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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 1-10986
MISONIX, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes 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 November 9, 2004
--------------------- ----------------
Common Stock, $.01 par value 6,748,453
MISONIX, INC.
-------------
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2004 (Unaudited) and June 30, 2004 3
Consolidated Statements of Operations
Three months ended September 30, 2004
and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended September 30, 2004
and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures
18
Part II - OTHER INFORMATION
Item 6. Exhibits
19
Signatures 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, June 30,
2004 2004
----------------------------------------
ASSETS (UNAUDITED)
----------------------------------------
Current assets:
Cash and cash equivalents $ 3,821,751 $ 4,839,866
Accounts receivable, less allowance for doubtful accounts of $390,525 and
$457,016, respectively 7,642,846 7,601,693
Inventories 11,563,808 10,944,572
Deferred income taxes 664,611 645,381
Prepaid expenses and other current assets 1,561,544 1,114,546
----------------------------------------
Total current assets 25,254,560 25,146,058
Property, plant and equipment, net 3,853,763 3,892,920
Deferred income taxes 412,201 412,201
Goodwill 4,473,713 4,473,713
Other assets 310,972 316,220
----------------------------------------
Total assets $ 34,305,209 $ 34,241,112
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 1,670,745 $ 1,373,681
Accounts payable 4,237,979 4,507,476
Accrued expenses and other current liabilities 1,416,885 1,857,097
Income taxes payable 36,189 107,282
Current maturities of long-term debt and capital lease obligations 282,207 302,932
----------------------------------------
Total current liabilities 7,644,005 8,148,468
Long-term debt and capital lease obligations 1,248,475 1,264,480
Deferred income 873,374 769,033
Minority interest 331,395 315,955
Stockholders' equity:
Common stock, $.01 par value--shares authorized 10,000,000; 6,826,253 and 6,816,253
issued and 6,748,453 and 6,738,453 outstanding, respectively 68,263 68,163
Additional paid-in capital 23,163,502 23,116,602
Retained deficit 1,081,728 665,461
Treasury stock, 77,800 shares (412,424) (412,424)
Accumulated other comprehensive income 306,891 305,374
----------------------------------------
Total stockholders' equity 24,207,960 23,743,176
----------------------------------------
Total liabilities and stockholders' equity $ 34,305,209 $ 34,241,112
========================================
See Accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
Net sales $ 10,500,066 $ 8,619,898
Cost of goods sold 6,089,326 4,954,203
-------------------- -------------------
Gross profit 4,410,740 3,665,695
Operating expenses:
Selling expenses 1,439,809 956,533
General and administrative expenses 1,740,894 2,055,768
Research and development expenses 741,768 488,480
-------------------- -------------------
Total operating expenses 3,922,471 3,500,781
-------------------- -------------------
Income from operations 488,269 164,914
Other income (expense):
Interest income 1,285 6,828
Interest expense (50,558) (37,796)
Option/license fees 6,078 6,461
Royalty income 245,000 564,049
Foreign exchange loss - (4,593)
Loss on impairment of Hearing Innovations, Inc. - (23,000)
Miscellaneous expense 1,534 -
-------------------- -------------------
Total other income 203,339 511,949
Income before minority interest and income taxes 691,608 676,863
Minority interest in net income of consolidated
subsidiaries 15,439 14,026
-------------------- -------------------
Income before income taxes 676,169 662,837
Income tax expense 259,902 269,095
-------------------- -------------------
Net income $ 416,267 $ 393,742
==================== ===================
Net income per share-Basic $ .06 $ .06
==================== ===================
Net income per share - Diluted $ .06 $ .06
==================== ===================
Weighted average common shares outstanding - Basic 6,741,786 6,655,865
==================== ===================
Weighted average common shares outstanding - Diluted 6,959,540 6,725,580
==================== ===================
See Accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
-----------------------------------------
OPERATING ACTIVITIES
Net income $ 416,267 $ 393,742
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Bad debt expense (63,510) 103,247
Deferred income tax benefit (19,229) (2,395)
Depreciation and amortization 188,068 171,521
Loss on disposal of equipment - 41,816
Foreign currency exchange loss - 4,593
Minority interest in net income of subsidiaries 15,439 14,026
Loss on impairment of investments - 23,000
Changes in operating assets and liabilities:
Accounts receivable (38,569) 1,225,678
Inventories (647,732) (280,095)
Prepaid income taxes - 44,204
Prepaid expenses and other current assets (416,263) 123,470
Other assets 739 (14,319)
Accounts payable and accrued expenses (818,893) (117,744)
Deferred income (loss) 104,341 (12,750)
Income taxes payable 105,046 682,772
-----------------------------------------
Net cash (used in) provided by operating activities (1,174,296) 2,400,766
-----------------------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (109,858) (130,084)
Loans to Hearing Innovations, Inc. - (23,000)
-----------------------------------------
Net cash used in investing activities (109,858) (153,084)
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 311,388 233,348
Principal payments on capital lease obligations (72,653) (66,803)
Proceeds from exercise of employee stock options 47,000 -
Payments of long-term debt (13,164) (12,518)
-----------------------------------------
Net cash provided by financing activities 272,571 154,027
-----------------------------------------
Effect of exchange rate changes on assets and liabilities (6,532) (6,606)
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (1,018,115) 2,395,103
Cash and cash equivalents at beginning of period 4,839,866 2,279,869
-----------------------------------------
Cash and cash equivalents at end of period $ 3,821,751 $ 4,674,972
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 50,558 $ 37,796
=========================================
Income taxes $ 349,005 $ (456,500)
=========================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 64,889 $ 130,568
=========================================
See Accompanying Notes to Consolidated Financial Statements.
