UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File Number: 1-10986

MISONIX, INC.

(Exact name of registrant as specified in its charter)

Delaware		84-1856018
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

1938 New Highway
Farmingdale, New York		11735
(Address of principal executive offices)		(Zip code)

(631) 694-9555

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes ☒ No

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $.0001 par value		MSON		Nasdaq Global Market

Indicate the number of shares outstanding of the issuer’s common stock as of the latest practicable date: As of May 3, 2021, there were 17,406,845 shares of the registrant’s common stock, $.0001 par value, outstanding.

MISONIX, INC.

PART I - FINANCIAL INFORMATION	1

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets (Unaudited)	1

Condensed Consolidated Statements of Operations (Unaudited)	2

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)	3

Condensed Consolidated Statements of Cash Flows (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	25

PART II - OTHER INFORMATION	26

Item 1. Legal Proceedings	26

Item 1A. Risk Factors.	26

Item 6. Exhibits	26

SIGNATURES	27

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Misonix, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	March 31,			June 30,
	2021			2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	30,913,686		$	37,978,809
Accounts receivable, less allowance for doubtful accounts of $2,265,401 and $2,573,968, respectively		12,034,563			11,064,768
Inventories, net		14,413,671			14,010,684
Prepaid expenses and other current assets		785,859			1,668,244
Total current assets		58,147,779			64,722,505

Property, plant and equipment, net of accumulated amortization and depreciation of $14,720,985 and $12,715,917, respectively		8,860,056			7,304,258
Patents, net of accumulated amortization of $1,462,069 and $1,341,976, respectively		763,900			784,318
Goodwill		108,234,664			108,310,350
Intangible assets		20,112,955			21,281,136
Lease right-of-use assets		1,108,454			1,098,830
Other assets		307,909			322,310
Total assets	$	197,535,717		$	203,823,707

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	5,850,797		$	4,273,568
Accrued expenses and other current liabilities		7,862,497			7,515,751
Current portion of lease liabilities		508,924			414,058
Current portion of notes payable		4,621,766			5,099,744
Total current liabilities		18,843,984			17,303,121

Non-current liabilities:
Notes payable		38,773,482			38,595,505
Lease liabilities		645,804			723,553
Deferred tax liabilities		33,293			33,293
Other non-current liabilities		227,599			516,665
Total liabilities		58,524,162			57,172,137

Commitments and contingencies		-

Shareholders’ equity
Common stock, $.0001 par value; shares authorized 40,000,000; 17,405,845 and 17,369,435 shares issued and outstanding in each period		1,741			1,737
Additional paid-in capital		188,321,138			185,961,104
Accumulated deficit		(49,311,324	)		(39,311,271	)
Total shareholders’ equity		139,011,555			146,651,570

Total liabilities and shareholders’ equity	$	197,535,717		$	203,823,707

See Accompanying Notes to Condensed Consolidated Financial Statements

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

	2021			2020			2021			2020
	For the three months ended						For the nine months ended
	March 31,						March 31,
	2021			2020			2021			2020

Revenue	$	18,347,180		$	17,902,512		$	54,338,932		$	48,770,419
Cost of revenue		5,402,754			5,311,565			15,778,053			14,493,321
Gross profit		12,944,426			12,590,947			38,560,879			34,277,098

Operating expenses:
Selling expenses		10,891,292			11,609,943			30,284,046			28,611,090
General and administrative expenses		3,631,175			4,463,467			12,002,453			13,820,989
Research and development expenses		1,317,036			1,842,837			3,535,587			3,701,697
Total operating expenses		15,839,503			17,916,247			45,822,086			46,133,776
Loss from operations		(2,895,077	)		(5,325,300	)		(7,261,207	)		(11,856,678	)

Other income (expense):
Interest income		4,519			37,785			8,531			61,954
Interest expense		(866,464	)		(755,528	)		(2,749,292	)		(1,624,659	)
Other		218			(434	)		1,915			(1,578	)
Total other expense		(861,727	)		(718,177	)		(2,738,846	)		(1,564,283	)

Loss from operations before income taxes		(3,756,804	)		(6,043,477	)		(10,000,053	)		(13,420,961	)

Income tax benefit		-			455,000			-			4,540,000

Net loss	$	(3,756,804	)	$	(5,588,477	)	$	(10,000,053	)	$	(8,880,961	)

Net loss per share:
Basic	$	(0.22	)	$	(0.34	)	$	(0.58	)	$	(0.64	)
Diluted	$	(0.22	)	$	(0.34	)	$	(0.58	)	$	(0.64	)

Weighted average shares - Basic		17,226,181			16,619,981			17,219,221			13,841,032
Weighted average shares - Diluted		17,226,181			16,619,981			17,219,221			13,841,032

