MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
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 six month periods ended December 31, 2006 and 2005,
the
Company granted options to purchase 52,400 and 69,000 shares of the Company’s
common stock, respectively.
As
a
result of adopting SFAS No. 123R, the Company recorded stock-based compensation
expense for the six month periods ended December 31, 2006 and 2005 of
approximately $100,000 and $374,000, respectively. Stock-based compensation
for
the three month periods ended December 31, 2006 and 2005 was $50,000 and
$287,000, respectively. 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. As of December 31, 2006,
there was
$249,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements to be recognized over a weighted-average
period of 2.5 years.
The
total
cash received from the exercise of stock options was $61,400 and $166,145
for
the six month periods ended December 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.
The
fair
values of the options granted during the six month periods ended December
31,
2006 and 2005 were estimated on the date of the grant using the Black-Scholes
option-pricing model on the basis of the following weighted average
assumptions:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Risk-free
interest rate
|
|
|
4.78
|
%
|
|
4.22
|
%
|
Expected
life
|
|
|
6
years
|
|
|
5
years
|
|
Expected
volatility
|
|
|
55.2
|
%
|
|
53.5
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Weighted-average
fair value of
options
granted
|
|
$
|
1.97
|
|
$
|
3.85
|
|
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 declared dividends
and
does not expect to declare any in the future.
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
Changes
in outstanding options during the six months ended December 31, 2006 were
as
follows:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Remaining Contractual Term
(yrs.)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at June 30, 2006
|
|
|
1,837,973
|
|
$
|
5.72
|
|
|
5.7
|
|
|
|
|
Granted
|
|
|
52,400
|
|
|
3.45
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
|
3.07
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,261
|
)
|
|
7.35
|
|
|
|
|
|
|
|
Expired
|
|
|
(7,500
|
)
|
|
4.00
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,857,612
|
|
$
|
5.69
|
|
|
5.8
|
|
$
|
315,778
|
|
Options
vested and exercisable at December 31, 2006
|
|
|
1,730,456
|
|
$
|
5.69
|
|
|
5.0
|
|
$
|
291,150
|
|
Options
available for grant at December 31, 2006
|
|
|
724,807
|
|
|
|
|
|
|
|
|
|
|
5.
Inventories
Inventories
are summarized as follows:
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Raw
material
|
|
$
|
5,430,554
|
|
$
|
5,702,171
|
|
Work-in-process
|
|
|
2,764,483
|
|
|
2,250,826
|
|
Finished
goods
|
|
|
5,380,983
|
|
|
5,456,684
|
|
|
|
|
13,576,020
|
|
|
13,409,681
|
|
Less
valuation reserve
|
|
|
2,190,018
|
|
|
2,102,455
|
|
|
|
$
|
11,386,002
|
|
$
|
11,307,226
|
|
6.
Accrued
Expenses and Other Current Liabilities
The
following summarizes accrued expenses and other current
liabilities:
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Customer
deposits and current deferred contracts
|
|
|
769,565
|
|
|
870,760
|
|
Accrued
payroll and vacation
|
|
|
571,120
|
|
|
549,933
|
|
Accrued
VAT and sales tax
|
|
|
209,778
|
|
|
94,813
|
|
Accrued
commissions and bonuses
|
|
|
560,565
|
|
|
446,165
|
|
Accrued
professional and legal fees
|
|
|
65,696
|
|
|
208,650
|
|
Litigation
expense
|
|
|
419,000
|
|
|
419,000
|
|
Other
|
|
|
520,820
|
|
|
374,441
|
|
|
|
$
|
3,116,544
|
|
$
|
2,963,762
|
|
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
7. Revolving
Credit Facilities
On
December 29, 2006, the Company and its subsidiaries, Acoustic Marketing
Research, Inc. d/b/a Sonora Medical Systems (“Sonora”) and Hearing Innovations
Incorporated (collectively referred to as the “Borrowers”) and Wells Fargo Bank,
entered into a (i) Credit and Security Agreement and a (ii) Credit and
Security
Agreement Export-Import Subfacility (collectively referred to as the “Credit
Agreements”). The aggregate credit limit under the Credit Agreements is
$8,000,000 consisting of a revolving facility in the amount of up to $8,000,000.
Up to $1,000,000 of the revolving facility is available under the Export-Import
Agreement as a subfacility for Export-Import working capital financing.
All
credit facilities under the Credit Agreements mature on December 29, 2009.
Payment of amounts outstanding under the Credit Agreements may be accelerated
upon the occurrence of an Event of Default (as defined in the Credit
Agreements). All loans and advances under the Credit Agreements are secured
by a
first priority security interest in all of the Borrowers’ accounts receivable,
deposit accounts, property, plant and equipment, general intangibles,
intellectual property, inventory, letter-of-credit rights, and all other
business assets. The Borrowers have the right to terminate or reduce the
credit
facility prior to December 29, 2009 by paying a fee based on the aggregate
credit limit (or reduction, as the case may be) as follows: (i) during
year one
of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements,
2%;
and (iii) during year three of the Credit Agreements, 1%.
