UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March
31, 2006
OR
o
|
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
(Exact
name of registrant as specified in its charter)
New
York
|
|
11-2148932
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
1938
New Highway, Farmingdale, NY
|
|
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
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).
Yes o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of
the
latest practical date:
|
|
Outstanding
at
|
Class
of Common Stock
|
|
May
9, 2006
|
Common
Stock, $.01 par value
|
|
6,900,369
|
MISONIX,
INC.
|
Page
|
|
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
14
|
|
|
|
|
|
25
|
|
|
|
|
|
25
|
|
|
|
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|
|
|
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|
|
26
|
|
|
|
|
|
|
MISONIX,
INC.
|
|
|
|
|
|
|
|
March
31,
2006
|
|
June
30,
2005
|
|
Assets
|
|
(unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
606,155
|
|
$
|
2,484,534
|
|
Accounts
receivable, less allowance for doubtful accounts of $501,581
and $405,998, respectively
|
|
|
7,195,229
|
|
|
11,757,827
|
|
Inventories
|
|
|
11,365,341
|
|
|
9,780,501
|
|
Income
tax receivable
|
|
|
1,073,292
|
|
|
224,734
|
|
Deferred
income taxes
|
|
|
1,093,740
|
|
|
964,426
|
|
Prepaid
expenses and other current assets
|
|
|
1,464,073
|
|
|
1,336,104
|
|
Total
current assets
|
|
|
22,797,830
|
|
|
26,548,126
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,205,689
|
|
|
6,409,835
|
|
Deferred
income taxes
|
|
|
37,903
|
|
|
244,769
|
|
Goodwill
|
|
|
4,473,713
|
|
|
4,473,713
|
|
Other
assets
|
|
|
480,240
|
|
|
409,493
|
|
Total
assets
|
|
$
|
33,995,375
|
|
$
|
38,085,936
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Revolving
credit facilities
|
|
$
|
1,483,786
|
|
$
|
1,883,193
|
|
Accounts
payable
|
|
|
4,647,504
|
|
|
5,482,313
|
|
Accrued
expenses and other current liabilities
|
|
|
2,401,235
|
|
|
2,901,247
|
|
Current
maturities of long-term debt and capital lease obligations
|
|
|
345,544
|
|
|
376,148
|
|
Total
current liabilities
|
|
|
8,878,069
|
|
|
10,642,901
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital lease obligations
|
|
|
1,164,531
|
|
|
1,240,324
|
|
Deferred
income taxes
|
|
|
—
|
|
|
270,884
|
|
Deferred
income
|
|
|
373,422
|
|
|
508,582
|
|
Minority
interest
|
|
|
341,744
|
|
|
329,085
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value—shares authorized 10,000,000; 6,978,169 and
6,902,752
issued, and 6,900,369 and 6,824,952 outstanding,
respectively
|
|
|
69,782
|
|
|
69,028
|
|
Additional
paid-in capital
|
|
|
24,479,939
|
|
|
23,619,281
|
|
Retained
(deficit) earnings
|
|
|
(1,040,420
|
)
|
|
1,601,166
|
|
Treasury
stock, 77,800 shares
|
|
|
(412,424
|
)
|
|
(412,424
|
)
|
Accumulated
other comprehensive income
|
|
|
140,732
|
|
|
217,109
|
|
Total
stockholders’ equity
|
|
|
23,237,609
|
|
|
25,094,160
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
33,995,375
|
|
$
|
38,085,936
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements.
MISONIX,
INC.
(UNAUDITED)
|
|
|
|
|
|
For
the nine months
ended
|
|
|
|
March
31
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
29,549,736
|
|
$
|
32,016,885
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
18,296,682
|
|
|
18,610,337
|
|
Gross
profit
|
|
|
11,253,054
|
|
|
13,406,548
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
5,014,110
|
|
|
4,407,551
|
|
General
and administrative expenses
|
|
|
7,528,168
|
|
|
6,026,911
|
|
Research
and development expenses
|
|
|
2,739,043
|
|
|
2,540,070
|
|
Total
operating expenses
|
|
|
15,281,321
|
|
|
12,974,532
|
|
(Loss)
income from operations
|
|
|
(4,028,267
|
)
|
|
432,016
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
65,857
|
|
|
45,194
|
|
Interest
expense
|
|
|
(168,629
|
)
|
|
(165,457
|
)
|
Royalty
income and license fees net of royalty expense of
($75,775) and ($40,756)
|
|
|
571,769
|
|
|
689,011
|
|
Other
|
|
|
(10,663
|
)
|
|
(19,744
|
)
|
Total
other income
|
|
|
458,334
|
|
|
549,004
|
|
|
|
|
|
|
|
|
|
(Loss)
income before minority interest and income taxes
|
|
|
(3,569,933
|
)
|
|
981,020
|
|
|
|
|
|
|
|
|
|
Minority
interest in net income of consolidated subsidiary
|
|
|
12,659
|
|
|
56,329
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(3,582,592
|
)
|
|
924,691
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(941,006
|
)
|
|
326,727
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
($2,641,586
|
)
|
$
|
597,964
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - Basic
|
|
|
($
.39
|
)
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - Diluted
|
|
|
($
.39
|
)
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Basic
|
|
|
6,857,924
|
|
|
6,776,137
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Diluted
|
|
|
6,857,924
|
|
|
6,981,837
|
|
See
Accompanying Notes to Consolidated Financial Statements.
MISONIX,
INC.
(UNAUDITED)
|
|
|
|
|
|
For
the three months ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
10,169,778
|
|
$
|
10,879,607
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
6,216,776
|
|
|
6,330,457
|
|
Gross
profit
|
|
|
3,953,002
|
|
|
4,549,150
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,765,639
|
|
|
1,476,236
|
|
General
and administrative expenses
|
|
|
2,502,626
|
|
|
2,284,786
|
|
Research
and development expenses
|
|
|
975,307
|
|
|
918,112
|
|
Total
operating expenses
|
|
|
5,243,572
|
|
|
4,679,134
|
|
(Loss)
from operations
|
|
|
(1,290,570
|
)
|
|
(129,984
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
17,742
|
|
|
15,462
|
|
Interest
expense
|
|
|
(54,019
|
)
|
|
(52,735
|
)
|
Royalty
income and license fees net of royalty expense of
($38,376) and ($24,056)
|
|
|
177,702
|
|
|
241,715
|
|
Other
|
|
|
2,718
|
|
|
(9,331
|
)
|
Total
other income
|
|
|
144,143
|
|
|
195,111
|
|
|
|
|
|
|
|
|
|
(Loss)
income before minority interest and income taxes
|
|
|
(1,146,427
|
)
|
|
65,127
|
|
|
|
|
|
|
|
|
|
Minority
interest in net (loss) income of consolidated subsidiary
|
|
|
(
6,465
|
)
|
|
29,083
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(1,139,962
|
)
|
|
36,044
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(310,844
|
)
|
|
32,683
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
($829,118
|
)
|
$
|
3,361
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - Basic
|
|
|
($
.12
|
)
|
$
|
¾
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - Diluted
|
|
|
($
.12
|
)
|
$
|
¾
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Basic
|
|
|
6,884,169
|
|
|
6,812,673
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Diluted
|
|
|
6,884,169
|
|
|
7,037,501
|
|
See
Accompanying Notes to Consolidated Financial Statements.
