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, 2003
------------------
OR
[x] 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 1, 2003
------------------------- ----------------
Common Stock, $.01 par value 6,655,865
MISONIX, INC.
-------------
INDEX
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2003 (Unaudited) and June 30, 2003 3
Consolidated Statements of Operations
Three months ended September 30, 2003
and 2002 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended September 30, 2003
and 2002 (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 and Reports on Form 8-K 19
Signatures 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MISONIX, INC.
CONSOLIDATED BALANCE SHEETS
===========================
SEPTEMBER 30, June 30,
2003 2003
-----------------------------
ASSETS (UNAUDITED)
-----------------------------
Current assets:
Cash and cash equivalents $ 4,674,972 $ 2,279,869
Accounts receivable, less allowance for doubtful accounts of $738,190 and
$644,157, respectively 6,492,919 7,844,399
Inventories 9,286,604 8,979,472
Deferred income taxes 482,345 477,580
Prepaid expenses and other current assets 868,446 983,523
-----------------------------
Total current assets 21,805,286 20,564,843
Property, plant and equipment, net 3,645,368 3,574,207
Deferred income taxes 860,320 862,690
Goodwill 4,473,713 4,473,713
Other assets 319,419 319,136
-----------------------------
Total assets $ 31,104,106 $29,794,589
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ 949,363 $ 704,669
Accounts payable 3,609,910 3,563,208
Accrued expenses and other current liabilities 1,810,104 2,002,154
Income taxes payable 775,031 47,453
Current maturities of long-term debt and capital lease obligations 314,582 279,554
-----------------------------
Total current liabilities 7,458,990 6,597,038
Long-term debt and capital lease obligations 1,260,867 1,235,362
Deferred income 343,326 356,076
Minority interest 277,477 263,450
Stockholders' equity:
Common stock, $.01 par value-shares authorized 10,000,000; 6,733,665
issued and 6,655,865 outstanding 67,337 67,337
Additional paid-in capital 22,712,511 22,712,511
Retained deficit (659,742) (1,053,484)
Treasury stock, 77,800 shares (412,424) (412,424)
Accumulated other comprehensive income 55,764 28,723
-----------------------------
Total stockholders' equity 21,763,446 21,342,663
-----------------------------
Total liabilities and stockholders' equity $ 31,104,106 $29,794,589
=============================
See Accompanying Notes to Consolidated Financial Statements.
3
MISONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
----------- -----------
Net sales $8,619,898 $7,010,322
Cost of goods sold 4,954,203 4,053,104
------------------------
Gross profit 3,665,695 2,957,218
Operating expenses:
Selling expenses 956,533 935,603
General and administrative expenses 2,055,768 1,519,873
Research and development expenses 488,480 539,326
Litigation (recovery) settlement expenses - (127,302)
------------------------
Total operating expenses 3,500,781 2,867,500
------------------------
Income from operations 164,914 89,718
Other income (expense):
Interest income 6,828 38,714
Interest expense (37,796) (42,977)
Option/license fees 6,461 6,078
Royalty income 564,049 122,645
Foreign exchange (loss) gain (4,593) 3,283
Loss on impairment of Hearing Innovations, Inc. (23,000) (98,907)
Loss on impairment of Focus Surgery, Inc. - (13,725)
------------------------
Total other income 511,949 15,111
Income before minority interest and income taxes 676,863 104,829
Minority interest in net income of consolidated subsidiaries 14,026 6,717
------------------------
Income before income taxes 662,837 98,112
Income tax expense 269,095 46,955
------------------------
Net income $ 393,742 $ 51,157
========================
Net income per share-Basic $ .06 $ .01
========================
Net income per share - Diluted $ .06 $ .01
========================
Weighted average common shares outstanding - Basic 6,655,865 6,105,865
========================
Weighted average common shares outstanding - Diluted 6,725,580 6,510,746
========================
See Accompanying Notes to Consolidated Financial Statements.