The
Credit Agreements contain financial covenants requiring that the Borrowers
(i)
on a consolidated basis not have a Net Loss (as defined in the Credit
Agreements) of more than (a) $700,000 for the fiscal quarter ended December
31,
2006, (b) $340,000 for the fiscal quarter ending March 31, 2007 and (c)
$150,000
for the fiscal quarter ending June 30, 2007; and (ii) not incur or contract
to
incur Capital Expenditures (as defined in the Credit Agreements) of more
than
$1,000,000 in the aggregate in any fiscal year or more than $1,000,000
in any
one transaction.
The
available amount under the Credit Agreements is the lesser of $8,000,000
or the
amount calculated under the Borrowing Base (as defined in the Credit
Agreements). The Borrowers must maintain a minimum outstanding amount of
$1,250,000 under the Credit Agreements at all times and pay a fee equal
to the
interest rate set forth on any such shortfall. Interest on amounts borrowed
under the Credit Agreements is payable at Wells Fargo’s prime rate of interest
plus 1% per annum floating, payable monthly in arrears. The default rate
of
interest is 3% higher than the rate otherwise payable. A fee of 1/2 % per
annum
on the Unused Amount (as defined in the Credit Agreements) is payable monthly
in
arrears. At December 31, 2006, the balance outstanding under the Credit
Agreements is $2,685,000 and the Company is not in violation of financial
covenants.
Approximately
$2,006,000 of the proceeds from the Credit Agreements was used to pay off
the
Company’s outstanding revolving credit facility with the Bank of America and
$629,000 was deposited with Bank of America to collateralize the Company’s
obligation with respect to an outstanding letter of credit. As of December
31,
2006, the Company no longer has a credit facility with the Bank of
America.
Labcaire
has a debt purchase agreement with Lloyds TSB Commercial Finance (“Lloyds”). The
amount of this facility bears interest at the bank’s base rate (4.5% and 5.25%
at December 31, 2006 and December 31, 2005, respectively) plus 1.75% and
a
service charge of .15% of sales invoice value and fluctuates based upon
the
outstanding United Kingdom and European receivables. The agreement expired
September 30, 2006 and was extended until March 2007. The agreement covers
all
United Kingdom and European sales. At December 31, 2006, the balance outstanding
under this credit facility was $1,221,000 and Labcaire is not in violation
of
financial covenants.
Labcaire
has an overdraft facility with Lloyds. The amount of this facility bears
interest at Lloyds’ base rate of 4.5% at December 31, 2006 plus 3%. The
agreement expired September 30, 2006 and is currently being extended on
a month
to month basis while the Company and Lloyds are working on a longer extension.
At December 31, 2006, the balance outstanding under this overdraft facility
was
$615,000 and Labcaire is not in violation of financial covenants.
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
8. Commitments
and Contingencies
A
jury in
the District Court of Boulder County, Colorado has returned a verdict against
Sonora in the amount of $419,000 which was recorded by the Company during
the
fourth quarter of fiscal 2005. The case involved royalties claimed on recoating
of transesophogeal probes, which is a process performed by Sonora. Approximately
80% of the judgment was based on the jury’s estimate of royalties for potential
sales of the product in the future. Sonora has moved for judgment
notwithstanding the verdict based on, among other things, the award of
damages
for future royalties. Sonora has also moved for a new trial in the
case.
The
Company is a defendant in claims and lawsuits arising in the ordinary course
of
business. The Company believes that it has meritorious defenses to such
claims
and lawsuits and is vigorously contesting them. Although the outcome of
litigation cannot be predicted with certainty, the Company believes that
these
actions will not have a material adverse effect on the Company’s consolidated
financial position or results of operations.
