Notes
to Condensed Consolidated Financial Statements
For
the Three Months Ended September 30, 2020 and 2019
(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. 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, 2020 (the “2020 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, which are of a normal recurring nature, considered
necessary for a fair statement of interim results.
Organization
and Business
Misonix
designs, manufactures and markets minimally invasive surgical 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. Misonix’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, general surgery, plastic surgery, wound
care and maxillo-facial surgery.
The
Company strives to have its proprietary procedural solutions
become the standard of care and enhance patient outcomes throughout the world. The Company intends to accomplish this,
in part, by utilizing its best-in-class surgical ultrasonic technology to improve patient outcomes in spinal surgery, neurosurgery
and wound care. The Company’s neXus generator, which received U.S. Food and Drug Administration, or FDA, marketing
clearance in June 2019 and Conformité Européenne, or CE, mark clearance in July 2019 combines the capabilities of
its three legacy ultrasonic products into a single system that can be used to perform soft and hard tissue resections.
The Company continues to market and sell these legacy ultrasonic products, which are:
|
●
|
BoneScalpel
Surgical System, or BoneScalpel, which is used for surgical procedures involving the precise cutting and sculpting of bone
while sparing soft tissue. BoneScalpel is now recognized by many surgeons globally as a critical surgical tool enabling improved
patient outcomes in the spine surgery arena.
|
|
|
|
|
●
|
SonaStar
Surgical Aspirator, or SonaStar, which is used to emulsify and remove soft and hard tumors, primarily in the neuro and general
surgery fields.
|
|
|
|
|
●
|
SonicOne
Wound Debridement System, or SonicOne, which offers tissue specific debridement and cleansing of wounds and burns for effective
removal of devitalized tissue and fibrin deposits while sparing viable cells.
|
Each
of the Company’s medical device systems consist of a proprietary console and handpiece that function to convert electrical
current into ultrasonic energy, ultimately delivered via a disposable titanium tip, to produce a therapeutic effect.
neXus®
neXus is a next generation integrated
ultrasonic surgical platform that combines all the features of the Company’s existing solutions, including 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. The device incorporates
Smart Technology that allows for easier setup and use.
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’
ease of use enables physicians to fully leverage neXus’ impressive set of capabilities via its digital touchscreen
display and smart system setup. Our current ultrasonic applications; BoneScalpel, SonaStar and SonicOne all work on the neXus
generator. This allows a hospital to access all of our product offerings on this all in one console. neXus received
FDA 510(k) clearance in June 2019 and received its CE mark approval in July 2019 for sale in Europe. neXus is principally
sold in the United States.
BoneScalpel®
The
BoneScalpel is a state of the art, ultrasonic bone cutting and sculpting system capable of enabling 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. The Company believes
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. The 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.
SonaStar®
The
SonaStar System provides powerful and precise aspiration following the ultrasonic ablation of hard or soft tissue. The SonaStar
has been used for a wide variety of surgical procedures applying both open and minimally invasive approaches, including neurosurgery
and liver surgery. The SonaStar may also be used with OsteoSculpt® probe tips, which enable the precise shaping or shaving
of bony structures that prevent open access to partially or completely hidden soft tissue masses.
SonicOne®
The
SonicOne Ultrasonic Cleansing and Debridement System is a highly 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 bed preparation, the essential first step in the
healing process, while contributing to a faster patient healing.
TheraSkin®
TheraSkin
is a biologically active human skin allograft that has all of the relevant characteristics of human skin, including living cells,
growth factors, and a collagen matrix, needed to heal wounds. TheraSkin is derived from human skin tissue from consenting and
highly screened donors and is regulated by the FDA as a Human Cells, Tissues, and Cellular and Tissue-Based Product. LifeNet processes
and supplies TheraSkin to the Company under a supply and distribution agreement that gives the Company exclusive
rights to sell TheraSkin in the United States. TheraSkin is indicated for use on all external skin tissue wounds, including but
not limited to difficult to heal diabetic foot ulcers, venous leg ulcers, dehisced surgical wounds, necrotizing fasciitis, burns,
Mohs and wounds with exposed structures.
