,429,132
|
|
|
|
29,094,208
|
|
|
|
24,033,700
|
|
|
License
|
|
|
—
|
|
|
|
4,010,000
|
|
|
|
—
|
|
|
|
4,010,000
|
|
|
Total
|
|
$
|
9,556,590
|
|
|
$
|
12,439,132
|
|
|
$
|
29,094,208
|
|
|
$
|
28,043,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
4,862,308
|
|
|
$
|
4,340,759
|
|
|
$
|
15,170,476
|
|
|
$
|
13,063,171
|
|
|
Equipment
|
|
|
547,470
|
|
|
|
590,269
|
|
|
|
1,727,181
|
|
|
|
1,920,424
|
|
|
Total
|
|
$
|
5,409,778
|
|
|
$
|
4,931,028
|
|
|
$
|
16,897,657
|
|
|
$
|
14,983,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
2,008,090
|
|
|
$
|
1,558,178
|
|
|
$
|
5,614,970
|
|
|
$
|
4,341,368
|
|
|
Equipment
|
|
|
2,138,722
|
|
|
|
1,939,926
|
|
|
|
6,581,581
|
|
|
|
4,708,737
|
|
|
Total
|
|
$
|
4,146,812
|
|
|
$
|
3,498,104
|
|
|
$
|
12,196,551
|
|
|
$
|
9,050,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
—
|
|
|
$
|
4,010,000
|
|
|
$
|
—
|
|
|
$
|
4,010,000
|
|
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 March 31, 2019. The Company
invoices in accordance with contract payment terms. Invoices 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.
The
Company has established a contract asset in conjunction with the Company’s L&M Agreement based upon its assessment of
the most likely variable consideration to 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 exceeding
one year. Contract assets as of March 31, 2019 and June 30, 2018 were $960,000 and $0, respectively.
Selling
Costs
Incremental
direct costs of obtaining a sales 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, costs in fulfilling a contract represent shipping and handling costs and
the Company accounts for these costs as fulfillment costs and they 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 fair value. This hierarchy requires
entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The
three levels of inputs used 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
March 31, 2019 and June 30, 2018, 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:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw material
|
|
$
|
3,698,319
|
|
|
$
|
3,540,205
|
|
|
Work-in-process
|
|
|
323,650
|
|
|
|
180,442
|
|
|
Finished goods
|
|
|
2,754,875
|
|
|
|
1,743,497
|
|
|
|
|
|
6,776,844
|
|
|
|
5,464,144
|
|
|
Less valuation reserve
|
|
|
(444,258
|
)
|
|
|
(444,258
|
)
|
|
|
|
$
|
6,332,586
|
|
|
$
|
5,019,886
|
|
5.
Property, Plant and Equipment
Depreciation
and amortization of property, plant and equipment was $1,074,000 and $953,000 for the nine months ended March 31, 2019 and 2018,
respectively. Inventory items included in property, plant and equipment are depreciated using the straight line method over estimated
useful lives of 3 to 5 years. Depreciation of generators which 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. Goodwill is not subject to
amortization, but is reviewed for impairment at the reporting unit level annually, or more frequently if impairment indicators
arise. The Company’s assessment of the recoverability of goodwill is based upon a comparison of the carrying value of goodwill
with its estimated fair value and the value of the Company at the measurement date.
Application
of these impairment tests requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts,
estimation of the long term rate of growth for the Company’s business, the useful lives over which cash flows will occur
and determination of the Company’s weighted average cost of capital. The Company’s market capitalization exceeds the
value of the goodwill. The Company concluded that there was no impairment to goodwill at June 30, 2018 and June 30, 2017. There
were no triggering events identified during the quarter ended March 31, 2019.
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 $779,621 and $757,447 at March 31, 2019 and June 30, 2018, respectively. Amortization expense for the nine months ended
March 31, 2019 and 2018 was $106,000 and $94,000, respectively. The following is a schedule of estimated future patent amortization
expenses by fiscal year as of March 31, 2019:
|
2019
|
|
|
$
|
34,998
|
|
|
2020
|
|
|
|
117,217
|
|
|
2021
|
|
|
|
110,025
|
|
|
2022
|
|
|
|
72,364
|
|
|
2023
|
|
|
|
71,273
|
|
|
Thereafter
|
|
|
|
373,744
|
|
|
|
|
|
$
|
779,621
|
|
8.
