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 market, sell and distribute TheraSkin in the United States, through an
agreement with 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 which
complements our ultrasonic medical devices. TheraSkin is derived from human skin
tissue from consenting and highly screened donors and is manufactured by
LifeNet.
Through an agreement with CryoLife, we market and sell Therion in the United
States. Therion is a skin allograft derived from human placental membrane and is
indicated for use as a cover and barrier for homologous use for wound care and
surgical procedures.
We strive to help 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 change
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 CE mark clearance in July 2019 combines the
capabilities of our three legacy ultrasonic products, namely BoneScalpel®
Surgical System, SonaStar® Surgical Aspirator, and SonicOne® Wound Cleansing and
Debridement System, into a single system that can be used to perform soft and
hard tissue resections.
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 generally sell to distributors who then resell
the products to hospitals. Our sales force operates as two groups, Surgical
(neurosurgery and spinal surgery) and Wound Care. We sell to all major markets
in the Americas, Europe, Middle East, Asia Pacific, and Africa. We operate with
two business segments.
Acquisition of Solsys Medical, LLC
On September 27, 2019, we completed our acquisition of 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.
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 affect
our consolidated operating results negatively. Principally beginning in March
2020, year-over-year consolidated revenue trends began to rapidly and materially
weaken. 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 conditions improve.
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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 in
those sites, and undertaken other actions to make these sites safer. We have
also substantially eliminated 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 have 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 impact of governmental regulations and other restrictions that
might be imposed in response to the pandemic.
Due to these impacts 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 through June 2020, we experienced a
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 at times delaying elective surgeries
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.
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 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
affect our sales and our ability to ship our products and supply our customers
in a negative manner. Any of these events could negatively affect 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 reduce our ability and
increase our 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 implemented a hiring
freeze, a temporary reduction of base salaries for all staff with a title of
director and above, implemented a reduction in personnel and significantly
limited the addition of third party contracted services, limited all travel
except where necessary to meet customer or regulatory needs, and acted to limit
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 effect 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 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 effects
on our financial condition and results of operations. The duration and severity
of the resulting economic downturn and the broader effect that COVID-19 could
have on our business, financial condition and operating results, remains highly
uncertain.
For more information, see "Item 1. Business- Impact of Covid-19 Pandemic" and
"Item 1A. Risk Factors.
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. Unless otherwise specified, this discussion relates
solely to our continuing operations.
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Fiscal years ended June 30, 2020 and 2019
Our revenues by segment for the two years ended June 30, 2020 are as follows:
For the years ended
June 30, Net change
2020 2019 $ %
Total
Surgical $ 34,457,631 $ 33,415,333 $ 1,042,298 3.1 %
Wound 28,026,020 5,433,158 22,592,862 415.8 %
Total $ 62,483,651 $ 38,848,491 $ 23,635,160 60.8 %
Domestic:
Surgical $ 20,874,419 $ 18,048,956 $ 2,825,463 15.7 %
Wound 27,678,534 4,926,752 22,751,782 461.8 %
Total $ 48,552,953 $ 22,975,708 $ 25,577,245 111.3 %
International:
Surgical $ 13,583,212 $ 15,366,377 $ (1,783,165 ) -11.6 %
Wound 347,486 506,406 (158,920 ) -31.4 %
Total $ 13,930,698 $ 15,872,783 $ (1,942,085 ) -12.2 %
Revenues
Revenues increased 60.8% or $23.6 million to $62.5 million in fiscal 2020 from
$38.8 million in fiscal 2019.
The revenue increase is principally attributable to the addition of $22.8
million of domestic wound product sales of TheraSkin resulting from the Solsys
acquisition, with no TheraSkin revenue in the prior year. Domestic surgical
revenue increased 15.7% based on strength from our new product, Nexus, and
offset by the impacts of the COVID-19 virus.
International revenue, which is principally from the Surgical segment, decreased
12.2% in part due to the weakness resulting from the COVID-19 virus, which
affected international markets in the third and fourth quarters of fiscal 2020.
Revenue from both domestic and international operations from June 30, 2020
through the date of this filing have continued to be affected negatively in
different regions of the United States and around the world, as hospitals have
cancelled elective surgical procedures due to COVID-19. We are not currently
able to predict when this trend will reverse.
