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SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually and whenever events or circumstances occur that indicate goodwill might be impaired. With the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets. The Company completed its annual goodwill impairment tests for fiscal 2007 and 2006 in the respective fourth quarter. There were no indicators that goodwill recorded was impaired.

Income Taxes : Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). 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 and operating loss and tax credit carryforwards. 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 : Prior to July 1, 2005, the Company accounted for stock option plans SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB No. 25 (“APB 25”). Effective July 1, 2005, the Company adopted the fair-value recognition provisions of SFAS No. 123R (“SFAS No. 123R”) and SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. See Note 9 of the Company’s consolidated financial statements for additional information regarding stock-based compensation.

Liquidity and Capital Resources:

Working capital at June 30, 2007 and June 30, 2006 was $11,165,000 and $12,103,000, respectively. For the fiscal year 2007, cash used in operations totaled $1,083,531. The increase in cash used in operations is predominantly due to an increase in accounts receivables and deferred income tax benefit. For the fiscal year 2007, cash provided by investing activities was $1,931,587, which primarily consisted of the proceeds from the sale and lease back of the facility in the United Kingdom. For the fiscal year 2007, cash provided in financing activities was $1,338,730, primarily consisting of net proceeds of short-term borrowings from the Company’s credit facilities, partially offset by paying off the mortgage on the Labcaire property.

Revolving Credit Facilities

Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance (“Llyods”). The amount of this facility bears interest at the bank’s base rate (5.5% and 4.5% at June 30, 2007 and 2006, respectively) plus 2%. The agreement expires on September 28, 2008 and covers all United Kingdom and European sales. At June 30, 2007, the balance outstanding under this credit facility was $897,208 and Labcaire is not in violation of financial covenants.

Labcaire had an overdraft facility with Lloyds which was secured by the Labcaire building. All amounts borrowed under this facility were paid when the Labcaire building was sold and the overdraft credit facility was cancelled.

On December 29, 2006 the Company and its subsidiaries, Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated (collectively referred to as the “Borrowers”) and Wells Fargo Bank National Association entered into a (i) Credit and Security Agreement and (ii) Credit and Security Agreement Export-Import Subfacility (collectively referred to as the “Credit Agreements”). The aggregate credit limit under the Credit Agreements is $8,000,000 consisting of a revolving facility in the amount of up to $8,000,000. Up to $1,000,000 of the revolving facility is available under the Export-Import Agreements as a subfacility for Export-Import working capital financing. All credit facilities under the Credit Agreements mature on December 29, 2009. Payment of amounts outstanding under the Credit Agreements may be accelerated upon to occurrence of an Event of Default (as defined in the Credit Agreements). All loans and advances under the Credit Agreements are secured by a first priority security interest in all of the Borrowers’ accounts receivable, deposit accounts, property, plant and equipment, general intangibles, intellectual property, inventory, letter-of-credit rights, and all other business assets. The Borrowers have the right to terminate or reduce the credit facility prior to December 29, 2009 by paying a fee based on the aggregate credit limit (or reduction, as the case may be) as follows: (i) during year one of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements, 2%; and (iii) during year three of the Credit Agreements, 1%.

The Credit Agreements contain financial covenants requiring that the Borrowers (i) on a consolidated basis not have a Net Loss (as defined in the Credit Agreements) of more than $150,000 for the fiscal quarter ending June 30, 2007; and (ii) not incur or contract to incur Capital Expenditures (as defined in the Credit Agreements) of more that $1,000,000 in the aggregate in any fiscal year or more than $1,000,000 in any one transaction. At June 30, 2007, the Borrowers were in compliance with the financial covenants.

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The available amount under the Credit Agreements is the lesser of $8,000,000 or the amount calculated under the Borrowing Base (as defined in the Credit Agreement). The Borrowers must maintain a minimum outstanding amount of $1,250,000 under the Credit Agreements at all times and pay a fee equal to the interest rate set forth on any such shortfall. Interest on amounts borrowed under payable monthly in arrears. The default rate of interest is 3% higher than the rate otherwise payable. A fee of ½ % per annum on the Unused Amount (as defined in the Credit Agreements) is payable monthly in arrears. At June 30, 2007, the balance outstanding under the Credit Agreements was $3,133,572. The amounts available to borrow are determined based on specified percentages of the Borrowers eligible trade receivables and inventories. An additional $331,000 was available to borrow at June 30, 2007.

