Notes to Condensed
Consolidated Financial Statements
For the Three and Six Months Ended December 31, 2019 and 2018 (unaudited)
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1.
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Basis of Presentation, Organization and Business and Summary of Significant Accounting Policies
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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, 2019 (the “2019 Form 10-K”), which provides a more complete explanation
of the Company’s accounting policies, financial position, operating results, business properties and other matters. In the
opinion of management, these financial statements reflect all adjustments considered necessary for a fair statement of interim
results.
Organization and Business
Misonix designs, manufactures
and markets minimally invasive 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, plastic surgery, wound care and maxillo-facial surgery.
The Company
strives to help proprietary procedural solutions become the standard of care and enhance patient outcomes throughout the
world. Misonix intends to accomplish this, in part, by utilizing its best in class surgical ultrasonic technology to change
patient outcomes in the areas of spinal surgery, neurosurgery and wound care. Misonix is currently developing proprietary
procedural solutions around its recently U.S. Food and Drug Administration (“FDA”) cleared Nexus ultrasonic
generator (“Nexus”), which combines the capabilities of the Company’s three existing products, namely
BoneScalpel® Surgical System (“BoneScalpel”), SonaStar® Surgical Aspirator (“SonaStar”) and
SonicOne® Wound Cleansing and Debridement System (“SonicOne”), into a single system that can be used to
perform soft and hard tissue resections. The Nexus platform is driven by
Misonix’s proprietary ultrasonic digital algorithm and additionally integrates the delivery of radio frequency energy
for use in general surgical procedures. In addition, through its acquisition of Solsys Medical, LLC (“Solsys”),
Misonix completed its first procedural expansion of its ultrasonic surgical technology in September 2019, adding the
TheraSkin product, a leading cellular skin substitute indicated for all wounds, to its product portfolio.
BoneScalpel is a state
of the art, ultrasonic bone cutting and sculpting system capable of making precise cuts with minimal necrosis, minimal burn artifact,
minimal inflammation and minimal bone loss. The device is also capable of preserving surrounding soft tissue structures because
of its unique ability to differentiate soft tissue from rigid bone. This device can make precise linear or curved cuts, on any
plane, with precision not normally associated with powered instrumentation. BoneScalpel offers the speed and convenience of a powered
instrument without the dangers associated with conventional rotary devices. The effect on surrounding soft tissue is minimal due
to the elastic and flexible structure of healthy tissue. This is a significant advantage in anatomical regions like the spine where
patient safety is of primary concern. In addition, the linear motion of the blunt, tissue-impacting tips avoids accidental ‘trapping’
of soft tissue while largely eliminating the high-speed spinning and tearing associated with rotary power instruments. BoneScalpel
allows surgeons to improve on existing surgical techniques by creating new approaches to bone cutting and sculpting and removal,
leading to substantial time savings and increased operation efficiencies. BoneScalpel is now recognized by many surgeons globally
as a critical surgical tool enabling improved patient outcomes in the spinal arena.
SonicOne is an innovative,
tissue specific approach for the effective removal of devitalized or necrotic tissue and fibrin deposits while sparing viable,
surrounding cellular structures. The tissue specific capability is, in part, due to the fact that healthy and viable tissue structures
have a higher elasticity and flexibility than necrotic tissue and are more resistant to destruction from the impact effects of
ultrasound. The ultrasonic debridement process separates devitalized tissue from viable tissue layers, allowing for a more defined
treatment and, usually, a reduced pain sensation. The Company believes SonicOne establishes a new standard in wound and burn bed
preparation, the essential first step in the healing process, while contributing to a faster patient healing.
SonaStar is used to
emulsify and remove soft and hard tumors. Specifically, SonaStar provides powerful precise aspiration following the ultrasonic
ablation of hard or soft tissue. SonaStar has been used for a wide variety of surgical procedures applying both open and minimally
invasive approaches, including neurosurgery and general surgery.
Nexus is a next-generation
integrated ultrasonic surgical platform that combines all the features of BoneScalpel, SonicOne and SonaStar into a single fully
integrated platform that will also serve to power future solutions. The Nexus platform is driven by a new proprietary digital algorithm
that results in more power, efficiency and control. Nexus uniquely integrates radio frequency capabilities, allowing for use in
general surgery procedures. Nexus’ increased power improves tissue resection rates for both soft and hard tissue removal
making it a unique surgical platform for a variety of different surgical specialties. In addition, Nexus’ easy setup and
use enables physicians to fully leverage Nexus’ impressive set of capabilities via its digital touchscreen display and smart
system technology. Because BoneScalpel, SonaStar and SonicOne all work on the Nexus generator, hospitals have access to all of
the Company’s product offerings on the all in one Nexus platform. Nexus received FDA 510(k) clearance in June 2019 and received
its CE mark approval in July 2019 for sale in Europe.