See Accompanying Notes to Condensed Consolidated Financial Statements

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

	of shares			Amount			capital			deficit			equity
	Common Stock						Additional						Total
	Number						paid-in			Accumulated			shareholders’
	of shares			Amount			capital			deficit			equity

Balance, December 31, 2019		15,491,560		$	1,549		$	152,802,535		$	(25,185,379	)	$	127,618,705
Net loss		-			-			-			(5,588,479	)		(5,588,479	)
Proceeds from exercise of stock options		1,375			-			10,332			-			10,332
Stock registration fees		-			-			(2,497,644	)		-			(2,497,644	)
Equity Offering		1,868,750			187			34,571,875			-			34,572,062
Equity restructuring
Issuance of shares for acquisition of Solsys
Issuance of shares for acquisition of Solsys, shares
Issuance of common stock
Issuance of common stock, shares
Shares released from escrow
Shares released from escrow, shares
Payments for fractional shares released from escrow
Stock-based compensation		-			-			482,203			-			482,203
Balance, March 31, 2020		17,361,685		$	1,736		$	185,369,301		$	(30,773,858	)	$	154,597,179

Balance, June 30, 2019		9,646,728		$	96,468		$	43,500,478		$	(21,892,897	)	$	21,704,049
Net loss		-			-			-			(8,880,961	)		(8,880,961	)
Proceeds from exercise of stock options		143,125			14			1,185,402			-			1,185,416
Equity restructuring		-			(151,964	)		151,964			-			-
Issuance of shares for acquisition of Solsys		5,703,082			57,031			108,586,679			-			108,643,710
Stock registration fees		-			-			(3,859,036	)		-			(3,859,036	)
Equity Offering		1,868,750			187			34,571,875			-			34,572,062
Stock-based compensation		-			-			1,231,939			-			1,231,939
Balance, March 31, 2020		17,361,685		$	1,736		$	185,369,301		$	(30,773,858	)	$	154,597,179

Balance, December 31, 2020		17,377,748		$	1,738		$	187,504,189		$	(45,554,520	)	$	141,951,407
Net loss		-			-			-			(3,756,804	)		(3,756,804	)
Proceeds from exercise of stock options		24,983			3			223,735			-			223,738
Stock-based compensation		-			-			607,693			-			607,693
Issuance of common stock		10,000			-			137,300			-			137,300
Shares released from escrow		(6,886	)		-			(150,000	)		-			(150,000	)
Payments for fractional shares released from escrow		-			-			(1,779	)		-			(1,779	)
Balance, March 31, 2021		17,405,845		$	1,741		$	188,321,138		$	(49,311,324	)	$	139,011,555

Balance, June 30, 2020		17,369,435		$	1,737		$	185,961,104		$	(39,311,271	)		146,651,570
Net loss		-			-			-			(10,000,053	)		(10,000,053	)
Proceeds from exercise of stock options		33,296			4			247,676			-			247,680
Stock-based compensation		-			-			2,126,837			-			2,126,837
Issuance of common stock		10,000			-			137,300			-			137,300
Shares released from escrow		(6,886	)		-			(150,000	)		-			(150,000	)
Payments for fractional shares released from escrow		-			-			(1,779	)		-			(1,779	)
Balance, March 31, 2021		17,405,845		$	1,741		$	188,321,138		$	(49,311,324	)	$	139,011,555

See Accompanying Notes to Condensed Consolidated Financial Statements

Misonix, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	2021			2020
	For the nine months ended
	March 31,
	2021			2020

Operating activities
Net loss	$	(10,000,053	)	$	(8,880,961	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Depreciation and amortization		3,297,747			2,447,359
Rent expense from operating lease right-of-use asset		450,392			354,810
Bad debt expense		547,212			207,010
Reserve for contract asset		-			960,000
Stock-based compensation		2,126,837			1,231,939
Issuance of common stock		137,300			-
Release of valuation allowance on deferred tax assets		-			(4,540,000	)
Changes in operating assets and liabilities:
Accounts receivable		(1,191,558	)		(3,317,969	)
Inventories		(3,929,284	)		(9,000,757	)
Prepaid expenses and other current assets		732,385			(852,408	)
Operating leases and other assets		(432,904	)		617,028
Accounts payable, accrued expenses and other		1,393,212			(537,552	)
Net cash used in operating activities		(6,868,714	)		(21,311,501	)

Investing activities
Acquisition of property, plant and equipment		(34,569	)		(304,855	)
Additional patents		(99,675	)		(104,694	)
Cash from acquisition of Solsys Medical, LLC		-			5,525,601
Net cash (used in) provided by investing activities		(134,244	)		5,116,052