Commitments

The Company has commitments under a revolving credit facility, note payable, mortgage and capital and operating leases that will be funded from operating sources. At June 30, 2007, the Company’s contractual cash obligations and commitments relating to the revolving credit facility and capital and operating leases are as follows:

Commitment		Less than 1 year			1-3 years			4-5 years			After 5 years			Total
Revolving credit facility		$	4,030,000		$	-		$	-		$	-		$	4,030,000
Note payable			295,000			-			-			-			295,000
Capital leases			327,000			196,000			14,000			-			537,000
Operating leases			1,124,000			2,260,000			839,000			1,202,000			5,425,000
		$	5,776,000		$	2,456,000		$	853,000		$	1,202,000		$	10,287,000

Labcaire sold its owned building in the United Kingdom in June 2007 in a sale and leaseback agreement with TESCO. The lease with TESCO expires June 2017. The rental amount is 20,000 per month.

On September 6, 2007, but effective as of August 30, 2007, the Company and Phillips entered into the Agreement. Pursuant to the Agreement, the Company and Phillips resolved certain disputes between them concerning the purchase price to be paid by the Company for shares of the common stock of Sonora owned by Phillips. The Company owned ninety (90%) percent of the outstanding shares of Sonora prior to the execution of the Agreement.

Pursuant to the Agreement, the Company will pay Phillips the aggregate sum of $1,214,780 (the “Purchase Price”). The Company paid Phillips $296,118 on June 7, 2007 and $311,272 on August 30, 2007. The Company will pay the balance of the Purchase Price in two (2) installments with the final installment due on March 1, 2008.

The shares of Acoustic being sold to the Company are being held in escrow and released pro-rata with each installment payment of the Purchase Price.

The effect of this transaction will be to increase goodwill by $969,800, decrease minority interest by $149,737 and record interest expense of $95,242.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.

Other

The Company believes that its existing capital resources will enable it to maintain its current and planned operations for at least 18 months from the date hereof.

In the opinion of management, inflation has not had a material effect on the operations of the Company.

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Item 7A.   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 27% of the Company’s revenues in fiscal 2007 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 1.93 and 1.78 for the fiscal year ended June 30, 2007 and 2006, 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 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 predominately in the currency of the country the subsidiary resides in. Misonix Ltd. invoices certain customers in Euros and as a result there is an exchange rate exposure between the English Pound and the Euro. The Company has not engaged in foreign currency hedging transactions, which include forward exchange agreements.

Item 8.  Financial Statements and Supplemental Data. 

The reports of independent registered public accounting firm and consolidated financial statements listed in the accompanying index is filed as part of this Report. See “Index to Consolidated Financial Statements” on page 51.

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected financial data for each quarter of fiscal 2007, 2006 and 2005. Although unaudited, this information has been prepared on a basis consistent with the Company’s audited consolidated financial statements and, in the opinion of the Company’s management, reflects all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of this information in accordance with accounting principles generally accepted in the United States. Such quarterly results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto.

 

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QUARTERLY FINANCIAL DATA:

		FISCAL 2007
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,642,878		$	10,639,086		$	10,583,924		$	11,566,017		$	42,431,905
Gross profit			3,931,866			4,786,755			4,459,997			4,528,773			17,707,391
Operating expenses			4,821,739			5,055,433			5,353,185			4,896,099			20,126,456
Loss from operations			(889,873	)		(268,678	)		(893,188	)		(367,326	)		(2,419,065	)
Other income			133,658			141,417			81,267			7,477			363,819
Minority interest in net income (loss) of consolidated subsidiaries			31,339			(5,840	)		(38,318	)		(28,115	)		(40,934	)
Income tax benefit			(245,138	)		(144,975	)		(244,567	)		(30,115	)		(664,795	)
Net income (loss)			($542,416	)	$	23,554			($529,036	)		($301,619	)		($1,349,517	)
Net loss per share-Basic			($.08	)	$	-			($.08	)		($.04	)		($.19	)
Net loss per share -Diluted			($.08	)	$	-			($.08	)		($.04	)		($.19	)

 