In the United States,
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 generally sells to distributors who then resell the products to hospitals.
The Company’s sales force operates as two groups, Surgical (neurosurgery and spinal surgery applications) and Wound Care.
The Company operates with one business segment.
Acquisition of Solsys Medical, LLC
On September 27, 2019,
the Company completed the acquisition (the “Solsys Acquisition”) of Solsys Medical, LLC (“Solsys”), a privately
held regenerative medical company, in an all-stock transaction valued at approximately $109 million. Solsys is the exclusive marketer
and distributor of TheraSkin in the United States, through an agreement with LifeNet Health (“LifeNet”). Solsys owns
the TheraSkin® brand name, which was commercially launched in January 2010. TheraSkin is a biologically active human skin allograft
which has all of the relevant characteristics of human skin, including living cells, growth factors, and a collagen matrix, needed
to heal wounds. TheraSkin is derived from human skin tissue from consenting and highly screened donors and is manufactured by LifeNet
Health. As a result of the Solsys Acquisition, the Company became the parent public-reporting company of the combined company;
Misonix, Inc., a New York corporation, now known as Misonix Opco, Inc., and Solsys became direct, wholly owned subsidiaries of
the Company. The acquisition of Solsys is expected to broaden the Company’s addressable market through wound care solutions
that are complementary to its existing products. After the completion of the Solsys Acquisition, the Company’s shareholders
immediately prior to the closing owned 64% of the combined entity, and Solsys unitholders immediately prior to the closing owned
36%. The Company issued 5,703,082 shares in connection with this transaction. Transaction fees were approximately $4.5 million,
of which $1.4 million were capitalized as additional paid in capital in connection with the registration of these shares. The Solsys
assets, liabilities and results of operations are included in the Company’s financial statements from the acquisition date.
The Company’s
common stock was created with a par value per share of $.0001, whereas the par value of Misonix Opco, Inc. is $.01. Accordingly,
the Company recorded a reclassification of $151,997 between common stock and additional paid in capital during the three months
ended September 30, 2019 to account for this change.
High Intensity Focused Ultrasound Technology
The Company sold its
rights to its former the high intensity focused ultrasound technology to SonaCare Medical, LLC (“SonaCare”) in May
2010. The Company may receive up to approximately $5.8 million in payment for the sale. SonaCare is 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 December 31, 2019 were approximately
$2.5 million. Currently, SonaCare is in default of its royalty payment due March 31, 2019. Although the Company is in discussions
with SonaCare regarding this default, there can be no assurance that the payments will be received on a timely basis or at all.
Due to this default, the Company has not recorded any income relating to this payment.
Major Customers and Concentration
of Credit Risk
For the six months ended
December 31, 2019 and 2018, the Company did not have any customers exceeding 10% of total revenue.
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:
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For the three months ended
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For the six months ended
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December 31,
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|
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December 31,
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|
|
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2019
|
|
|
2018
|
|
|
2019
|
|
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2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic weighted average shares outstanding
|
|
|
15,222,870
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|
|
|
9,322,237
|
|
|
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12,439,860
|
|
|
|
9,210,031
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Dilutive effect of restricted stock awards (participating securities)
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-
|
|
|
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-
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|
|
-
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|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Denominator for basic earnings per share
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|
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15,222,870
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|
|
|
9,322,237
|
|
|
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12,439,860
|
|
|
|
9,210,031
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Dilutive effect of stock options
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted weighted average shares outstanding
|
|
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15,222,870
|
|
|
|
9,322,237
|
|
|
|
12,439,860
|
|
|
|
9,210,031
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|
Diluted EPS for the
three months and six months ended December 31, 2019 and 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 408,926 and 530,978 shares of common stock for the three months ended December 31,
2019 and 2018, respectively, and the dilutive effect of options to purchase 466,412 and 544,143 shares of common stock for the
six months ended December 31, 2019 and 2018, respectively. Also excluded from the calculation of earnings per share for the three
and six months ended December 31, 2019 and 2018 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 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 leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company
adopted ASC 842 on July 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. Entities have the option to continue to apply historical accounting under Topic 840,
including its disclosure requirements, in comparative periods presented in the year of adoption. An entity that elects this option
recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption instead of the
earliest period presented. The Company adopted the optional ASC 842 transition provisions beginning on July 1, 2019. Accordingly,
the Company will continue to apply Topic 840 prior to July 1, 2019, including Topic 840 disclosure requirements, in the comparative
periods presented. The Company elected the package of practical expedients for all its leases that commenced before July 1, 2019.