Financing activities
Proceeds from notes payable		25,900,000			28,750,000
Repayments of notes payable		(26,200,001	)		(12,569,940	)
Proceeds from exercise of stock options		247,680			1,185,416
Stock registration and investment bank fees		-			(3,859,036	)
Proceeds from equity offering		-			34,572,062
Payments of finance lease		(8,065	)		-
Payments for fractional shares released from escrow		(1,779	)		-
Net cash (used in) provided by financing activities		(62,165	)		48,078,502

Net (decrease) increase in cash and cash equivalents		(7,065,123	)		31,883,053
Cash and cash equivalents at the beginning of the period		37,978,809			7,842,403
Cash and cash equivalents at the end of the period	$	30,913,686		$	39,725,456

Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$	2,663,206		$	1,397,191
Income taxes	$	-		$	550
Transfer of inventory to property, plant and equipment for consignment of product	$	3,526,297		$	3,536,488
Stock issued for the acquisition of Solsys Medical, LLC	$	-		$	108,643,710
Shares released from escrow	$	150,000		$	-

See Accompanying Notes to Condensed Consolidated Financial Statements

Misonix, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended March 31, 2021 and 2020

(Unaudited)

1. Basis of Presentation, Organization and Business and Summary of Significant Accounting Policies

Basis of Presentation

These Condensed Consolidated Financial Statements of Misonix, Inc. (“Misonix” or the “Company”) include the accounts of Misonix and its subsidiaries, each of which is 100% owned. All significant intercompany balances and transactions have been eliminated.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these Condensed Consolidated Financial Statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. As such, they should be read with reference to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (the “2020 Form 10-K”), which provides a more complete explanation of the Company’s accounting policies, financial position, operating results, business properties and other matters. In the opinion of management, these Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, considered necessary for a fair statement of interim results.

Organization and Business

Misonix designs, manufactures, markets, sells and distributes minimally invasive surgical ultrasonic medical devices and markets, sells and distributes skin allografts and wound care products used to support healing of wounds, and which complement Misonix’s ultrasonic medical devices. Misonix’s ultrasonic products are used for precise bone sculpting, removal of soft and hard tumors and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, general surgery, plastic surgery, wound care and maxillo-facial surgery.

The Company strives to have its proprietary procedural solutions become the standard of care and enhance patient outcomes throughout the world. The Company intends to accomplish this, in part, by utilizing its best-in-class surgical ultrasonic technology to improve patient outcomes in spinal surgery, neurosurgery and wound care. The Company’s neXus generator combines the capabilities of its three legacy ultrasonic products into a single system that can be used to perform soft and hard tissue resections. The Company continues to market and sell these legacy ultrasonic products, which are:

	●	BoneScalpel Surgical System, or BoneScalpel, which is used for surgical procedures involving the precise cutting and sculpting of bone while sparing soft tissue. BoneScalpel is now recognized by many surgeons globally as a critical surgical tool enabling improved patient outcomes in the spine surgery arena.

	●	SonaStar Surgical Aspirator, or SonaStar, which is used to emulsify and remove soft and hard tumors, primarily in the neuro and general surgery fields.

	●	SonicOne Wound Debridement System, or SonicOne, which offers tissue specific debridement and cleansing of wounds and burns for effective removal of devitalized tissue and fibrin deposits while sparing viable cells.

Each of the Company’s medical device systems consist of a proprietary console and handpiece that function to convert electrical current into ultrasonic energy, ultimately delivered via a disposable titanium tip, to produce a therapeutic effect.

neXus^®

neXus is a next generation integrated ultrasonic surgical platform that combines all the features of the Company’s existing solutions, including BoneScalpel, SonicOne and SonaStar, into a single fully integrated platform that will also serve to power future solutions. The neXus platform is driven by a new proprietary digital algorithm that results in more power, efficiency, and control. The device incorporates Smart Technology that allows for easier setup and use.

neXus’ increased power improves tissue resection rates for both soft and hard tissue removal making it a unique surgical platform for a variety of different surgical specialties. In addition, neXus’ ease of use enables physicians to fully leverage neXus’ impressive set of capabilities via its digital touchscreen display and smart system setup. The Company’s current ultrasonic applications; BoneScalpel, SonaStar and SonicOne all work on the neXus generator. This allows a hospital to access all of the Company’s product offerings on this all in one console. neXus received FDA 510(k) clearance in June 2019 and received its CE mark clearance in July 2019 for sale in Europe. neXus is principally sold in the United States.