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		FISCAL 2006
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,213,486		$	10,376,318		$	10,279,301		$	9,618,188		$	39,487,293
Gross profit			3,538,445			3,971,453			4,062,525			3,120,587			14,693,010
Operating expenses			5,315,150			4,932,445			5,353,095			5,666,359			21,267,049
Loss from operations			(1,776,705	)		(960,992	)		(1,290,570	)		(2,545,772	)		(6,574,039	)
Other income			174,859			139,332			144,143			94,515			552,849
Minority interest in net income (loss) of consolidated subsidiaries			16,339			2,785			(6,465	)		(113	)		12,546
Income tax benefit			(312,822	)		(317,340	)		(310,844	)		(1,333,293	)		(2,274,299	)
Net loss			($1,305,363	)		($507,105	)		($829,118	)		($1,117,851	)		($3,759,437	)
Net loss per share-Basic			($.19	)		($.07	)		($.12	)		($.16	)		($.55	)
Net loss per share -Diluted			($.19	)		($ .07	)		($.12	)		($.16	)		($.55	)

 

		FISCAL 2005
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	10,605,456		$	10,747,686		$	10,998,745		$	14,031,089		$	46,382,976
Gross profit			4,516,130			4,557,132			4,668,288			5,772,190			19,513,740
Operating expenses			4,027,861			4,483,401			4,798,272			5,644,865			18,954,399
Income (loss) from operations			488,269			73,731			(129,984	)		127,325			559,341
Other income			203,339			150,554			195,111			133,229			682,233
Minority interest in net income (loss) of consolidated subsidiaries			15,439			11,807			29,083			(43,199	)		13,130
Income tax provision (benefit)			259,902			34,142			32,683			(33,988	)		292,739
Net income		$	416,267		$	178,336		$	3,361		$	337,741		$	935,705
Net income per share-Basic		$	.06		$	.03		$	.00		$	.05		$	.14
Net income per share -Diluted		$	.06		$	.03		$	.00		$	.05		$	.13

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .

On November 14, 2005, Ernst & Young LLP (“E&Y”) informed Misonix that it was resigning as Misonix’s independent auditor.

The report of E&Y on Misonix’s financial statements as of and for the fiscal year ended June 30, 2005 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

 

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During the fiscal year ended June 30, 2005 and through the date of E&Y's resignation, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to E&Y’s satisfaction, would have caused E&Y to make reference to the subject matter of the disagreement in connection with its report on Misonix’s financial statements for such years.

On January 23, 2006, Misonix engaged Grant Thornton LLP (“Grant Thornton”) to act as its independent registered public accounting firm as successor to E&Y. The Audit Committee of Misonix’s Board of Directors approved the appointment of Grant Thornton as Misonix’s independent registered public accounting firm.

Item 9A.   Controls and Procedures.

 

Our management, with the participation of the our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of 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”)) as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective in enabling us to record, process, summarize, and report information required to be included in our periodic SEC filings within the required time period.

 

There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act ) during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B.   Other Information .

None.

Item 9A (T).  Controls and Procedures.

Not applicable.

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PART III

Item 10.  Directors and Executive Officers of the Registrant.

The Company currently has six Directors. Their term expires at the Annual Meeting of Shareholders. The following table contains information regarding all Directors and executive officers of the Company:

Name		Age		Principal Occupation		Director Since
John Gildea		64		Director		2004
Howard Alliger		80		Director		1971
Dr. Charles Miner III		56		Director		2005
T. Guy Minetti		56		Director		2003
Thomas F. O’Neill		61		Director		2003
Michael A. McManus, Jr.		64		Director, President and		1998
				Chief Executive Officer
Richard Zaremba		52		Senior Vice President, Chief
				Financial Officer, Secretary and Treasurer		—
Dr. W. Paul Constantine*		36		Senior Vice President, Strategic Planning And New Product Development		—
Dan Voic		45		Vice President of Research and Development and Engineering		—
Ronald Manna		53		Vice President of New Product Development and Regulatory Affairs		—
Frank Napoli		50		Vice President of Operations		—

 

*Dr. W. Paul Constantine resigned from the Company in January 2007.

 

The following is a brief account of the business experience for the past five years of the Company’s Directors and executive officers:

John W. Gildea is the founding principal of Gildea Management Co., a management Company of special situations with middle market companies in the United States and Central Europe. From 2000 to 2003 Gildea Management Co. formed a joint venture with J.O. Hambro Capital Management Co. to manage accounts targeting high yield debt and small capitalization equities. From 1996 to 2000 Gildea Management Co. formed and founded Latona Europe, a joint venture between Latona U.S., Lazard Co., and Gildea Management Co. to restructure several Czech Republic companies. Before forming Gildea Management Co. in 1990, Mr. Gildea managed the Corporate Series Group at Donaldson, Lufkin and Jenrette, an investment banking firm. Mr. Gildea is a graduate of the University of Pittsburgh.