4
MISONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------------------
OPERATING ACTIVITIES
Net income $ 393,742 $ 51,157
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Bad debt expense 103,247 16,608
Litigation recovery - (127,302)
Deferred income tax benefit (2,395) (23,008)
Depreciation and amortization 171,521 153,558
Loss on disposal of equipment 41,816 53,795
Foreign currency exchange loss (gain) 4,593 (3,283)
Minority interest in net income of subsidiaries 14,026 6,717
Loss on impairment of investments 23,000 112,632
Changes in operating assets and liabilities:
Accounts receivable 1,225,678 321,909
Inventories (280,095) (943,179)
Prepaid income taxes 44,204 72,384
Prepaid expenses and other current assets 123,470 (6,224)
Other assets (14,319) 114,500
Accounts payable and accrued expenses (117,744) 171,113
Litigation settlement liabilities - (4,332)
Deferred (loss) income (12,750) 2,290
Income taxes payable 682,772 (37,392)
------------------------
Net cash provided by (used in) operating activities 2,400,766 (68,057)
------------------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (130,084) (97,830)
Loans to Hearing Innovations, Inc. (23,000) (75,666)
------------------------
Net cash used in investing activities (153,084) (173,496)
------------------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 233,348 189,491
Principal payments on capital lease obligations (66,803) (65,387)
Proceeds from long-term debt - 11,824
Payments of long-term debt (12,518) -
------------------------
Net cash provided by financing activities 154,027 135,928
------------------------
Effect of exchange rate changes on assets and liabilities (6,606) (7,546)
------------------------
Net increase (decrease) in cash and cash equivalents 2,395,103 (113,171)
Cash and cash equivalents at beginning of period 2,279,869 1,065,465
------------------------
Cash and cash equivalents at end of period $4,674,972 $ 952,294
========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 37,796 $ 42,977
========================
Income taxes $ (456,500) $ 50,114
========================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease additions $ 130,568 $ 198,722
========================
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, 2003 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2004.
The balance sheet at June 30, 2003 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, 2003.
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,
2003 2002
--------- ---------
Weighted average common
shares outstanding 6,655,865 6,105,865
Dilutive effect of stock options 69,715 404,881
--------- ---------
Diluted weighted average common
shares outstanding 6,725,580 6,510,746
========= =========
3. Comprehensive Income
---------------------
Total comprehensive income was $420,783 and $202,289 for the three months
ended September 30, 2003 and 2002, respectively. Accumulated other
comprehensive income is comprised of foreign currency translation
adjustments.
6
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
4. Stock-Based Compensation
-------------------------
The Company accounts for stock-based employee and outside directors'
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company has adopted the
disclosure-only provisions of 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 Company had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation.
For the three months ended
September 30,
2003 2002
---------------------
Net income - As reported: $ 393,742 $ 51,157
Stock based compensation
determined under SFAS 123 (107,914) (73,159)
---------------------
Net income (loss)- Pro forma: $ 285,828 $(22,002)
Net income (loss) per share -
Basic:
As reported $ .06 $ .01
Pro forma $ .04 -
Net income (loss) per share -
Diluted:
As reported $ .06 $ .01
Pro forma $ .04 $ -
5. Inventories
-----------
Inventories are summarized as follows:
SEPTEMBER 30, 2003 June 30, 2003
------------------- --------------
Raw materials $ 4,244,314 $ 4,230,870
Work-in-process 1,005,017 1,112,453
Finished goods 4,037,273 3,636,149
-----------------------------------
$ 9,286,604 $ 8,979,472
===================================
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, 2003 June 30, 2003
------------------- --------------
Accrued payroll and vacation $ 279,274 $ 283,339
Accrued sales tax 79,353 208,005
Accrued commissions and bonuses 374,524 212,585
Customer deposits and deferred contracts 864,583 1,116,869
Accrued professional fees 139,145 132,766
Other 73,225 48,590
------------------- --------------
$ 1,810,104 $ 2,002,154
=================== ==============
7. Loans to Affiliate
--------------------
Hearing Innovations, Inc.
---------------------------
During fiscal 2004, the Company entered into two loan agreements whereby
Hearing Innovations, Inc. ("Hearing Innovations") is required to pay the
Company an aggregate amount of $23,000 due November 30, 2003. All notes
bear interest at 8% per annum. The notes are 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 these
agreements. The loan agreements contain warrants to acquire 23,000 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 October 2005. The Company recorded an allowance against the
entire balance of $23,000 for the above loans. The related expense has been
included in loss on impairment of Hearing Innovations in the accompanying
consolidated statements of operations. The Company believes the loans and
related interest are impaired since the Company does not anticipate that
these loans will be paid in accordance with the contractual terms of the
loan agreements. 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, the Company continues to review strategic options available to
it and Hearing Innovations due to Hearing Innovations' continuing need for
financial support. The Company has made the decision not to continue
funding Hearing Innovations' operations at this time. The Company continues
to believe that Hearing Innovations technology provides a benefit to
patients but the products require more improvement and market development.