BoneScalpel®

The BoneScalpel is a state of the art, ultrasonic bone cutting and sculpting system capable of enabling precise cuts with minimal necrosis, minimal burn artifact, minimal inflammation and minimal bone loss. The device is also capable of preserving surrounding soft tissue structures because of its ability to differentiate soft tissue from rigid bone. This device can make precise linear or curved cuts, on any plane, with precision not normally associated with powered instrumentation. The Company believes BoneScalpel offers the speed and convenience of a powered instrument without the dangers associated with conventional rotary devices. The effect on surrounding soft tissue is minimal due to the elastic and flexible structure of healthy tissue. This is a significant advantage in anatomical regions like the spine where patient safety is of primary concern. In addition, the linear motion of the blunt, tissue-impacting tips avoids accidental ‘trapping’ of soft tissue while largely eliminating the high-speed spinning and tearing associated with rotary power instruments. The BoneScalpel allows surgeons to improve on existing surgical techniques by creating new approaches to bone cutting and sculpting and removal, leading to substantial time-savings and increased operation efficiencies.

SonaStar®

The SonaStar System provides powerful and precise aspiration following the ultrasonic ablation of soft tissue. The SonaStar has been used for a wide variety of surgical procedures applying both open and minimally invasive approaches, including neurosurgery and general surgery. The SonaStar may also be used with OsteoSculpt® probe tips, which enable the precise shaping or shaving of bony structures that prevent open access to partially or completely hidden soft tissue masses.

SonicOne®

The SonicOne Ultrasonic Cleansing and Debridement System is a highly innovative, tissue specific approach for the effective removal of devitalized or necrotic tissue and fibrin deposits while sparing viable, surrounding cellular structures. The tissue specific capability is, in part, due to the fact that healthy and viable tissue structures have a higher elasticity and flexibility than necrotic tissue and are more resistant to destruction from the impact effects of ultrasound. The ultrasonic debridement process separates devitalized tissue from viable tissue layers, allowing for a more defined treatment and, usually, a reduced pain sensation. The Company believes SonicOne establishes a new standard in wound bed preparation, the essential first step in the healing process, while contributing to a faster patient healing.

TheraSkin®

TheraSkin is a biologically active human skin allograft that has all of the relevant characteristics of human skin needed to heal wounds, including living cells, growth factors, and a collagen matrix. TheraSkin is derived from human skin tissue from consenting and highly screened donors and is regulated by the FDA as a Human Cells, Tissues, and Cellular and Tissue-Based Product. LifeNet processes and supplies TheraSkin to the Company under a supply and distribution agreement that gives the Company exclusive rights to sell TheraSkin in the United States. TheraSkin is indicated for use on all external skin tissue wounds, including but not limited to difficult to heal diabetic foot ulcers, venous leg ulcers, dehisced surgical wounds, necrotizing fasciitis, burns, Mohs and wounds with exposed structures.

Therion®

Therion is indicated for use as a cover and barrier for homologous use for wound care and surgical procedures. Therion is a dehydrated and terminally sterilized chorioamniotic allograft derived from human placental membrane and is regulated by the FDA as a Human Cells, Tissues, and Cellular and Tissue-Based Product. CryoLife processes and supplies Therion to the Company under a supply and distribution agreement that gives the Company exclusive rights to distribute the product in the United States. CryoLife processes Therion using a proprietary process that removes the maternal-derived decidua cells from the placental membrane, leaving the amnion and chorion layers in their native configuration.

TheraGenesis®

TheraGenesis is a Bilayer Wound Matrix and Meshed Bilayer Wound Matrix consisting of a porcine collagen sponge layer and a silicone film layer that provides a scaffold for cellular invasion and capillary growth for management of wounds including partial and full-thickness wounds, chronic wounds, surgical wounds, trauma wounds and draining wounds. The Company obtains TheraGenesis under an exclusive supply and distribution agreement with Gunze Limited that gives the Company exclusive rights to distribute the product in the United States.

Sales and Distribution; Reportable Segments

In the United States, the Company sells its products through its direct sales force, in addition to a network of commissioned agents assisted by Misonix personnel. Outside of the United States, the Company sells BoneScalpel and SonaStar through distributors who then resell the products to hospitals. The Company sells to all major markets in the Americas, Europe, Middle East, Asia Pacific, and Africa.

The Company manufactures and sells its products in two global reportable business segments: the Surgical segment and the Wound segment. The Company’s sales force also operates as two segments, Surgical and Wound Care.

Risks and Uncertainties

The Company’s business is subject to material risks and uncertainties as a result of the coronavirus (“COVID-19”) pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the response to the pandemic continues to rapidly evolve. As a result of COVID-19, the Company’s customers diverted resources to treat COVID-19 patients and deferred elective surgical procedures, both of which have and are likely to continue to impact demand for the Company’s products. While we expect to see gradual improvement during the remainder of fiscal 2021 as elective surgical procedure volumes return to pre-COVID-19 levels in some jurisdictions, we could experience further variable impacts on our business if a resurgence of the virus emerges and/or elective procedures continue to be deferred. The Company is also monitoring news reports that indicate that several jurisdictions are experiencing new increases in the rate of infection by COVID-19 which could result in further mitigation efforts. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on the Company’s business as hospitals and surgery centers curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions and the Company’s ability to benefit from them remains uncertain.