Howard Alliger founded the Company’s predecessor in 1955 and the Company was a sole proprietorship until 1960. The Company name then was Heat Systems-Ultrasonics. Mr. Alliger was President of the Company until 1982 and Chairman of the Board until 1996. In 1996 Mr. Alliger stepped down as Chairman and ceased to be a corporate officer. He has been awarded 23 patents and has published various papers on ultrasonic technology. For three years, ending in 1991, Mr. Alliger was the President of the Ultrasonic Industry Association. Mr. Alliger holds a B.A. degree in economics from Allegheny College and also attended Cornell University School of Engineering for four years. He has also established, and is President of, two privately held entities which are engaged in pharmaceutical research and development.

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Dr. Charles Miner III currently practices internal medicine in Darien, Connecticut. Dr. Miner is on staff at Stamford and Newark Hospitals and retains a teaching position at Columbia Presbyterian Hospital from 1982. Dr. Miner received his M.D. from the University Of Cincinnati College Of Medicine in 1979 and received a Bachelor of Science from Lehigh University in 1974.

T. Guy Minetti is the founder and Managing Director of Senior Resource Advisors LLC. a management consulting firm. Prior to being Managing Director of Senior Resource Advisors LLC, Mr. Minetti served as the Vice Chairman of the Board of Directors of 1-800-Flowers.Com, a publicly-held specialty gift retailer based in Westbury, New York. Before joining 1-800-Flowers.Com in 2000, Mr. Minetti was the Managing Director of Bayberry Advisors, an investment-banking boutique he founded in 1989 to provide corporate finance advisory services to small-to-medium-sized businesses. From 1981 through 1989, Mr. Minetti was a Managing Director of the investment banking firm, Kidder, Peabody & Company. While at Kidder, Peabody, Mr. Minetti worked in the investment banking and high yield bond departments. Mr. Minetti is a graduate of St. Michael’s College.

Thomas F. O’Neill, a founding principal of Sandler O’Neill & Partners L.P., an investment banking firm, began his Wall Street career at L.F. Rothschild. Mr. O’Neill specialized in working with financial institutions in Rothschild’s Bank Service Group from 1972. He was appointed Managing Director of the Bank Service Group, a group consisting of fifty-five professionals, in 1984. In 1985, he became a Bear Stearns Managing Director and Co-Manager of the Group. Mr. O’Neill serves on the Board of Directors of Archer-Daniels-Midland Company and the Nasdaq Stock Market, Inc. Mr. O’Neill is a graduate of New York University and a veteran of the United States Air Force.

Michael A. McManus, Jr., became President and Chief Executive Officer of the Company in November 1999. From November 1991 to March 1999, Mr. McManus was President and Chief Executive Officer of New York Bancorp, Inc. Prior to New York Bancorp, Inc., Mr. McManus held senior positions with Jamcor Pharmaceutical, Inc., Pfizer, Inc. and Revlon Corp. Mr. McManus also spent several years as an Assistant to President Reagan. Mr. McManus serves on the Board of Directors of the following publicly traded companies: American Home Mortgage Holdings, Inc.; Liquid Audio, Inc.; and Novavax, Inc. Mr. McManus holds a B.A. degree in Economics from the University of Notre Dame and a Juris Doctorate from Georgetown University Law Center.

Richard Zaremba became Senior Vice President in 2004. He became Vice President and Chief Financial Officer in February 1999. From March 1995 to February 1999, he was the Vice President and Chief Financial Officer of Converse Information Systems, Inc., a manufacturer of digital voice recording systems. Previously, Mr. Zaremba was Vice President and Chief Financial Officer of Miltope Group, Inc., a manufacturer of electronic equipment. Mr. Zaremba is a licensed certified public accountant in the state of New York and holds BBA and MBA degrees in Accounting from Hofstra University.

Dr. W. Paul Constantine became Senior Vice President of Strategic Planning and New Product Development in September 2005. Dr. Constantine’s entire career has focused on the development and management of world-class marketing and sales programs for global medical device companies. Earlier, Dr. Constantine held product development and marketing strategy positions with leading medical products suppliers, including units of and/or entities later acquired by Aesculap-B. Braun, Boston Scientific, Medtronic, and Smith & Nephew. He graduated from Samuel Merritt College with a doctorate degree after completing undergraduate studies at Loma Linda University.