Gross profit
The gross profit percentage on product sales was 70.0% in fiscal 2020, compared
with 70.2% in fiscal 2019. The gross profit margin on TheraSkin sales is about
the same as our legacy products.
Selling expenses
Selling expenses increased by $21.8 million, or 119.3% to $40.2 million in
fiscal 2020 from $18.3 million in fiscal 2019. The increase is primarily due to
our acquisition of Solsys on September 27, 2019. Additional factors impacting
selling expenses include higher compensation costs, consulting, Nexus product
launch costs, travel related expenses resulting from the continued build out of
our direct sales force, increased freight expense on higher sales, and
additional bad debt expense of $2.5 million, principally relating to the
Company's accounts receivable from China, offset by lower commissions to
distributors resulting from the transition of accounts from distributors to the
direct sales force. Selling expenses were lower in our fourth quarter as a
result of our cost reduction efforts related to the COVID-19 virus.
General and administrative expenses
General and administrative expenses increased $6.1 million to $18.0 million in
fiscal 2020 from $11.9 million in fiscal 2019. The increase is primarily due to
our acquisition of Solsys on September 27, 2019. In addition, during the second
quarter of fiscal 2020, we recorded a $960,000 non-cash reserve relating to a
contract asset. This asset relates to future royalty payments from our Chinese
distributor of SonaStar, which we believe will be uncollectible.
Research and development expenses
Research and development expenses increased by $0.4 million, or 10% to $4.9
million in fiscal 2020 from $4.5 million in the prior year period. Research and
development expenses increased as a result of our acquisition of Solsys on
September 27, 2019, offset by a decrease in our Nexus development expenses.
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Other expense
Other expense increased to $2.5 million in fiscal 2020 from other income of $0.1
million in fiscal 2019. The increase of $2.6 million is related to interest
expense, which is primarily due to new debt facilities relating to our
acquisition of Solsys on September 27, 2019.
Income taxes
For the fiscal years ended June 30, 2020 and 2019, we recorded an income tax
expense (benefit) of $(4.5) million and $0.029 million, respectively. We
purchased Solsys Medical, LLC on September 27, 2019. The acquisition of Solsys
resulted in the recognition of deferred tax liabilities of approximately $4.6
million, which 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 a cumulative $4.5 million of the pre-existing
valuation allowance against the deferred tax assets and corresponding deferred
tax benefit.
The components of the tax provision are as follows:
Year ended June 30,
2020 2019
Tax at federal statutory rates $ (4,600,276 ) $ (1,541,883 )
State income taxes, net of federal benefit (482,344 ) 22,552
Research credit (112,468 ) (186,761 )
Permanent differences 145,107 61,039
Transaction Costs 120,401 293,256
Long-term Contracts - 201,600
Valuation allowance 5,006,509 1,194,917
Solsys acquisition (4,575,507 )
Other (16,173 )
$ (4,498,578 ) $ 28,547Liquidity 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 2020
Working capital at June 30, 2020 was $47.4 million. For fiscal 2020, cash used
in operations was $26.7 million, mainly due to our net loss of $17.4 million, an
increase in inventory of $10.9 million, an increase in accounts receivable of
$1.8 million, and a decrease in accounts payable and accrued expenses of $1.0
million, offset by $4.7 million of non-cash expenses.
Cash provided by investing activities for fiscal 2020 was $5.1 million,
primarily consisting of cash provided by the acquisition of Solsys of $5.5
million, offset by the purchase of property, plant and equipment of $0.3 million
and cash outflows from filing for additional patents of $0.1 million.
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Cash provided by financing activities was $51.7 million for fiscal 2020,
primarily consisting of net cash of $32 million from an offering of our equity
securities, $1.4 million of transaction fees relating to the Solsys acquisition,
and net long-term debt borrowings of $19.8 million, in addition to $1.2 million
in proceeds received from the exercise of stock options.
As of June 30, 2020, we had a cash balance of approximately $38 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.
Fiscal 2019
As of June 30, 2019, the Company had a cash balance of approximately $7.8
million.
Working capital at June 30, 2019 was $13.5 million. For fiscal 2019, cash used
in operations was $3.7 million, mainly due to the Company's net loss of $7.4
million and an increase in inventory of $3.2 million, offset by an increase in
accounts payable and accrued expenses of $3.1 million, and $4.0 million of
non-cash expenses.