5
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited)
1. Basis of Presentation
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 months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2005.
The balance sheet at June 30, 2004 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, 2004.
2. Net Income Per Share
Basic 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. The following
table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding:
For the Three Months
Ended September 30,
2004 2003
---- ----
Weighted average common
shares outstanding 6,741,786 6,655,865
Dilutive effect of stock options 217,754 69,715
--------- ---------
Diluted weighted average common
shares outstanding 6,959,540 6,725,580
========= =========
3. Comprehensive Income
Total comprehensive income was $306,893 and $402,783 for the three months
ended September 30, 2004 and 2003, respectively. Accumulated other
comprehensive income is comprised of foreign currency translation
adjustments.
4. Stock-Based Compensation
The Company accounts for stock-based employee and outside directors'
compensation under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") and SFAS No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure", which was released in December 2002 as an
amendment of SFAS No. 123. The following table illustrates the effect on
net income (loss) and net income (loss) per share as if the
6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
For the three months ended
September 30,
2004 2003
-------------------- --------------------
Net income - As reported: $ 416,267 $ 393,742
Stock based compensation
determined under SFAS 123 (182,383) (107,914)
-------------------- --------------------
Net income (loss)- Pro forma: $ 233,884 $ 285,828
Net income (loss) per share -
Basic:
As reported $ .06 $ .06
Pro forma $ .03 $ .04
Net income (loss) per share -
Diluted:
As reported $ .06 $ .06
Pro forma $ .03 $ .04
The Financial Accounting Standards Board ("FASB") is expected to issue in the
fourth quarter of 2004 FASB Statement 123R, Share-Based Payment ("FAS 123R"). If
adopted as currently contemplated, FAS 123R would require all companies to
measure compensation cost for all share-based payments (including employee stock
options) at fair value and recognize such costs in the statement of operations.
FAS 123R would be effective for public companies for periods beginning after
June 15, 2005. Management is currently evaluating the impact of FAS 123R and has
not determined the impact of this statement on the consolidated financial
statements.
5. Inventories
Inventories are summarized as follows:
SEPTEMBER 30, 2004 June 30, 2004
------------------ -------------
Raw material $ 5,155,188 $ 4,397,472
Work-in-process 1,804,929 1,733,577
Finished goods 4,603,691 4,813,523
------------------------------------------------
$ 11,563,808 $ 10,944,572
================================================
7
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
6. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
SEPTEMBER 30, 2004 June 30, 2004
------------------ -------------
Accrued payroll and vacation $ 263,289 $ 296,628
Accrued sales tax 70,875 155,180
Accrued commissions and bonuses 241,866 387,078
Customer deposits and deferred contracts 652,312 808,414
Accrued professional fees 19,502 176,426
Other 169,041 33,371
----------- -----------
$ 1,416,885 $ 1,857,097
=========== ===========
7. Loans to Affiliate
Hearing Innovations, Inc.