Therion®
Therion
is indicated for use as a cover and barrier for homologous use for wound care and surgical procedures. Therion is a dehydrated
and terminally sterilized chorioamniotic allograft derived from human placental membrane and is regulated by the FDA as a Human
Cells, Tissues, and Cellular and Tissue-Based Product. CryoLife processes and supplies Therion to the Company under a supply
and distribution agreement that gives the Company exclusive rights to distribute the product in the United States. CryoLife
processes Therion using a proprietary process that removes the maternal-derived decidua cells from the placental membrane, leaving
the amnion and chorion layers in their native configuration.
In the United States, the Company sells
its products through its direct sales force, in addition to a network of commissioned agents assisted by Misonix personnel. Outside
of the United States, the Company sells BoneScalpel and SonaStar through distributors who then resell the products to hospitals.
The Company sells to all major markets in the Americas, Europe, Middle East, Asia Pacific, and Africa.
The Company manufactures and sells its
products in two global reportable business segments: the Surgical segment (consisting of its BoneScalpel and SonaStar products)
and the Wound segment (consisting of its SonicOne, TheraSkin and Therion products). The Company’s sales force also operates
as two segments, Surgical and Wound Care.
Risks
and Uncertainties
The
Company’s business is subject to material risks and uncertainties as a result of the coronavirus
(“COVID-19”) pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is
highly uncertain and difficult to predict, as the response to the pandemic is rapidly evolving. The Company’s customers
are diverting resources to treat COVID-19 patients and deferring elective surgical procedures, both of which have and are
likely to continue to impact demand for the Company’s products. The Company is also monitoring news reports that
indicate that several States and local jurisdictions within the U.S. are experiencing new increases in the rate of infection
by COVID-19 which could result in further mitigation efforts. Furthermore, capital markets and economies worldwide have
also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic
recession. Such economic disruption could have a material adverse effect on the Company’s business as hospitals and
surgery centers curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal
policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these
actions and the Company’s ability to benefit from them remains uncertain.
The
severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including,
but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s
customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity
could be materially and adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms,
supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to
address financial and operations challenges faced by its customers. As of the date of issuance of these consolidated financial
statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity,
or results of operations is uncertain.
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 entity; 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. was
$.01. Accordingly, the Company recorded a reclassification of $151,964 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
In
May 2010, the Company sold its rights to its former the high intensity focused ultrasound technology to SonaCare Medical, LLC
(“SonaCare”). The Company may receive up to approximately $5.8 million in payment for the sale. SonaCare is required
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. Cumulative payments through March 31,
2020 were approximately $2.5 million. Currently, SonaCare is in default of its royalty payment due March 31, 2019 and 2020. Although
the Company is in discussions with SonaCare regarding this default, there can be no assurance that the payments will be received
on a timely basis or at all. Due to this default, the Company has not recorded any income relating to these payments due.
Major
Customers and Concentration of Credit Risk
For
the three months ended September 30, 2020, the Company did not have any customers exceeding 10% of total revenue. Revenues
from one customer of the Surgical Segment represents approximately $1.5 million of the Company’s Consolidated Revenues
for the three months ended September 30, 2019.
At
September 30, 2020 and June 30, 2020, the Company’s accounts receivable with customers outside the United States were approximately
$2.4 million and $2.0 million, respectively, and $0.7 million and $0.8 million were over 90 days past due at September
30, 2020 and June 30, 2020.
In
the event one or more of our major customers is adversely affected by COVID-19 or otherwise the current market environment, that
may impact our business with them. We may face an increased risk of our customers’ inability to make payments or remain
solvent.
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 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-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 the Company’s basic and diluted earnings per share calculation:
|
|
For the three months
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,978,652
|
)
|
|
$
|
1,796,492
|
|
Less allocation of earnings to participating securities
|
|
|
-
|
|
|
|
(38,725
|
)
|
Net (loss) income available to common shareholders
|
|
$
|
(4,978,652
|
)
|
|
$
|
1,757,767
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,978,652
|
)
|
|
$
|
1,757,767
|
|
Less allocation of earnings to participating securities
|
|
|
-
|
|
|
|
(36,769
|
)
|
Net (loss) income available to common shareholders
|
|
$
|
(4,978,652
|
)
|
|
$
|
1,720,998
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
17,213,686
|
|
|
|
9,686,402
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
-
|
|
|
|
526,683
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
17,213,686
|
|
|
|
10,213,085
|
|
Diluted EPS for the three months ended
September 30, 2020 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 basic and diluted EPS are the dilutive effect of options
to purchase 295,694 shares of common stock for the three months ended September 30, 2020. Also excluded from the calculation
of earnings per share for the three months ended September 30, 2020 and 2019 are the unvested restricted stock awards that were
issued in December 2016.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”).
ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit
losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. Management is currently
assessing the impact that ASU 2016-13 will have on the 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 long-term leases. Leases will be classified
as either financing or operating, with classification affecting the pattern of expense recognition and classification 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 accumulated deficit 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 $0.4 million 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 of 10.5% 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
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, valuation of assets acquired and liabilities assumed in business combinations, asset impairment
evaluations, establishing deferred tax assets and related valuation allowances, and stock-based compensation accounting. Actual
results could differ from those estimates.
2.
Revenue Recognition
The
Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the
FASB, in applying Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers,
as amended” (“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.
Recognition
of Revenue
The
Company generates revenue from the sale and leasing of medical equipment, from the sale of consumable products used with medical
equipment in surgical procedures, from the sale of TheraSkin, a regenerative skin product, and from product licensing arrangements.
In the United States, the Company’s products are 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 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 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. Products shipped F.O.B. destination 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.
Revenue
derived from consignment agreements is earned as consumables product orders are fulfilled. Therefore, revenue is recognized
as control passes to the customer, which is typically when shipments are made F.O.B shipping 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.
The
following table disaggregates the Company’s product revenue by sales channel and geographic location:
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Total
|
|
|
|
|
|
|
Surgical
|
|
$
|
9,099,464
|
|
|
$
|
9,611,298
|
|
Wound
|
|
|
8,635,878
|
|
|
|
1,534,624
|
|
Total
|
|
$
|
17,735,342
|
|
|
$
|
11,145,922
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
Surgical
|
|
$
|
6,215,171
|
|
|
$
|
5,115,022
|
|
Wound
|
|
|
8,528,240
|
|
|
|
1,429,886
|
|
Total
|
|
$
|
14,743,411
|
|
|
$
|
6,544,908
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
Surgical
|
|
$
|
2,884,293
|
|
|
$
|
4,496,276
|
|
Wound
|
|
|
107,638
|
|
|
|
104,738
|
|
Total
|
|
$
|
2,991,931
|
|
|
$
|
4,601,014
|
|
The
Company’s international sales include a concentration
in China, aggregating $0.4 million and $1.5 million for the three months ended September 2020 and 2019, respectively.
Beginning
with the fiscal third 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, TheraSkin and Therion product lines. As a result, the Company
presents total, domestic and international sales performance supplemental data for its Surgical and Wound divisions. Further,
in the Third Quarter of 2020, the Company began operating in two business segments, and disclosing the Surgical and Wound businesses
as its two segments.
3.
Fair Value of Financial Instruments
The
Company follows a three-level fair value hierarchy that prioritizes the inputs to measure the fair 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 that 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
September 30, 2020 and June 30, 2020, 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. The Company’s current
and long-term debt arrangements are classified as level 2 financial instruments.
4.
Inventories
Inventories
are summarized as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
Raw material
|
|
$
|
7,501,649
|
|
|
$
|
7,000,453
|
|
Work-in-process
|
|
|
253,819
|
|
|
|
467,037
|
|
Finished goods
|
|
|
6,307,552
|
|
|
|
6,813,034
|
|
|
|
|
14,063,020
|
|
|
|
14,280,524
|
|
Less obsolescence
reserve
|
|
|
(268,301
|
)
|
|
|
(269,840
|
)
|
Inventory, net
|
|
$
|
13,794,719
|
|
|
$
|
14,010,684
|
|
5.
Property, Plant and Equipment
Depreciation
and amortization of property, plant and equipment was $0.7 million and $0.4 million for the three months ended September
30, 2020 and 2019, 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-line method over estimated useful
lives of 3 to 5 years. Depreciation of generators that are consigned to customers is expensed over a 5-year period, and depreciation
is charged to selling expenses.
6.
Goodwill
Under
accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs
or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount.