The Company has evaluated its real estate lease, its copier leases and its generator rental agreements. The adoption of ASC 842
did not materially impact the Company’s balance sheet and had an immaterial impact on its results of operations. Based on
the Company’s current agreements, upon the adoption of ASC 842 on July 1, 2019, the Company recorded an operating lease liability
of approximately $436,000 and corresponding ROU assets based on the present value of the remaining minimum rental payments associated
with the Company’s leases. As the Company’s leases do not provide an implicit rate, nor is one readily available, the
Company used its incremental borrowing rate based on information available at July 1, 2019 to determine the present value of its
future minimum rental payments.
Critical Accounting Policies and Use
of Estimates
Use 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 and establishing
deferred tax assets and related valuation allowances, and stock-based compensation. Actual results could differ from those estimates.
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 that had not been
completed as of the adoption date. The Company’s reported results for the year ended June 30, 2019 reflect the application
of ASC Topic 606 guidance while the Company’s reported results for fiscal year 2018 were prepared under the guidance of ASC
Topic 605, “Revenue Recognition”. The Company’s adoption of ASC Topic 606 resulted in a cumulative prior period
adjustment in the amount of $960,000 related to the Company’s license and manufacturing agreement dated October 19, 2017,
under which the Company licensed to its Chinese partner certain manufacturing and distribution rights to its SonaStar product line
in China, Hong Kong and Macau (the “License and Exclusive Manufacturing Agreement”), but the remainder of the adoption
did not have a material impact on the timing or amount of revenue recognized.
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.
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 also provides an immaterial
amount of service revenue that is recognized over time, but not stated separately because the amounts are immaterial.
The Company satisfies
performance obligations either over time, or at a point in time, upon which control of a product shipped transfers to the customer.
Revenue derived by the
Company from the shipping and billing of product is recorded upon shipment, when transfer of control occurs for products shipped
freight on board (“F.O.B.”) shipping point. Products shipped F.O.B. destination point are recorded as revenue when
received at the point of destination when the transfer of control is completed. Shipments under agreements with distributors are
not subject to return, and payment for these shipments is not contingent on sales by the distributor. Accordingly, the Company
recognizes revenue on shipments to distributors in the same manner as with other customers under the ship and bill process.
Revenue derived from
the rental of equipment is recorded on a monthly basis over the term of the lease. Shipments of consumable products to these rental
customers is recorded as orders are received and shipments are made F.O.B. destination or F.O.B. shipping point.
Revenue derived from
consignment agreements is earned as consumables product orders are fulfilled. Therefore, revenue is recognized as shipments are
made F.O.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.
The following table
disaggregates the Company’s product revenue by classification and geographic location:
|
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For the three months ended
|
|
|
For the six months ended
|
|
|
|
December 31,
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|
|
December 31,
|
|
|
|
2019
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|
|
2018
|
|
|
2019
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|
|
2018
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|
Total
|
|
|
|
|
|
|
|
|
|
|
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Surgical
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|
$
|
9,988,559
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|
|
$
|
8,628,587
|
|
|
$
|
19,599,856
|
|
|
$
|
16,771,546
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|
Wound
|
|
|
9,733,427
|
|
|
|
1,547,866
|
|
|
|
11,268,052
|
|
|
|
2,766,071
|
|
Total
|
|
$
|
19,721,986
|
|
|
$
|
10,176,453
|
|
|
$
|
30,867,908
|
|
|
$
|
19,537,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
|
|
$
|
5,652,381
|
|
|
$
|
4,706,926
|
|
|
$
|
10,767,402
|
|
|
$
|
8,953,194
|
|
Wound
|
|
|
9,606,332
|
|
|
|
1,371,628
|
|
|
|
11,036,219
|
|
|
|
2,534,683
|
|
Total
|
|
$
|
15,258,713
|
|
|
$
|
6,078,554
|
|
|
$
|
21,803,621
|
|
|
$
|
11,487,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surgical
|
|
$
|
4,336,178
|
|
|
$
|
3,921,661
|
|
|
$
|
8,832,454
|
|
|
$
|
7,818,351
|
|
Wound
|
|
|
127,095
|
|
|
|
176,238
|
|
|
|
231,833
|
|
|
|
231,388
|
|
Total
|
|
$
|
4,463,273
|
|
|
$
|
4,097,899
|
|
|
$
|
9,064,287
|
|
|
$
|
8,049,739
|
|
Beginning with the fiscal
first quarter of 2020, Misonix adopted certain changes in its quarterly financial results related to the presentation of its sales
performance supplemental data to more accurately reflect the Company’s two separate sales channels - its Surgical and Wound
product divisions. The Surgical division includes the Company’s Nexus, BoneScalpel and SonaStar product lines, and the Wound
division includes the Company’s SonicOne and TheraSkin product lines. As a result, the Company presents total, domestic and
international sales performance supplemental data for its Surgical and Wound divisions and no longer presents total, domestic and
international sales performance supplemental data based on its consumables and equipment products.