MISONIX,
INC.
(UNAUDITED)
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Operating
activities
|
|
|
|
|
|
Net
(loss) income
|
|
|
($2,641,586
|
)
|
$
|
597,964
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Bad
debt expense (recovery)
|
|
|
209,084
|
|
|
(12,560
|
)
|
Deferred
income tax benefit
|
|
|
(169,554
|
)
|
|
9,874
|
|
Depreciation
and amortization
|
|
|
941,681
|
|
|
628,555
|
|
Loss
on disposal of equipment
|
|
|
141,857
|
|
|
153,552
|
|
Minority
interest in net income of subsidiaries
|
|
|
12,369
|
|
|
56,329
|
|
Stock
option compensation
|
|
|
440,060
|
|
|
¾
|
|
Other
|
|
|
6,131
|
|
|
19,744
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,166,860
|
|
|
(374,014
|
)
|
Inventories
|
|
|
(1,633,752
|
)
|
|
(1,561,418
|
)
|
Income
taxes receivable
|
|
|
(771,716
|
)
|
|
¾
|
|
Prepaid
expenses and other current assets
|
|
|
(141,308
|
)
|
|
(405,585
|
)
|
Other
assets
|
|
|
(98,064
|
)
|
|
(115,010
|
)
|
Accounts
payable and accrued expenses
|
|
|
(1,103,063
|
)
|
|
(100,476
|
)
|
Deferred
income
|
|
|
(135,160
|
)
|
|
(135,585
|
)
|
Income
taxes payable
|
|
|
¾
|
|
|
(36,502
|
)
|
Net
cash used in operating activities
|
|
|
(776,161
|
)
|
|
(1,275,132
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Acquisition
of property, plant and equipment
|
|
|
(737,690
|
)
|
|
(560,329
|
)
|
Net
cash used in investing activities
|
|
|
(737,690
|
)
|
|
(560,329
|
)
|
(Continued
on next page)
MISONIX,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
672,746
|
|
|
437,279
|
|
Payments
of short-term borrowings
|
|
|
(1,008,686
|
)
|
|
(398,114
|
)
|
Principal
payments on capital lease obligations
|
|
|
(325,087
|
)
|
|
(255,090
|
)
|
Proceeds
from stock options
|
|
|
381,511
|
|
|
349,117
|
|
Income
tax benefit - stock options
|
|
|
(39,841
|
)
|
|
¾
|
|
Payments
of long-term debt
|
|
|
(44,039
|
)
|
|
(42,753
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(363,396
|
)
|
|
90,439
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(1,132
|
)
|
|
(34,020
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(1,878,379
|
)
|
|
(1,779,042
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
2,484,534
|
|
|
4,839,866
|
|
Cash
and cash equivalents at end of period
|
|
$
|
606,155
|
|
$
|
3,060,824
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for
|
|
|
|
|
|
|
|
Interest
|
|
$
|
168,629
|
|
$
|
165,457
|
|
Income
taxes
|
|
$
|
40,804
|
|
$
|
351,227
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
Capital
lease additions
|
|
$
|
319,657
|
|
$
|
397,685
|
|
See
Accompanying Notes to Consolidated Financial Statements.
MISONIX,
INC.
(Information
with respect to interim periods is unaudited)
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended March 31, 2006 are not necessarily indicative of the results that may
be
expected for the year ending June 30, 2006.
The
balance sheet at June 30, 2005 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended June 30, 2005.
2. |
Net
(Loss) Income Per Share
|
Basic
(loss) income per common share excludes any dilution. It is based upon the
weighted average number of common shares outstanding during the period. Dilutive
earnings per share reflects the potential dilution that would occur if options
to purchase common stock were exercised. For the nine and three month periods
ended March 31, 2006, dilutive weighted average common shares outstanding of
214,165 and 138,018, respectively, were excluded from the diluted loss per
share
calculation, since the effect of including these options would have been
anti-dilutive. The following table sets forth the reconciliation of weighted
average shares outstanding and diluted weighted average shares
outstanding:
|
|
For
the Nine Months
|
|
For
the Three Months
|
|
|
|
Ended
March 31,
|
|
Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Weighted
average common shares outstanding
|
|
|
6,857,924
|
|
|
6,776,137
|
|
|
6,884,169
|
|
|
6,812,673
|
|
Dilutive
effect of stock options
|
|
|
¾
|
|
|
205,700
|
|
|
¾
|
|
|
224,828
|
|
Diluted
weighted average common shares outstanding
|
|
|
6,857,924
|
|
|
6,981,837
|
|
|
6,884,169
|
|
|
7,037,501
|
|
Total
comprehensive (loss) income was ($2,717,963) and ($817,166) for the nine and
three months ended March 31, 2006, respectively, and $713,774 and $56,015 for
the nine and three months ended March 31, 2005, respectively. The components
of
comprehensive (loss) income are net (loss) income and foreign currency
translation adjustments.
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited) (CONTINUED)
4. |
Stock-Based
Compensation
|
Prior
to
July 1, 2005, the Company accounted for stock option plans under Statement
of
Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No. 123”). As permitted
under this standard, compensation cost was recognized using the intrinsic value
method described in Accounting Principles Board Opinion No. 25 (“APB 25”).
Effective July 1, 2005, the Company adopted the fair-value recognition
provisions of SFAS No. 123R (“SFAS No. 123R”) and Securities and Exchange
Commission Staff Accounting Bulletin No. 107 using the modified-prospective
transition method; therefore, prior periods have not been restated. Compensation
cost recognized in the nine and three-month periods ended March 31, 2006
includes compensation cost for all share-based payments granted prior to, but
not yet vested as of, July 1, 2005, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123, and compensation
cost for all share-based payments granted subsequent to July 1, 2005, based
on
the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R.
Stock
options are granted with exercise prices not less than the fair market value
of
our common stock at the time of the grant, with an exercise term (as determined
by the Committee administering the applicable option plan (the “Committee”)) not
to exceed 10 years. The Committee determines the vesting period for the
Company’s stock options. Generally, such stock options have vesting periods of
immediate to four years. Certain option awards provide for accelerated vesting
upon meeting specific retirement, death or disability criteria, and upon change
of control. During the nine month periods ended March 31, 2006 and 2005, the
Company granted options to purchase 89,560 and 293,500 shares of the Company’s
common stock, respectively.
No
stock-based compensation cost related to stock options was recognized in the
statements of operations for the years ended June 30, 2005 and 2004 as all
options granted in these periods had an exercise price equal to the market
price
at the date of grant. As a result of adopting SFAS No. 123R, the Company’s loss
before income taxes and net loss for the nine months ended March 31, 2006 were
approximately $440,000 and $349,000 higher, respectively, than if we had
continued to account for stock-based compensation under APB No. 25. Loss before
income taxes and net loss for the three months ended March 31, 2006 were $66,000
and $61,000 higher, respectively, as a result of adopting SFAS No. 123R.