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be materially and adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. As of the date of issuance of these Condensed Consolidated Financial Statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity, or results of operations is uncertain.

Acquisition of Solsys Medical, LLC

On September 27, 2019, the Company completed the acquisition (the “Solsys Acquisition”) of Solsys Medical, LLC (“Solsys”), a privately held regenerative medical company, in an all-stock transaction valued at approximately $109 million. Solsys is the exclusive marketer and distributor of TheraSkin in the United States, through an agreement with LifeNet Health (“LifeNet”). Solsys owns the TheraSkin® brand name, which was commercially launched in January 2010. As a result of the Solsys Acquisition, the Company became the parent public-reporting company of the combined entity; Misonix, Inc., a New York corporation, now known as Misonix Opco, Inc., and Solsys became direct, wholly owned subsidiaries of the Company. After the completion of the Solsys Acquisition, the Company’s shareholders immediately prior to the closing owned 64% of the combined entity, and Solsys unitholders immediately prior to the closing owned 36%. The Company issued 5,703,082 shares in connection with this transaction. Transaction fees were approximately $4.5 million, of which $1.4 million were capitalized as additional paid in capital in connection with the registration of these shares. The Solsys assets, liabilities and results of operations are included in the Company’s financial statements from the acquisition date.

The Company’s common stock was created with a par value per share of $.0001, whereas the par value of Misonix Opco, Inc. was $.01. Accordingly, the Company recorded a reclassification of $151,964 between common stock and additional paid in capital during the three months ended September 30, 2019 to account for this change.

Major Customers and Concentration of Credit Risk

For the three and nine months ended March 31, 2021 and 2020, the Company did not have any customers exceeding 10% of total revenue.

At March 31, 2021 and June 30, 2020, the Company’s accounts receivable with customers outside the United States were approximately $2.1 million and $2.0 million, respectively, and $0.3 million and $0.8 million were over 90 days past due at March 31, 2021 and June 30, 2020.

If one or more of the Company’s major customers continues to be adversely affected by COVID-19 or otherwise as a result of the current market environment, that may result in a material decline in the Company’s business received from them. Additionally, the Company may face an increased risk of its customers’ inability to make payments or remain solvent.

Earnings Per Share

Earnings per share (“EPS”) is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity’s capital structure includes either two or more classes of common stock or common stock and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. As such, unvested restricted stock awards of the Company are considered participating securities. The dilutive effect of options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the “treasury” method.

Basic income per common share is based on the weighted average number of common shares outstanding during the period. Diluted income per common share includes the dilutive effect of potential common shares outstanding. The following table sets forth the reconciliation of the Company’s basic and diluted earnings per share calculation:

	For the three months				For the nine months
	March 31,				March 31,
	2021		2020		2021		2020

Basic weighted average shares outstanding		17,226,181		16,619,981		17,219,221		13,841,032
Dilutive effect of restricted stock awards (participating securities)		-		-		-		-

Denominator for basic earnings per share		17,226,181		16,619,981		17,219,221		13,841,032

Dilutive effect of stock options		-		-		-		-

Diluted weighted average shares outstanding		17,226,181		16,619,981		17,219,221		13,841,032

Diluted EPS for the three and nine months ended March 31, 2021 as presented is the same as basic EPS as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive. Accordingly, excluded from the calculation of basic and diluted EPS are the dilutive effect of options to purchase 407,413 and 398,920 shares of common stock for the three months ended March 31, 2021 and 2020, respectively, and the dilutive effect of options to purchase 268,495 and 562,388 shares of common stock for the nine months ended March 31, 2021 and 2020, respectively. Also excluded from the calculation of earnings per share for the three and nine months ended March 31, 2021 and 2020 are the unvested restricted stock awards that were issued in December 2016.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. Management is currently assessing the impact that ASU 2016-13 will have on the Company.

There are no other recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Critical Accounting Policies and Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, establishing the allowance for doubtful accounts, valuation of inventory, depreciation, valuation of assets acquired and liabilities assumed in business combinations, asset impairment evaluations, establishing deferred tax assets and related valuation allowances, and stock-based compensation accounting. Actual results could differ from those estimates.