Contract Assets
The timing of revenue
recognition, customer invoicing, and collections produces accounts receivable and contract assets on the Company’s consolidated
balance sheet. Contract liabilities are not material to the operations of the Company as of December 31, 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.
Upon the adoption of
ASC Topic 606 on July 1, 2018, the Company recorded a contract asset for $960,000 relating to royalties to be received from its
Chinese partner relating to its License and Exclusive Manufacturing Agreement. This resulted in a cumulative prior period adjustment
in the amount of $960,000 which was charged to accumulated deficit. When this contract asset was established, the value of such
asset was determined based upon the Company’s assessment of the most likely variable consideration to be received by the
Company as a result of the royalty provisions in the contract. As of December 31, 2019, the Company’s Chinese partner has
defaulted on its initial royalty payment obligations. Management has determined that collection of this contract is unlikely, and
accordingly, has recorded a full $960,000 reserve against such asset, and has charged this reserve to bad debt expense, classified
as general and administrative expenses.
|
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 December 31, 2019
and June 30, 2019, all of the Company’s cash and cash equivalents, trade accounts receivable and trade accounts payable were
short term in nature, and their carrying amounts approximate fair value.
Inventories are summarized
as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Raw material
|
|
$
|
5,991,584
|
|
|
$
|
4,830,207
|
|
Work-in-process
|
|
|
462,383
|
|
|
|
224,252
|
|
Finished goods
|
|
|
5,176,194
|
|
|
|
2,743,361
|
|
|
|
|
11,630,161
|
|
|
|
7,797,820
|
|
Less valuation reserve
|
|
|
(444,258
|
)
|
|
|
(444,258
|
)
|
|
|
$
|
11,185,903
|
|
|
$
|
7,353,562
|
|
|
5.
|
Property, Plant and Equipment
|
Depreciation and amortization
of property, plant and equipment was $977,000 and $698,000 for the six months ended December 31, 2019 and 2018, respectively. Inventory
items used for demonstration purposes, subject to a rental agreement or provided on consignment are included in property, plant
and equipment and are depreciated using the straight-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.
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 primarily utilizes the Company’s market capitalization and a discounted cash flow model
in determining the fair value, which consists of Level 3 inputs. Changes in the projected cash flows and discount rate estimates
and assumptions underlying the valuation of goodwill could materially affect the determination of fair value at acquisition or
during subsequent periods when tested for impairment. The Company completed its annual goodwill impairment tests for fiscal 2019
and 2018 as of March 31 of each year. There were no triggering events identified during the quarter ended December 31, 2019 that
would result in an impairment of goodwill. Goodwill decreased by $253,517 during the three months ended December 31, 2019 as a
result of refinements relating to the purchase price valuation of Solsys.
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 $787,605
and $779,100 at December 31, 2019 and June 30, 2019, respectively. Amortization expense for the six months ended December 31, 2019
and 2018 was $63,000 and $70,000, respectively. The following is a schedule of estimated future patent amortization expenses by
fiscal year as of December 31, 2019:
2020
|
|
$
|
64,146
|
|
2021
|
|
|
123,028
|
|
2022
|
|
|
81,093
|
|
2023
|
|
|
80,002
|
|
2024
|
|
|
72,173
|
|
Thereafter
|
|
|
367,163
|
|
|
|
$
|
787,605
|
|
In connection with the
Solsys Acquisition, the Company acquired intangible assets primarily consisting of customer relationships, trade names and non-competition
agreements. The table below summarizes the intangible assets acquired:
|
|
December 31,
|
|
|
June 30,
|
|
|
Amortization
|
|
|
2019
|
|
|
2019
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
7,400,000
|
|
|
$
|
-
|
|
|
15 years
|
Trade names
|
|
|
12,800,000
|
|
|
|
-
|
|
|
15 years
|
Non-competition agreements
|
|
|
200,000
|
|
|
|
-
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,400,000
|
|
|
|
-
|
|
|
|
Less accumulated amortization
|
|
|
(386,667
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
20,013,333
|
|
|
$
|
-
|
|
|
|
The following is a schedule
of estimated future intangible asset amortization expense by fiscal year as of December 31, 2019:
2020
|
|
$
|
1,160,000
|
|
2021
|
|
|
1,396,667
|
|
2022
|
|
|
1,346,667
|
|
2023
|
|
|
1,346,667
|
|
2024
|
|
|
1,346,667
|
|
Thereafter
|
|
|
13,803,332
|
|
|
|
$
|
20,400,000
|
|
9.