Compensation expense is recognized in the general and administrative expenses
line item of the Company’s statements of operations on a straight-line basis
over the vesting periods. There are no capitalized stock-based compensation
costs at March 31, 2006 and 2005. Basic and dilutive loss per share for the
nine
and three-month periods ended March 31, 2006 would have been ($.33) and ($.11),
respectively, if the Company had not adopted SFAS No. 123R, compared to the
reported basic and dilutive loss per share of ($.39) and ($.12), respectively.
As of March 31, 2006, there was approximately $355,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
to
be recognized over a weighted-average period of 3 years.
The
total
cash received from the exercise of stock options was $381,511 and $349,117
for
the nine-month periods ended March 31, 2006 and 2005, respectively, and are
classified as financing cash flows. SFAS No. 123R requires that cash flows
from
tax benefits attributable to tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) be classified as financing
cash flows.
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited) (CONTINUED)
The
fair
values of the options granted during the nine-month periods ended March 31,
2006
and 2005 were estimated on the dates of their grants using the Black-Scholes
option-pricing model on the basis of the following weighted average
assumptions:
|
|
March
31,
2006
|
|
March
31,
2005
|
|
Risk-free
interest rate
|
|
|
4.43
|
%
|
|
3.75
|
%
|
Expected
life
|
|
|
5.7
years
|
|
|
5
years
|
|
Expected
volatility
|
|
|
54.7
|
%
|
|
86.5
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Weighted-average
fair value of options
granted
|
|
$
|
3.82
|
|
$
|
4.40
|
|
The
expected life was based on historical exercises and terminations. The expected
volatility for the periods with the expected life of the options is determined
using historical volatilities based on historical stock prices. The expected
dividend yield is 0% as the Company has historically not issued dividends and
does not expect to issue any in the future.
Changes
in outstanding options are as follows:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at June 30, 2005
|
|
|
1,908,075
|
|
$
|
5.66
|
|
|
|
|
Granted
|
|
|
89,560
|
|
|
7.20
|
|
|
|
|
Exercised
|
|
|
(75,417
|
)
|
|
5.06
|
|
$
|
117,171
|
|
Forfeited
|
|
|
(73,460
|
)
|
|
6.52
|
|
|
|
|
Options
outstanding at March 31, 2006
|
|
|
1,848,758
|
|
$
|
5.72
|
|
$
|
|
|
Options
vested at March 31, 2006
|
|
|
1,695,019
|
|
|
|
|
$
|
|
|
Options
available for grant at March 31, 2006
|
|
|
903,293
|
|
|
|
|
|
|
|
Weighted
average remaining contractual
term
|
|
|
7
years
|
|
|
|
|
|
|
|
On
December 14, 2005, the shareholders approved the adoption of the 2005 Employee
Equity Incentive Plan (“Employee Plan”) and the 2005 Non-Employee Director Stock
Option Plan (“Director’s Plan”). The Employee Plan makes 500,000 shares
available for issuance. The Employee Plan permits the Company to grant either
incentive stock options or non-qualified stock options. The exercise price
will
not be less than fair market value on the date of grant. The Employee Plan
also
permits the Company to grant restricted stock or restricted stock units.
Restricted stock and restricted stock units will generally be subject to vesting
and non-transferability restrictions that will lapse upon achievement of one
or
more goals relating to the completion of service by the participant, or the
achievement of performance or other objectives determined by the Committee
at
the time of grant.
The
Director’s Plan makes 200,000 shares available for issuance. Under the
Director’s Plan, the exercise price will not be less than 100% of the fair
market value of the common stock as of the date the option is granted. Options
expire ten years from the date of grant.
The
table
below presents the pro forma effect on net income and basic and diluted loss
per
share if the Company had applied the fair value recognition provision to options
granted under its stock option plans
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited) (CONTINUED)
for
the
nine and three-month periods ended March 31, 2006. For purposes of this pro
forma disclosure, the value of the options is estimated using the Black-Scholes
option-pricing model and amortized to expense over the options’ vesting periods.
If the Company had adopted the fair value based method for the nine and three
months ended March 31, 2005, additional compensation expense of approximately
$1,082,000 and $495,000, respectively, would have been recognized in the
statements of operations.
|
|
Nine-month
period
ended
March 31,
2005
|
|
Three-month
period ended March 31,
2005
|
|
Net
income - As reported:
|
|
$
|
597,964
|
|
$
|
3,361
|
|
Stock
based compensation determined under
SFAS No. 123 net of income tax
|
|
|
(692,357
|
)
|
|
(327,498
|
)
|
Net
income (loss) - Pro forma:
|
|
|
($
94,393
|
)
|
|
($324,137
|
)
|
Net
income (loss) per share -
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.09
|
|
$
|
---
|
|
Pro
forma
|
|
|
($
.01
|
)
|
|
($
.05
|
)
|
Net
income (loss) per share -
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.09
|
|
$
|
---
|
|
Pro
forma
|
|
|
($
.01
|
)
|
|
($
.05
|
)
|
Inventories
are summarized as follows:
|
|
|
|
|
|
March
31,
2006
|
|
June
30,
2005
|
|
Raw
material
|
|
$
|
4,902,191
|
|
$
|
5,303,581
|
|
Work-in-process
|
|
|
2,309,740
|
|
|
1,643,835
|
|
Finished
goods
|
|
|
4,153,410
|
|
|
2,833,085
|
|
|
|
$
|
11,365,341
|
|
$
|
9,780,501
|
|
The
Company has a revolving credit facility with the Bank of America (the "Bank")
to
support future working capital needs. The revolving credit facility has interest
rate options ranging from Libor plus 1.o% per annum to prime rate .25% per
annum
and expires on January 18, 2008. This facility is secured by the assets of
the
Company. The terms provide for the repayment of the debt in full on its maturity
date. Certain financial covenants of the facility were amended effective
February 14, 2006. The Company was not in compliance with these amended loan
covenants at March 31, 2006. The Bank reduced the maximum amount available
under
the line of credit to $2,500,000 from $6,000,000 and issued a waiver for
such
non-compliance.