9. Business
Segments
The
Company operates in two business segments which are organized by product
types:
medical device products and laboratory and scientific products. Medical
device
products 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
Isis 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. 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, Labcaire, UKHIFU
and Misonix Ltd. 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
six months ended December 31, 2006:
|
|
Medical
Device Products
|
|
Laboratory
and Scientific Products
|
|
Corporate
and Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
11,051,464
|
|
$
|
9,230,500
|
|
$
|
—
|
|
$
|
20,281,964
|
|
Cost
of goods sold
|
|
|
6,180,576
|
|
|
5,382,767
|
|
|
—
|
|
|
11,563,343
|
|
Gross
profit
|
|
|
4,870,888
|
|
|
3,847,733
|
|
|
—
|
|
|
8,718,621
|
|
Selling
expenses
|
|
|
2,343,822
|
|
|
1,177,534
|
|
|
—
|
|
|
3,521,356
|
|
Research
and development expenses
|
|
|
1,049,026
|
|
|
599,359
|
|
|
—
|
|
|
1,648,385
|
|
General
and administrative
|
|
|
—
|
|
|
—
|
|
|
4,707,431
|
|
|
4,707,431
|
|
Total
operating expenses
|
|
|
3,392,848
|
|
|
1,776,893
|
|
|
4,707,431
|
|
|
9,877,172
|
|
Income
(loss) from operations
|
|
$
|
1,478,040
|
|
$
|
2,070,840
|
|
|
($4,707,431
|
)
|
|
($1,158,551
|
)
|
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
For
the
three months ended December 31, 2006:
|
|
Medical Device
Products
|
|
Laboratory
and Scientific Products
|
|
Corporate
and Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
6,221,009
|
|
$
|
4,418,077
|
|
$
|
—
|
|
$
|
10,639,086
|
|
Cost
of goods sold
|
|
|
3,204,488
|
|
|
2,647,843
|
|
|
—
|
|
|
5,852,331
|
|
Gross
profit
|
|
|
3,016,521
|
|
|
1,770,234
|
|
|
—
|
|
|
4,786,755
|
|
Selling
expenses
|
|
|
1,272,400
|
|
|
651,717
|
|
|
—
|
|
|
1,924,117
|
|
Research
and development expenses
|
|
|
525,342
|
|
|
302,826
|
|
|
—
|
|
|
828,168
|
|
General
and administrative
|
|
|
—
|
|
|
—
|
|
|
2,303,148
|
|
|
2,303,148
|
|
Total
operating expenses
|
|
|
1,797,742
|
|
|
954,543
|
|
|
2,303,148
|
|
|
5,055,433
|
|
Income
(loss) from operations
|
|
$
|
1,218,779
|
|
$
|
815,691
|
|
|
($2,303,148
|
)
|
|
($268,678
|
)
|
For
the
six months ended December 31, 2005:
|
|
Medical Device
Products
|
|
Laboratory
and Scientific
Products
|
|
Corporate
and Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
10,444,816
|
|
$
|
8,935,142
|
|
$
|
—
|
|
$
|
19,379,958
|
|
Cost
of goods sold
|
|
|
6,111,109
|
|
|
5,968,797
|
|
|
—
|
|
|
12,079,906
|
|
Gross
profit
|
|
|
4,333,707
|
|
|
2,966,345
|
|
|
—
|
|
|
7,300,052
|
|
Selling
expenses
|
|
|
1,890,609
|
|
|
1,357,862
|
|
|
—
|
|
|
3,248,471
|
|
Research
and development expenses
|
|
|
1,098,998
|
|
|
664,738
|
|
|
—
|
|
|
1,763,736
|
|
General
and administrative
|
|
|
—
|
|
|
—
|
|
|
5,025,542
|
|
|
5,025,542
|
|
Total
operating expenses
|
|
|
2,989,607
|
|
|
2,022,600
|
|
|
5,025,542
|
|
|
10,037,749
|
|
Income
(loss) from operations
|
|
$
|
1,344,100
|
|
$
|
943,745
|
|
|
($5,025,542
|
)
|
|
($2,737,697
|
)
|
For
the
three months ended December 31, 2005:
|
|
Medical Device
Products
|
|
Laboratory
and Scientific Products
|
|
Corporate
and Unallocated
|
|
Total
|
|
Net
sales
|
|
$
|
5,470,480
|
|
$
|
4,797,906
|
|
$
|
—
|
|
$
|
10,268,386
|
|
Cost
of goods sold
|
|
|
3,016,912
|
|
|
3,387,953
|
|
|
—
|
|
|
6,404,865
|
|
Gross
profit
|
|
|
2,453,568
|
|
|
1,409,953
|
|
|
—
|
|
|
3,863,521
|
|
Selling
expenses
|
|
|
983,565
|
|
|
703,272
|
|
|
—
|
|
|
1,686,837
|
|
Research
and development expenses
|
|
|
507,207
|
|
|
339,789
|
|
|
—
|
|
|
846,996
|
|
General
and administrative
|
|
|
—
|
|
|
—
|
|
|
2,290,680
|
|
|
2,290,680
|
|
Total
operating expenses
|
|
|
1,490,772
|
|
|
1,043,061
|
|
|
2,290,680
|
|
|
4,824,513
|
|
Income
(loss) from operations
|
|
$
|
962,796
|
|
$
|
366,892
|
|
|
($2,290,680
|
)
|
|
($960,992
|
)
|
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
The
Company’s sales are generated from various geographic regions. The following is
an analysis of net sales for the six months and three months ended December
31,
2006 and 2005:
|
|
Six
Months
|
|
Three
Months
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
United
States
|
|
$
|
11,924,858
|
|
$
|
12,650,811
|
|
$
|
5,915,357
|
|
$
|
6,489,051
|
|
United
Kingdom
|
|
|
5,440,671
|
|
|
4,303,706
|
|
|
2,719,336
|
|
|
2,408,806
|
|
Europe
|
|
|
1,692,694
|
|
|
1,139,940
|
|
|
1,318,741
|
|
|
667,673
|
|
Asia
|
|
|
753,335
|
|
|
598,391
|
|
|
445,825
|
|
|
275,575
|
|
Canada
and Mexico
|
|
|
182,133
|
|
|
235,765
|
|
|
116,570
|
|
|
103,749
|
|
Middle
East
|
|
|
56,237
|
|
|
130,555
|
|
|
10,669
|
|
|
99,662
|
|
Other
|
|
|
232,036
|
|
|
320,790
|
|
|
112,588
|
|
|
223,870
|
|
|
|
$
|
20,281,964
|
|
$
|
19,379,958
|
|
$
|
10,639,086
|
|
$
|
10,268,386
|
|
10. Recent
Accounting Standards
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets” (“SFAS 156”), an amendment of
SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities”. SFAS 156 requires all separately recognized
servicing assets and servicing liabilities to be initially measured at
fair