|
Accrued
Expenses and Other Current Liabilities
|
The
following summarizes accrued expenses and other current liabilities:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and vacation
|
|
$
|
820,060
|
|
|
$
|
488,339
|
|
Accrued bonus
|
|
|
761,791
|
|
|
|
622,115
|
|
Accrued commissions
|
|
|
1,831,815
|
|
|
|
662,007
|
|
Professional fees
|
|
|
471,257
|
|
|
|
181,313
|
|
Vendor, tax and other accruals
|
|
|
1,280,285
|
|
|
|
534,740
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,165,208
|
|
|
$
|
2,488,514
|
|
|
10.
|
Stock-Based
Compensation Plans
|
Stock
Option Awards
For
the three and six months ended December 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, excluding the compensation cost for restricted stock, was $281,023
and $502,358, and $500,087 and $844,601, respectively. As of December 31, 2019, there was approximately $3.9 million of total
unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average
period of 3.1 years.
Stock
options typically expire 10 years from the date of grant and vest over service periods, which typically are 4 years. All options
are granted at fair market value, as defined in the applicable plans.
The
fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model that uses the
assumptions noted in the following table. The expected volatility represents the historical price changes of the Company’s
stock over a period equal to that of the expected term of the option. The Company uses the simplified method for determining the
option term. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend
yield is based upon historical and projected dividends. The Company has historically not paid dividends, and it does not expect
to do so in the near term.
There
were options to purchase 185,500 and 182,000 shares granted during the six months ended December 31, 2019 and 2018, respectively. The
fair value was estimated based on the weighted average assumptions of:
|
|
For the six months ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rates
|
|
|
1.67
|
%
|
|
|
2.90
|
%
|
Expected option life in years
|
|
|
6.25
|
|
|
|
6.25
|
|
Expected stock price volatility
|
|
|
54.69
|
%
|
|
|
55.87
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
A
summary of option activity under the Company’s equity plans as of December 31, 2019, and changes during the six months ended
December 31, 2019 is presented below:
|
|
Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
Vested and exercisable at June 30, 2019
|
|
|
1,163,856
|
|
|
$
|
10.28
|
|
|
$
|
19,409,569
|
|
Granted
|
|
|
185,500
|
|
|
|
21.41
|
|
|
|
|
|
Exercised
|
|
|
(141,750
|
)
|
|
|
8.29
|
|
|
|
|
|
Forfeited
|
|
|
(47,500
|
)
|
|
|
13.99
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
1,160,106
|
|
|
$
|
12.15
|
|
|
$
|
8,084,272
|
|
Vested and exercisable at December 31, 2019
|
|
|
663,979
|
|
|
$
|
8.94
|
|
|
$
|
6,420,769
|
|
The
total fair value of stock options vested during the six months ended December 31, 2019 was $863,924. The number and weighted-average
grant-date fair value of non-vested stock options at December 31, 2019 was 496,127 and $8.93, respectively. The number and weighted-average
grant-date fair value of stock options which vested during the six months ended December 31, 2019 was 148,999 and $5.80, respectively.
Restricted
Stock Awards
On
December 15, 2016, the Company issued 400,000 shares of restricted stock to its Chief Executive Officer. These awards vest over
a period of up to five years, subject to meeting certain service, performance and market conditions. These awards were valued
at approximately $3.6 million. Compensation expense recorded in the three and six months ended December 31, 2019 and 2018 related
to these awards was $123,629 and $144,953, and $247,378 and $871,329, respectively. As of December 31, 2019, there was approximately
$886,365 of total unrecognized compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average
period of 1.82 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 December 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 December 31, 2019, 186,600 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 “Prepaid expenses and other current assets” and “Lease right of use and other assets” on the Company’s December 31, 2019 consolidated balance sheet and represent the Company’s right to use
the underlying asset for the lease term. The Company’s obligation to make lease payments are included in “Current portion of lease liabilities” and “Lease right of use liabilities” on the Company’s December 31, 2019
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 $0.5 million and lease liabilities for operating
leases of approximately $0.5 million on July 1, 2019. Operating lease right-of-use assets and liabilities commencing after January
1, 2019 are recognized at their commencement date based on the present value of lease payments over the lease term. As of December
31, 2019, total right-of-use assets and operating lease liabilities were approximately $1.2 million and $1.2 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 balance sheet. All operating lease expense is recognized on a straight-line basis over the
lease term. During the six months ended December 31, 2019, the Company recognized approximately $153,000 in total lease costs,
which was composed operating lease costs for right-of-use assets.