7. |
Accrued
Expenses and Other Current
Liabilities
|
The
following summarizes accrued expenses and other current
liabilities:
|
|
March
31,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Customer
deposits and deferred contracts
|
|
$
|
652,996
|
|
$
|
1,121,741
|
|
Accrued
payroll and vacation
|
|
|
393,227
|
|
|
356,850
|
|
Accrued
commissions and bonuses
|
|
|
355,978
|
|
|
255,400
|
|
Accrued
professional fees
|
|
|
161,266
|
|
|
226,235
|
|
Accrued
VAT and sales tax
|
|
|
134,704
|
|
|
246,170
|
|
Litigation
|
|
|
419,000
|
|
|
419,000
|
|
Other
|
|
|
284,064
|
|
|
275,851
|
|
|
|
$
|
2,401,235
|
|
$
|
2,901,247
|
|
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited) (CONTINUED)
The
Company operates in two business segments which are organized by product types:
medical devices and laboratory and scientific products. Medical devices include
the Auto Sonix ultrasonic cutting and coagulatory system, the Sonoblate 500®
(used to treat prostate cancer), refurbishing of high-performance ultrasound
systems and replacement transducers for the medical diagnostic ultrasound
industry, ultrasonic lithotriptor, ultrasonic neuroaspirator (used for
neurosurgery) and soft tissue aspirator (used primarily for the cosmetic surgery
market). Laboratory and scientific products include the Sonicator Ultrasonic
liquid processor, Aura ductless fume enclosure, the Labcaire Autoscope and
Guardian endoscope disinfectant systems and the Mystaire wet scrubber. The
Company evaluates the performance of the segments based upon income from
operations before general and administrative expenses. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies (Note 1) in the Company’s Annual Report on Form 10-K for the
year ended June 30, 2005. Certain items are maintained at the corporate
headquarters (corporate) and are not allocated to the segments. They primarily
include general and administrative expenses. General and administrative expenses
at the Company’s Sonora and Labcaire subsidiaries are included in corporate and
unallocated amounts in the tables below. The Company does not allocate assets
by
segment. Summarized financial information for each of the segments is as
follows:
For
the
nine months ended March 31, 2006:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
Device
Products
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
15,526,996
|
|
$
|
14,022,740
|
|
$
|
¾
|
|
$
|
29,549,736
|
|
Cost
of goods sold
|
|
|
8,967,482
|
|
|
9,329,200
|
|
|
¾
|
|
|
18,296,682
|
|
Gross
profit
|
|
|
6,559,514
|
|
|
4,693,540
|
|
|
¾
|
|
|
11,253,054
|
|
Selling
expenses
|
|
|
3,127,838
|
|
|
1,886,272
|
|
|
¾
|
|
|
5,014,110
|
|
Research
and development expenses
|
|
|
1,686,533
|
|
|
1,052,510
|
|
|
¾
|
|
|
2,739,043
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
7,528,168
|
|
|
7,528,168
|
|
Total
operating expenses
|
|
|
4,814,371
|
|
|
2,938,782
|
|
|
7,528,168
|
|
|
15,281,321
|
|
Income
(loss) from operations
|
|
$
|
1,745,143
|
|
$
|
1,754,758
|
|
|
($
7,528,168
|
)
|
|
($
4,028,267
|
)
|
For
the
three months ended March 31, 2006:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
Device
Products
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,082,180
|
|
$
|
5,087,598
|
|
$
|
¾
|
|
$
|
10,169,778
|
|
Cost
of goods sold
|
|
|
2,856,373
|
|
|
3,360,403
|
|
|
¾
|
|
|
6,216,776
|
|
Gross
profit
|
|
|
2,225,807
|
|
|
1,727,195
|
|
|
¾
|
|
|
3,953,002
|
|
Selling
expenses
|
|
|
1,237,229
|
|
|
528,410
|
|
|
¾
|
|
|
1,765,639
|
|
Research
and development expenses
|
|
|
587,535
|
|
|
387,772
|
|
|
¾
|
|
|
975,307
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
2,502,626
|
|
|
2,502,626
|
|
Total
operating expenses
|
|
|
1,824,764
|
|
|
916,182
|
|
|
2,502,626
|
|
|
5,243,572
|
|
Income
(loss) from operations
|
|
$
|
401,043
|
|
$
|
811,013
|
|
|
($2,502,626
|
)
|
|
($1,290,570
|
)
|
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited) (CONTINUED)
For
the
nine months ended March 31, 2005:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
Device
Products
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
17,317,800
|
|
$
|
14,699,085
|
|
$
|
¾
|
|
$
|
32,016,885
|
|
Cost
of goods sold
|
|
|
9,621,898
|
|
|
8,988,439
|
|
|
¾
|
|
|
18,610,337
|
|
Gross
profit
|
|
|
7,695,902
|
|
|
5,710,646
|
|
|
¾
|
|
|
13,406,548
|
|
Selling
expenses
|
|
|
2,284,383
|
|
|
2,123,168
|
|
|
¾
|
|
|
4,407,551
|
|
Research
and development expenses
|
|
|
1,816,253
|
|
|
723,817
|
|
|
¾
|
|
|
2,540,070
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
6,026,911
|
|
|
6,026,911
|
|
Total
operating expenses
|
|
|
4,100,636
|
|
|
2,846,985
|
|
|
6,026,911
|
|
|
12,974,532
|
|
Income
(loss) from operations
|
|
$
|
3,595,266
|
|
$
|
2,863,661
|
|
|
($
6,026,911
|
)
|
$
|
432,016
|
|
For
the
three months ended March 31, 2005:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
Device
Products
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,666,421
|
|
$
|
5,213,186
|
|
$
|
¾
|
|
$
|
10,879,607
|
|
Cost
of goods sold
|
|
|
3,083,901
|
|
|
3,246,556
|
|
|
¾
|
|
|
6,330,457
|
|
Gross
profit
|
|
|
2,582,520
|
|
|
1,966,630
|
|
|
¾
|
|
|
4,549,150
|
|
Selling
expenses
|
|
|
770,968
|
|
|
705,268
|
|
|
¾
|
|
|
1,476,236
|
|
Research
and development expenses
|
|
|
640,498
|
|
|
277,614
|
|
|
¾
|
|
|
918,112
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
2,284,786
|
|
|
2,284,786
|
|
Total
operating expenses
|
|
|
1,411,466
|
|
|
982,882
|
|
|
2,284,786
|
|
|
4,679,134
|
|
Income
(loss) from operations
|
|
$
|
1,171,054
|
|
$
|
983,748
|
|
|
($
2,284,786
|
)
|
|
($
129,984
|
)
|
The
Company’s revenues are generated from various geographic regions. The following
is an analysis of net sales by geographic region:
For
the
nine months ended March 31:
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
18,629,700
|
|
$
|
19,806,026
|
|
United
Kingdom
|
|
|
6,915,710
|
|
|
7,389,117
|
|
Europe
|
|
|
1,748,641
|
|
|
2,419,255
|
|
Asia
|
|
|
1,031,670
|
|
|
775,694
|
|
Canada
|
|
|
515,986
|
|
|
707,669
|
|
Middle
East
|
|
|
268,640
|
|
|
372,683
|
|
Other
|
|
|
439,389
|
|
|
546,441
|
|
|
|
$
|
29,549,736
|
|
$
|
32,016,885
|
|
In
April
2006, Misonix Ltd., a wholly-owned subsidiary of the Company, acquired a 60%
ownership interest in the Company’s UK distributor, UK-HIFU Limited, for the
purchase price of $200,000.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Nine
months Ended March 31, 2006 and 2005.