During fiscal 2005, the Company entered into a loan agreement whereby Hearing
Innovations, Inc. ("Hearing Innovations") is required to pay the Company $16,720
due December 31, 2004. The note bears interest at 8% per annum. The note is
secured by a lien on all of Hearing Innovations' right, title and interest in
accounts receivable, inventory, property, plant and equipment and processes of
specified products whether now existing or arising after the date of this
agreement. The loan agreement contains warrants to acquire 16,720 shares of
Hearing Innovations common stock, at the option of the Company, at a cost of
$.20 per share. These warrants, which are deemed nominal in value, expire in
December 2005. The current ability of companies such as Hearing Innovations to
access capital markets or incur third party debt is very limited and is likely
to remain so for the foreseeable future. In light of this fact, Hearing
Innovations suspended operations in April 2004.
In connection with the adoption of FASB Interpretation 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46") the
Company consolidated Hearing Innovations in its March 31, 2004 balance sheet as
the entity was determined to be a variable interest entity ("VIE") and the
Company is its primary beneficiary. The Company elected to record the adoption
of FIN 46 as a cumulative effect of an accounting change. Consolidating Hearing
Innovations did not have a material impact on the Company's consolidated results
of operations or financial condition. Since Hearing Innovations, Inc. is now
consolidated, a loan of $16,720 for the three months ended September 30, 2004 is
eliminated in consolidation.
On July 14, 2004, Hearing Innovations sent all shareholders and creditors a plan
for reorganization and disclosure statement. The Company committed to fund
Hearing Innovations up to $150,000 for the reorganization plan. Hearing
Innovations plans to file for relief under Chapter 11 of the U.S. Bankruptcy
Code in November 2004. If the petition is approved, the Company will own 100% of
the equity in Hearing Innovations.
8. Business Segments
The Company operates in two business segments which are organized by product
types: laboratory and scientific products and medical devices. Laboratory and
scientific products include the Sonicator ultrasonic liquid processor, Aura
ductless fume enclosure, the Labcaire Autoscope and Guardian
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
endoscope disinfectant systems and the Mystaire wet scrubber. Medical devices
include the Auto Sonix ultrasonic cutting and coagulatory system, refurbishing
revenues 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). 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, 2004. Certain
items are maintained at the corporate headquarters (corporate) and are not
allocated to the segments. They primarily include general and administrative
expenses. The Company does not allocate assets by segment. Summarized financial
information for each of the segments are as follows:
For the three months ended September 30, 2004:
LABORATORY AND (A)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------------- ----------------------- ------------------ --------------------
Net sales $ 5,930,673 $ 4,569,393 $ - $ 10,500,066
Cost of goods sold 3,376,606 2,712,720 - 6,089,326
------------ ---------- -----------
Gross profit 2,554,067 1,856,673 - 4,410,740
Selling expenses 761,040 678,769 - 1,439,809
Research and development
expenses 509,440 232,328 - 741,768
------------ ---------- -----------
Total operating
expenses 1,270,480 911,097 1,740,894 3,922,471
------------ ---------- ------------ -----------
Income from operations $ 1,283,587 $ 945,576 $(1,740,894) $ 488,269
============ ========== ============ ===========
(A) Amount represents general and administrative expenses.
For the three months ended September 30, 2003:
LABORATORY AND (A)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------------- ----------------------- ------------------ --------------------
Net sales $ 4,602,120 $ 4,017,778 $ - $ 8,619,898
Cost of goods sold 2,550,892 2,403,311 - 4,954,203
-------------- ----------- -----------
Gross profit 2,051,228 1,614,467 - 3,665,695
Selling expenses 374,239 582,294 - 956,533
Research and development
expenses 318,066 170,414 - 488,480
-------------- ----------- -----------
Total operating
expenses 692,305 752,708 2,055,768 3,500,781
-------------- ----------- --------------- -----------
Income from operations $ 1,358,923 $ 861,759 $(2,055,768) $ 164,914
============== =========== ============== ===========
(A) Amount represents general and administrative expenses.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
For the three months ended September 30:
2004 2003
---- ----
United States $ 6,564,697 $ 5,765,060
Canada 271,593 66,639
United Kingdom 2,265,420 2,130,915
Europe 867,173 173,211
Asia 112,403 181,990
Middle East 198,601 73,723
Other 220,179 228,360
---------------------------------------
$ 10,500,066 $ 8,619,898
=======================================
10
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.
Three Months Ended September 30, 2004 and 2003.