Because
the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the
present value of the lease payments.
Information
related to the Company’s right-of-use assets and related lease liabilities were as follows:
|
|
Six months ended
|
|
|
|
December 31,
2019
|
|
|
|
|
|
Cash paid for operating lease liabilities
|
|
$
|
203,449
|
|
Right of use assets obtained in exchange for new operating lease obligations
|
|
$
|
1,301,009
|
|
|
|
As of
|
|
|
|
December 31,
2019
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
4.0 years
|
|
Weighted-average discount rate
|
|
|
10.5
|
%
|
Maturities
of lease liabilities as of December 31, 2019 were as follows:
2020
|
|
$
|
303,863
|
|
2021
|
|
|
348,252
|
|
2022
|
|
|
247,359
|
|
2023
|
|
|
254,199
|
|
2024
|
|
|
254,794
|
|
Thereafter
|
|
|
109,493
|
|
|
|
|
1,517,960
|
|
Less imputed interest
|
|
|
(288,955
|
)
|
|
|
|
|
|
Total lease liabilities
|
|
$
|
1,229,005
|
|
Former
Chinese Distributor - Litigation
On
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
|
Note
payable consists of the following as of June 30, 2019 and December 31, 2019:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
8,750,000
|
|
|
$
|
-
|
|
Notes payable
|
|
|
30,095,761
|
|
|
|
-
|
|
|
|
$
|
38,845,761
|
|
|
$
|
-
|
|
Following
are the scheduled maturities of the notes payable for the twelve-month period ending June 30:
2020
|
|
$
|
-
|
|
2021
|
|
|
2,500,000
|
|
2022
|
|
|
5,000,000
|
|
2023
|
|
|
31,345,761
|
|
2024
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
38,845,761
|
|
Revolving
Credit Facility
Through
the Solsys acquisition, the Company became party to a $5 million revolving line of credit loan agreement with Silicon Valley Bank,
originally effective January 22, 2019 (as amended and supplemented, the “Prior Solsys Credit Agreement”). The line
of credit had an original maturity date of January 22, 2021.
On
December 26, 2019 (the “Effective Date”), the Company entered into a Loan and Security Agreement (the “New Loan
and Security Agreement”) among the Company, Misonix OpCo, Inc. and Solsys, as borrowers, and Silicon Valley Bank. The New
Loan and Security Agreement provides for a revolving credit facility (the “New Credit Facility”) in an aggregate principal
amount of $20 million, including borrowings and letters of credit. The New Loan and Security Agreement replaces the $5 million
Prior Solsys Credit Agreement, dated as of January 22, 2019, among Solsys, as borrower, and Silicon Valley Bank. The Company did
not incur any early termination penalties in connection with the termination of the Prior Solsys Credit Agreement.
Borrowings
of $8,750,000 under the New Credit Facility were used in part to repay the amount of $3,750,000 outstanding under the Prior
Solsys Credit Agreement, and the balance may be used by the Company for general corporate purposes and working capital. The
New Credit Facility matures on December 26, 2022. Interest on outstanding indebtedness under the New Credit Facility accrues
at a rate equal to the greater of the “Prime Rate” and 5.25%. In addition, on each year anniversary of the
Effective Date, the Company is required to pay an anniversary fee of $100,000.
The
New Loan and Security Agreement contains representations and warranties and covenants that the Company believes are customary
for agreements of this type, including covenants applicable to the Company and its subsidiaries limiting indebtedness, liens,
substantial asset sales and mergers as well as financial maintenance covenants and other provisions. The New Loan and Security
Agreement contains customary events of default. Upon the occurrence of an event of default, the lender may accelerate the indebtedness
under the New Credit Facility, provided, that in the case of certain bankruptcy or insolvency events of default, the indebtedness
under the New Credit Facility will automatically accelerate. If the New Credit Facility or the New Loan and Security Agreement
terminates before the maturity date of December 26, 2022, then the Company must pay the then-owing amounts, in addition to a termination
fee equal to 1% of the New Credit Facility at that time. The termination fee would not apply if the New Credit Facility or the
New Loan and Security Agreement terminates before the maturity date for either of the following reasons: (1) the New Credit Facility
is replaced with another new credit facility from Silicon Valley Bank or (2) Silicon Valley Bank sells, transfers, assigns or
negotiates its obligations, rights and benefits under the New Loan and Security Agreement and related loan documentation to another
person or entity that is not an affiliate of Silicon Valley Bank and the Company terminates the New Loan and Security Agreement
or the New Credit Facility within sixty days thereof (unless the Company consented to that sale, transfer, assignment or negotiation).