All equity investments and debt in Hearing Innovations have been fully
reserved and currently have a zero basis.
8
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
8. Business Segments
------------------
The Company operates in two business segments which are organized by
product types: industrial products and medical devices. Industrial products
include the Sonicator ultrasonic liquid processor, Aura ductless fume
enclosure, the Labcaire Autoscope and Guardian 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 and litigation (recovery) settlement
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, 2003.
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, 2003:
(a)
MEDICAL INDUSTRIAL 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.
For the three months ended September 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------------------------------------------------
Net sales $3,168,672 $ 3,841,650 $ - $7,010,322
Cost of goods sold 1,843,770 2,209,334 - 4,053,104
---------- ----------- ----------
Gross profit 1,324,902 1,632,316 - 2,957,218
Selling expenses 267,625 667,978 - 935,603
Research and
development expenses 383,021 156,305 - 539,326
---------- ----------- ----------
Total operating expenses 650,646 824,283 1,392,571 2,867,500
---------- ----------- --------------- ----------
Income from operations $ 674,256 $ 808,033 $ (1,392,571) $ 89,718
========== =========== =============== ==========
(a) Amount represents general and administrative and litigation (recovery)
settlement expenses.
9
MISONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to interim periods is unaudited) (CONTINUED)
======================================================================
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the three months ended September 30:
2003 2002
---------- ----------
United States $5,765,060 $4,481,294
Canada 66,639 101,373
Mexico - 4,321
United Kingdom 2,130,915 1,715,181
Europe 173,211 472,385
Asia 181,990 153,995
Middle East 73,723 13,018
Other 228,360 68,755
----------------------
$8,619,898 $7,010,322
======================
9. Subsequent Event
----------------
The Company received a letter dated October 31, 2003 from the Food and Drug
Administration ("FDA") regarding the Company's notification concerning the
implemented procedures to "field correct" a shock sensation that was caused
by users forcing the output connector improperly when using the Lysonix
2000. Although the output cable was properly marked, the Company issued new
sticker directions and notified all its customers in writing. The FDA
stated that it "agreed with the Company's decision to "field correct" the
Lysonix 2000."
The FDA classified this field correction as a Class II recall which means
that this is a situation in which use of or exposure to such product may
cause temporary or medically reversible adverse health consequences or
which probability of serious adverse health consequences is remote. The
Company will do everything necessary to satisfy the FDA request for
information on the "field correction." The Company, additionally, is
following FDA policies to be fully compliant with all requirements. The
Company has estimated the cost of this field correction to be immaterial.
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, 2003 and 2002.
NET SALES. Net sales of the Company's medical devices and industrial products
- -----------
increased $1,609,576 to $8,619,898 for the three months ended September 30, 2003
from $7,010,322 for the three months ended September 30, 2002. This difference
in net sales is due to an increase in sales of medical devices of $1,433,448 to
$4,602,120 for the three months ended September 30, 2003 from $3,168,672 for the
three months ended September 30, 2002. This difference in net sales is also
due to an increase in sales of industrial products of $176,128 to $4,017,778 for
the three months ended September 30, 2003 from $3,841,650 for the three months
ended September 30, 2002. The increase in sales of medical devices is due to
an increase in sales of diagnostic medical devices of $631,423 and an increase
of $802,025 in sales of therapeutic medical devices, both due to increased
customer demand for several diagnostic and therapeutic medical products. The
increase in sales for diagnostic medical devices was not attributable to a
single customer, distributor or any other specific factor. The increase in
sales for therapeutic medical devices was mostly attributable to an increase in
sales to United States Surgical Corporation ("USS") of approximately $634,000.