Accrued Expenses and Other Current Liabilities
The
following summarizes accrued expenses and other current liabilities:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and vacation
|
|
$
|
443,623
|
|
|
$
|
351,435
|
|
|
Accrued bonus
|
|
|
450,144
|
|
|
|
552,988
|
|
|
Accrued commissions
|
|
|
698,534
|
|
|
|
742,807
|
|
|
Professional fees
|
|
|
167,240
|
|
|
|
102,065
|
|
|
Vendor, tax and other accruals
|
|
|
565,482
|
|
|
|
661,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,325,023
|
|
|
$
|
2,411,172
|
|
9.
Stock-Based Compensation Plans
Stock
Option Awards
For
the nine months ended March 31, 2019 and 2018, the compensation cost relating to stock option awards that has been charged against
income for the Company’s stock option plans was $896,730 and $1,405,152, respectively. As of March 31, 2019, there was $2,965,772
of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average
period of 2.9 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 is not expected to
do so in the near term.
The
weighted average fair value per share at date of grant for options granted during the nine months ended March 31, 2019 was $9.22.
There were options to purchase 255,000 and 305,500 shares granted during the nine months ended March 31, 2019 and 2018, respectively.
The fair value was estimated based on the weighted average assumptions of:
|
|
|
For nine months ended
|
|
|
|
|
March 31, 2019
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Risk-free interest rates
|
|
|
2.80
|
%
|
|
|
1.98
|
%
|
|
Expected option life in years
|
|
|
6.25
|
|
|
|
5.95
|
|
|
Expected stock price volatility
|
|
|
56.01
|
%
|
|
|
57.42
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
A
summary of option activity under the Company’s equity plans as of March 31, 2019, and changes during the nine months ended
March 31, 2019 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
|
|
|
255,000
|
|
|
|
16.64
|
|
|
|
|
|
|
Exercised
|
|
|
(240,210
|
)
|
|
|
7.97
|
|
|
|
|
|
|
Forfeited
|
|
|
(159,252
|
)
|
|
|
10.18
|
|
|
|
|
|
|
Expired
|
|
|
(15,000
|
)
|
|
|
2.66
|
|
|
|
|
|
|
Outstanding as of March 31, 2019
|
|
|
1,170,731
|
|
|
$
|
10.27
|
|
|
$
|
10,530,733
|
|
|
Vested and exercisable at March 31, 2019
|
|
|
642,355
|
|
|
$
|
8.28
|
|
|
$
|
7,034,104
|
|
The
total fair value of stock options vested during the nine months ended March 31, 2019 was $1,101,971. The number and weighted-average
grant-date fair value of non-vested stock options at the beginning of fiscal 2018 was 648,877 and $5.08, respectively. The number
and weighted-average grant-date fair value of stock options which vested during the nine months ended March 31, 2019 was 220,624
and $4.99, 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 nine months ended March 31, 2019 and 2018 related to these
awards was $992,445 and $675,869 respectively. As of March 31, 2019, there was approximately $1,256,204 of total unrecognized
compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average period of 2.82 years.
The awards contain a combination of vesting terms which include time vesting, performance vesting relating to revenue achievement,
and market vesting related to obtaining certain levels of Company stock prices. At March 31, 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 free interest rate of 1.6% to 2.1% and a volatility
factor of 66.5%. As of March 31, 2019, 186,600 shares from this set of awards have vested.
During
the nine months ended March 31, 2019, 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 for the rental of certain manufacturing and office space, equipment
and automobiles expiring in various years through 2021. The principal building lease provides for a monthly rental of approximately
$28,000.
Class
Action Securities Litigation
On
September 19, 2016, Richard Scalfani, an individual shareholder of Misonix, filed a lawsuit against the Company and its former
chief executive officer and chief financial officer 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. 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 the Company’s products in China and the Company’s knowledge of those business
practices, which may have had implications under the FCPA, as well as 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 agencies of these potential issues. The Company has provided and will continue
to provide documents and information to the SEC and the DOJ, if requested, and is cooperating fully with these agencies in their
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, including
costs of litigation relating to the Company’s former Chinese distributor as described below, are approximately $3.7 million,
of which approximately $0.2 million and $0.6 million was charged to general and administrative expenses during the three and nine
months ended March 31, 2019, respectively, compared with $0.1 million and $0.3 million for the three and nine months ended March
31, 2018.