Dan Voic became Vice President of Research and Development and Engineering in January 2002. Prior thereto, he served as Engineering Manager and Director of Engineering with the Company. Mr. Voic has approximately 14 years experience in both medical and laboratory and scientific products development. Mr. Voic holds a M.S. degree in mechanical engineering from Polytechnic University “Traian Vuia” of Timisoara, Romania and a MS degree in applied mechanics from Polytechnic University of New York.

Ronald Manna became Vice President of New Product Development and Regulatory Affairs of the Company in January 2002. Prior thereto, Mr. Manna served as Vice President of Research and Development and Engineering, Vice President of Operations and Director of Engineering of the Company. Mr. Manna holds a B.S. degree in mechanical engineering from Hofstra University.

 

Frank Napoli became Vice President of Operations in September 2004. From March 2004 to September 2004, Mr. Napoli was Vice President of Manufacturing for Spellman High Voltage Electronics Corp. Previously, Mr. Napoli was Director of Manufacturing for Telephonics Corporation. Mr. Napoli holds a B.S. degree in Mechanical Engineering from the New York Institute of Technology.

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Item 11.  Executive Compensation.

Compensation Discussion and Analysis

Overview of Compensation Program and Philosophy

Our compensation program is intended to:

·

Attract, motivate, retain and reward employees of outstanding ability;

·

Link changes in employee compensation to individual and corporate performance;

·

Align employees’ interests with those of the stockholders.

The ultimate objective of our compensation program is to increase shareholder value. We seek to achieve these objectives with a total compensation approach which takes into account a competitive base salary, bonus pay based on the annual performance of the Company and individual goals and stock option awards.

Base Salaries

Base salaries paid to executives are intended to attract and retain highly talented individuals. In setting base salaries, individual experience, individual performance, the Company performance and job responsibilities during the year are considered. Executive salaries are reconciled by Human Resources and evaluated against local companies of similar size and nature.

Annual Bonus Plan Compensation

The Compensation Committee of the Board of Directors approves annual performance based compensation. The purpose of the annual bonus based compensation is to motivate executive officers and key employees. Target bonuses, based upon recommendation from the Chief Executive Officer is evaluated and approved by the Compensation Committee for all employees other than the Chief Executive Officer. The bonus recommendations are derived from individual and Company performance but not based on a specific formula but is discretionary. The Chief Executive Officer’s bonus compensation is derived from the Board of Directors’ recommendation to the Compensation Committee based upon the Chief Executive Officer’s performance and Company performance and is not based on a specific formula but is discretionary.

Stock Option Awards

Stock option awards are indented to attract and retain highly talented executives, to provide an opportunity for significant compensation when overall Company performance is reflected in the stock price, and to help align executives’ and shareholders’ interests. Stock options are typically granted at the time of hire to key new employees and annually to a broad group of existing key employees, including executive officers.

 

Annual option grants to executive officers are made in the form of incentive stock options (“ISO’s”) to the fullest extent permitted under tax rules, with the balance granted in the form of nonqualified stock options (“NQSO’s”). ISO’s have potential income tax advantage for executives if the executive disposes of the acquired share after satisfying certain holding periods. Tax laws provide that the aggregate grant, at date of grant for market value of ISO’s that become exercisable for any employee in any year may not exceed $100,000.

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Our current standard vesting schedule for all employees is 25% on the first anniversary of the date of grant, 50% on the second anniversary of the date of grant, 75% on the third anniversary of the date of grant and 100% on the fourth anniversary of the date of grant.

401 (k) Plan

Change in Control benefits

Change in control benefits are intended to diminish the distinction that executives would face by virtue of the personal uncertainties created by a pending or threatened change in control and to assure that the Company will continue to have the executive’s full attention and services at all time. Our change in control benefits are designed to be competitive with similar benefits available at companies with which we compete for executives’ talent. These benefits, as one element of our total compensation program, help the Company attract, retain and motivate highly talented executives.

 

Mr. McManus has an agreement that provides, after a change in control of the Company for a one-time additional compensation payment equal to his annual base salary and a bonus of no less than two hundred and fifty thousand ($250,000) dollars. Mr. Zaremba has an agreement for the payment of six months of annual base salary upon a change in control of the Company. Mr. Manna has an agreement with the Company which provides for the payment of six months severance upon his termination for any reason.

Tax deductibility of Executive Compensation

Section 162 (m) of the Internal Revenue Code limits to $1,000,000 per person the amount that we may deduct for compensation paid to any of our most highly compensated officers in any year. In fiscal 2007, there was no executive officer’s compensation that exceeded $1,000,000.