2. Revenue Recognition

The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers, as amended” (“ASC Topic 606”): 1) the Company accounts for amounts collected from customers for sales and other taxes net of related amounts remitted to tax authorities; 2) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; 3) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs fall within selling, general and administrative expenses; 4) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; 5) the Company utilizes 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, Therion and TheraGenesis, and from product supply and 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, SonaStar, and SonicOne to specialty distributors who purchase products to resell to their clinical customer bases. The Company sells to all major markets in the Americas, Europe, Middle East, Asia Pacific, and Africa. Revenue is disaggregated from contracts between products under ship and bill arrangements and licensing agreements, and by geography, which the Company believes best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors.

The Company satisfies performance obligations either over time, or at a point in time, upon which control transfers to the customer.

Revenue derived from the shipping and billing of product is recorded upon shipment, when transfer of control occurs for products shipped freight on board (“F.O.B.”) shipping. Products shipped F.O.B. destination are recorded as revenue when received at the point of destination when the transfer of control is completed. Shipments under agreements with distributors are not subject to return, and payment for these shipments is not contingent on sales by the distributor. Accordingly, the Company recognizes revenue on shipments to distributors in the same manner as with other customers under the ship and bill process.

Revenue derived from the rental of equipment is recorded on a monthly basis over the term of the lease. Shipments of consumable products to these rental customers is recorded as orders are received and shipments are made F.O.B. destination or F.O.B. shipping.

Revenue derived from consignment agreements is earned as consumables product orders are fulfilled. Therefore, revenue is recognized as control passes to the customer, which is typically when shipments are made F.O.B shipping or F.O.B destination.

Revenue derived from service and maintenance contracts is recognized evenly over the life of the service agreement as the services are performed.

The following table disaggregates the Company’s product revenue by sales channel and geographic location:

	For the three months ended				For the nine months ended
	March 31,				March 31,
	2021		2020		2021		2020
Total
Surgical	$	10,351,130	$	9,102,711	$	29,569,718	$	28,702,566
Wound		7,996,050		8,799,801		24,769,214		20,067,853
Total	$	18,347,180	$	17,902,512	$	54,338,932	$	48,770,419

Domestic:
Surgical	$	6,940,825	$	6,052,548	$	19,927,462	$	16,819,950
Wound		7,872,060		8,725,868		24,454,340		19,762,087
Total	$	14,812,885	$	14,778,416	$	44,381,802	$	36,582,037

International:
Surgical	$	3,410,305	$	3,050,163	$	9,642,256	$	11,882,616
Wound		123,990		73,933		314,874		305,766
Total	$	3,534,295	$	3,124,096	$	9,957,130	$	12,188,382

The Company’s international sales include a concentration in China, aggregating $0.4 million and $1.4 million for the three and nine months ended March 31, 2021, respectively, and $0 million and $3.1 million for the three and nine months ended March 31, 2020, respectively.

Beginning with the quarter ended March 31, 2020, Misonix adopted certain changes in its quarterly financial results related to the presentation of its sales performance supplemental data to more accurately reflect the Company’s two separate sales channels - its Surgical and Wound product divisions. The Surgical division includes the Company’s neXus, BoneScalpel and SonaStar product lines, and the Wound division includes the Company’s SonicOne, TheraSkin, Therion, and TheraGenesis product lines. As a result, the Company presents total, domestic and international sales performance supplemental data for its Surgical and Wound divisions. In addition, in the third quarter of 2020, the Company began operating in two business segments, and disclosing the Surgical and Wound businesses as its two segments.

3. Fair Value of Financial Instruments

The Company follows a three-level fair value hierarchy that prioritizes the inputs to measure the fair value of the Company’s financial instruments. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs that the Company uses to measure fair value are as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.

At March 31, 2021 and June 30, 2020, all of the Company’s cash and cash equivalents, trade accounts receivable and trade accounts payable were short term in nature, and their carrying amounts approximate fair value. The Company’s current and long-term debt arrangements are classified as level 2 financial instruments.

4. Inventories

Inventories are summarized as follows:

Schedule of Inventories

	March 31,			June 30,
	2021			2020
Raw material	$	7,660,367		$	7,000,453
Work-in-process		657,878			467,037
Finished goods		6,671,421			6,813,034
Inventory, gross		14,989,666			14,280,524
Less obsolescence reserve		(575,995	)		(269,840	)
Inventory, net	$	14,413,671		$	14,010,684

5. Property, Plant and Equipment

Depreciation and amortization of property, plant and equipment was $2.1 million and $1.6 million for the nine months ended March 31, 2021 and 2020, respectively. Inventory items used for demonstration purposes, subject to a rental agreement or provided on consignment are included in property, plant and equipment and are depreciated using the straight-line method over estimated useful lives of 3 to 5 years. Depreciation of generators that are consigned to customers is expensed over a 5-year period, and depreciation is charged to selling expenses.