Net
sales. Net sales decreased $2,467,149 to $29,549,736 for the nine months ended
March 31, 2006 from $32,016,885 for the nine months ended March 31, 2005. This
difference in net sales was due to a decrease in sales of medical device
products of $1,790,804 to $15,526,996 for the nine months ended March 31, 2006
from $17,317,800 for the nine months ended March 31, 2005. The decrease in
medical device products revenues was attributable to a 26% reduction in
therapeutic medical device products revenues to $6.8 million, partially offset
by a 7.5% increase in diagnostic medical device products revenues to $8.7
million. Decreased sales of therapeutic medical device products was primarily
due to a $1,200,000 decrease in sales of Auto Sonix ultrasonic cutting and
coagulatory systems due to volume decrease and a price reduction agreed to
in a
new 3-year manufacturing agreement which reduces the price to United States
Surgical (“USS”) for new ultrasonic generation systems. Sales of ultrasonic
surgical aspirator systems decreased $850,000. This difference in net sales
is
also due to a decrease in sales of laboratory and scientific products of
$676,345 to $14,022,740 for the nine months ended March 31, 2006 from
$14,699,085 for the nine months ended March 31, 2005. The decrease in sales
of
laboratory and scientific products was substantially due to a decrease in sales
of ductless fume enclosure products of $493,000 and Labcaire Systems Limited
(“Labcaire”) sales of $775,000, partially offset by an increase in laboratory
ultrasonic product sales of $600,000. The decrease in Labcaire sales is
primarily due to a reduction in sales of the Guardian (endoscopic cleaning)
product, due to a temporary slow-down from the National Health System. Export
sales from the United States are remitted in U.S. Dollars and export sales
for
Labcaire are remitted in English Pounds. During the nine months ended March
31,
2006 and 2005, the Company had foreign net sales of $10,920,036 and $12,210,859,
respectively, representing 37% and 38% of net sales, respectively. The decrease
in foreign sales during the nine months ended March 31, 2006 as compared to
the
nine months ended March 31, 2005 was due to decreased Labcaire sales and
decreased sales of therapeutic and diagnostic medical device products to Europe
and Canada. Labcaire represented 71% and 70% of foreign net sales during the
nine months ended March 31, 2006 and 2005, respectively. The remaining 29%
and
30% represents net foreign sales remitted in U.S. Dollars during the nine months
ended March 31, 2006 and 2005, respectively. Approximately 26% of the Company’s
revenues for the nine months ended March 31, 2006 were received in English
Pounds currency. To the extent that the Company’s revenues are generated in
English Pounds, its operating results are translated for reporting purposes
into
U.S. Dollars using weighted average rates of 1.76 and 1.86 for the nine months
ended March 31, 2006 and 2005, respectively. A strengthening of the English
Pound, in relation to the U.S. Dollar, will have the effect of increasing
reported revenues and profits, while a weakening of the English Pound will
have
the opposite effect. Since the Company’s operations in England generally set
prices and bids for contracts in English Pounds, a strengthening of the English
Pound, while increasing the value of its UK assets, might place the Company
at a
pricing disadvantage in bidding for work from manufacturers based overseas.
The
Company collects its receivables in the currency the subsidiary resides in.
The
Company has not engaged in foreign currency hedging transactions, which include
forward exchange agreements.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The
Company’s revenues are generated from various products regions. The following is
an analysis of net sales by geographic region:
For
the
nine months ended March 31:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
United
States
|
|
$
|
18,629,700
|
|
$
|
19,806,026
|
|
Canada
|
|
|
515,986
|
|
|
707,669
|
|
United
Kingdom
|
|
|
6,915,710
|
|
|
7,389,117
|
|
Europe
|
|
|
1,748,641
|
|
|
2,419,255
|
|
Asia
|
|
|
1,031,670
|
|
|
775,694
|
|
Middle
East
|
|
|
268,640
|
|
|
372,683
|
|
Other
|
|
|
439,389
|
|
|
546,441
|
|
|
|
$
|
29,549,736
|
|
$
|
32,016,885
|
|
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Summarized
financial information for each of the segments for the nine months ended March
31, 2006 and 2005 are as follows:
For
the
nine months ended March 31, 2006:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
15,526,996
|
|
$
|
14,022,740
|
|
$
|
¾
|
|
$
|
29,549,736
|
|
Cost
of goods sold
|
|
|
8,967,482
|
|
|
9,329,200
|
|
|
¾
|
|
|
18,296,682
|
|
Gross
profit
|
|
|
6,559,514
|
|
|
4,693,540
|
|
|
¾
|
|
|
11,253,054
|
|
Selling
expenses
|
|
|
3,127,838
|
|
|
1,886,272
|
|
|
¾
|
|
|
5,014,110
|
|
Research
and development expenses
|
|
|
1,686,533
|
|
|
1,052,510
|
|
|
¾
|
|
|
2,739,043
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
7,528,168
|
|
|
7,528,168
|
|
Total
operating expenses
|
|
|
4,814,371
|
|
|
2,938,782
|
|
|
7,528,168
|
|
|
15,281,321
|
|
Income
(loss) from operations
|
|
$
|
1,745,143
|
|
$
|
1,754,758
|
|
|
($
7,528,168
|
)
|
|
($
4,028,267
|
)
|
For
the
nine months ended March 31, 2005:
|
|
Medical
|
|
Laboratory
|
|
Corporate
|
|
|
|
|
|
Device
Products
|
|
and
Scientific
Products
|
|
and
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
17,317,800
|
|
$
|
14,699,085
|
|
$
|
¾
|
|
$
|
32,016,885
|
|
Cost
of goods sold
|
|
|
9,621,898
|
|
|
8,988,439
|
|
|
¾
|
|
|
18,610,337
|
|
Gross
profit
|
|
|
7,695,902
|
|
|
5,710,646
|
|
|
¾
|
|
|
13,406,548
|
|
Selling
expenses
|
|
|
2,284,383
|
|
|
2,123,168
|
|
|
¾
|
|
|
4,407,551
|
|
Research
and development expenses
|
|
|
1,816,253
|
|
|
723,817
|
|
|
¾
|
|
|
2,540,070
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
6,026,911
|
|
|
6,026,911
|
|
Total
operating expenses
|
|
|
4,100,636
|
|
|
2,846,985
|
|
|
6,026,911
|
|
|
12,974,532
|
|
Income
from operations
|
|
$
|
3,595,266
|
|
$
|
2,863,661
|
|
|
($
6,026,911
|
)
|
$
|
432,016
|
|
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross
profit:
Gross
profit decreased to 38.1% as a percentage of sales for the nine months ended
March 31, 2006 from 41.9% for the nine months ended March 31, 2005. Gross profit
for medical device products decreased to 42.2% of sales in the nine months
ended
March 31, 2006 from 44.4% of sales in the nine months ended March 31, 2005.
The
decrease in gross profit for medical device products was negatively impacted
by
decreased volume, price reduction for Auto Sonix systems to USS and an
unfavorable mix of high and low margin product deliveries. Gross profit for
laboratory and scientific products decreased to 33.5% for the nine months ended
March 31, 2006 from 38.9% for the nine months ended March 31, 2005. The decrease
in gross profit for laboratory and scientific products was due to a decrease
in
gross profit margin for Labcaire, which was attributable to higher discounts
to
win business of Guardian endoscopic units, and decreased margins for wet
scrubbers due to higher than expected costs on several jobs shipped this year.