NET SALES. Net sales of the Company's medical device products and laboratory and
scientific products increased $1,880,168 to $10,500,066 for the three months
ended September 30, 2004 from $8,619,898 for the three months ended September
30, 2003. This difference in net sales is due to an increase in sales of medical
device products of $1,328,553 to $5,930,673 for the three months ended September
30, 2004 from $4,602,120 for the three months ended September 30, 2003. This
difference in net sales is also due to an increase in sales of laboratory and
scientific products of $551,615 to $4,569,393 for the three months ended
September 30, 2004 from $4,017,778 for the three months ended September 30,
2003. The increase in sales of medical device products is due to an increase in
sales of diagnostic medical device products of $216,299 and an increase of
$1,112,254 in sales of therapeutic medical device products, both due to
increased customer demand for several diagnostic and therapeutic medical
products. The increase in sales for diagnostic medical device products was not
attributable to a single customer, distributor or any other specific factors.
The increase in sales for therapeutic medical device products was mostly
attributable to an increase in sales to United States Surgical Corporation
("USS") of approximately $542,000 and sales in Europe of the Sonablate 500
product of approximately $366,000. The remaining increase in therapeutic medical
device products is due to increased demand for several products. The increase in
laboratory and scientific products is due to an increase in Labcaire sales of
$144,979, sales of wet scrubber products of $404,110 and ductless fume enclosure
products of $22,208 partially offset by a decrease in laboratory ultrasonic
product sales of $19,682. The increase in Labcaire sales is primarily due to
demand for the Guardian (endoscopic cleaning) product. 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 September 2004 and
2003, the Company had foreign net sales of $3,935,369 and $2,854,838,
respectively, representing 37.5% and 33.1% of net sales for such years,
respectively. The increase in foreign sales during the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003 is
substantially due to increased sales of therapeutic medical device products in
Europe. In March 2004, the Company signed an exclusive distribution agreement
with Focus Surgery, Inc. ("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 2 years by the Company for automatic renewals for successive 1 year terms as
long as minimum quantities are purchased.
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three months ended September 30:
2004 2003
---- ----
United States $ 6,564,697 $ 5,765,060
Canada 271,593 66,639
United Kingdom 2,265,420 2,130,915
Europe 867,173 173,211
Asia 112,403 181,990
Middle East 198,601 73,723
Other 220,179 228,360
---------------------------------------
$ 10,500,066 $ 8,619,898
=======================================
Summarized financial information for each of the segments for the three months
ended September 30, 2004 and 2003 are as follows:
For the three months ended September 30, 2004:
LABORATORY AND (A)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
---------------- ---------------- --------------- ------------------
Net sales $ 5,930,673 $ 4,569,393 $ - $ 10,500,066
Cost of goods sold 3,376,606 2,712,720 - 6,089,326
----------- ----------- ------------
Gross profit 2,554,067 1,856,673 - 4,410,740
Selling expenses 761,040 678,769 - 1,439,809
Research and development
expenses 509,440 232,328 - 741,768
----------- ----------- ------------
Total operating
expenses 1,270,480 911,097 1,740,894 3,922,471
----------- ----------- -------------- ------------
Income from operations $ 1,283,587 $ 945,576 $(1,740,894) $ 488,269
=========== =========== ============== ============
(A) Amount represents general and administrative expenses.
For the three months ended September 30, 2003:
LABORATORY AND (A)
MEDICAL SCIENTIFIC CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
------------------- ------------------- ------------------- --------------------
Net sales $ 4,602,120 $ 4,017,778 $ - $ 8,619,898
Cost of goods sold 2,550,892 2,403,311 - 4,954,203
----------- ----------- ------------
Gross profit 2,051,228 1,614,467 - 3,665,695
Selling expenses 374,239 582,294 - 956,533
Research and development
expenses 318,066 170,414 - 488,480
----------- ----------- ------------
Total operating
expenses 692,305 752,708 2,055,768 3,500,781
----------- ----------- -------------- ------------
Income from operations $ 1,358,923 $ 861,759 $(2,055,768) $ 164,914
=========== ========== ============ ===========
(A) Amount represents general and administrative expenses.
GROSS PROFIT: Gross profit decreased to 42.0% for the three months ended
September 30, 2004 from 42.5% for the three months ended September 30, 2003.