The remaining increase in therapeutic medical devices is due to increased demand
for several products. The increase in industrial products is due to an increase
in Labcaire sales of $352,036 and ultrasonic sales of $21,467 partially offset
by a decrease in wet scrubber sales of $108,555 and a decrease in ductless fume
enclosure sales of $88,820. Wet scrubber sales continue to be adversely
affected by the downturn in the semi-conductor market. The increase in Labcaire
sales is primarily due to the demand for the new Guardian (endoscopic cleaning)
product. The decrease in fume enclosure sales is due to lower customer demand
for several industrial products and current economic conditions for such
products. 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 2003 and 2002, the Company had foreign net sales of
$2,854,839 and $2,529,028, respectively, representing 33.1% and 36.1% of net
sales for such years, respectively. The increase in foreign sales during the
three months ended September 30, 2003 as compared to the three months ended
September 30, 2002 is substantially due to an increase in Labcaire sales of
$352,036. Labcaire represented 88% and 85% of foreign net sales during the
three months ended September 30, 2003 and 2002, respectively. Approximately 29%
of the Company's revenues for the three months ended September 30, 2003 were
received in English Pounds currency. To the extent that the Company's revenues
are generated in English Pounds, its operating results are translated for
reporting purposes into U.S. Dollars using weighted average rates of 1.61 and
1.55 for the three months ended September 30, 2003 and 2002, respectively. A
strengthening of the English Pound, in relation to the U.S. Dollar, will have
the effect of increasing reported revenues and profits, while a weakening of the
English Pound will have the opposite effect. Since the Company's operations in
England generally set prices and bids for contracts in English Pounds, a
strengthening of the English Pound, while increasing the value of its UK assets,
might place the Company at a pricing disadvantage in bidding for work from
manufacturers based overseas. The Company collects its receivables in the
currency the subsidiary resides in. The Company has not engaged in foreign
currency hedging transactions, which include forward exchange agreements.
11
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
The Company's revenues are generated from various geographic regions. The
following is an analysis of net sales by geographic region:
For the three months ended September 30:
2003 2002
---------- ----------
United States $5,765,060 $4,481,294
Canada 66,639 101,373
Mexico - 4,321
United Kingdom 2,130,915 1,715,181
Europe 173,211 472,385
Asia 181,990 153,995
Middle East 73,723 13,018
Other 228,360 68,755
----------------------
$8,619,898 $7,010,322
======================
Summarized financial information for each of the segments for the three months
ended September 30, 2003 and 2002 are as follows:
For the three months ended September 30, 2003:
(a)
MEDICAL INDUSTRIAL 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.
For the three months ended September 30, 2002:
(a)
MEDICAL INDUSTRIAL CORPORATE AND
DEVICES PRODUCTS UNALLOCATED TOTAL
----------------------------------------------------
Net sales $3,168,672 $ 3,841,650 $ - $7,010,322
Cost of goods sold 1,843,770 2,209,334 - 4,053,104
---------- ----------- ----------
Gross profit 1,324,902 1,632,316 - 2,957,218
Selling expenses 267,625 667,978 - 935,603
Research and development
expenses 383,021 156,305 - 539,326
---------- ----------- ----------
Total operating expenses 650,646 824,283 1,392,571 2,867,500
---------- ----------- --------------- ----------
Income from operations $ 674,256 $ 808,033 $ (1,392,571) $ 89,718
========== =========== =============== ==========
(a) Amount represents general and administrative expenses and
litigation (recovery) settlement expenses.
12
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
GROSS PROFIT: Gross profit increased to 42.5% for the three months ended
- --------------
September 30, 2003 from 42.2% for the three months ended September 30, 2002.
Gross profit for medical devices increased to 44.6% of sales in the three months
ended September 30, 2003 from 41.8% of sales in the three months ended September
30, 2002. The increase in gross profit for medical devices was positively
impacted by the favorable order mix for sales of therapeutic medical devices
offset by a decrease in diagnostic medical devices, which traditionally carry
lower margins. Gross profit for industrial products decreased to 40.2% for the
three months ended September 30, 2003 from 42.5% for the three months ended
September 30, 2002. The decrease in gross profit for industrial products is
due to a proportionate increase in sales by Labcaire, whose products
traditionally carry lower gross margins. The Company manufactures and sells
both medical devices and industrial products with a wide range of product costs
and gross margin dollars as a percentage of revenues.