The Company reviews goodwill for impairment annually and whenever events or changes indicate that the carrying value of an asset
may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors,
operating performance indicators, competition, or sale or disposition of 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-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 also compares its market capitalization
to the value of its goodwill to review for evidence of impairment. The Company completes its annual goodwill impairment tests
as of March 31 of each year. The Company considered the current and expected future economic and market conditions surrounding
COVID-19, and other potential indicators of impairment and determined a triggering event had not occurred which would necessitate
an interim impairment tests during the three months ended September 30, 2020. There were no goodwill impairments recorded
during the three months ended September 30, 2020 and 2019.
|
|
Surgical
|
|
|
Wound
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2019
|
|
$
|
1,701,094
|
|
|
$
|
-
|
|
|
$
|
1,701,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Solsys
|
|
|
-
|
|
|
|
109,086,682
|
|
|
|
109,086,682
|
|
Goodwill (gross)
|
|
|
1,701,094
|
|
|
|
109,086,682
|
|
|
|
110,787,776
|
|
Accumulated impairment
losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2019
|
|
$
|
1,701,094
|
|
|
$
|
109,086,682
|
|
|
$
|
110,787,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2020
|
|
$
|
1,701,094
|
|
|
$
|
106,609,256
|
|
|
$
|
108,310,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price accounting adjustments
|
|
|
|
|
|
|
(75,686
|
)
|
|
|
(75,686
|
)
|
Goodwill (gross)
|
|
|
1,701,094
|
|
|
|
106,533,570
|
|
|
|
108,234,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment
losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2020
|
|
$
|
1,701,094
|
|
|
$
|
106,533,570
|
|
|
$
|
108,234,664
|
|
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 $764,968 and $784,318 at September 30, 2020 and June 30, 2020, respectively. Amortization expense for the three months
ended September 30, 2020 and 2019 was $35,000 and $32,000, respectively. The following is a schedule of estimated future patent
amortization expenses by fiscal year as of September 30, 2020:
2021
|
|
$
|
103,499
|
|
2022
|
|
|
88,603
|
|
2023
|
|
|
87,471
|
|
2024
|
|
|
79,521
|
|
2025
|
|
|
72,984
|
|
Thereafter
|
|
|
332,890
|
|
|
|
$
|
764,968
|
|
8.
Intangible Assets
In
connection with the Solsys Acquisition, the Company acquired intangible assets primarily consisting of customer relationships,
trade names and non-competition agreements. Amortization expense for the three months ended September 30, 2020 and 2019 were $0.4
million and $0, respectively. The table below summarizes the intangible assets acquired:
|
|
September 30,
|
|
|
June 30,
|
|
|
Amortization
|
|
|
2020
|
|
|
2020
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
9,500,000
|
|
|
$
|
9,500,000
|
|
|
15 years
|
Trade names
|
|
|
12,800,000
|
|
|
|
12,800,000
|
|
|
15 years
|
Non-competition
agreements
|
|
|
200,000
|
|
|
|
200,000
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,500,000
|
|
|
|
22,500,000
|
|
|
|
Less accumulated
amortization
|
|
|
(1,642,121
|
)
|
|
|
(1,218,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible
assets
|
|
$
|
20,857,879
|
|
|
$
|
21,281,136
|
|
|
|
The
following is a schedule of estimated future intangible asset amortization expense by fiscal year as of September 30, 2020:
2021
|
|
$
|
1,117,386
|
|
2022
|
|
|
1,489,848
|
|
2023
|
|
|
1,489,848
|
|
2024
|
|
|
1,489,848
|
|
2025
|
|
|
1,489,848
|
|
Thereafter
|
|
|
13,781,101
|
|
|
|
$
|
20,857,879
|
|
9.
Accrued Expenses and Other Current Liabilities
The
following summarizes accrued expenses and other current liabilities:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll
taxes and vacation
|
|
$
|
2,639,531
|
|
|
$
|
2,277,752
|
|
Accrued bonus
|
|
|
455,402
|
|
|
|
417,000
|
|
Accrued commissions
|
|
|
962,987
|
|
|
|
1,678,966
|
|
Professional fees
|
|
|
291,253
|
|
|
|
355,145
|
|
Vendor, tax and
other accruals
|
|
|
2,779,916
|
|
|
|
2,786,888
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
and other current liabilities
|
|
$
|
7,129,089
|
|
|
$
|
7,515,751
|
|
10.