Gross profit for medical device products decreased to 43.1% of sales in the
three months ended September 30, 2004 from 44.6% of sales in the three months
ended September 30, 2003. The decrease in gross profit for medical device
products was negatively impacted by an unfavorable order mix for sales of
therapeutic medical device products, partially offset by an increase in
diagnostic medical device products. Gross profit for laboratory and
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
scientific products increased to 40.6% for the three months ended September 30,
2004 from 40.2% for the three months ended September 30, 2003. The increase in
gross profit for laboratory and scientific products is predominantly due to an
increase in gross margins for wet scrubber products due to increased volume. 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 $483,276 to $1,439,809 for the
three months ended September 30, 2004 from $956,533 for the three months ended
September 30, 2003. Medical device products selling expenses increased $386,801
predominantly due to 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 selling expenses
increased $96,475 predominantly due to an increase in marketing expenses for
Labcaire's Guardian endoscopic cleaning product.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
decreased $314,874 from $2,055,768 in the three months ended September 30, 2003
to $1,740,894 in the three months ended September 30, 2004. The decrease is
predominantly due to a decrease in the allowance for doubtful accounts,
specifically related to a reserve established against Focus Surgery which is no
longer needed, and reduced administrative costs in Labcaire principally due to
the prior fiscal year including one time severance costs.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses increased
$253,288 from $488,480 for the three months ended September 30, 2003 to $741,768
for the three months ended September 30, 2004. Medical device research and
development expenses increased $191,374 predominantly due to research and
development efforts for a product to treat liver and kidney cancer. Laboratory
and Scientific research and development expenses increased $61,914 predominantly
due to increased research and development efforts in various product
enhancements and new product designs.
OTHER INCOME (EXPENSE): Other income for the three months ended September 30,
2004 was $203,339 as compared to $511,949 for the three months ended September
30, 2003. The decrease of $308,610 was primarily due to a decrease in royalty
income. The Company received an additional royalty payment for the quarter ended
September 30, 2003 of approximately $410,000, which was based upon a review of
USS' records that determined that royalties were due for prior years. The review
showed that USS owed (and subsequently paid in the first quarter of fiscal 2004)
royalties due on a product that was not included in the original royalty
computation.
INCOME TAXES: The effective tax rate is 38.4% for the three months ended
September 30, 2004 as compared to an effective tax rate of 40.6% for the three
months ended September 30, 2003. The current effective income tax rate of 38.4%
was favorably impacted by a higher proportionate increase in Labcaire income,
which is under UK tax regulations and has a lower standard tax rate.
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, 2004 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
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, income taxes and
stock-based compensation to be critical policies due to the estimation process
involved in each.
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.
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.
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. SFAS 142 provided a six-month transitional period from the effective
date of adoption for the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To the extent that an indication of
impairment exists, the Company must perform a second test to measure the amount
of impairment. The second test must be performed as soon as possible, but no
later than the end of the fiscal year. Any impairment measured as of the date of
adoption will be recognized as the cumulative effect of a change in accounting
principle. The Company performed the first test and determined that there is no
indication that the goodwill recorded is impaired and, therefore, the second
test was not required. The Company also completed its annual goodwill impairment
tests for fiscal 2004 in the fourth quarter with no impairment noted.
14
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is generally set equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). In
December 2003, the FASB modified FIN 46 to make certain technical corrections
and address certain implementation issues that had arisen. FIN 46 provides a new
framework for identifying a variable interest entity ("VIE") and determining
when a company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited liability company,
trust, or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest holder)
is obligated to absorb a majority of the risk of loss from the VIE's activities,
is entitled to receive a majority of the VIE's residual returns (if no party
absorbs a majority of the VIE's losses), or both. A variable interest holder
that consolidates the VIE is called the primary beneficiary. Upon consolidation,
the primary beneficiary generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and subsequently account
for the VIE as if it were consolidated based on majority voting interest. FIN 46
also requires disclosures about VIEs that the variable interest holder is not
required to consolidate but in which it has a significant variable interest.
In connection with the adoption of FIN 46 during the third quarter of fiscal
2004, the Company consolidated Hearing Innovations in its March 31, 2004 balance
sheet as the entity was determined to be a VIE and the Company is its primary
beneficiary. The Company elected to record the adoption of FIN 46 as a
cumulative effect of an accounting change. Consolidating Hearing Innovations did
not have a material impact on the Company's consolidated results of operations
or financial condition. Prior periods were not restated. For additional
information on Hearing Innovations see Note 7 of the consolidated financial
statements.
On March 31, 2004, the FASB issued an Exposure Draft, "Share-Based Payment - An
Amendment of FASB Statements No. 123 and 95" (proposed "FAS 123R"), which is
currently is expected to be
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
effective for public companies in periods beginning after June 15, 2005. We
would be required to implement the proposed standard no later than the quarter
that begins July 1, 2005. The cumulative effect of adoption, if any, applied on
a modified prospective basis, would be measured and recognized on July 1, 2005.
