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, orthopaedic surgery, plastic surgery, wound care and maxillo-facial surgery. We also exclusively market, sell and distribute skin allografts and wound care products used to support healing of wounds, and which complement our ultrasonic medical devices.
We strive to have our proprietary procedural solutions become the standard of care and enhance patient outcomes throughout the world. We intend to accomplish this, in part, by utilizing our best-in-class surgical ultrasonic technology to improve patient outcomes in spinal surgery, neurosurgery and wound care. Our neXus generator 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. Inthe United States , we sell our products through our direct sales force, in addition to a network of commissioned agents assisted byMisonix personnel. Outside ofthe United States , we sell BoneScalpel and SonaStar through distributorswho then resell the products to hospitals. We sell to all major markets in theAmericas ,Europe ,Middle East ,Asia Pacific , andAfrica . We manufacture and sell our products in two global reportable business segments: the Surgical segment and the Wound segment. Our sales force also operates as two segments, Surgical and Wound Care.
Acquisition of
OnSeptember 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 ofMisonix 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 our 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 onSeptember 27, 2019 . Impact of COVID-19 Pandemic In March of 2020, theWorld Health Organization designated the novel coronavirus disease (COVID-19) as a global pandemic. In March of 2020, the impact of COVID-19 and related actions to attempt to control its spread began to impact our consolidated operating results. Principally beginning inMarch 2020 , year-over-year consolidated revenue trends began to weaken rapidly and materially. This trend continued through the end of our fiscal year endedJune 30, 2020 . While we have seen some gradual improvements in consolidated operating results during the fiscal year endedJune 30, 2021 , in part, due to elective surgical procedure volumes returning to pre-COVID-19 levels in some jurisdictions, several jurisdictions are experiencing new increases in the rate of infection by COVID-19 and have begun to divert resources to treat COVID-19 patients and re-defer elective surgical procedures. We continue to execute on our business continuity plans and our crisis management response to address the challenges related to the COVID-19 pandemic. During the course of the pandemic, our headquarters have generally remained open, with certain essential employees continuing to work in our facilities. We are generally following the requirements and protocols published by theU.S. Centers for Disease Control andthe World Health Organization , and state and local governments and we continue to monitor the latest public health and government guidance related to COVID-19, including vaccine availability to our employees and protocols for social distancing and wearing of masks within our facilities. As a result of this guidance, we have begun to lift the actions put in place as part of our business continuity plans, including work from home requirements and travel restrictions. We cannot be certain, however, that we will not be required or encouraged to implement additional restrictions as new variants of the virus arise, any of which may have an adverse effect on our business. As of the date of this filing, we do not believe our work from home protocol has adversely affected our internal controls, financial reporting systems or our operations.
Our sales teams are focused on how to meet changing needs of our customers in this environment.
As a result of the COVID-19 pandemic, we experienced a disruption to our global supply chain of our products and a decrease in sales due to a decrease in elective surgical procedures, as described in more detail below. While this disruption began to alleviate during the quarter endedDecember 31, 2020 and continues to gradually improve, we could experience further variable impacts on our business if a resurgence of the virus or variants thereof emerge, elective procedures continue to be deferred or disruptions in the global supply chain worsen. 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, including as variants of the virus arise and put stress on the healthcare system, the efficacy of any vaccines and related distributions, the number of cases presenting in the jurisdictions in which we operate, and the effect of governmental regulations and other restrictions that might be imposed in response to the pandemic. Due to these effects and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers diverted 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 mentioned above, we have experienced and may continue to experience a significant decline in procedure volume in theU.S. , as healthcare systems diverted resources to meet the increasing demands of managing COVID-19. As mentioned above, while many countries are past their initial peak with COVID-19, many regions are now experiencing new increases in the rate of infection by COVID-19. To the extent individuals and hospital systems further de-prioritize, delay or cancel elective medical procedures, our business, cash flows, financial condition and results of operations will further be negatively affected. Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic recession could have a material adverse effect on our long-term business as hospitals and surgical centers curtail and reduce capital and overall spending. The COVID-19 pandemic and local actions, such as "shelter-in-place" orders and restrictions on our salesforce's ability to travel and access our customers or temporary closures of our facilities or the facilities of our suppliers and their contract manufacturers, could further significantly reduce our sales and our ability to ship our products and supply our customers. We are continuing to monitor closely indications that several jurisdictions are experiencing new increases in the rate of infection by COVID-19, which could result in further mitigation efforts, the impact of these new increases on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, business partners, and distribution channels. Any of these events could negatively impact the number of surgical procedures performed using our products and have a material adverse effect on our business, financial condition, results of operations, or cash flows. 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 us to estimate the future performance of our businesses, particularly over the near to medium term. The extent to which the COVID-19 global pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions taken to contain the virus or address its impact including vaccine distribution and efficacy,U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. The duration and severity of the resulting economic downturn and the broader impact that COVID-19 could have on our business, financial condition and operating results remains highly uncertain. 16
For more information, see "Item 1. Business- Impact of Covid-19 Pandemic" and "Item 1A. Risk Factors.