6. Goodwill

Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount. The Company reviews goodwill for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company’s business, the useful lives over which cash flows will occur and determination of the Company’s weighted average cost of capital. The Company also compares its market capitalization to the value of its goodwill to review for evidence of impairment. The Company completes its annual goodwill impairment tests as of March 31 of each year. There were no goodwill impairments recorded during the three and nine months ended March 31, 2021 and 2020.

Schedule of Goodwill

	Surgical		Wound			Total

Balance as of June 30, 2019	$	1,701,094	$	-		$	1,701,094

Acquisition of Solsys		-		109,086,682			109,086,682
Purchase price accounting adjustments		-		(2,217,026	)		(2,217,026	)
Goodwill (gross)		1,701,094		106,869,656			108,570,750
Accumulated impairment losses		-		-			-

Balance as of March 31, 2020	$	1,701,094	$	106,869,656		$	108,570,750

Balance as of June 30, 2020	$	1,701,094	$	106,609,256		$	108,310,350

Purchase price accounting adjustments				(75,686	)		(75,686	)
Goodwill (gross)		1,701,094		106,533,570			108,234,664

Accumulated impairment losses		-		-			-

Balance as of March 31, 2021	$	1,701,094	$	106,533,570		$	108,234,664

7. Patents

The costs of acquiring or processing patents are capitalized at cost. These amounts are being amortized using the straight-line method over the estimated useful lives of the underlying assets, which is approximately 17 years. Patents, net of accumulated amortization, totaled $0.8 million and $0.8 million at March 31, 2021 and June 30, 2020, respectively. Amortization expense for the nine months ended March 31, 2021 and 2020 was $120,000 and $98,000, respectively. The following is a schedule of estimated future patent amortization expenses by fiscal year as of March 31, 2021:

2021	$	36,833
2022		97,369
2023		96,143
2024		86,874
2025		79,815
Thereafter		366,866
	$	763,900

8. Intangible Assets

In connection with the Solsys Acquisition, the Company acquired intangible assets primarily consisting of customer relationships, trade names and non-competition agreements. Amortization expense for the nine months ended March 31, 2021 and 2020 were $1.2 million and $0.8, respectively. The table below summarizes the intangible assets acquired:

Summary of Intangible Assets

	March 31,			June 30,			Amortization
	2021			2020			Period

Customer relationships	$	9,500,000		$	9,500,000		15 years
Trade names		12,800,000			12,800,000		15 years
Non-competition agreements		200,000			200,000		1 year

Total		22,500,000			22,500,000
Less accumulated amortization		(2,387,045	)		(1,218,864	)

Net intangible assets	$	20,112,955		$	21,281,136

The following is a schedule of estimated future intangible asset amortization expense by fiscal year as of March 31, 2021:

2021	$	372,462
2022		1,489,848
2023		1,489,848
2024		1,489,848
2025		1,489,848
Thereafter		13,781,101
	$	20,112,955

9. Accrued Expenses and Other Current Liabilities

The following summarizes accrued expenses and other current liabilities:

	March 31,		June 30,
	2021		2020

Accrued payroll, payroll taxes and vacation	$	2,752,852	$	2,277,752
Accrued bonus		1,185,249		417,000
Accrued commissions		1,434,985		1,678,966
Professional fees		185,701		355,145
Vendor, tax and other accruals		2,303,710		2,786,888

Accrued expenses and other current liabilities	$	7,862,497	$	7,515,751

10. Stock-based Compensation Plans

Stock Option Awards

For the three months ended March 31, 2021 and 2020, the compensation cost relating to stock option awards that has been charged against income for the Company’s stock option plans, excluding the compensation cost for restricted stock, was $0.6 million and $0.4 million, respectively. For the nine months ended March 31, 2021 and 2020, 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 $1.9 million and $0.9 million, respectively.

As of March 31, 2021, there was approximately $5.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 2.6 years, which includes $0.3 million of unrecognized compensation expense on restricted stock awards.

