This Management's Discussion and Analysis of Financial Condition and Results of
Operations of Misonix and its subsidiaries, which we refer to as the "Company",
"Misonix", "we", "our" and "us", should be read in conjunction with the
accompanying unaudited financial statements included in Part I - Item 1
"Financial Statements" of this Report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K, filed with the Securities and Exchange Commission (the "SEC") on
September 3, 2020, for the fiscal year ended June 30, 2020 ("2020 Form 10-K").
Item 7 of the 2020 Form 10-K describes the application of our critical
accounting policies, for which there have been no significant changes during the
three months ended September 30, 2020.
Forward Looking Statements
In this document, we refer to Misonix, Inc. and its subsidiaries (unless the
context otherwise requires) as "we," "our," "us," the "Company" or "Misonix."
With the exception of historical information contained in this Form 10-Q,
content herein may contain "forward looking statements" that are made pursuant
to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations and are
subject to uncertainty and changes in circumstances. Investors are cautioned
that forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the statements made. These factors
include general economic conditions, the impact of COVID-19, or other pandemics,
including any increased rates in infection, and the impact of related
governmental, individual and business responses. This includes our ability to
obtain or forecast accurate surgical procedure volume in the midst of the
COVID-19 pandemic; the risk that the COVID-19 pandemic could lead to further
material delays and cancellations of, or reduced demand for, surgical
procedures; curtailed or delayed capital spending by hospitals and surgical
centers; potential closures of our facilities; delays in gathering clinical
evidence; diversion of management and other resources to respond to the COVID-19
outbreak; the impact of global and regional economic and credit market
conditions on healthcare spending; the risk that the COVID-19 virus disrupts
local economies and causes economies in our key markets to enter prolonged
recessions; the ability of our staff to travel to work, our ability to maintain
adequate inventories and delivery capabilities, the impact on our customers and
supply chain, and the impact on demand in general. These forward-looking
statements are also subject to uncertainties and change resulting from delays
and risks associated with the performance of contracts; risks associated with
international sales and currency fluctuations; uncertainties as a result of
research and development; acceptable results from clinical studies, including
publication of results and patient/procedure data with varying levels of
statistical relevancy; risks involved in introducing and marketing new products,
potential acquisitions, consumer and industry acceptance, litigation and/or
court proceedings, including the timing and monetary requirements of such
activities, the timing of finding strategic partners and implementing such
relationships; regulatory risks including clearance of pending and/or
contemplated 510(k) filings; our ability to achieve and maintain profitability
in the our business lines, access to capital, and other factors discussed in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2020, subsequent
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We disclaim any
obligation to update any forward-looking statements
Acquisition of Solsys Medical, LLC
On September 27, 2019, we completed our acquisition of Solsys Medical, LLC
("Solsys"), a medical technology company focused on the regeneration and healing
of soft tissue associated with chronic wounds and surgical procedures. Solsys'
primary product is TheraSkin, a living cell wound therapy indicated to treat all
external wounds from head-to-toe. The purchase price was approximately $108.6
million, representing 5,703,082 shares of Misonix common stock, 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. The results of operations of Solsys
are included in our Consolidated Statement of Operations beginning on September
27, 2019.
Overview
We design, manufacture and market minimally invasive surgical ultrasonic medical
devices. These products are used for precise bone sculpting, removal of soft and
hard tumors, and tissue debridement, primarily in the areas of neurosurgery,
orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery. We
also exclusively market, sell and distribute TheraSkin in the United States,
through an agreement with LifeNet Health, or LifeNet. TheraSkin is a
biologically active human skin allograft that has all of the relevant
characteristics of human skin, including living cells, growth factors, and a
collagen matrix, needed to heal wounds, and which complements our ultrasonic
medical devices. TheraSkin is derived from human skin tissue from consenting and
highly screened donors and is manufactured by LifeNet.
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We strive to have our proprietary procedural solutions become the standard of
care and enhance patient outcomes throughout the world. We intend to accomplish
this, in part, by utilizing our best-in-class surgical ultrasonic technology to
improve patient outcomes in spinal surgery, neurosurgery and wound care. Our
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 our three legacy ultrasonic
products into a single system that can be used to perform soft and hard tissue
resections. We continue 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.
These devices primarily serve the following clinical specialties: neurosurgery,
orthopedic surgery, general surgery, plastic surgery, wound care and
maxillo-facial surgery.
In the United States, we sell our products through our direct sales force, in
addition to a network of commissioned agents assisted by Misonix personnel.