value, if practicable, and permits an entity to subsequently measure those
servicing assets and servicing liabilities at fair value. SFAS 156 is effective
for fiscal years beginning after September 15, 2006. The Company does not
expect
the adoption of SFAS 156 to have a material effect on the Company’s consolidated
financial position or results of operations.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes”. It prescribes a recognition threshold and
measurement methodology for financial statement reporting purposes and
promulgates a series of new disclosures of tax positions taken or expected
to be
taken on a tax return for which less than all of the resulting tax benefits
are
expected to be realized. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will adopt this interpretation
in
the first quarter of its 2008 fiscal year, which will begin July 1, 2007.
The
Company is currently evaluating the requirements of FIN 48 and has not
yet
determined the impact of such requirements on the Company’s consolidated
financial position or results of operations.
In
September 2006, the Securities and Exchange Commission (the “SEC”) staff issued
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 was issued to provide consistency between how
registrants quantify financial statement misstatements.
Historically,
there have been two widely-used methods for quantifying the effects of
financial
statement misstatements. These methods are referred to as the “roll-over” and
“iron curtain” method. The roll-over method quantifies the amount by which the
current year income statement is misstated. Exclusive reliance on an income
statement approach can result in the accumulation of errors on the balance
sheet
that may not have been material to any individual income statement, but
which
may misstate one or more balance sheet accounts. The iron curtain method
quantifies the error as the cumulative amount by which the current year
balance
sheet is misstated. Exclusive reliance on a balance sheet approach can
result in
disregarding the effect of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. We currently use the iron curtain method for quantifying identified
financial statement misstatements.
MISONIX,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
with respect to interim periods is unaudited)
SAB
108
established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatement on each of the Company’s
financial statements and the related financial statement disclosures. This
approach is commonly referred to as the “dual approach” because it requires
quantification of errors under both the roll-over and iron curtain methods.
SAB
108 allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach
had
always been used or by (2) recording the cumulative effect of initially
applying
the dual approach as adjustments to the carrying values of assets and
liabilities as of January 2, 2006 with an offsetting adjustment recorded
to the
opening balance of retained earnings. Use of this “cumulative effect” transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when
it
arose.
We
will
initially apply SAB 108 using the cumulative effect transition method in
connection with the preparation of our annual financial statements for
the year
ending June 30, 2007. The Company does not expect the provisions of SAB
108 to
have a material effect on the Company’s consolidated financial position or
results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”) to eliminate the diversity in practice that exists due to the
different definitions of fair value. SFAS No. 157 retains the exchange
price
notion in earlier definitions of fair value, but clarifies that the exchange
price is the price in an orderly transaction between market participants
to sell
an asset or liability in the principal or most advantageous market for
the asset
or liability. SFAS No. 157 states that the transaction is hypothetical
at the
measurement date, considered from the perspective of the market participant
who
holds the asset or liability. As such, fair value is defined as the price
that
would be received to sell an asset or paid to transfer a liability in an
orderly
transaction between market participants at the measurement date (an exit
price),
as opposed to the price that would be paid to acquire the asset or received
to
assume the liability at the measurement date (an entry price).
SFAS
No.
157 also stipulates that, as a market-based measurement, fair value measurement
should be determined based on the assumptions that market participants
would use
in pricing the asset or liability, and establishes a fair value hierarchy
that
distinguishes between (a) market participant assumptions developed based
on
market data obtained from sources independent of the reporting entity
(observable outputs) and (b) the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available
in the
circumstances (unobservable inputs). SFAS No. 157 expands disclosures about
the
use of fair value to measure assets and liabilities in interim and annual
periods subsequent to initial recognition.