Cash used in investing activities was $0.8 million, primarily consisting of the
purchase of property, plant and equipment along with filing for additional
patents.
Cash provided by financing activities was $1.4 million for fiscal 2019,
resulting from the exercise of stock options.
Financing Transactions
In connection with the consummation of our recent Solsys acquisitions and our
efforts to strengthen our balance sheet, we undertook several financing
transactions in the fiscal year ended June 30, 2020. For a detailed description
of these transactions please see the notes to our audited consolidated financial
statements included elsewhere herein.
On September 27, 2019, we entered into an amended and restated credit agreement,
or (as amended and supplemented from time to time) the SWK Credit Agreement,
with SWK Holdings Corporation, or SWK, pursuant to a commitment letter whereby
SWK (a) consented to the acquisition of Solsys and (b) agreed to provide
financing to us. Through the acquisition of Solsys, we became party to a $20.2
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. On December 23, 2019, the parties amended the
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.
The maturity date of the Amended SWK Credit Agreement remains June 30, 2023. On
June 30, the parties amended the SWK Credit Agreement, (as so amended, the
"Amended SWK Credit Agreement") to modify the minimum aggregate revenue and
minimum EBITDA financial covenants thereunder. The modified terms under the
Amended SWK Credit Agreement reduce the minimum aggregate revenue requirements
through December 31, 2021 and reduce the minimum EBITDA requirements through
June 30, 2021. As of June 30, 2020, the outstanding principal balance of the
term loans under the Amended SWK Credit Agreement is approximately $30.1
million.
Through the acquisition of Solsys, we also became party to a $5.0 million
revolving line of credit loan agreement with Silicon Valley Bank, originally
effective January 22, 2019, or (as amended and supplemented from time to time)
the Prior Solsys Credit Agreement. The line of credit had an original maturity
date of January 22, 2021. On December 26, 2019, we entered into a Loan and
Security Agreement, or (as amended and supplemented from time to time) the New
Loan and Security Agreement, among us and our wholly-owned subsidiaries, Misonix
OpCo, Inc. and Solsys, as borrowers, and Silicon Valley Bank. The New Loan and
Security Agreement provides for a revolving credit facility, or 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. We did not incur any early
termination penalties in connection with the termination of the Prior Solsys
Credit Agreement.
On June 30, the parties amended the New Loan and Security Agreement (as so
amended, the "Amended SVB Loan Agreement") to modify the minimum aggregate
revenue and minimum EBITDA financial covenants thereunder. The Second SVB
Modification reduces the minimum aggregate revenue requirements through December
31, 2021 and reduces the minimum EBITDA requirements through June 30, 2021.
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. As of June 30,
2020, the outstanding principal balance of the New Credit Facility is $8.4
million.
On January 27, 2020, we completed an underwritten public offering of 1,868,750
shares of our common stock at a price to the public of $18.50 per share. The
gross proceeds of the offering were $34.6 million. We intend to use the proceeds
of the offering for general corporate purposes, which may include investment in
sales and marketing initiatives and funding growth opportunities such as
collaborations and acquisitions of complementary products or technologies.
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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 the recently congressionally approved Coronavirus
Aid, Relief, and Economic Security Act, or the 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.
Commitments
We have commitments under operating leases that we plan to fund from operating
sources. At June 30, 2020, our contractual cash obligations and commitments
relating to operating leases and other purchase commitments are as follows:
Less than After
Commitment 1 year 1-3 years 4-5 years 5 years Total
Long-term debt $ 5,099,744 $ 38,595,505 $ - $ - $ 43,695,249
Operating leases 519,174 742,008 115,067 - 1,376,249
Purchase commitments 4,460,083 - - - 4,460,083
$ 10,079,001 $ 39,337,513 $ 115,067 $ - $ 49,531,581Off-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 our management, inflation has not had a material effect on our
operations.
Critical Accounting Policies and Use of Estimates
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities, and the reported amounts
of revenues and expenses. Significant estimates affecting amounts reported or
disclosed in the consolidated financial statements include net realizable value
of inventories, valuation of intangible assets including amortization periods
for acquired intangible assets, estimates of projected cash flows and discount
rates used to value intangible assets and test goodwill and intangible assets
for impairment, computation of valuation allowances recorded against deferred
tax assets, and valuation of stock-based compensation. These estimates are based
on historical experience and on various other assumptions that are believed to
be reasonable under the current circumstances. Actual results could differ from
these estimates.