Compensation Committee Report

The Compensation Committee has received and discussed the Compensation Discussion and Analysis section above with management and, based on the review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Report.

Howard Alliger

T. Guy Minetti

Thomas F. O’Neill

John W. Gildea

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The following table sets forth information for the fiscal year ended June 30, 2007 concerning the compensation awarded to, earned by or paid to our named executive officers during Fiscal 2007 for services rendered to the Company.

SUMMARY COMPENSATION TABLE FOR THE 2007 FISCAL YEAR

Name and Principal   Position		Fiscal Year   Ended June 30,			Salary ($)			Bonus ($)			Options Awards ($)			Total ($)
Michael A. McManus, Jr.			2007		$	275,000			−			-			275,000
President and Chief			2006			275,000			-			-			275,000
Executive Officer			2005			275,000			250,000			401,875			926,875
Richard Zaremba			2007			183,790			23,000			23,640			230,430
Senior Vice President,			2006			178,437			28,000			45,680			252,117
Chief Financial Officer,			2005			170,740			33,000			109,062			312,802
Secretary and Treasurer
Dan Voic			2007			126,915			18,000			15,760			160,675
Vice President of			2006			123,224			20,000			28,550			171,774
Research and Development and			2005			119,600			22,000			72,708			214,308
Engineering
Ronald Manna			2007			111,342			5,000			5,910			122,252
Vice President- New Product			2006			108,099			5,000			11,420			124,519
Development and Regulation Affairs			2005			104,948			4,000			24,236			133,184
Frank Napoli			2007			121,690			7,000			7,880			136,570
Vice President- Operations			2006			118,146			7,000			7,200			132,846
			2005			90,824			-			-			90,824
Dr. W. Paul Constantine (1)			2007			101,563			20,000			19,700			141,263
Senior Vice President-Strategic			2006			153,601			-			61,080			214,681
Planning and New Product Development			2005			-			-			-			-

 

(1) Dr. Constantine is no longer employed by the Company

Employment Agreements

In October 2005, the Company entered into an employment agreement with its President and Chief Executive Officer which expires on October 31, 2007 and is automatically renewable for one-year periods unless notice is given by the Company or Mr. McManus that it or he declines to renew the agreement. This agreement provides for an annual base compensation of $275,000 and a Company-provided automobile. The agreement also provides for a discretionary bonus.

 

41

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In conformity with the Company's policy, all of its directors, officers and employees execute confidentiality and nondisclosure agreements upon the commencement of employment with the Company. The agreements generally provide that all inventions or discoveries by the employee related to the Company's business and all confidential information developed or made known to the employee during the term of employment shall be the exclusive property of the Company and shall not be disclosed to third parties without the prior approval of the Company. Mr. Manna has an agreement with the Company which provides for the payment of six months’ severance upon his termination for any reason. Mr. McManus and Zaremba have an agreement for the payment of six months’ annual base salary upon a change in control of the Company. Mr. McManus shall be entitled to a one-time additional compensation payment equal to a payment of the annual base salary and a bonus of no less than $250,000. The Company's employment agreement with Mr. McManus also contains non-competition provisions that preclude him from competing with the Company for a period of 18 months from the date of his termination of employment.

		GRANTS OF PLAN-BASED AWARDS FOR THE 2007 FISCAL YEAR
Name		Grant Date		All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards (a)
Michael A. McManus, Jr.		−		−		−		−
Richard Zaremba		10/20/2006		12,000		3.45		23,640
Dan Voic		10/20/2006		8,000		3.45		15,760
Ronald Manna		10/20/2006		3,000		3.45		5,910
Frank Napoli		10/20/2006		4,000		3.45		7,880
Dr. W. Paul Constantine		10/20/2006		10,000		3.45		19,700

(a) The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.7%; no dividend yield; volatility factor of the expected market price of the Common Stock of 53.8%, and a weighted-average expected life of the options of six years.