The Company manufactures and sells both medical device and laboratory and
scientific products with a wide range of product costs and gross margin dollars
as a percentage of revenues.
Selling
expenses:
Selling
expenses increased $606,559 to $5,014,110 for the nine months ended March 31,
2006 from $4,407,551 for the nine months ended March 31, 2005. Medical device
products selling expenses increased $843,455, predominantly due to increased
personnel expenses related to sales of diagnostic medical device products and
increased clinical trial expense related to high intensity focused ultrasound
(HIFU) therapeutic medical device products. Laboratory and scientific products
selling expenses decreased $236,896, predominantly due to a decrease in
marketing expenses and employees for the Company’s fume enclosure and Labcaire
products.
General
and administrative expenses:
General
and administrative expenses increased $1,501,257 from $6,026,911 in the nine
months ended March 31, 2005 to $7,528,168 in the nine months ended March 31,
2006. The implementation of SFAS No. 123R (as hereinafter defined), which
requires companies to measure and record compensation cost for all share-based
payments, increased general and administrative expenses by $440,000 in the
March
2006 period. Other expense increases were: insurance, $164,000; rent, $100,000;
utilities, $44,000; and additional personnel costs of approximately $300,000.
In
addition, bad debt expense was approximately $213,000 higher in the March 2006
period than the March 2005 period, due to the decrease in the 2005 period in
the
allowance for doubtful accounts specifically related to a reserve established
against Focus Surgery, Inc. (“Focus Surgery”) which was no longer
needed.
Research
and development expenses:
Research
and development expenses increased $198,973 from $2,540,000 for the nine months
ended March 31, 2005 to $2,739,043 for the nine months ended March 31, 2006.
Laboratory and scientific products research and development expenses increased
approximately $329,000 due to new product designs at Labcaire. Research and
development expenses for medical device products decreased approximately
$130,000. Therapeutic medical device products research and development expenses
decreased approximately $208,000, primarily due to decreased consulting fees
to
Focus Surgery for the liver/kidney product. Research and development expenses
for diagnostic medical device products increased approximately $78,000 related
to developing new products which are expected to be introduced during the
current fiscal year.
Other
income (expense):
Other
income for the nine months ended March 31, 2006 was $458,334 as compared to
$549,004 for the nine months ended March 31, 2005. The decrease of $90,670
was
primarily due to decreased royalty income of $82,000 and increased royalty
expense of $35,000, which was partially offset by increased interest income
of
$21,000.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income
taxes:
The
effective tax rate was 26.3% for the nine months ended March 31, 2006, as
compared to an effective tax rate of 35.3% for the nine months ended March
31,
2005. The estimated effective tax rate for fiscal 2006 is lower than the
statutory rate due to permanent tax items, such as the R&D credit and the
extra territorial income exclusion, and lower tax rates in the United Kingdom,
where Labcaire is domiciled.
Three
Months Ended March 31, 2006 and 2005.
Net
sales:
Net
sales of the Company’s medical device products and laboratory and scientific
products decreased $709,829 to $10,169,778 for the three months ended March
31,
2006 from $10,879,607 for the three months ended March 31, 2005. This difference
is due to a decrease in sales of laboratory and scientific products of $125,588
to $5,087,598 for the three months ended March 31, 2006 from $5,213,186 for
the
three months ended March 31, 2005. This difference in net sales is also due
to a
decrease in sales of medical device products of $584,241 to $5,082,180 for
the
three months ended March 31, 2006 from $5,666,421 for the three months ended
March 31, 2005. The decrease in laboratory and scientific products sales is
due
to a decrease in Labcaire sales of $442,728, partially offset by an increase
in
ultrasonic laboratory sales of $163,048 and wet scrubber sales of $160,100.
The
decrease in sales of medical device products is due to a decrease in sales
of
therapeutic medical device products of $315,813 and a decrease in sales of
diagnostic medical device products of $268,428. The decrease in sales of
therapeutic medical device products was mostly attributable to a decrease in
surgical aspirator sales of approximately $123,000 and lithotriptor sales of
$130,000. The decrease in sales of diagnostic medical products was not
attributable to a single customer, distributor or any other specific factor.
Export sales from the United States are remitted in U.S. Dollars and export
sales for Labcaire are remitted in English Pounds. During the three months
ended
March 31, 2006 and 2005, the Company had foreign net sales of $4,190,889 and
$4,465,793, respectively, representing 41% of net sales for both such years.
The
decrease in foreign sales during the three months ended March 31, 2006 as
compared to the three months ended March 31, 2005 is substantially due to
decreased Labcaire sales. In March 2005, the Company signed an exclusive
distribution agreement with Focus Surgery for the sale of the Sonablate 500
for
the treatment of prostate cancer and other prostatic tumors in the geographic
areas of Western Europe, Eastern Europe and Russia. The agreement is for a
term
of two years with automatic renewals for successive one-year terms as long
as
the specified minimum quantities are purchased. Labcaire represented 71% and
77%
of foreign net sales during the three months ended March 31, 2006 and 2005,
respectively. The remaining 29% and 23% represents net foreign sales remitted
in
U.S. Dollars during the three months ended March 31, 2006 and 2005,
respectively. Approximately 29% of the Company’s revenues for the three months
ended March 31, 2006 were received in English Pounds currency. To the extent
that the Company’s revenues are generated in English Pounds, its operating
results are translated for reporting purposes into U.S. Dollars using weighted
average rates of 1.75 and 1.89 for the three months ended March 31, 2006 and
2005, respectively. A strengthening of the English Pound, in relation to the
U.S. Dollar, will have the effect of increasing reported revenues and profits,
while a weakening of the English Pound will have the opposite effect. Since
the
Company’s operations in England generally set prices and bids for contracts in
English Pounds, a strengthening of the English Pound, while increasing the
value
of its UK assets, might place the Company at a pricing disadvantage in bidding
for work from manufacturers based overseas. The Company collects its receivables
in the currency the subsidiary resides in. The Company has not engaged in
foreign currency hedging transactions, which include forward exchange
agreements.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The
Company’s revenues are generated from various geographic regions. The following
is an analysis of net sales by geographic region:
For
the
three months ended March 31:
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
5,978,889
|
|
$
|
6,413,814
|
|
United
Kingdom
|
|
|
2,612,004
|
|
|
2,966,475
|
|
Europe
|
|
|
608,701
|
|
|
800,277
|
|
Asia
|
|
|
433,279
|
|
|
109,352
|
|
Canada
|
|
|
280,221
|
|
|
252,266
|
|
Middle
East
|
|
|
138,085
|
|
|
181,538
|
|
Other
|
|
|
118,599
|
|
|
155,885
|
|
|
|
$
|
10,169,778
|
|
$
|
10,879,607
|
|
Summarized
financial information for each of the segments for the three months ended March
31, 2006 and 2005 are as follows:
For
the
three months ended March 31, 2006:
|
|
Medical