Former
Chinese Distributor - Litigation
On
April 5, 2018, the Company’s former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit
against the Company and certain 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, 2018, the court granted the Company’s motion to dismiss all of the
tort claims asserted against it, and also granted the individual defendants’ motion to dismiss all claims asserted against
them. The only claim currently remaining in the case is for breach of contract against the Company; the plaintiff has moved to
amend its complaint to add tort claims, which the Company intends to oppose. The Company believes it has various legal and factual
defenses to the allegations in the complaint, and intends to vigorously defend the action. Fact discovery in the case is currently
scheduled to end on May 31, 2019, and there is no trial 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 chief executive officer and chief financial officer, 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, counsel for the Company
and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in principle.
On May 7, counsel for Mr. Feldbaum and Mr. Rubin filed a motion for preliminary approval of the settlement, to which the executed
settlement agreement is an exhibit. The Company has agreed to certain corporate governance reforms in resolving the case
and to pay counsel for Mr. Feldbaum and Mr. Rubin an attorneys fee of $500,000 which is expected to be covered by Misonix’s
insurance carrier. If the court preliminarily approves the settlement, the settlement will remain subject to the district
court's final approval.
11.
Related Party Transactions
OrthoXact
Proprietary Limited (“OrthoXact”) (formerly Applied BioSurgical) is an independent distributor for the Company in
South Africa. The chief executive officer of OrthoXact is also the brother of Stavros G. Vizirgianakis, the Company’s chief
executive officer.
Sales
to OrthoXact for the nine months ended March 31, 2019 and 2018 were $996,631 and $675,943, respectively. Accounts receivable at
March 31, 2019 and June 30, 2019 were $286,852 and $120,376, respectively.
12.
Income Taxes
For
the three and nine months ended March 31, 2019 and 2018, the Company recorded income tax expense (benefit), as follows:
|
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
(509,000
|
)
|
|
$
|
411,405
|
|
|
$
|
(1,164,000
|
)
|
|
$
|
(97,744
|
)
|
|
Reduction of deferred
tax assets relating
to Tax Legislation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,764,039
|
|
|
Valuation
allowance on deferred tax assets
|
|
|
509,000
|
|
|
|
(411,405
|
)
|
|
|
1,164,000
|
|
|
|
3,577,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,243,422
|
|
For
the nine months ended March 31, 2019 and 2018, the effective rate of 0% and (892.7%), respectively, 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 of the Tax Cuts and Jobs Act
of 2018.
Tax
Cuts and Jobs Act of 2017
The
Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, contains significant changes to U.S. 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.
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, 2018, based on actual results for fiscal 2018 and the Company’s current forecast for fiscal 2019 the Company
is in a three-year cumulative loss position at March 31, 2019, and it expects to be in a cumulative pretax loss position as of
June 30, 2019. Management evaluated available positive evidence, including the continued growth of the Company’s revenues
and gross profit margins, its recent SonaStar technology license to its Chinese partner and the reduction in investigative and
professional fees recognized in fiscal 2018, 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
at the same time paying commissions to its domestic sales distributors. 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 full valuation allowance against its deferred tax assets. 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 March 31, 2019 and June 30, 2018, the Company had no material unrecognized tax benefits or accrued interest and penalties.
13.
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. The Company’s products are relatively consistent
and manufacturing is centralized and consistent across product offerings. Based on these factors, key operating decisions and
resource allocations are made by the CODM using consolidated financial data and as such the Company has concluded that it operates
as one segment.
Worldwide
revenue for the Company’s products and license revenue is categorized as follows:
|
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
5,409,778
|
|
|
$
|
4,931,028
|
|
|
$
|
16,897,657
|
|
|
$
|
14,983,595
|
|
|
International
|
|
|
4,146,812
|
|
|
|
3,498,104
|
|
|
|
12,196,551
|
|
|
|
9,050,105
|
|
|
Total
|
|
|
9,556,590
|
|
|
|
8,429,132
|
|
|
|
29,094,208
|
|
|
|
24,033,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
revenue
|
|
|
—
|
|
|
|
4,010,000
|
|
|
|
—
|
|
|
|
4,010,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
9,556,590
|
|
|
$
|
12,439,132
|
|
|
$
|
29,094,208
|
|
|
$
|
28,043,700
|
|
Substantially
all of the Company’s long-lived assets are located in the United States.