High Intensity Focused Ultrasound Technology
InMay 2010 , we sold our rights to our former high intensity focused ultrasound technology toSonaCare Medical, LLC , or SonaCare. Under the terms of the sale, SonaCare is required to pay us 7% of the gross revenues received from its sales of the (i) prostate product inEurope and (ii) kidney and liver products worldwide, until we have received payments of$3.0 million , and thereafter 5% of the foregoing gross revenues, until we have received payments of$5.8 million . Until we have received payments of$5.8 million , the minimum annual amount that SonaCare is required to pay, however, is$250,000 . SonaCare was in default of its obligations to make payments to us onMarch 31, 2020 andMarch 31 , 2021and as ofJune 30, 2021 , we had received cumulative payments of approximately$2.8 million from SonaCare. Due to SonaCare's default and inability to pay, we entered into an amended agreement with SonaCare onApril 30, 2021 and SonaCare made a payment to us of$300,000 onMay 28, 2021 . The amended agreement with SonaCare requires that SonaCare make minimum annual payments of$300,000 throughMarch 2031 . We cannot assure you that SonaCare will make all payments due on a timely basis, or at all. We recorded the$300,000 payment received as other income on our Consolidated Statement of Operations during the fourth quarter of fiscal year 2021, and will record any future payments on a cash basis only when received due to the uncertainty of payment receipt. 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
Fiscal years ended
Our revenues by segment for the two years endedJune 30, 2021 are as follows: For the years ended June 30, Net change 2021 2020 $ % Total Surgical$ 40,379,693 $ 34,457,631 $ 5,922,062 17.2 % Wound 33,644,380 28,026,020 5,618,360 20.0 % Total$ 74,024,073 $ 62,483,651 $ 11,540,422 18.5 % Domestic: Surgical$ 27,384,277 $ 20,874,419 $ 6,509,858 31.2 % Wound 33,272,947 27,678,534 5,594,413 20.2 % Total$ 60,657,224 $ 48,552,953 $ 12,104,271 24.9 % International: Surgical$ 12,995,416 $ 13,583,212 $ (587,796 ) -4.3 % Wound 371,433 347,486 23,947 6.9 % Total$ 13,366,849 $ 13,930,698 $ (563,849 ) -4.0 % 17 Revenues
Revenues increased 18.5% or
The revenue increase is principally attributable to growth of domestic surgical revenues by 31.2%, fueled by the introduction of our new platform, neXus. Domestic wound revenue increased by 20.2% primarily from the addition of TheraSkin as a result of the Solsys acquisition, which was only included in 9 months of fiscal 2020 and the full year fiscal 2021. TheraSkin revenue increased from$23.4 million in fiscal 2020 to$26.4 million in fiscal 2021. International revenue, which is principally from the Surgical segment, decreased 4.0% in part due to weakness in sales of surgical products resulting from the COVID-19 virus, which had an impact on sales throughout fiscal 2021 and only on the second half of fiscal 2020. Gross profit The gross profit percentage on product sales was 71.1% in fiscal 2021, compared with 70.0% in fiscal 2020. The increase was in part attributable to a higher mix of domestic revenue compared with international revenue for fiscal 2021. Selling expenses Selling expenses increased by$1.9 million , or 4.6% to$42.1 million in fiscal 2021 from$40.2 million in fiscal 2020. The increase is primarily due to our acquisition of Solsys onSeptember 27, 2019 . Additional factors impacting selling expenses include higher compensation and commission costs, consulting costs, neXus product launch costs, higher freight expense on higher sales, and costs resulting from the continued build out of our direct sales force. These cost increases were offset by lower travel related expenses and trade show costs relating to the pandemic lockdown.