Outside of the United States, we sell BoneScalpel and SonaStar through
distributors who then resell the products to hospitals. We sell to all major
markets in the Americas, Europe, Middle East, Asia Pacific, and Africa.
We manufacture and sell our products in two global reportable business segments:
the Surgical segment (consisting of our BoneScalpel and SonaStar products) and
the Wound segment (consisting of our SonicOne, TheraSkin and Therion products).
Our sales force also operates as two segments, Surgical and Wound Care.
Impact of COVID-19 Pandemic
In March of 2020, the World Health Organization designated the novel coronavirus
disease (COVID-19) as a global pandemic. In March of 2020, the impact of
COVID-19 and related actions to attempt to control its spread began to impact
our consolidated operating results. Principally beginning in March 2020,
year-over-year consolidated revenue trends began to weaken rapidly and
materially. We expect consolidated revenue to continue to be impacted negatively
and materially in fiscal 2021 and for negative impacts to continue until
COVID-19 and related economic and medical conditions improve.
As these events developed, we executed on our business continuity plans and our
crisis management response to address the challenges related to the COVID-19
pandemic. Since March, our headquarters remained open, however, most of our
employees have been working from home, with only certain essential employees not
working remotely. For employees who are not working remotely, we have instituted
social distancing protocols, increased the level of cleaning and sanitizing at
those sites and undertaken other actions to make these sites safer. We have also
significantly reduced employee travel to only essential business needs. We are
generally following the requirements and protocols published by the U.S. Centers
for Disease Control and the World Health Organization, and state and local
governments. We cannot predict when or how we will begin to lift the actions put
in place as part of our business continuity plans, including work from home
requirements and travel restrictions. As of the date of this filing, we do not
believe our work from home protocol has adversely affected our internal
controls, financial reporting systems or our operations.
Our sales teams are focused on how to meet changing needs of our customers in
this environment.
As a result of the COVID-19 pandemic, we experienced a disruption to our global
supply chain of our products and a decrease in sales due to a decrease in
elective surgical procedures. The ultimate effect of these disruptions,
including the extent of their adverse effect on our financial and operational
results, will be impacted by the length of time that such disruptions continue,
which will, in turn, depend on the currently unknown duration of the COVID-19
pandemic and the effect of governmental regulations and other restrictions that
might be imposed in response to the pandemic.
Due to these effects and measures, we have experienced and may continue to
experience significant and unpredictable reductions in the demand for our
products as healthcare customers divert medical resources and priorities towards
the treatment of that disease. In addition, our customers may delay, cancel, or
redirect planned capital expenditures in order to focus resources on COVID-19 or
in response to economic disruption related to COVID-19. For example, as COVID-19
reached a global pandemic level in March, we experienced significant decline in
procedure volume in the U.S., as healthcare systems diverted resources to meet
the increasing demands of managing COVID-19. In addition, the American College
of Surgeons, U.S. surgeon general, and other public health bodies have
recommended delaying elective surgeries at different times and geographies
during the COVID-19 pandemic, and surgeons and medical societies are evaluating
the risks of minimally invasive surgeries in the presence of infectious
diseases, which we expect will continue to negatively impact the usage of our
product.
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Capital markets and worldwide economies have also been significantly impacted by
the COVID-19 pandemic, and it is possible that it could cause a local and/or
global economic recession. Such economic recession could have a material adverse
effect on our long-term business as hospitals and surgical centers curtail and
reduce capital and overall spending. The COVID-19 pandemic and local actions,
such as "shelter-in-place" orders and restrictions on our salesforce's ability
to travel and access our customers or temporary closures of our facilities or
the facilities of our suppliers and their contract manufacturers, could further
significantly reduce our sales and our ability to ship our products and supply
our customers. We are 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. Any of these events could negatively impact the number of surgical
procedures performed using our products and have a material adverse effect on
our business, financial condition, results of operations, or cash flows. The
COVID-19 impact on the capital markets could negatively affect our ability and
cost to borrow under financing arrangements. There are certain limitations on
our ability to mitigate the adverse financial impact of these items, including
the fixed costs of our businesses. COVID-19 also makes it more challenging for
management to estimate future performance of our businesses, particularly over
the near to medium term. As a response to the ongoing COVID-19 pandemic, we have
implemented plans to manage our costs. We have implemented a hiring freeze, a
reduction of base salaries for all staff with a title of director and above, a
reduction in personnel, and have significantly limited the addition of third
party contracted services, travel, except where necessary to meet customer or
regulatory needs, and discretionary spending. To the extent the business
disruption continues for an extended period, additional cost management actions
will be considered.