We believe that the following accounting policies, which form the basis for
developing these estimates, are those that are most critical to the presentation
of our consolidated financial statements and require the more difficult
subjective and complex judgments.
Revenue Recognition
We satisfy 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,
or 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 distributor payments to us are not contingent on sales of
our products by the distributor. Accordingly, we recognize 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.
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Revenue derived from consignment agreements is earned as consumables product
orders are fulfilled using the right to invoice practical expedient. Therefore,
revenue is recognized as control passes to the customer, which is typically when
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.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost (determined by the first-in, first-out
method) or net realizable value. At each balance sheet date, we evaluate ending
inventories for excess quantities and obsolescence. Our evaluation includes an
analysis of historical sales levels by product, projections of future demand by
product, the risk of technological or competitive obsolescence for our products,
general market conditions, and the feasibility of reworking or using excess or
obsolete products or components in the production or assembly of other products
that are not obsolete or for which we do not have excess quantities in
inventory. To the extent that we determine there are excess or obsolete
quantities or quantities on hand, we adjust their carrying value to estimated
net realizable value. If future demand or market conditions are lower than our
projections, or if we are unable to rework excess or obsolete quantities into
other products, we may record further adjustments to the carrying value of
inventory through a charge to cost of product revenues in the period the
revision is made.
Purchase Price Accounting
The allocation of the purchase price for business combinations requires
management estimates and judgment as to expectations for future cash flows of
the acquired business and the allocation of those cash flows to identifiable
intangible assets in determining the estimated fair value for purchase price
allocation purposes. If the actual results differ from the estimates and
judgments used in these estimates, the amounts recorded in the consolidated
financial statements could result in a possible impairment of the intangible
assets and goodwill or require acceleration of the amortization expense of
finite-lived intangible assets. In addition, accounting guidance requires that
goodwill and other indefinite-lived intangible assets be tested at least
annually for impairment. If circumstances or events prior to the date of the
required annual assessment indicate that, in management's judgment, it is more
likely than not that there has been a reduction of fair value of a reporting
unit below its carrying value, the Company performs an impairment analysis at
the time of such circumstance or event. Changes in management's estimates or
judgments could result in an impairment charge, and such a charge could have an
adverse effect on the Company's financial condition and results of operations.
Goodwill
The excess of the cost over the fair value of net assets of acquired businesses
is recorded as goodwill. In connection with the acquisition of Solsys, the
Company recorded $106.6 million of Goodwill as of June 30, 2020, $12.7 million
of which is expected to be deductible for tax purposes. The Goodwill recognized
from the Solsys acquisition represents the excess of the purchase price over
aggregate fair value of net assets acquired and is related to the benefits
expected as a result of the acquisition, including sales, and a stronger
portfolio of Wound solutions that will drive growth in the wound care market.
Our Goodwill balance as of each reporting period by segment, includes:
Surgical Wound Total
Balance as of June 30, 2018 $ 1,701,094 $ - $ 1,701,094
Goodwill (gross) - - -
Accumulated impairment losses - - -
Balance as of June 30, 2019 $ 1,701,094 $ - $ 1,701,094
Acquisition of Solsys $ - $ 108,833,165 $ 108,833,165
Purchase price accounting adjustments (2,223,909 ) (2,223,909 )
Goodwill (gross) 1,701,094 106,609,256 108,310,350
Accumulated impairment losses - - -
Balance as of June 30, 2020 $ 1,701,094 $ 106,609,256 $ 108,310,350Goodwill is not subject to amortization but is reviewed for impairment at the
reporting unit level annually, or more frequently if impairment indicators
arise. Our assessment of the recoverability of goodwill is based upon a
comparison of the carrying value of goodwill with its estimated fair value and
the value of the Company at the measurement date.
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We performed our annual impairment test as of March 31 and concluded there was
no impairment to goodwill. As of March 31, 2020, the fair value of the Wound and
Surgical reporting units exceeded their carrying values by more than 10%. The
fair values of the Company's reporting units were estimated considering both the
market approach and the income approach. The Market approach provides an
indication of value based on a comparison to recent sales. The income approach
is based upon the estimated future income streams associated with each reporting
unit. 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 our businesses, the useful lives
over which cash flows will occur and determination of our weighted average cost
of capital. If actual results are not consistent with management's estimate and
assumptions, a material impairment charge of Goodwill could occur, which would
have a material adverse effect on our consolidated financial statements.