42

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		OUTSTANDING EQUITY AWARDS FOR THE 2007 FISCAL YEAR
Name		Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Option Exercise Price ($)			Option Expiration Date
Michael A. McManus Jr.			250,000			-			5.06			10/07/08
			250,000			-			7.375			10/13/10
			150,000			-			6.07			10/17/11
			150,000			-			5.10			09/30/12
			125,000			-			4.66			11/01/13
			125,000			-			5.18			11/01/14
Richard Zaremba			7,500			-			7.3125			08/09/10
			7,500			-			6.12			05/08/11
			16,000			-			6.07			10/17/11
			20,000			-			5.10			09/30/12
			15,000			-			4.70			09/16/13
			8,000			4,000	(1)		8.00			09/15/14
			2,667			5,333	(2)		7.60			09/27/15
			1,000			3,000	(3)		5.82			02/07/16
			-			12,000	(4)		3.45			10/20/16
Dan Voic			7,500			-			7.57			07/28/08
			7,500			-			7.3125			08/09/10
			2,210			-			6.07			10/17/11
			6,700			-			5.10			09/30/12
			15,000			-			4.70			09/16/13
			8,000			4,000	(1)		8.00			09/15/14
			1,667			3,333	(2)		7.60			09/26/15
			625			1,875	(3)		5.82			02/07/16
			-			8,000	(4)		3.45			10/20/16
Ronald Manna			15,000			-			12.33			09/09/07
			10,000			-			18.50			10/21/07
			5,000			-			5.50			01/13/09
			15,000			-			3.09			03/31/09
			15,000			-			7.3125			08/09/10
			10,000			-			6.07			10/17/11
			5,000			-			5.10			09/30/12
			2,667			1,333	(1)		8.00			09/15/14
			667			1,333	(2)		7.60			09/26/15
			250			750	(3)		5.82			02/07/16
			-			3,000	(4)		3.45			10/20/16
Frank Napoli			667			1,333	(2)		7.60			09/26/15
			250			750	(3)		5.82			02/07/16
			-			4,000	(4)		3.45			10/20/16
Dr. W. Paul Constantine			-			-			-			-

(1) Options issued 09/15/04 and vest equally over 3 years

(2) Options issued 09/27/05 and vest equally over 3 years

(3) Options issued 02/07/06 and vest equally over 4 years

(4) Options issued 10/15/06 and vest equally over 4 years

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OPTIONS EXERCISES AND STOCK VESTED TABLE FOR FISCAL YEAR 2007

Name		Number of Shares Acquired on Exercise (#)			Value Realized on Exercise ($)
Michael A. McManus Jr.			20,000			22,000
Richard Zaremba			-			-
Dan Voic			-			-
Ronald Manna			-			-
Frank Napoli			-			-
Dr. W. Paul Constantine			-			-

Stock Options

In September 1991, in order to attract and retain persons necessary for the success of the Company, the Company adopted a stock option plan (the "1991 Plan") which covers up to 375,000 shares of Common Stock. Pursuant to the 1991 Plan, officers, directors, consultants and key employees of the Company are eligible to receive incentive and/or non-incentive stock options. At June 30, 2007, options to purchase 30,000 shares were outstanding under the 1991 Plan at an exercise price of $7.38 per share with a vesting period of two years, options to purchase 327,750 shares had been exercised and options to purchase 47,250 shares have been forfeited (of which options to purchase 30,000 shares have been reissued).

In March 1996, the Board of Directors adopted and, in February 1997, the shareholders approved the 1996 Employee Incentive Stock Option Plan covering an aggregate of 450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of Common Stock. At June 30, 2007, options to purchase 291,278 shares were outstanding at exercise prices ranging from $3.07 to $18.50 per share with a vesting period of immediate to three years under the 1996 Plan and options to acquire 250,000 shares were outstanding at exercise prices ranging from $.73 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2007, options to purchase 138,295 shares under the 1996 Plan have been exercised and options to purchase 197,372 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2007, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised, options to purchase 90,000 shares have been forfeited (of which none have been reissued) and there are no shares available for future granting.

In October 1998, the Board of Directors adopted and, in January 1999, the shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”) covering an aggregate of 500,000 shares of Common Stock. At June 30, 2007, options to purchase 385,675 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2007, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 106,752 shares under the 1998 Plan have been forfeited (of which options to purchase 69,275 shares have been reissued).

 Item 14.  Principal Accountant Fees and Services.

Audit Fees:

Grant Thornton LLP billed the Company in the amounts of $336,449 and $84,240 in the aggregate for services rendered for the audit of the Company’s 2007 and 2006 fiscal years, respectively, and the review of the Company’s interim financial statements included in the Company’s Quarterly Reports on Form 10-Q for the Company’s 2007 and 2006 fiscal years, respectively.