Stock-Based Compensation Plans
Stock
Option Awards
For
the three months ended September 30, 2020 and 2019, 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 $0.6 million
and $0.2 million, respectively. As of September 30, 2020, there was approximately $6.7 million 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, which includes $0.5 million of unrecognized compensation expense on restricted stock awards.
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 it does not expect
to do so in the near term.
There
were options to purchase 18,000 granted during the three months ended September 30, 2020 and no options to purchase shares
granted during September 30, 2019. The fair value was estimated based on the weighted average assumptions of:
|
|
For
the three months ended
|
|
|
|
September
30, 2020
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free
interest rates
|
|
|
0.34
|
%
|
|
|
-
|
|
Expected
option life in years
|
|
|
6.02
|
|
|
|
-
|
|
Expected
stock price volatility
|
|
|
60.37
|
%
|
|
|
-
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
-
|
|
A
summary of option activity under the Company’s equity plans as of September 30, 2020, and changes during the three months
ended September 30, 2020 is presented below:
|
|
Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
Outstanding as of June
30, 2020
|
|
|
1,778,070
|
|
|
$
|
11.81
|
|
|
$
|
5,164,938
|
|
Vested and exercisable
at June 30, 2020
|
|
|
683,442
|
|
|
$
|
9.16
|
|
|
$
|
3,156,051
|
|
Granted
|
|
|
18,000
|
|
|
|
12.88
|
|
|
|
|
|
Exercised
|
|
|
(8,313
|
)
|
|
|
2.88
|
|
|
|
|
|
Forfeited
|
|
|
(14,499
|
)
|
|
|
10.31
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding as of September 30,
2020
|
|
|
1,773,258
|
|
|
$
|
11.87
|
|
|
$
|
3,027,014
|
|
Vested and exercisable
at September 30, 2020
|
|
|
763,593
|
|
|
$
|
9.60
|
|
|
$
|
2,095,613
|
|
The number and weighted-average grant-date
fair value of stock options which vested during the three months ended September 30, 2020 was 88,464 and $6.78, respectively.
The number and weighted-average grant-date fair value of non-vested stock options at September 30, 2020 was 1,009,665 and
$7.27, respectively.
Restricted
Stock Awards
On
December 15, 2016, the Company issued 400,000 shares of restricted stock to its Chief Executive Officer. 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%. 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 at the date of grant.
Compensation expense recorded in the three months ended September 30, 2020 and 2019 related to these awards was $0.1 million
and $0.1 million, respectively. As of September 30, 2020, there was approximately $0.5 million of total unrecognized
compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average period of 2.1 years.
The awards contain a combination of vesting terms that include time vesting, performance vesting relating to revenue achievement,
and market vesting related to obtaining certain levels of Company stock prices. At September 30, 2020, the Company has estimated
that it is probable that the performance conditions of the outstanding awards will be met. As of September 30, 2020, 240,200 shares
from this set of awards have vested.
11.
Commitments and Contingencies
Leases
The
Company has entered into 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 “Lease right-of-use assets” on the
Company’s September 30, 2020 consolidated balance sheet and represent the Company’s right to use the underlying
asset for the lease term. The Company’s obligation to make lease payments are included in “Current portion of
lease liabilities” and “Lease liabilities” on the Company’s September 30, 2020 consolidated balance
sheet. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases,
the Company recognized right-of-use assets of approximately $0.4 million and lease liabilities for operating leases of
approximately $0.4 million on July 1, 2019. Operating lease right-of-use assets and liabilities commencing after July 1, 2019
are recognized at their commencement date based on the present value of lease payments over the lease term. As of September
30, 2020, total right-of-use assets and operating lease liabilities were approximately $1.3 million and $1.4 million,
respectively. As of June 30, 2020, total right-of-use assets and operating lease liabilities were approximately $1.1
million and $1.1 million, respectively. The Company has entered into various short-term operating leases with an initial
term of twelve months or less. These leases are not recorded on the Company’s consolidated balance sheet. All operating
lease expense is recognized on a straight-line basis over the lease term. During the three months ended September 30,
2020 and 2019, the Company recognized approximately $0.1 million and $0.1 million, respectively, in total
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. The incremental borrowing rate used for any leases entered into during the three months ended
September 30, 2020 was 10.9%. There were no new leases entered into in the prior period. The incremental borrowing rate
used upon transition to ASC 842 was 10.5%.