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 transactions contemplated
by the Solsys merger agreement and (b) agreed to provide financing to the Company. Through the Solsys acquisition, the Company became party to a $20.2 million note payable to SWK. The SWK credit facility originally provided
an additional $5 million in financing, totaling approximately $25.1 million and a maturity date of June 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 December 31, 2019, the outstanding principal balance of the term loans under
the Amended SWK Credit Agreement is approximately $30.1 million.
Under
the Amended SWK Credit Agreement, the Company and Solsys are required to make quarterly aggregate principal payments beginning
in March 2021 of $1.25 million. The Company and Solsys are also obligated to begin making cash payments of accrued interest in
March 2021.
The
Company may not prepay the loans under the SWK Credit Agreement until September 27, 2020. On and after September 27, 2020, the
Company may prepay the loans subject to a 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) $0
if such prepayment is made on or after September 27, 2022.
Under
the terms of the Amended SWK Credit Agreement, the Company is required to meet certain additional financial covenants requiring,
among other things, (a) a minimum amount of unencumbered liquid assets that will vary based on the Company’s market capitalization,
(b) minimum aggregate revenue of specified amounts for the 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.
|
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 six months ended December 31, 2019 and 2018 and accounts
receivable at December 31, 2019 and 2018 with Minoan:
|
|
For the six months ended and
|
|
|
|
as of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,060,248
|
|
|
$
|
573,953
|
|
Accounts Receivable
|
|
$
|
367,132
|
|
|
$
|
260,222
|
|
For
the three and six months ended December 31, 2019 and 2018, the Company recorded an income tax expense (benefit), as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(1,255,000
|
)
|
|
$
|
(228,000
|
)
|
|
$
|
(1,770,000
|
)
|
|
$
|
(655,000
|
)
|
Income tax benefit - Solsys Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,085,000
|
)
|
|
|
-
|
|
Valuation allowance on deferred tax assets
|
|
|
1,255,000
|
|
|
|
228,000
|
|
|
|
1,770,000
|
|
|
|
655,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4,085,000
|
)
|
|
$
|
-
|
|
For
the six months ended December 31, 2019 and 2018, the Company recorded an income tax expense (benefit) of $4.1 million and $0,
respectively. For the six months ended December 31, 2019 and 2018, the effective rate of 55% and 0% 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.
The
acquisition of Solsys resulted in the recognition of deferred tax liabilities of approximately $4.1 million, related primarily
to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its deferred tax assets.
The deferred tax liabilities generated from the business combination is netted against the Company’s pre-existing deferred
tax assets. Consequently, this resulted in a release of $4.1 million of the pre-existing valuation allowance against the deferred
tax assets and corresponding deferred tax benefit.
Valuation
Allowance on Deferred Tax Assets
Deferred
tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise
be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income,
including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established,
with a corresponding charge to net income.
In
accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are
not more likely-than-not realizable. The guidance requires entities to evaluate all available positive and negative evidence,
including cumulative results in recent periods, weighted based on its objectivity, in determining whether its deferred tax assets
are more likely than not realizable.
The
Company regularly assesses its ability to realize its deferred tax assets. The Company is in a three-year cumulative loss position
at June 30, 2019, and it expects to be in a cumulative pretax loss position as of June 30, 2020. Management evaluated available
positive evidence, including the continued growth of the Company’s revenues and gross profit margins, the completion of
the development of its next generation Nexus product, its SonaStar technology license to its Chinese partner and the reduction
in investigative and professional fees, along with available negative evidence, including the Company’s continuing investment
in building a direct sales force and payment of transaction fees for the Company’s Solsys Acquisition. After weighing both
the positive and negative evidence, management concluded that the Company’s deferred tax assets are not more likely-than-not
realizable. Accordingly, the Company recorded an increase in the valuation allowance for the three months ended December 31, 2019
of approximately $1.3 million against its remaining deferred tax assets at December 31, 2019. As a result of the Solsys Acquisition,
the Company recorded a valuation allowance release of approximately $4.1 million. The remaining cumulative valuation allowance
at December 31, 2019 is approximately $3.1 million. The Company will continue to assess its ability to utilize its net operating
loss carryforwards, and will reverse this valuation allowance when sufficient evidence is achieved to allow the realizability
of such deferred tax assets.
As
of December 31, 2019 and June 30, 2019, the Company had no material unrecognized tax benefits or accrued interest and penalties.
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 and wound care
products. The Company’s products are relatively consistent and manufacturing is centralized and consistent across
product offerings. However, based on the Solsys Acquisition, the Company is currently evaluating its business to conclude as
to whether it operates in more than one segment.