FASB 123R would eliminate the ability to account for share-based compensation
transactions using APB 25, and would instead require companies to recognize
compensation expense, using a fair-value based method, for costs related to
share-based payments including stock options and employee stock purchase plans.
The FASB expects to issue a final standard by December 31, 2004. The Company is
in the process of determining the impact of this statement on its consolidated
financial statements.
Forward Looking Statements: This report contains certain forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of 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 September 30, 2004 and June 30, 2004 was $17,610,555 and
$16,997,590, respectively. In the three months ended September 30, 2004, cash
used in operations totaled $1,174,296. The decrease in the cash balance is
predominately due to the increase in inventory to support future shipments and
payments of accounts payable and accrued expenses. In the three months ended
September 30, 2004, cash used in investing activities was $109,858, which
primarily consisted of the purchase of property, plant and equipment during the
regular course of business. In the three months ended September 30, 2004, cash
provided by financing activities was $272,571 primarily consisting of proceeds
from short-term borrowings and receipts from the exercise of employee stock
options offset by payments on capital lease obligations and long term debt.
REVOLVING CREDIT FACILITIES
Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance. The
amount of this facility is approximately $1,710,000 ((pound)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. The agreement expires on February 28, 2005 and
covers all United Kingdom and European sales.
The Company secured a $5,000,000 revolving credit facility with Bank of America
on January 18, 2002 to support future working capital needs. The revolving
credit facility expires January 18, 2005 and has interest rate options ranging
from Libor plus 1.0% per annum to prime rate plus .25% per annum. This facility
is secured by the assets of the Company. This facility contains certain
financial covenants, including requiring that the Company maintain a ratio of
debt to earnings before interest, depreciation, taxes and amortization of not
greater than 2 to 1; that the Company maintain a working capital ratio of not
less than 1.5 to 1; and that the Company maintain a tangible net worth of
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$14,500,000. The terms provide for the repayment of the debt in full on its
maturity date. On September 30, 2004, the Company had $5,000,000 available on
this line of credit. The Company is in compliance with all such covenants.
HEARING INNOVATIONS, INC.
During fiscal 2005, the Company entered into a loan agreement whereby Hearing
Innovations is required to pay the Company $16,720. This note is due December
31, 2004. Hearing Innovations is currently negotiating with the Company to
extend the due dates of all its outstanding debt. The note bears interest at 8%
per annum. The note is secured by a lien on all of Hearing Innovations' right,
title and interest in accounts receivable, inventory, property, plant and
equipment and processes of specified products whether now existing or arising
after the date of this agreement. The loan agreement contains warrants to
acquire 16,720 shares of Hearing Innovations common stock, at the option of the
Company, at a cost of $.20 per share. These warrants, which are deemed nominal
in value, expire in December 2005. The current ability of companies such as
Hearing Innovations to access capital markets or incur third party debt is very
limited and is likely to remain so for the foreseeable future. In light of this
fact, Hearing Innovations suspended operations in April 2004.
In connection with the adoption of FIN 46, the Company consolidated Hearing
Innovations in its March 31, 2004 balance sheet as the entity was determined to
be a VIE and the Company is its primary beneficiary. The Company elected to
record the adoption of FIN 46 as a cumulative effect of an accounting change.
Consolidating Hearing Innovations did not have a material impact on the
Company's consolidated results of operations or financial condition.
On July 14, 2004, Hearing Innovations sent all shareholders and creditors a plan
for reorganization and disclosure statement. The Company committed to fund
Hearing Innovations up to $150,000 for the reorganization plan. Hearing
Innovations plans to file for relief under Chapter 11 of the U.S. Bankruptcy
Code in November 2004. If the petition is approved, the Company will own 100% of
the equity in Hearing Innovations.
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 due to the increase in cash flow from operations. The Company expects
future cash flow from operations to fund all the ongoing cash flow needs.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
17
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.
Foreign Exchange Rates:
Approximately 25% of the Company's revenues in the period ended September 30,
2004 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 1.79 and 1.61 for the
three months ended September 30, 2004 and 2003, 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.
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (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 September 30, 2004 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 first quarter of fiscal 2005 that has materially affected,
or is reasonable likely to materially affect, the Company's internal control
over financial reporting.
18
MISONIX, INC.
PART II - OTHER INFORMATION
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
19
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: November 11, 2004
MISONIX, INC.
-----------------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
-------------------------------------
Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
-------------------------------------
Richard Zaremba
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
20