SELLING EXPENSES: Selling expenses increased $20,930 to $956,533 for the three
- ------------------
months ended September 30, 2003 from $935,603 for the three months ended
September 30, 2002. Medical device selling expenses increased $106,614
predominantly due to additional sales and marketing efforts for diagnostic
medical devices. Industrial selling expenses decreased $85,684 predominantly
due to a decrease in fume enclosure and industrial ultrasonic commissions and
marketing expenses and a transfer of salaries of two Labcaire employees to
general and administrative expenses from selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
- --------------------------------------
increased $535,895 from $1,519,873 in the three months ended September 30, 2002
to $2,055,768 in the three months ended September 30, 2003. The increase is
predominantly due to an increase in general and administrative expenses relating
to severance costs and a transfer of two employees from selling expenses, all
attributable to Labcaire, as well as an increase in corporate expenses relating
to insurance, bad debt and legal and accounting fees.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses decreased
- ------------------------------------
$50,846 from $539,326 for the three months ended September 30, 2002 to $488,480
for the three months ended September 30, 2003. Medical device research and
development expenses decreased $64,955 predominantly due to a decrease in
research and development funding made to Focus Surgery, Inc. ("Focus Surgery")
for the three months ended September 30, 2003 as compared to the three months
ended September 30, 2002. Industrial research and development expenses
increased $14,109 predominantly due to increased research and development
efforts at Labcaire.
LITIGATION (RECOVERY) SETTLEMENT EXPENSES: The Company recorded a reversal of
- ---------------------------------------------
the litigation settlement for the three months ended September 30, 2002 of
$127,302 as compared to $0 for the three months ended September 30, 2003. This
reversal represents the sale of $127,302 of Lysonix 2000 units by Mentor
Corporation ("Mentor") that were received by Mentor from LySonix, Inc.
("LySonix") in connection with inventory received under the settlement agreement
with LySonix (this inventory was previously reserved for in fiscal year June 30,
2002, as its salability was uncertain). 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, 2003.
OTHER INCOME (EXPENSE): Other income for the three months ended September 30,
- -------------------------
2003 was $511,949 as compared to $15,111 for the three months ended September
30, 2002. The increase of $496,838 was primarily due to an increase in royalty
income. The Company received an additional royalty payment 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) royalties due on a product that was not
included in the original royalty computation. The increase was also due to a
decrease in loss on impairment of investments of Hearing Innovations, Inc.
("Hearing Innovations") of $75,907. The decrease in impairment of Hearing
Innovations is a direct result of current period loans to Hearing Innovations
being less than in the prior period.
13
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
INCOME TAXES: The effective tax rate is 40.6% for the three months ended
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September 30, 2003 as compared to an effective tax rate of 47.9% for the three
months ended September 30, 2002. The current effective income tax rate of 40.6%
was impacted by no corresponding income tax benefit from the loss on impairment
of Hearing Innovations of approximately $9,200 plus the standard consolidated
tax rate of approximately 36%. The loss on impairment of Hearing Innovations is
recorded with no corresponding tax benefit since these transactions are capital
losses. Benefits for such losses are only received if Hearing Innovations has
the ability to generate capital gains.
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, 2003 includes a summary of the Company's significant
accounting policies and methods used in the preparation of its financial
statements. The Company's discussion and analysis of its financial condition
and results of operations are based upon the Company's financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis,
management evaluates its estimates and judgments, including those related to bad
debts, inventories, goodwill, property, plant and equipment and income taxes.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company considers certain accounting policies
related to allowance for doubtful accounts, inventories, property, plant and
equipment, goodwill and income taxes to be critical policies due to the
estimation process involved in each.
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.
14
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
============================================================
Goodwill: In July 2001, the Financial Accounting Standards Board ("FASB") issued
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Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141") and
No. 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.
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 losses 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.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at September 30, 2003 and June 30, 2003 was $14,346,296 and
$13,967,805, respectively. In the three months ended September 30, 2003, cash
provided by operations totaled $2,400,766. The increase in the cash balance is
due to the collection of accounts receivable and royalties and a refund of
prepaid income taxes offset by cash paid for inventory purchased for unshipped
orders. In the three months ended September 30, 2003, cash used in investing
activities was $153,084, which primarily consisted of the purchase of property,
plant and equipment during the regular course of business and of loans made to
Hearing Innovations. In the three months ended September 30, 2003, cash
provided by financing activities was $154,027, primarily consisting of proceeds
from short-term borrowings offset by payments on capital lease obligations.
15
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
Hearing Innovations, Inc.
- ---------------------------
During fiscal 2004, the Company entered into two loan agreements whereby Hearing
Innovations is required to pay the Company an aggregate amount of $23,000 due
November 30, 2003. All notes bear interest at 8% per annum. The notes are
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 these
agreements. The loan agreements contain warrants to acquire 23,000 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
October 2005. The Company recorded an allowance against the entire balance of
$23,000 for the above loans. The related expense has been included in loss on
impairment of Hearing Innovations in the accompanying consolidated statements of
operations. The Company believes the loans and related interest are impaired
since the Company does not anticipate that these loans will be paid in
accordance with the contractual terms of the loan agreements. 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, the Company continues to review
strategic options available to it and Hearing Innovations due to Hearing
Innovations' continuing need for financial support. The Company has made the
decision not to continue funding Hearing Innovations' operations at this time.