SFAS
No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years,
although
earlier application is encouraged. Additionally, prospective application
of the
provisions of SFAS No. 157 is required as of the beginning of the fiscal
year in
which it is initially applied, except when certain circumstances require
retrospective application. The Company is currently evaluating the impact
of
SFAS No. 157 on its consolidated financial position and results of
operations.
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.
Six
months ended December 31, 2006 and 2005.
Net
sales:
Net
sales increased $902,006 to $20,281,964 for the six months ended December
31,
2006 from $19,379,958 for the six months ended December 31, 2005. The difference
in net sales was due to an increase in sales of medical device products
of
$606,648 to $11,051,464 for the six months ended December 31, 2006 from
$10,444,816 for the six months ended December 31, 2005. The increase in
medical
device products revenues was attributable to a 20% increase in therapeutic
medical device products revenues to $5,439,575, partially offset by a 5%
decrease in diagnostic medical device products revenues to $5,611,889.
The
increase in therapeutic medical device products revenues was primarily
due to
the increase in unit sales and fee per use revenues from the Sonoblate
500®
which is used to treat prostate cancer as well as other prostate afflictions.
The decrease in diagnostic medical device product revenues was not attributable
to any one specific product or customer but across multiple products and
customers. This difference in net sales is also due to an increase in sales
of
laboratory and scientific products of $295,358 to $9,230,500 for the six
months
ended December 31, 2006 from $8,935,142 for the six months ended December
31,
2005. The increase in sales of laboratory and scientific products was a
result
of increased ultrasonic laboratory products sales of $74,993, increased
ductless
fume enclosure and related product sales of $57,203 and increased Labcaire
Systems Limited (“Labcaire”) sales of $543,735, primarily sales of Guardian
product service partially offset by reduced sales of wet scrubber products
of
$380,573. The decrease in sales of wet scrubber products is due to the
Company
being extremely selective in the opportunities it pursues.
Gross
profit:
Gross
profit increased to 43.0% as a percentage of sales for the six months ended
December 31, 2006 from 37.7% for the six months ended December 31, 2005.
Gross
profit for medical device products increased to 44.1% of sales in the six
months
ended December 31, 2006 from 41.5% of sales in the six months ended December
31,
2005. The increase in gross profit for medical device products was primarily
due
to increased volume from Sonoblate 500 unit sales and fee per use revenue
which
carry higher margins than other medical device products. Gross profit for
laboratory and scientific products increased to 41.7% for the six months
ended
December 31, 2006 from 33.2% for the six months ended December 31, 2005.
The
increase in gross profit for laboratory and scientific products was due
to an
increase in gross profit margin at Labcaire, which was attributable to
increased
service revenues on Guardian endoscopic units and increased margins for
wet
scrubbers due to higher margin product shipments. 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 $272,885 to $3,521,356 for the six months ended December
31,
2006 from $3,248,471 for the six months ended December 31, 2005. Medical
device
products selling expenses increased $453,213, predominantly due to increased
expenses related to sales of therapeutic medical device products, and clinical
trial expenses primarily related to the Sonoblate 500 which is used to
treat
prostate cancer. Laboratory and scientific products selling expenses decreased
$180,328, predominantly due to a decrease in marketing expenses and employees
for the Company’s fume enclosure, Ultrasonic and wet scrubber
products.
General
and administrative expenses:
General
and administrative expenses decreased $318,111 from $5,025,542 in the six
months
ended December 31, 2005 to $4,707,431 in the six months ended December
31, 2006.
Effective July 1, 2005 the Company implemented SFAS 123R which requires
companies to measure and record expenses related to stock-based compensation.
Stock-based compensation decreased $274,000 from $374,000 in the December
2005
period to $100,000 in the December 2006 period. In addition, general and
administrative expenses decreased at Labcaire and Sonora due to reduced
personnel. The above decreases were partially offset by administrative
expenses
at UKHIFU which commenced operations April 1, 2006.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS.
Research
and development expenses:
Research and development expenses decreased $115,351 from $1,763,736 for
the six
months ended December 31, 2005 to $1,648,385 for the six months ended December
31, 2006. Laboratory and Scientific products research and development expenses
decreased $65,379, predominately due to reduced research and development
efforts
for wet scrubber products. Research and development expenses for medical
device
products decreased $49,972. Therapeutic medical device products research
and
development expenses decreased $69,709 due to decreased consulting fees
to Focus
Surgery, Inc. for the liver/kidney product. Research and development expenses
for diagnostic medical device products increased $19,737 relating to the
development of new products which are expected to be introduced during
the
current fiscal year.