Stock options typically expire 10 years from the date of grant and vest over service periods, which typically are four 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 48,000 and 185,500 shares granted during the nine months ended March 31, 2021 and 2020, respectively. The fair value was estimated based on the weighted average assumptions of:

	For the nine months ended
	March 31, 2021
	2021			2020
Risk-free interest rates		0.44	%		1.67	%
Expected option life in years		5.73			6.25
Expected stock price volatility		59.32	%		54.69	%
Expected dividend yield		0	%		0	%

A summary of option activity under the Company’s equity plans as of March 31, 2021, and changes during the nine months ended March 31, 2021 is presented below:

Schedule of Option Activity

	Options
				Weighted
				Average		Aggregate
	Outstanding			Exercise		Intrinsic
	Shares			Price		Value
Outstanding as of June 30, 2020		1,778,070		$	11.81	$	5,164,938
Vested and exercisable at June 30, 2020		683,442		$	9.16	$	3,156,051
Granted		48,000			13.37
Exercised		(33,296	)		7.44
Forfeited		(82,664	)		12.50
Expired		-			-
Outstanding as of March 31, 2021		1,710,110		$	11.90	$	13,475,442
Vested and exercisable at March 31, 2021		933,434		$	10.47	$	8,597,840

The number and weighted-average grant-date fair value of stock options which vested during the nine months ended March 31, 2021 was 288,046 and $7.14, respectively. The number and weighted-average grant-date fair value of non-vested stock options at March 31, 2021 was 776,676 and $7.28, respectively.

Restricted Stock Awards

On December 15, 2016, the Company issued 400,000 shares of restricted stock to its Chief Executive Officer. The awards were valued using a Monte Carlo valuation model using a stock price at the date of grant of $9.60, a term of 3 to 5 years, a risk-free interest rate of 1.6% to 2.1% and a volatility factor of 66.5%. These awards vest over a period of up to five years, subject to meeting certain service, performance and market conditions. These awards were valued at approximately $3.6 million at the date of grant. Compensation expense recorded in the three months ended March 31, 2021 and 2020 related to these awards was $0.1 million and $0.1 million, respectively. Compensation expense recorded in the nine months ended March 31, 2021 and 2020 related to these awards was $0.4 million and $0.4 million, respectively.

As of March 31, 2021, there was approximately $0.3 million of total unrecognized compensation cost related to non-vested restricted stock awards to be recognized over a weighted-average period of 0.6 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 March 31, 2021, the Company has estimated that it is probable that the performance conditions of the outstanding awards will be met. As of March 31, 2021, 240,200 shares from this set of awards have vested.

11. Commitments and Contingencies

Leases

The Company has entered into operating leases primarily for real estate and to a lesser extent for office copiers. The Company has entered into one finance lease for manufacturing equipment. The Company does not expect finance leases to become material. All leases generally have terms that range from 1 year to 6 years. Operating leases are included in “Lease right-of-use assets” and Finance leases are included in “Other assets” on the Company’s Condensed Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments on operating leases are included in “Current portion of lease liabilities” and “Lease liabilities”. The Company’s obligation to make lease payments on finance leases are included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” on the Company’s Condensed Consolidated Balance sheets. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized right-of-use assets of approximately $0.4 million and lease liabilities for operating leases of approximately $0.4 million on July 1, 2019. Lease right-of-use assets and liabilities commencing after July 1, 2019 are recognized at their commencement date based on the present value of lease payments over the lease term. The Company has entered into various short-term operating leases with an initial term of 12 months or less. These leases are not recorded on the Company’s Condensed Consolidated Balance Sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term, within “Operating expenses” in the Company’s Condensed Consolidated Statements of Operations. Lease expense for finance leases is recorded as Depreciation expense within “Operating expenses”, and in “Interest expense”.

During the nine months ended March 31, 2021 and 2020, the Company recognized approximately $0.5 million and $0.4 million, respectively, in total operating lease costs for right-of-use assets.

Because the rate implicit in each operating lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate used for operating leases entered into during the nine months ended March 31, 2021 was 10.9%. The finance lease contains a stated rate of 3.0%, and therefore the rate explicit in the lease was used for the finance lease. There were no new leases entered into in the prior period. The incremental borrowing rate used upon transition to ASC 842 was 10.5%.

Information related to the Company’s right-of-use assets and related lease liabilities were as follows:

Classification		2021		2020
		March 31,
	Balance Sheet Classification	2021		2020

Right-of-use assets
Operating leases	Lease right-of-use assets	$	1,108,454	$	1,266,237
Finance leases	Other assets		80,779		-

Total		$	1,189,233	$	1,266,237

Short-term Lease Liabilities

Operating leases	Current portion of lease liabilities	$	508,924	$	342,658
Finance leases	Accrued expenses and other current liabilities		16,064		-

Total		$	524,988	$	342,658

Long-term Lease Liabilities

Operating leases	Lease liabilities	$	645,804	$	765,627
Finance leases	Other non-current liabilities		61,666		-

Total		$	707,470	$	765,627

	March 31,
	2021		2020
Cash paid for lease liabilities
Operating leases	$	446,212	$	355,381
Finance leases	$	8,065	$	-

Right-of-use assets obtained in exchange for new lease obligations
Operating leases	$	361,999	$	1,378,409
Finance leases	$

SEC Form 10-Q filed by MISONIX, Inc.