The Company continues to believe that Hearing Innovations technology provides a
benefit to patients but the products require more improvement and market
development. All equity investments and debt in Hearing Innovations have been
fully reserved and currently have a zero basis.
Regulatory
- ----------
The Company received a letter dated October 31, 2003 from the Food and Drug
Administration ("FDA") regarding the Company's notification concerning the
implemented procedures to "field correct" a shock sensation that was cause by
users forcing the output connector improperly when using the Lysonix 2000.
Although the output cable was properly marked, the Company issued new sticker
directions and notified all its customers in writing. The FDA stated that it
"agreed with the Company's decision to "field correct" the Lysonix 2000." The
FDA classified this field correction as a Class II recall which means that this
is a situation in which use of or exposure to such product may cause temporary
or medically reversible adverse health consequences or which probability of
serious adverse health consequences is remote. The Company will do everything
necessary to satisfy the FDA request for information on the "field correction."
The Company, additionally, is following FDA policies to be fully compliant with
all requirements. The Company has estimated the cost of this field correction to
be immaterial.
Recent Accounting Pronouncements
- ----------------------------------
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." ("SFAS No. 146") This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date of an entity's commitment as provided under Issue No. 94-3. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on the Company's
consolidated results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities."("SFAS No. 149"). Among other
things, the Statement requires that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a derivative. SFAS No.
149 was effective July 1, 2003. In the first quarter of fiscal 2004, the
Company adopted SFAS No. 149. The adoption of SFAS No. 149 did not have a
material impact on the Company's consolidated results of operations or financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity."("SFAS No.
150"). SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 was effective for financial instruments entered into or modified after
May 31, 2003. In October 2003, the FASB deferred indefinitely the application
of SFAS 150 only as it relates to non-controlling interests that are classified
as equity in the financial statements of the subsidiary but would be classified
as a liability in the parent's financial statements under SFAS150. In the first
quarter of fiscal 2004, the Company adopted SFAS No. 150. The adoption of SFAS
No. 150 did not have a material impact on the Company's consolidated results of
operations or financial condition.
16
MISONIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
=========================================================
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." ("EITF 00-21").
The consensus provides that revenue arrangements with multiple deliverables
should be divided into separate units of accounting if certain criteria are met.
The consideration for the arrangement should be allocated to the separate units
of accounting based on their relative fair values, with different provisions if
the fair value of all deliverables are not known or if the fair value is
contingent on delivery of specified items or performance conditions. Applicable
revenue recognition criteria should be considered separately for each separate
unit of accounting. EITF 00-21 was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Entities may elect to
report the change as a cumulative effect adjustment in accordance with APB
Opinion 20, Accounting Changes. In the first quarter of fiscal 2004, the
Company adopted EITF 00-21. The adoption of EITF 00-21 did not have a material
impact on the Company's consolidated results of operations or financial
condition.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant variable
interest but which it does not consolidate. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises as of the end of the applicable annual period. FIN 46
may be applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. The Company has not yet determined the
impact on its consolidated results of operations or financial condition that may
result from the application of FIN 46. In October 2003, FASB deferred the
effective date for applying the provisions of FIN 46 provided that conditions
are met. FIN 46 will now be effective December 31, 2003 for the Company.
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.
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 29% of the Company's revenues in the period ending September 30,
2003 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 1.61 and 1.55 for the
three months ended September 30, 2003 and 2002, 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, 2003 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 2004 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 and Reports on Form 8-K.
(a) 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
(b) The following report on Form 8-K was filed during the last quarter of
the period covered by the Report.
On August 27, 2003, a Form 8-K was filed by the Company under "Item 9.
Regulation FD Disclosure."
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 6, 2003
MISONIX, INC.
------------------------------------
(Registrant)
By: /s/ Michael A. McManus, Jr.
-------------------------------
Michael A. McManus, Jr.
President and Chief Executive Officer
By: /s/ Richard Zaremba
-------------------------------
Richard Zaremba
Vice President, Chief Financial Officer,
Treasurer and Secretary
20