Worldwide
revenue for the Company’s product revenue is categorized as follows:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
15,258,713
|
|
|
$
|
6,078,554
|
|
|
$
|
21,803,621
|
|
|
$
|
11,487,878
|
|
International
|
|
|
4,463,273
|
|
|
|
4,097,899
|
|
|
|
9,064,287
|
|
|
|
8,049,739
|
|
Total
|
|
$
|
19,721,986
|
|
|
$
|
10,176,453
|
|
|
$
|
30,867,908
|
|
|
$
|
19,537,617
|
|
Substantially
all of the Company’s long-lived assets are located in the United States.
Solsys
Medical, LLC
On
September 27, 2019, the Company completed the Solsys Acquisition. The purchase price was approximately $108.6 million, based on
the Company’s issuance of 5,703,082 shares of Misonix common stock as acquisition consideration, valued at $19.05 per share.
In addition, business transaction costs incurred in connection with the acquisition were $4.5 million, of which $1.8 million and
were incurred in the six months ended December 31, 2019. These fees were charged to general and administrative expenses on the
Statement of Operations. In addition, approximately $1.4 million of the transaction costs were capitalized to additional paid
in capital, in connection with the registration of the underlying stock issued in the transaction.
The
transaction was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805. U.S. GAAP requires
that one of the companies in the transactions be designated as the acquirer for accounting purposes based on the evidence available.
Misonix was treated as the acquiring entity for accounting purposes.
The
preliminary Solsys purchase price allocation as of September 27, 2019, is shown in the following table:
Cash
|
|
$
|
5,525,601
|
|
Accounts receivable
|
|
|
5,480,890
|
|
Inventory
|
|
|
98,911
|
|
Prepaid expenses
|
|
|
88,863
|
|
Property and equipment
|
|
|
673,353
|
|
Lease assets
|
|
|
946,617
|
|
Indemnified assets
|
|
|
250,000
|
|
Customer relationships
|
|
|
7,400,000
|
|
Trade names
|
|
|
12,800,000
|
|
Non-competition agreements
|
|
|
200,000
|
|
Accounts payable and other current liabilities
|
|
|
(4,794,878
|
)
|
Lease liabilities
|
|
|
(858,111
|
)
|
Deferred tax liability
|
|
|
(4,085,000
|
)
|
Notes payable
|
|
|
(23,915,701
|
)
|
Total identifiable net assets
|
|
|
(189,455
|
)
|
Goodwill
|
|
|
108,833,165
|
|
Total consideration
|
|
$
|
108,643,710
|
|
The
fair values of the Solsys assets and liabilities are provisional and were determined based on preliminary estimates and assumptions
that management believes are reasonable. The preliminary purchase price allocation is subject to further refinement and may require
significant adjustments to arrive at the final purchase price allocation. These adjustments will primarily relate to certain short-term
assets, intangible assets, and certain liabilities. The final determination of the fair value of certain assets and liabilities
will be completed as soon as the necessary information is available, including the completion of a valuation of the tangible and
intangible assets, but no later than one year from the acquisition date.
The
goodwill from the acquisition of Solsys, which is fully deductible for tax purposes, consists largely of synergies and economies
of scale expected from combining the operations of Solsys and the Company’s existing business.
The
estimate of fair value of the Solsys identifiable intangible assets was determined primarily using the “income approach,”
which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings
method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset
values include: the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows, the assessment of the intangible asset’s life cycle, as well as other factors. The following table
summarizes key information underlying intangible assets related to the Solsys Acquisition:
|
|
December 31,
|
|
|
June 30,
|
|
|
Amortization
|
|
|
2019
|
|
|
2019
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
7,400,000
|
|
|
$
|
-
|
|
|
15 years
|
Trade names
|
|
|
12,800,000
|
|
|
|
-
|
|
|
15 years
|
Non-competition agreements
|
|
|
200,000
|
|
|
|
-
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,400,000
|
|
|
$
|
-
|
|
|
|
Solsys’
operations were consolidated with those of the Company for the period September 27, 2019 through December 31, 2019. Had the acquisition
occurred as of the beginning of fiscal 2018, revenue and net loss, on a pro forma basis excluding transaction fees and the one
time tax benefit, for the combined company would have been as follows:
|
|
For the six months ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
39,212,703
|
|
|
$
|
21,890,347
|
|
Net loss
|
|
$
|
(9,246,809
|
)
|
|
$
|
(5,161,602
|
)
|
17.
Subsequent Events
On
January 27, 2020, the Company completed an offering of its equity securities, resulting in net proceeds to the Company of $32.5
million. The Company issued 1,868,750 shares of its common stock at a price of $18.50 per share.