We are closely monitoring the impact of COVID-19 on all aspects of our business
and geographies, including its impact on our customers, employees, suppliers,
business partners, and distribution channels. The extent to which the COVID-19
global pandemic impacts our business, results of operations, and financial
condition will depend on future developments, which are highly uncertain and are
difficult to predict; these developments include, but are not limited to, the
duration and spread of the outbreak, its severity, the actions taken to contain
the virus or address its impact, U.S. and foreign government actions to respond
to the reduction in global economic activity, and how quickly and to what extent
normal economic and operating conditions can resume. Even after the COVID-19
outbreak has subsided, we may continue to experience materially adverse impacts
on our financial condition and results of operations. The duration and severity
of the resulting economic downturn and the broader impact that COVID-19 could
have on our business, financial condition and operating results remains highly
uncertain.
For more information, see "Item 1A. Risk Factors" in our 2020 Form 10-K - "Our
business and operations could be adversely affected by health epidemics, such as
the recent COVID-19 pandemic, impacting the markets and communities in which we
and our customers operate" and "The COVID-19 global pandemic has disrupted our
operations and if we are unable to re-commence normal operations in the
near-term, we may be out of compliance with certain covenants in our debt
facilities."
Impact of Coronavirus Aid, Relief, and Economic Security Act
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted in March 2020, in response to the COVID-19 pandemic. The CARES Act and
related rules and guidelines include several significant provisions, including
delaying certain payroll tax payments, mandatory transition tax payments, and
estimated income tax payments that we are deferring to future periods.
On April 5, 2020, we applied for an unsecured $5.2 million loan under the
Paycheck Protection Program, or the PPP Loan. The Paycheck Protection Program,
or PPP, was established under CARES Act and is administered by the U.S. Small
Business Administration. On April 10, 2020, the PPP loan was approved and
funded. We entered into a promissory note with JP Morgan Chase evidencing the
unsecured $5.2 million loan. The promissory note has a maturity date of April 4,
2022 and accrues interest at an annual rate of 0.98%. 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. In
accordance with the requirements of the CARES Act, we used the proceeds from the
PPP Loan primarily for payroll costs. 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.
Other than as outlined above, we do not currently expect the CARES Act to have a
material impact on our financial results, including on our annual estimated
effective tax rate or on our liquidity. We will continue to monitor and assess
the impact the CARES Act may have on our business and financial results.
Results of Operations
The following discussion and analysis provides information that our management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein.
Three months ended September 30, 2020 and 2019
Our revenues by category for the three months ended September 30, 2020 and 2019
are as follows:
For the three months ended
September 30, Net change
2020 2019 $ %
Total
Surgical $ 9,099,464 $ 9,611,298 $ (511,834 ) -5.3 %
Wound 8,635,878 1,534,624 7,101,254 462.7 %
Total $ 17,735,342 $ 11,145,922 $ 6,589,420 59.1 %
Domestic:
Surgical $ 6,215,171 $ 5,115,022 $ 1,100,149 21.5 %
Wound 8,528,240 1,429,886 7,098,354 496.4 %
Total $ 14,743,411 $ 6,544,908 $ 8,198,503 125.3 %
International:
Surgical $ 2,884,293 $ 4,496,276 $ (1,611,983 ) -35.9 %
Wound 107,638 104,738 2,900 2.8 %
Total $ 2,991,931 $ 4,601,014 $ (1,609,083 ) -35.0 %
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Revenues
Total revenue increased 59.1% or $6.6 million to $17.7 million in the first
quarter of fiscal 2021, from $11.1 million in the first quarter of fiscal 2020.
The revenue increase is principally attributable to the addition of $7.1 million
of domestic wound product sales, $6.7 million of which is attributable to
TheraSkin, resulting from the Solsys Acquisition. Domestic surgical revenue
increased by 21.5%, or $1.1 million based on strength from our new product,
neXus. International revenue decreased 35.0% or $1.6 million due in part to the
weakness resulting from the COVID-19 pandemic, which impacted international
markets, including China.
Gross profit
Gross profit in the first quarter of fiscal 2021 was 71.2% of revenue,
approximately the same as the 71.0% gross profit margin recorded in the first
quarter of fiscal 2020. The gross profit margin on TheraSkin sales is similar to
our legacy products.
Selling expenses
Selling expenses increased by $5.8 million, or 110.9% to $11.0 million in the
first quarter of fiscal 2021 from $5.2 million in the prior year period. The
increase is primarily due to the acquisition of Solsys on September 27, 2019.