|
|
Laboratory
and
|
|
Corporate
and
|
|
|
|
|
|
Device
Products
|
|
Scientific
Products
|
|
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,082,180
|
|
$
|
5,087,598
|
|
$
|
¾
|
|
$
|
10,169,778
|
|
Cost
of goods sold
|
|
|
2,856,373
|
|
|
3,360,403
|
|
|
¾
|
|
|
6,216,776
|
|
Gross
profit
|
|
|
2,225,807
|
|
|
1,727,195
|
|
|
¾
|
|
|
3,953,002
|
|
Selling
expenses
|
|
|
1,237,229
|
|
|
528,410
|
|
|
¾
|
|
|
1,765,639
|
|
Research
and development expenses
|
|
|
587,535
|
|
|
387,772
|
|
|
¾
|
|
|
975,307
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
2,502,626
|
|
|
2,502,626
|
|
Total
operating expenses
|
|
|
1,824,764
|
|
|
916,182
|
|
|
2,502,626
|
|
|
5,243,572
|
|
Income
(loss) from operations
|
|
$
|
401,043
|
|
$
|
811,013
|
|
|
($2,502,626
|
)
|
|
($1,290,570
|
)
|
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For
the
three months ended March 31, 2005:
|
|
Medical
|
|
Laboratory
and
|
|
Corporate
and
|
|
|
|
|
|
Device
Products
|
|
Scientific
Products
|
|
Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,666,421
|
|
$
|
5,213,186
|
|
$
|
¾
|
|
$
|
10,879,607
|
|
Cost
of goods sold
|
|
|
3,083,901
|
|
|
3,246,556
|
|
|
¾
|
|
|
6,330,457
|
|
Gross
profit
|
|
|
2,582,520
|
|
|
1,966,630
|
|
|
¾
|
|
|
4,549,150
|
|
Selling
expenses
|
|
|
770,968
|
|
|
705,268
|
|
|
¾
|
|
|
1,476,236
|
|
Research
and development expenses
|
|
|
640,498
|
|
|
277,614
|
|
|
¾
|
|
|
918,112
|
|
General
and administrative
|
|
|
¾
|
|
|
¾
|
|
|
2,284,786
|
|
|
2,284,786
|
|
Total
operating expenses
|
|
|
1,411,466
|
|
|
982,882
|
|
|
2,284,786
|
|
|
4,679,134
|
|
Income
(loss) from operations
|
|
$
|
1,171,054
|
|
$
|
983,748
|
|
|
($
2,284,786
|
)
|
|
($
129,984
|
)
|
Gross
profit:
Gross
profit decreased from 41.8% for the three months ended March 31, 2005 to 38.9%
for the three months ended March 31, 2006. Gross profit for medical device
products decreased to 43.8% of sales in the three months ended March 31, 2006
from 45.6% of sales in the three months ended March 31, 2005. The gross profits
decrease for medical device products was substantially due to price reductions
agreed to with USS in a new 3-year manufacturing agreement. Gross profit for
laboratory and scientific products decreased to 33.9% for the three months
ended
March 31, 2006 from 37.7% for the three months ended March 31, 2005. The
decrease in gross profit for laboratory and scientific products was primarily
due to increased costs at the Company’s wet scrubber operations, which is a
result of cost overruns on several products. The Company manufactures and sells
both medical device products and laboratory and scientific products with a
wide
range of product costs and gross margin dollars as a percentage of
revenues.
Selling
expenses:
Selling
expenses increased $289,403 to $1,765,639 for the three months ended March
31,
2006 from $1,476,236 for the three months ended March 31, 2005. Medical device
products selling expenses increased $466,261, principally due to additional
sales and marketing efforts for diagnostic medical device products and
additional sales and marketing efforts for European distribution of the
Sonablate 500 product used to treat prostate cancer and other prostatic
afflictions. Laboratory and scientific products selling expenses decreased
$176,858, predominantly due to a decrease in marketing expenses for Labcaire’s
Guardian endoscopic cleaning product and decreased selling expenses for wet
scrubbers.
General
and administrative expenses:
General
and administrative expenses increased $217,840 to $2,502,626 in the three months
ended March 31, 2006 from $2,284,786 in the three months ended March 31, 2005.
The increase is predominantly due to implementation of SFAS 123R, which
increased general and administrative expenses by $66,000 and an increase in
general and administrative expenses of approximately $140,000 relating to
salaries, rent and utility expenses at Sonora Medical Systems, Inc.
Research
and development expenses:
Research
and development expenses increased $57,195 to $975,307 for the three months
ended March 31, 2006 from $918,112 for the three months ended March 31, 2005.
Medical device products research and development expenses decreased $52,963.
Research and development expenses for laboratory and scientific products
increased $110,158, primarily due to new product designs at
Labcaire.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other
income (expense):
Other
income for the three months ended March 31, 2006 was $144,143 as compared to
$195,111 for the three months ended March 31, 2005. The decrease of $50,968
was
primarily due to a decrease in royalty income of $49,693 and an increase in
royalty expense of $14,320, which was partially offset by other income (expense)
of $12,049.
Income
taxes:
The
effective tax rate is 27.3% for the three months ended March 31, 2006 as
compared to an effective tax rate of 91% for the three months ended March 31,
2005. The prior period’s consolidated effective tax rate was impacted by the
large percentage of minority interest to total pre-tax income.
Critical
Accounting Policies:
General:
Financial Reporting Release No. 60, which was released by the Securities and
Exchange Commission in December 2001, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation
of
the financial statements. Note 1 of the Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year
ended June 30, 2005 includes a summary of the Company’s significant accounting
policies and methods used in the preparation of its financial statements. The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, management
evaluates its estimates and judgments, including those related to bad debts,
inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
Revenue
Recognition:
The
Company records revenue upon shipment for products shipped F.O.B. shipping
point. Products shipped F.O.B. destination point are recorded as revenue when
received at the point of destination. Shipments under agreements with
distributors are not subject to return, and payment for these shipments is
not
contingent on sales by the distributor. The Company recognizes revenue on
shipments to distributors in the same manner as with other customers. Fees
from
exclusive license agreements are recognized ratably over the terms of the
respective agreements. Service contracts and royalty income is recognized when
earned.
Allowance
for Doubtful Accounts:
The
Company’s policy is to review its customers’ financial condition prior to
extending credit and, generally, collateral is not required. The Company
utilizes letters of credit on foreign or export sales where appropriate.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
and
consist of raw materials, work-in-process and finished goods. Management
evaluates the need to record adjustments for impairments of inventory on a
quarterly basis. The Company’s policy is to assess the valuation of all
inventories, including raw materials, work-in-process and finished
goods.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Property,
Plant and Equipment:
Property, plant and equipment are recorded at cost. Depreciation of property
and
equipment is provided using the straight-line method over estimated useful
lives
ranging from 1 to 5 years. Depreciation of the Labcaire building is provided
using the straight-line method over the estimated useful life of 50 years.
Leasehold improvements are amortized over the life of the lease or the useful
life of the related asset, whichever is shorter. The Company’s policy is to
periodically evaluate the appropriateness of the lives assigned to property,
plant and equipment and to make adjustments if necessary. Certain inventory
products which are used for clinical trials, demo equipment, fee-for-service,
or
consignment are classified in property, plant and equipment and are depreciated
over estimated useful lives of 2 to 4 years.