General and administrative expenses
General and administrative expenses decreased$1.4 million to$16.6 million in fiscal 2021 from$18.0 million in fiscal 2020. The decrease was in part due to$1.8 million of transaction expenses incurred in fiscal 2020 related to our acquisition of Solsys, along with a$1.0 million contract asset reserve taken in fiscal 2020. These decreases were offset by higher compensation and non-cash compensation incurred in fiscal 2021.
Research and development expenses
Research and development expenses increased by$0.1 million , or 2.3% to$5.0 million in fiscal 2021 from$4.9 million in the prior year period, primarily due to increased expense associated with the development of new handpieces and tips to expand our neXus product portfolio. Other expense Other expense increased to$3.3 million in fiscal 2021 from other expense of$2.5 million in fiscal 2020. The increase of$0.8 million is related primarily to interest expense from the debt we acquired relating to our acquisition of Solsys onSeptember 27, 2019 . Income taxes For the fiscal years endedJune 30, 2021 and 2020, we recorded an income tax expense (benefit) of$0.1 million and$(4.5) million , respectively. We purchasedSolsys Medical, LLC onSeptember 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 Solsys acquisition, we had a full valuation allowance on our deferred tax assets. The deferred tax liabilities generated from the Solsys acquisition is netted against our pre-existing deferred tax assets. Consequently, this resulted in a release of$4.6 million of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit.
The components of the tax provision are as follows:
Year ended June 30, 2021 2020 Tax at federal statutory rates$ (3,011,456 ) $ (4,600,276 ) State income taxes, net of federal benefit (244,712 ) (482,344 ) Research credit (105,659 ) (112,468 ) Permanent differences 37,260 76,341 Stock-based compensation 276,770 68,766 Transaction Costs - 120,401 Valuation allowance 3,162,279 5,006,509 Solsys acquisition - (4,575,507 ) True up and rate change 17,626 -$ 132,071 $ (4,498,578 ) 18
Liquidity and Capital Resources
General
Our liquidity position and capital requirements may be impacted by a number of factors, including the following:
? our ability to generate revenue, including a potential decline in revenue
resulting from COVID-19; ? fluctuations in gross margins, operating expenses and net loss; and ? fluctuations in working capital.
Our primary short-term capital needs, which are subject to change, include expenditures related to:
? expansion of our sales, marketing and distribution activities; ? expansion of our research and development activities; and ? maintaining sufficient inventory to supply our sales volume. Fiscal 2021 Working capital atJune 30, 2021 was$36.6 million . For fiscal 2021, cash used in operations was$9.0 million , mainly due to our net loss of$14.5 million , an increase in inventory of$6.4 million , an increase in accounts receivable of$0.4 , offset by a decrease in accounts payable and accrued expenses of$3.8 million , and$8.6 million of non-cash expenses. Cash used by investing activities for fiscal 2021 was$0.3 million , consisting of cash used to purchase property, plant and equipment of$0.1 million and cash outflows to file for additional patents of$0.2 million .