Additional factors impacting selling expenses include increased freight expense
on higher sales, increased depreciation expense from the higher level of
generator consignments to customers, and higher bad debt expense, offset by a
reduction in travel, meals, meetings and trade shows due to the COVID-19
pandemic.
General and administrative expenses
General and administrative expenses increased by $0.2 million, or 5.8% to $4.5
million in the first quarter of fiscal 2021 from $4.2 million in the prior year
period. The increase is primarily due to the acquisition of Solsys on September
27, 2019.
Research and development expenses
Research and development expenses increased by $0.5 million or 62.1% to $1.3
million in the first quarter of fiscal 2021 from $0.8 million in the prior year
period. The increase is primarily due to the acquisition of Solsys on September
27, 2019.
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.
The acquisition of Solsys originally resulted in the recognition of deferred tax
liabilities of approximately $4.1 million in 2019 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.
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Liquidity and Capital Resources
General
Our liquidity position and capital requirements may be impacted by a number of
factors, including the following:
? our ability to generate revenue, including a potential decline in revenue
resulting from COVID-19;
? fluctuations in gross margins, operating expenses and net loss; and
? fluctuations in working capital.
Our primary short-term capital needs, which are subject to change, include
expenditures related to:
? expansion of our sales, marketing and distribution activities;
? expansion of our research and development activities; and
? maintaining sufficient inventory to supply our sales volume.
Fiscal First Quarter of 2020
Working capital at September 30, 2020 was $42 million. For the three months
ended September 30, 2020, cash used in operations was $3.8 million, mainly due
to an increase in inventory of $0.8 million, an increase in accounts receivable
of $2.0 million due to higher sales in the quarter, and from our loss from
operations for the period plus non-cash items, of $1.2 million.
Cash used by investing activities during the three months ended September 30,
2020 was $0.1 million, and consisted of purchases of property, plant and
equipment, as well as acquisition of additional patents.
Cash provided by financing activities during the three months ended September
30, 2020 was $0.8 million, principal from net additional borrowings on our term
loan and revolving credit facility.
We have $7.2 million of debt principal payments due during the next twelve-month
period ending September 30, 2021. We estimate that we will make approximately
$3.4 million in debt interest payments from October 1, 2020 through September
30, 2021.
As of September 30, 2020, we had cash and cash equivalents of approximately
$34.9 million. The COVID-19 global pandemic has negatively impacted the global
economy, disrupted consumer spending and created significant volatility and
disruption of financial markets. As a result, we experienced a significant
decline in revenue since March 2020 and the pandemic has made it more
challenging for management to estimate future performance of our businesses and
liquidity needs, particularly over the near to medium term. However, management
currently believes that we have sufficient cash to finance operations for at
least the next 12 months following the issuance date of the consolidated
financial statements included herein.
We have also been actively monitoring the global outbreak and spread of COVID-19
and taking steps to mitigate the potential risks to us posed by its spread and
related circumstances and impacts. We are focused on navigating these recent
challenges presented by the COVID-19 global pandemic through preserving our
liquidity and managing our cash flow through taking preemptive action to enhance
our ability to meet our short-term liquidity needs. We cannot assure you that
our assumptions used to estimate our liquidity requirements will be correct
because we have never previously experienced this type of disruption to our
operations, and as a consequence, our ability to be predictive is uncertain.
Fiscal First Quarter of 2019
As of September 30, 2019, we had a cash balance of approximately $12.9 million.
Working capital at September 30, 2019 was $21.6 million. For the three-month
period ended September 30, 2019, cash used in operating activities was $5.4
million, mainly due to the release of the valuation allowance on deferred tax
assets of $4.1 million, an increase in inventory of $2.2 million, and an
increase in accounts receivable of $1.9 million, offset by $2.7 million of net
income and other non-cash expenses.
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Cash provided by investing activities for the three-month period ended September
30, 2019 was $5.4 million, primarily due to the cash received upon the
acquisition of Solsys.
Cash provided by financing activities for the three-month period ended September
30, 2019 was $5.0 million resulting from proceeds from borrowings.
Financing Transactions
See Note 12 to our consolidated financial statements included herein for a
summary of our financing transactions.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to us.
Other
In the opinion of management, inflation has not had a material effect on our
operations.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included herein.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires
management to make judgments and estimations that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. We consider our accounting policies relating to goodwill,
intangible assets and income taxes to be critical policies that require
judgments or estimations in their application where variances in those judgments
or estimations could make a significant difference to future reported results.
These critical accounting policies and estimates are more fully discussed in our
2020 Form 10-K.
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