Information
related to the Company’s right-of-use assets and related lease liabilities were as follows:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash paid for operating lease liabilities
|
|
$
|
144,916
|
|
|
$
|
93,420
|
|
Right of use assets obtained in exchange for new operating lease
obligations
|
|
$
|
342,933
|
|
|
$
|
1,301,009
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
3.13
|
|
|
|
4.00
|
|
Weighted-average discount rate
|
|
|
10.6
|
%
|
|
|
10.5
|
%
|
Maturities
of lease liabilities as of September 30, 2020 were as follows:
2021
|
|
$
|
453,165
|
|
2022
|
|
|
494,092
|
|
2023
|
|
|
273,917
|
|
2024
|
|
|
274,512
|
|
2025
|
|
|
129,211
|
|
Thereafter
|
|
|
1,643
|
|
|
|
|
1,626,540
|
|
Less imputed
interest
|
|
|
(258,909
|
)
|
|
|
|
|
|
Total lease liabilities
|
|
$
|
1,367,631
|
|
Former
Chinese Distributor - Litigation
On
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 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 each of the
tort claims asserted against us, and also granted the individual defendants’ motion to dismiss all claims asserted against
them. On January 23, 2020, the Court granted Cicel’s motion to amend its complaint, to include claims for alleged defamation
and theft of trade secrets in addition to the breach of contract claim. The Company believes that it has various legal and factual
defenses to the allegations in the complaint and intends to defend the action vigorously. Fact discovery in the case is ongoing,
and there is no trial date currently set.
12.
Financing Arrangements
Notes
payable consists of the following as of September 30, 2020 and June 30, 2020:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
9,200,000
|
|
|
$
|
8,400,000
|
|
PPP Note Payable
|
|
|
5,199,487
|
|
|
|
5,199,487
|
|
Term loans
|
|
|
30,095,761
|
|
|
|
30,095,762
|
|
|
|
|
44,495,248
|
|
|
|
43,695,249
|
|
Less current
portion of notes payable
|
|
|
(7,216,324
|
)
|
|
|
(5,099,744
|
)
|
Notes payable
|
|
$
|
37,278,924
|
|
|
$
|
38,595,505
|
|
Following
are the scheduled maturities of the notes payable for the twelve-month periods ending June 30:
2021
|
|
$
|
5,099,744
|
|
2022
|
|
|
7,599,743
|
|
2023
|
|
|
31,795,761
|
|
2024
|
|
|
-
|
|
2025
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
44,495,248
|
|
Revolving
Credit Facility
Through
the Solsys Acquisition, the Company became party to a $5.0 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 up to $20.0 million, including borrowings and letters of credit. The New Loan and Security Agreement replaces the $5.0
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
under the New Credit Facility were used in part to repay the amount of $3.75 million 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 $0.1 million.
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)
As
of September 30, 2020, the outstanding principal balance of the New Credit Facility is $9.2 million.
Notes
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 Solsys Acquisition
and (b) agreed to provide financing to the Company. Through the Solsys Acquisition, the Company became party to a $20.1 million
note payable to SWK. The SWK credit facility originally provided an additional $5.0 million in financing, totaling approximately
$25.1 million and a maturity date of June 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 additional
$5 million of term 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 September 30, 2020, the outstanding principal balance of the term loans under the Amended
SWK Credit Agreement is approximately $30.1 million.
Beginning
in March 2021, the Company is required to make principal payments of $1.25 million per quarter under the Amended SWK Credit Agreement.
The
Company may prepay the loans subject to a prepayment fee of
(a) $800,000 if such prepayment is made prior to September 27, 2021, (b) 1.00% of the amount prepaid if such prepayment is on
or after September 27, 2021 and prior to September 27, 2022 and (c) at par 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 varies based on the Company’s market capitalization,
(b) minimum aggregate revenue of specified amounts for the nine month period ending March 31, 2020, and for the twelve month period
ending on the last day of the subsequent fiscal quarters and (c) minimum EBITDA at levels that will vary based on the Company’s
market capitalization. The Company’s obligations under the Amended SWK Credit Agreement are (i) guaranteed by Misonix OpCo,
Inc., and (ii) secured by a first lien on substantially all assets of the Company, Solsys and Misonix OpCo, Inc. and a second
lien position on accounts receivable and inventory of the same entities
Paycheck
Protection Program Loan
On
April 5, 2020, the Company applied for an unsecured $5.2 million loan under the Paycheck Protection Program (the “PPP Loan”).