Goodwill:
In July
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141 (“SFAS 141”) and SFAS 142 (“SFAS
142”), “Business Combinations” and “Goodwill and Other Intangible Assets”,
respectively. SFAS 141 replaced Accounting Principles Board (“APB”) Opinion 16
“Business Combinations” and requires the use of the purchase method for all
business combinations initiated after June 30, 2001. SFAS 142 requires goodwill
and intangible assets with indefinite useful lives to no longer be amortized,
but instead be tested for impairment at least annually and whenever events
or
circumstances occur that indicate goodwill might be impaired. With the adoption
of SFAS 142, as of July 1, 2001, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, only goodwill was
determined to have an indefinite useful life and no adjustments were made to
the
amortization period or residual values of other intangible assets. The Company
also completed its annual goodwill impairment tests for fiscal 2005 in the
fourth quarter with no impairment noted.
Income
Taxes:
Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income
Taxes”. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Stock-Based
Compensation:
The
Company accounts for its stock-based compensation plans in accordance with
SFAS
123R.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Recent
Accounting Standards
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123R”). This statement supersedes SFAS No. 123, “Accounting
for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123”,
and APB No. 25, “Accounting for Stock Issued to Employees.” The statement was
effective for interim or annual periods beginning after June 15, 2005.
Accordingly, effective July 1, 2005, the Company adopted the fair-value
recognition provisions of SFAS No. 123R. Reference is hereby made to Note 4
of
the Notes to Consolidated Financial Statements contained in Part I - Item 1
of
this Report, Stock-Based Compensation, for further information regarding the
implementation of SFAS No. 123R.
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No.
3,
Reporting Accounting Changes in Interim Financial Statements” (“SFAS 154”). SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition via a cumulative effect adjustment within net
income for the period of the change. SFAS No. 154 requires retrospective
application to prior periods’ financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements. The Company
does not believe that the adoption of SFAS No. 154 will have a material impact
on its financial condition or results of operations.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, an amendment of
APB No. 43, Chapter 4 (“SFAS 151”). The amendments made by SFAS No. 151 will
improve financial reporting by clarifying that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and by requiring the allocation of fixed
production overhead to inventory based on the normal capacity of the production
facilities. SFAS No. 151 was effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 151
effective July 1, 2005, the adoption of which did not have a material impact
on
the Company’s financial condition or results of operations.
Forward
Looking Statements
This
Report contains certain forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act of 1934, as amended (the “Exchange Act”), which are intended to be covered
by the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there
can
be no assurance that the forward looking statements contained in this Report
will prove to be accurate. Factors that could cause actual results to differ
from the results specifically discussed in the forward looking statements
include, but are not limited to, the absence of anticipated contracts, higher
than historical costs incurred in performance of contracts or in conducting
other activities, product mix in sales, results of joint ventures and
investments in related entities, future economic, competitive and market
conditions, and the outcome of legal proceedings as well as management business
decisions.
Liquidity
and Capital Resources
Working
capital at March 31, 2006 and June 30, 2005 was approximately $13,920,000 and
$15,905,000, respectively. In the nine months ended March 31, 2006, cash used
in
operating activities totaled $776,161, which was principally due to the net
loss
for the period, inventory increase, and decrease in accounts payable, partially
offset by the collection of accounts receivable. In the nine months ended March
31, 2006, cash used in investing activities was approximately $737,690, which
primarily consisted of the purchase of property, plant and equipment in the
regular course of business. In the nine months ended March 31, 2006, cash used
in financing activities was approximately $363,396, primarily consisting of
payments on short-term borrowings, capital lease obligations and long-term
debt,
partially offset by proceeds from short-term borrowings and receipts from the
exercise of employee stock options.
Revolving
Credit Facilities
Labcaire
has a debt purchase agreement with Lloyds TSB Commercial Finance. The amount
of
this facility is approximately $1,670,000 (£950,000) and bears interest at the
bank’s base rate of 5.25% plus 1.75% and a service charge of .15% of sales
invoice value and fluctuates based upon the outstanding United Kingdom and
European receivables. This agreement expires on June 30, 2006 and covers all
United Kingdom and European sales. At March 31, 2006, approximately $1,100,000
(£635,000) was outstanding under this agreement. Amounts available under the
debt purchase agreement are determined as a percentage of eligible receivables
and at March 31, 2006 no additional funds were available.
The
Company has a revolving credit facility with the Bank of America (the “Bank”) to
support future working capital needs. The revolving credit facility has interest
rate options ranging from Libor plus 1.0% per annum to prime rate plus .25%
per
annum and expires on January 18, 2008. This facility is secured by the assets
of
the Company. The terms provide for the repayment of the debt in full on its
maturity date. Certain financial covenants of the facility were amended
effective February 14, 2006. The Company was not in compliance with these
amended loan covenants at March 31, 2006. The Bank reduced the maximum amount
available under the line of credit to $2,500,000 from $6,000,000 and issued
a
waiver for such non-compliance.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to the
Company.
Other
The
Company believes that its existing capital resources will enable it to maintain
its current and planned operations for at least 18 months from the date
hereof.
In
the
opinion of management, inflation has not had a material effect on the operations
of the Company.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Market
Risk:
The
principal market risks (i.e. the risk of loss arising from adverse changes
in
market rates and prices) to which the Company is exposed are interest rates
on
short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire.
Foreign
Exchange Rates:
Approximately
26% of the Company’s revenues in the nine months ended March 31, 2006 were
received in English Pounds currency. To the extent that the Company’s revenues
are generated in English Pounds, its operating results are translated for
reporting purposes into U.S. Dollars using rates of 1.76 and 1.86 for the nine
months ended March 31, 2006 and 2005, respectively. A strengthening of the
English Pound, in relation to the U.S. Dollar, will have the effect of
increasing its reported revenues and profits, while a weakening of the English
Pound will have the opposite effect. Since the Company’s operations in England
generally sets prices and bids for contracts in English Pounds, a strengthening
of the English Pound, while increasing the value of its UK assets, might place
the Company at a pricing disadvantage in bidding for work from manufacturers
based overseas. The Company collects its receivables in the currency the
subsidiary resides in. The Company has not engaged in foreign currency hedging
transactions, which include forward exchange agreements.
Our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act are designed to ensure that information required to
be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. The Company
carried out an evaluation, under the supervision and with the participation
of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the
Company's disclosure controls and procedures as of March 31, 2006 and, based
on
their evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There
has
been no change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the third quarter of fiscal 2006 that has materially affected, or is
reasonable likely to materially affect, the Company’s internal control over
financial reporting.
MISONIX,
INC.
|
|
-
Section 1350 Certification of Chief Executive
Officer
|
|
Exhibit
32.2 |
-
Section 1350 Certification of Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: May
15,
2006
MISONIX,
INC.
(Registrant)
By:
/s/
Michael A. McManus, Jr.
Michael
A. McManus, Jr.
President
and Chief Executive Officer
Richard
Zaremba
Senior
Vice President, Chief Financial Officer,
Treasurer
and Secretary