Cash provided by financing activities was
As ofJune 30, 2021 , we had a cash balance of approximately$31.0 million . 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 2020
As of
Working capital atJune 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 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 to file for additional patents of$0.1 million . 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. Financing Transactions OnSeptember 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 ofJune 30, 2023 . OnDecember 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 remainsJune 30, 2023 . OnJune 30, 2020 , 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 throughDecember 31, 2021 and reduce the minimum EBITDA requirements throughJune 30, 2021 . As ofJune 30, 2021 , 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 withSilicon Valley Bank , originally effectiveJanuary 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 ofJanuary 22, 2021 . OnDecember 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, andSilicon 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. OnJune 30, 2020 , 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 throughDecember 31, 2021 and reduces the minimum EBITDA requirements throughJune 30, 2021 .
The Company is in compliance with all covenants in its financing agreements as
of
19 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 us for general corporate purposes and working capital. The New Credit Facility matures onDecember 26, 2022 . As ofJune 30, 2021 , the outstanding principal balance of the New Credit Facility is$8.4 million . OnJanuary 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. OnApril 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 theU.S. Small Business Administration . OnApril 10, 2020 , the PPP loan was approved and funded. We entered into a promissory note withJ.P. Morgan Chase evidencing the unsecured$5.2 million loan. The promissory note has a maturity date ofApril 4, 2022 and accrues interest at an annual rate of 0.98%. The promissory note evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note. In accordance with the requirements of the CARES Act, we used the proceeds from the PPP Loan primarily for payroll costs. Commitments We have commitments under operating leases that we plan to fund from operating sources. AtJune 30, 2021 , our contractual cash obligations and commitments relating to debt repayment, operating leases and other purchase commitments
are as follows: Less than After Commitment 1 year 1-3 years 4-5 years 5 years Total Long-term debt$ 6,449,487 $ 20,500,000 $ 18,845,761 $ -$ 45,795,248 Operating and financing leases 597,392 1,015,916 7,698 - 1,621,006 Purchase commitments 19,430,995 - -
- 19,430,995$ 26,477,874 $ 21,515,916 $ 18,853,459 $ -$ 66,847,249
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to us. Other
In the opinion of 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 inthe 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 ("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, 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.
20 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.
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, we perform 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 our 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 has$106.5 million of goodwill recorded on its Consolidated Balance Sheet as ofJune 30, 2021 ,$12.7 million of which is expected to be deductible for tax purposes. The goodwill recognized from the Solsys acquisition represents the excess of the purchase price over aggregate fair value of net assets acquired and is related to the benefits expected as a result of the acquisition, including sales, and a stronger portfolio of Wound solutions that will drive growth in the wound care market. Our goodwill balance as of each reporting
period by segment, includes: Surgical Wound Total Balance as of June 30, 2019$ 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 $ 106,269,256 $ 108,310,350 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 June 30, 2021$ 1,701,094 $ 106,533,570 $ 108,234,664 Goodwill 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 ofMisonix at the measurement date. We performed our annual impairment test as ofMarch 31 and concluded there was no impairment to goodwill. As ofMarch 31, 2021 , the fair value of the Wound and Surgical reporting units exceeded their carrying values by more than 10%. The fair values of our 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. 21
There were no triggering events in the fourth quarter 2021 that would cause us to re-evaluate our 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. OnDecember 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 aMonte 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 our 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
InJune 2016 , theFinancial 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 currentU.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 forSEC small business filers for fiscal years beginning afterDecember 15, 2022 . Management is currently assessing the impact that ASU 2016-13 will have on us. There are no other recently issued accounting pronouncements that are expected to have a material effect on our financial position, results of operations
or cash flows.
Recently Adopted Accounting Pronouncements
InFebruary 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 our Consolidated Statement of Operations. We adopted ASC 842 onJuly 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 onJuly 1, 2019 . Accordingly, we will continue to apply Topic 840 prior toJuly 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 beforeJuly 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 onJuly 1, 2019 , we recorded an operating lease liability of approximately$0.4 million and corresponding ROU assets based on the present value of the remaining minimum rental payments associated with 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 atJuly 1, 2019 to determine the present value of its future minimum rental payments. 22
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