The Paycheck Protection Program (or “PPP”) was established under the recently congressionally approved Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). On April 10, 2020, the PPP loan was approved and funded. Misonix entered into a promissory note with JP Morgan
Chase evidencing the unsecured $5.2 million loan. In accordance with the requirements of the CARES Act, the Company used the proceeds
from the PPP Loan primarily for payroll costs.
The
PPP Loan has a maturity date of April 4, 2022 and accrues interest at an annual rate of 0.98%. Interest and principal payments
are deferred for the first six months of the loan. Thereafter, monthly interest and principal payments are due until the loan
is fully satisfied at the end of 24 months. The promissory note evidencing the PPP Loan contains customary events of default relating
to, among other things, payment defaults and provisions of the promissory note. The PPP provides for borrowers to apply for
forgiveness for some or all of the loan based on meeting certain criteria. Given that the SBA continues
to issue guidance surrounding the criteria for loan forgiveness, it is unclear as to when and if the Company might apply for forgiveness,
and if it does, whether such application will be approved by the SBA.
13.
Related Party Transactions
Minoan
Medical (Pty) Ltd. (“Minoan”) (formerly Applied BioSurgical) is an independent distributor for the Company in South
Africa. The chief executive officer of Minoan is also the brother of Stavros G. Vizirgianakis, the Company’s Chief Executive
Officer.
Set
forth below is a table showing the Company’s net revenues for the three months ended September 30, 2020 and 2019
and accounts receivable at September 30, 2020 and 2019 with Minoan:
|
|
For the three months ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
359,486
|
|
|
$
|
625,134
|
|
Accounts receivable
|
|
$
|
631,115
|
|
|
$
|
426,142
|
|
14.
Income Taxes
For
the three months ended September 30, 2020 and 2019, the Company recorded an income tax benefit of $0 and $4.1 million, respectively.
For the three months ended September 30, 2020 and 2019, the effective rate of 0% and 178% varied from the U.S. federal statutory
rate primarily due to the recording of a full valuation allowance on the deferred tax assets, and the business combination related
to the Solsys Acquisition.
On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
The CARES Act contains various corporate tax provisions; however, these benefits do not impact Company’s current tax provision.
15.
Segment Reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
on a regular basis by the chief operating decision-maker (“CODM”) in deciding how to allocate resources to an individual
segment and in assessing performance of the segment. Starting with the third quarter 2020, the Company began operating in two
segments, organized by its sales channels and product types – the Surgical and the Wound segment. Prior to the third quarter
2020, the Company operated as one segment. Prior period information has been presented on the basis of the new segmentation. The
Surgical segment consists of the Company’s BoneScalpel and SonaStar products and the Wound segment consists of the
Company’s SonicOne, TheraSkin and Therion products. 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. The CODM evaluates the segments using gross profit and gross profit margin. The Company
does not allocate its assets by segment, and therefore does not disclose assets by segment.
Segment
gross profit include:
For the three months ended September
30, 2020
|
|
Surgical
|
|
|
Wound
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
9,099,464
|
|
|
$
|
8,635,878
|
|
|
$
|
17,735,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
6,311,403
|
|
|
$
|
6,313,338
|
|
|
$
|
12,624,741
|
|
For the three months ended September
30, 2019
|
|
Surgical
|
|
|
Wound
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
9,611,298
|
|
|
$
|
1,534,624
|
|
|
$
|
11,145,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
6,702,021
|
|
|
$
|
1,207,254
|
|
|
$
|
7,909,275
|
|
Worldwide
revenue for the Company’s products is categorized as follows:
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
14,743,411
|
|
|
$
|
6,544,908
|
|
International
|
|
|
2,991,931
|
|
|
|
4,601,014
|
|
Total
|
|
$
|
17,735,342
|
|
|
$
|
11,145,922
|
|
All
of the Company’s long-lived assets are located in the United States. Our international revenue includes a concentration
in China, aggregating to $0.4 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively.
16.