Other
income (expense):
Other
income for the six months ended December 31, 2006 was $275,075 as compared
to
$314,191 for the six months ended December 31, 2005. The decrease of $39,116
was
primarily due to increased interest expense of $111,883, which was partially
offset by increased royalty and license income of $27,009 and decreased
royalty
expense of $26,048. The increased interest expense was due principally
to
short-term borrowings used to fund domestic operations and increased borrowings
at Labcaire.
Income
taxes:
The
effective tax rate was 42.9% for the six months ended December 31, 2006,
as
compared to an effective tax rate of 25.8% for the six months ended December
31,
2005. The effective tax rate for the six months ended December 31, 2006
was
favorably impacted by an additional $98,000 of Research and Experimentation
Credits provided for by the December 20, 2006 enactment of the Tax Relief
and Health Care Act of 2006 (HR6111), which retroactively extends the tax
credit
for Research and Experimentation Expenditures through December 31,
2007.
Three
months ended December 31, 2006 and 2005.
Net
sales:
Net
sales increased $370,700 to $10,639,086 for the three months ended December
31,
2006 compared to $10,268,386 for the three months ended December 31, 2005.
This
increase in net sales is due to an increase of medical device products
revenues
of $750,529 to $6,221,009 for the three months ended December 31, 2006
from
$5,470,480 for the three months ended December 31, 2005. This difference
in net
sales is also due to a decrease in laboratory and scientific products sales
of
$379,829 to $4,418,077 for the three months ended December 21, 2006 from
$4,797,906 for the three months ended December 31, 2005. The increase in
sales
of medical device products is due to a $681,579 increase in sales of therapeutic
medical device products and an increase of $68,950 in sales of diagnostic
medical device products. The increase in sales of therapeutic medical device
products was primarily due to increased unit sales and fee per use revenues
from
the Sonoblate 500 in Europe. The increase in sales of diagnostic medical
device
products was not attributable to a single customer or distributor or any
other
specific factor, but an increase in demand for several products. The decrease
in
sales of laboratory and scientific products is due to a decrease in wet
scrubber
sales of $463,989 partially offset by an increase in ultrasonic laboratory
products sales of $64,415, an increase in ductless fume enclosures and
related
product sales of $5,357 and an increase in Labcaire sales of $14,388. The
decrease in sales of wet scrubbers is due to the Company being extremely
selective in the opportunities it pursues.
Gross
profit:
Gross
profit increased to 45.0% of sales for the three months ended December
31, 2006
from 37.6% of sales for the three months ended December 31, 2005. Gross
profit
for medical device products increased to 48.5% of sales for the three months
ended December 31, 2006 from 44.9% for the three months ended December
31, 2005.
Gross profit for laboratory and scientific products increased to 40.1%
of sales
for the three months ended December 31, 2006 from 29.4% of sales for the
three
months ended December 31, 2005. The increase in gross profit from medical
device
products was a result of increased units sales and fee per use revenue
from the
Sonoblate 500 which carry higher margins.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS.
The
increase in gross profit from laboratory and scientific products is primarily
due to the Company’s selectivity of opportunities pursued in wet scrubber
products.
Selling
expenses:
Selling
expenses increased $237,280 to $1,924,117 for the three months ended December
31, 2006 from $1,686,837 for the three months ended December 31, 2005.
Medical
device products selling expenses increased $288,835, principally due to
additional sales and marketing efforts for European distribution of the
Sonoblate 500 product used to treat prostate cancer and other prosthetic
afflictions. Laboratory and scientific products selling expenses decreased
$51,555, predominately due to decreased head count related to wet scrubber
product sales.
General
and administrative expenses:
General
and administrative expenses increased $12,468 to $2,303,148 in the three
months
ended December 31, 2006 from $2,290,680 in the three months ended December
31,
2005. The increase is predominately due to increased expenses at Misonix
and
UKHIFU which were partially offset by reduced stock-based compensation
and
decreased personnel expense related to head count reductions at Labcaire
and
Sonora.
Research
and development expenses:
Research and development expenses decreased $18,828 to $828,168 for the
three
months ended December 31, 2006 from $846,996 from the three months ended
December 31, 2005. Medical device products research and development expenses
increased $18,135, predominately due to increased efforts in research and
development for the liver/kidney project. Research and development expenses
for
laboratory and scientific products decreased $36,963, primarily due to
reduced
research and development efforts for various product enhancements and new
product designs for wet scrubber products.
Other
income (expense):
Other
income for the three months ended December 31, 2006 was $141,417 as compared
to
$139,332 for the three months ended December 31, 2005. The increase of
$2,085
was primarily due to an increase in royalty and license income of $56,005
and a
decrease in royalty expense of $31,895 offset by increased interest expense
of
$100,555. The increase in interest expense is due to an increase in the
average
outstanding balance of the Labcaire note payable and borrowings against
the
Company’s line of credit for the three months ended December 31, 2006 as
compared to the three months ended December 31, 2005.