There were no triggering events in the fourth quarter 2020 that would cause the
Company to re-evaluate its impairment analysis.
Income Taxes
We assess whether a valuation allowance should be established against our
deferred tax assets based on consideration of all available evidence, both
positive and negative, using a more likely than not standard. This assessment
considers, among other matters, the nature, frequency and severity of recent
losses; a forecast of future profitability; the duration of statutory carryback
and carryforward periods; our experience with tax attributes expiring unused;
and tax planning alternatives. The likelihood that the deferred tax asset
balance will be recovered from future taxable income is assessed at least
quarterly, and the valuation allowance, if any, is adjusted accordingly.
Loss Contingencies
We are subject to claims and lawsuits in the ordinary course of our business,
including claims by employees or former employees, with respect to our products
and involving commercial disputes, or shareholder actions. We accrue for loss
contingencies when it is deemed probable that a loss has been incurred and that
loss is estimable. The amounts accrued are based on the full amount of the
estimated loss before considering insurance proceeds, if applicable, and do not
include an estimate for legal fees expected to be incurred in connection with
the loss contingency. Our consolidated financial statements do not reflect any
material amounts related to possible unfavorable outcomes of claims and lawsuits
to which we are currently a party because we currently believe that such claims
and lawsuits are not expected to result in a material adverse effect on our
financial condition. However, it is possible that these contingencies could
materially affect our results of operations, financial position and cash flows
in a particular period if we change our assessment of the likely outcome of
these matters.
Stock-Based Compensation
We recognize compensation expense associated with the issuance of equity
instruments to employees for their services. Based on the type of equity
instrument, the fair value is estimated on the date of grant using the
Black-Scholes option valuation model, is expensed in the consolidated financial
statements over the service period and is recorded in general and administrative
expenses. The input assumptions used in determining fair value are the expected
life, expected volatility, risk-free rate and expected dividend yield.
On December 15, 2016, we issued 400,000 shares of restricted stock to our Chief
Executive Officer. These awards vest over a period of up to five years, subject
to meeting certain service, performance, and market conditions. We valued these
awards using a Monte Carlo valuation model, which required the use of various
estimates in arriving at the valuation of the awards. The valuation included the
estimate of the probability of achieving the performance criteria, which
included minimum levels of Company stock price and revenue. If the stock price
and performance conditions are not met, some or all of these awards will not
vest and compensation cost recorded, if any, could be reversed.
Recently Issued 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.
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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
consolidated 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 Consolidated Statement of
Operations. 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 consolidated 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. We adopted the optional ASC
842 transition provisions beginning on July 1, 2019. Accordingly, we will
continue to apply Topic 840 prior to July 1, 2019, including Topic 840
disclosure requirements, in the comparative periods presented. We elected the
package of practical expedients for all its leases that commenced before July 1,
2019. We have evaluated our real estate lease, copier leases and generator
rental agreements. The adoption of ASC 842 did not materially affect our
consolidated balance sheet and had an immaterial impact on our results of
operations. Based on our current agreements, upon the adoption of ASC 842 on
July 1, 2019, we 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 our leases. As our leases do not provide an
implicit rate, nor is one readily available, we used our 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.
In May 2014, the FASB, issued ASC Update No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which was subsequently updated ("ASU 2014-09"). The
purpose of the updated standard is to provide enhancements to the quality and
consistency of revenue recognition between companies using U.S. GAAP and
International Financial Reporting Standards. The new five-step recognition model
introduces the core principle of recognizing revenue in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for the
promised goods or services, which includes additional footnote disclosures to
describe the nature, amount, timing and uncertainty of revenue, certain costs
and cash flow arising from customers. As amended, ASU 2014-09 requires us to use
either of the following transition methods: (i) a full retrospective approach
reflecting the application of the standard in each prior reporting period with
the option to elect certain practical expedients; or (ii) a modified
retrospective approach with the cumulative effect of initially adopting ASU
2014-09 recognized at the date of adoption. This standard became effective for
us on July 1, 2018 and we adopted the new pronouncement using the modified
retrospective method.
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