Acquisitions Solsys Medical, LLC
On
September 27, 2019, the Company completed the Solsys Acquisition. The purchase price was approximately $108.6 million, based on
the Company’s issuance of 5,703,082 shares of Misonix common stock as acquisition consideration, valued at $19.05 per share.
In addition, business transaction costs incurred in connection with the acquisition were $4.5 million. Of these transaction costs,
$3.1 million were charged to general and administrative expenses on the Consolidated Statement of Operations and $1.4 million
of the transaction costs were capitalized to additional paid in capital, in connection with the registration of the underlying
stock issued in the transaction. For the three months ended September 30, 2019, transaction costs expensed in general and administrative
expenses were $1.8 million. As of September 30, 2019, transaction costs capitalized to additional paid in capital were $1.3
million.
The
transaction was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805. U.S. GAAP requires
that one of the companies in the transactions be designated as the acquirer for accounting purposes based on the evidence available.
Misonix was treated as the acquiring entity for accounting purposes
The
final Solsys purchase price allocation as of September 30, 2020 is shown in the following table:
Cash
|
|
$
|
5,525,601
|
|
Accounts receivable
|
|
|
6,173,371
|
|
Inventory
|
|
|
98,911
|
|
Prepaid expenses
|
|
|
88,863
|
|
Indemnified asset - sales tax
|
|
|
150,000
|
|
Property and equipment
|
|
|
673,353
|
|
Lease assets
|
|
|
946,617
|
|
Customer relationships
|
|
|
9,500,000
|
|
Trade names
|
|
|
12,800,000
|
|
Non-competition agreements
|
|
|
200,000
|
|
Accounts payable and other current liabilities
|
|
|
(4,694,878
|
)
|
Lease liabilities
|
|
|
(860,490
|
)
|
Deferred tax liability
|
|
|
(4,575,507
|
)
|
Notes payable
|
|
|
(23,915,701
|
)
|
|
|
|
|
|
Total identifiable
net assets
|
|
|
2,110,140
|
|
Goodwill
|
|
|
106,533,570
|
|
Total
consideration
|
|
$
|
108,643,710
|
|
The
fair values of the Solsys assets and liabilities were determined based on preliminary estimates and assumptions that management
believes are reasonable. Goodwill decreased by $0.1 million during the three months ended September 30, 2020 as a result
of final refinements relating to the purchase price valuation of Solsys.
The
goodwill from the acquisition of Solsys, which is fully deductible for tax purposes, consists largely of synergies and economies
of scale expected from combining the operations of Solsys and the Company’s existing business.
The
estimate of fair value of the Solsys identifiable intangible assets was determined primarily using the “income approach,”
which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings
method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset
values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows, the assessment of the intangible asset’s life cycle, revenue growth rates and EBITDA margins,
as well as other factors. The following table summarizes key information underlying intangible assets related to the Solsys Acquisition:
|
|
September 30,
|
|
|
June 30,
|
|
|
Amortization
|
|
|
2020
|
|
|
2020
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
9,500,000
|
|
|
$
|
9,500,000
|
|
|
15 years
|
Trade names
|
|
|
12,800,000
|
|
|
|
12,800,000
|
|
|
15 years
|
Non-competition
agreements
|
|
|
200,000
|
|
|
|
200,000
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,500,000
|
|
|
|
22,500,000
|
|
|
|
Less accumulated
amortization
|
|
|
(1,642,121
|
)
|
|
|
(1,218,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible
assets
|
|
$
|
20,857,879
|
|
|
$
|
21,281,136
|
|
|
|
Solsys’
operations were consolidated with those of the Company for the period September 27, 2019 through September 30, 2020. Had the acquisition
occurred as of the beginning of fiscal 2018, revenue and net loss, on a pro forma basis excluding transaction fees and the one-time
tax benefit, for the combined company would have been as follows:
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,735,342
|
|
|
$
|
19,490,717
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,978,652
|
)
|
|
$
|
(4,601,195
|
)
|
Pro
forma net loss for the three months ended September 30, 2019 was adjusted to exclude $3.0 million of acquisition-related
costs, include $4.1 million of acquisition-related income tax benefit, include $0.2 million of additional interest expense related
to new and refinanced borrowings that occurred as a result of the acquisition, and include $0.4 million of amortization expense
related to the intangible assets acquired.