Income
taxes:
The
effective tax rate is 119% for the three months ended December 31, 2006,
as
compared to an effective tax rate of 38.5% for the three months ended December
31, 2005. The effective tax rate was favorably impacted by an additional
$98,000
of Research and Experimentation Credits provided for with the December
20, 2006
enactment of the Tax Relief and Health Care Act of 2006 (HR6111), which
retroactively extends the tax credit for Research and Experimentation
Expenditures through December 31, 2007. The effective income tax rate excluding
the Research Experimentation Credit, in the December 2006 quarter, was
38.7%.
Critical
Accounting Policies:
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
Certain of these accounting policies require the Company to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and the related disclosure of contingent assets and liabilities,
revenues and expenses. On an ongoing basis, the Company bases its estimates
on
historical data and experience, when available, and on various other assumptions
that are believed to be reasonable under the circumstances, the combined
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.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS.
Actual
results may differ from these estimates. There have been no material changes
in
the Company’s critical accounting policies and estimates from those discussed in
Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30,
2006.
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 Securities
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 December 31, 2006 and June 30, 2006 was $11,220,764 and $12,103,001,
respectively. The decrease in working capital at December 31, compared
to June
30, 2006, was due principally to increases in short-term debt which were
partially offset by increased accounts receivable and reduced accounts
payable
and other accruals.
Accounts
receivable increased 19.6% at December 31, 2006 compared to June 30, 2006,
primarily as a result of higher sales volumes. The Company borrowed against
its
revolving credit facilities during the six month period ended December
31, 2006
to pay down accounts payable and to fund operations.
For
the
six months ended December 31, 2006, cash used in operations totaled $1,885,029.
For the six months ended December 31, 2006, cash used in investing activities
was $217,208, which primarily consisted of the purchase of property, plant
and
equipment in the regular course of business. For the six months ended December
31, 2006, cash provided by financing activities was $2,680,223, primarily
consisting of short-term borrowings of $5,070,569, partially offset by
principal
payments on short-term borrowings, capital lease obligations and long-term
debt.
On December 29, 2006 the Company entered into a Credit Agreement with Wells
Fargo Bank (see information below in “Revolving Credit Facilities”). The
proceeds from this loan totaled $2,685,000 and approximately $2,006,000
was used
to pay off the Company’s outstanding revolving credit facility with the Bank of
America and $629,000 was deposited with Bank of America to collateralize
the
Company’s obligation with respect to an outstanding letter of
credit.
The
Company believes its financial resources will be sufficient for the
foreseeable future to provide for continued investment in working capital
and
property, plant and equipment and for general corporate purposes.
Revolving
Credit Facilities
On
December 29, 2006, the Company and its subsidiaries, Acoustic Marketing
Research, Inc. d/b/a Sonora Medical Systems (“Sonora”) and Hearing Innovations
Incorporated (collectively referred to as the “Borrowers”) and Wells Fargo Bank,
entered into a (i) Credit and Security Agreement and a (ii) Credit and
Security
Agreement Export-Import Subfacility (collectively referred to as the “Credit
Agreements”). The aggregate credit limit under the Credit Agreements is
$8,000,000 consisting of a revolving facility in the amount of up to $8,000,000.
Up to $1,000,000 of the revolving facility is available under the Export-Import
Agreement as a subfacility for Export-Import working capital financing.
All
credit facilities under the Credit Agreements mature on December 29, 2009.
Payment of amounts outstanding under the Credit Agreements may be accelerated
upon the occurrence of an Event of Default (as defined in the Credit
Agreements). All loans and advances under the Credit Agreements are secured
by a
first priority security interest in all of the Borrowers’ accounts receivable,
deposit accounts, property, plant and equipment, general intangibles,
intellectual property, inventory, letter-of-credit rights, and all other
business assets. The Borrowers have the right to terminate or reduce the
credit
facility prior to December 29, 2009 by paying a fee based on the aggregate
credit limit (or reduction, as the case may be) as follows: (i) during
year one
of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements,
2%;
and (iii) during year three of the Credit Agreements, 1%.
MISONIX,
INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
Credit Agreements contain financial covenants requiring that the Borrowers
(i)
on a consolidated basis not have a Net Loss ( as defined in the Credit
Agreements) of more than $700,000 for the fiscal quarter ended December
31,
2006, (b) $340,000 for the fiscal quarter ending March 31, 2007 and (c)
$150,000
for the fiscal quarter ending June 30, 2007; and (ii) not incur or contract
to
incur Capital Expenditures (as defined in the Credit Agreements) of more
than
$1,000,000 in the aggregate in any fiscal year or more than $1,000,000
in any
one transaction.
The
available amount under the Credit Agreements is the lesser of $8,000,000
or the
amount calculated under the Borrowing Base (as defined in the Credit
Agreements). The Borrowers must maintain a minimum outstanding amount of
$1,250,000 under the Credit Agreements at all times and pay a fee equal
to the
interest rate set forth on any such shortfall. Interest on amounts borrowed
under the Credit Agreements is payable at Wells Fargo’s prime rate of interest
plus 1% per annum floating, payable monthly
in arrears. The default rate of interest is 3% higher than the rate otherwise
payable. A fee of 1/2 % per annum on the Unused Amount (as defined in the
Credit
Agreements) is payable monthly in arrears. At December 31, 2006, the balance
outstanding under the Credit Agreements is $2,685,000 and the Company is
not in
violation of financial covenants.
Approximately
$2,006,000 of the proceeds from the Credit Agreements was used to pay off
the
Company’s outstanding revolving credit facility with the Bank of America and
$629,000 was deposited with Bank of America to collateralize the Company’s
obligation with respect to an outstanding letter of credit. As of December
31,
2006 the Company no longer has a credit facility with the Bank of
America.
Labcaire
has a debt purchase agreement with Lloyds TSB Commercial Finance (“Lloyds”). The
amount of this facility bears interest at the bank’s base rate (4.5% and 5.25%
at December 31, 2006 and December 31, 2005, respectively) plus 1.75% and
a
service charge of .15% of sales invoice value and fluctuates based upon
the
outstanding United Kingdom and European receivables. The agreement expired
September 30, 2006 and was extended until March 2007. The agreement covers
all
United Kingdom and European sales. At December 31, 2006, the balance outstanding
under this credit facility was $1,221,000 and Labcaire is not in violation
of
financial covenants.
Labcaire
has an overdraft facility with Lloyds. The amount of this facility bears
interest at Lloyds’ base rate of 4.5% at December 31, 2006 plus 3%. The
agreement expired September 30, 2006 and is currently being extended on
a month
to month basis while the Company and Lloyds are working on a longer extension.
At December 31, 2006, the balance outstanding under this overdraft facility
was
$615,000 and Labcaire is not in violation of financial covenants.
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.
MISONIX,
INC.
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,
Misonix Ltd and UKHIFU.
Foreign
Exchange Rates:
Approximately
27% of the Company’s revenues in the six month period ended December 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 1.90 and 1.77 for
the
six months ended December 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 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.
Interest
Rate Risk
The
Company earns interest on cash balances and pays interest on debt incurred.
In
light of the Company’s existing cash, results of operations, the terms of its
debt obligations and projected borrowing requirements, it does not believe
a 10%
change in interest rates would have a significant impact on its consolidated
financial position.
Item
4. Controls and Procedures
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 SEC. 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 December 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 six months ended December 31, 2006 that has materially affected,
or
is reasonable likely to materially affect, the Company’s internal control over
financial reporting.
MISONIX,
INC.
PART
II - OTHER
INFORMATION
Item
1A. Risk
Factors.
Risks
and
uncertainties that, if they were to occur, could materially adversely affect
our
business or that could cause our actual results to differ materially from
the
results contemplated by the forward-looking statements contained in this
Report
and other public statements we make were set forth in the “Item 1A - Risk
Factors” section of our Annual Report on Form 10-K for the year ended June 30,
2006. There have been no material changes from the risk factors disclosed
in
that Form 10-K.
Item
4. Submission
of Matters to a Vote of Security Holders.
At
the
Company’s Annual Meeting of Shareholders, held on December 14, 2006, Messrs.
Howard Alliger, John W. Gildea, Michael A. McManus, Jr., Dr. Charles Miner
III,
T. Guy Minetti and Thomas F. O’Neill were elected as Directors for a one-year
term. The votes were as follows: Mr. Alliger - votes for 5,666,077; votes
withheld 567,913. Mr. Gildea - votes for 5,665,977; votes withheld 568,013.
Mr.
McManus - votes for 5,513,929; votes withheld 720,061. Dr. Miner - votes
for
5,664,977; votes withheld 569,013. Mr. Minetti - votes for 5,667,577; votes
withheld 566,413. Mr. O’Neill - votes for 5,667,577; votes withheld
566,413.
Item
6. Exhibits.
Exhibit
31.1 - Rule 13a-14(a)/15d-14(a) Certification
Exhibit
31.2 - Rule 13a-14(a)/15d-14(a) Certification
Exhibit
32.1 - Section 1350 Certification of Chief Executive Officer
Exhibit
32.2 - Section 1350 Certification of Chief Financial Officer
SIGNATURES
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: February
13, 2007
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MISONIX,
INC.
(Registrant)
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By: |
/s/
Michael A. McManus, Jr. |
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Michael
A. McManus, Jr.
President
and Chief Executive Officer
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By: |
/s/
Richard Zaremba |
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Richard
Zaremba
Senior
Vice President, Chief Financial Officer,
Treasurer
and Secretary
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