Audit-Related Fees:

Grant Thornton LLP did not render any audit-related services, as defined by the SEC, to the Company for the fiscal years ended June 30, 2007 and 2006.

Tax Fees:

Grant Thornton LLP did not render any tax related services, as defined by the SEC, to the Company for the fiscal year ended June 30, 2007.

Grant Thornton billed the Company $38,019 in the aggregate for professional services for tax compliance, tax advice and tax planning for the Company’s 2006 fiscal year.

All Other Fees:

Grant Thornton LLP billed the Company for an audit of the Company’s 401K plan ending December 31, 2005 in the amount of $20,800.

 

Policy on Pre-approval of Independent Registered Public Accounting Firm Services:

The charter of the Audit Committee provides for the pre-approval of all audit services and all permitted non-audit services to be performed for Misonix by the independent registered public accounting firm, subject to the requirements of applicable law. The procedures for pre-approving all audit and non-audit services provided by the independent registered public accounting firm include the Audit Committee reviewing audit-related services, tax services, and other services. The Audit Committee periodically monitors the services rendered by and actual fees paid to the independent registered public accounting firm to ensure that such services are within the parameters approved by the Committee. All the services described in Tax Fees and All Other Fees, above, were approved by the Audit Committee in accordance with its pre-approval policies and procedures.

 

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PART IV

Item 15.  Exhibits and Financial Statement Schedules .

(a)	1.	The response to this portion of Item 15 is submitted as a separate section of this Report.
	2.	Financial Statement Schedules
		Schedule II - Valuation and Qualifying Accounts and Reserves.
	3.	Exhibits

 

	3(a)		Restated Certificate of Incorporation of the Company. (1)
	3(b)		By-laws of the Company.
	10(a)		Lease extension and modification agreement dated October 31, 1992. (3)
	10(b)		Stock Option Plan. (1)
	10(g)		Settlement and License Agreement dated March 12, 1984 between the Company and Mettler Electronics Corporation. (1)
	10(j)		Assignment Agreement between the Company and Robert Ginsburg. (2)
	10(k)		Subscription Agreement between the Company and Labcaire. (2)
	10(l)		Option Agreements between the Company and each of Graham Kear, Geoffrey Spear, John Haugh, Martin Keeshan and David Stanley. (2)
	10(n)		Form of Director's Indemnification Agreement. (2)
	10(s)		Severance Agreement between the Company and Ronald Manna. (4)
	10(u)		Option Agreement dated September 11, 1995 between the Company and Medical Device Alliance, Inc. (4)
	10(w)		Amendment to agreement with principal shareholders of Labcaire Systems Ltd. (5)
	10(y)		Development and Option Agreement dated August 27, 1996 between the Company and United States Surgical Corporation. (6)
	10(z)		License Agreement dated October 16, 1996 between the Company and United States Surgical Corporation. (6)
	10(aa)		Amendment No. 1 dated January 23, 1997 to Underwriters’ Warrant Agreement. (6)
	10(bb)		1996 Non-Employee Director Stock Option Plan. (7)
	10(cc)		1996 Employee Incentive Stock Option Plan. (7)
	10(ee)		1998 Employee Stock Option Plan. (8)
	10(ff)		Investment Agreement, dated as of May 3, 1999, by and between the Company and Focus Surgery, Inc. (10)
	10(gg)		Investment Agreement dated October 14, 1999 by and between the Company and Hearing Innovations, Inc. (10)

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	10(ii)		Exclusive License Agreement dated as of February, 2001 between the Company and Medical Device Alliance, Inc. (10)
	10(jj)		Stock Purchase Agreement dated as of November 4, 1999 between the Company and Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems. (10)
	10(kk)		6% Secured Convertible Debenture, dated April 12, 2001, by Focus Surgery, Inc. payable to the Company. (9)
	10(ll)		Asset Purchase Agreement dated January 16, 2001, by and among the Company, Fibra-Sonics, Inc., Mary Anne Kirchschlager, James Kirchschlager and James Conrad Kirchschlager. (9)
	10(mm)		Purchase and Sale Agreement, dated July 28, 2000, by and between CraMar Technologies, Inc., Acoustic Marketing Research, Inc. and Randy Muelot. (9)
	10(oo)		5.1% Secured Convertible Debenture, dated November 7, 2000, by Focus Surgery, Inc. payable to the Company. (9)
	10(pp)		Asset Purchase Agreement by and between Perceptron, Inc. and Acoustic Market Research, Inc. d/b/a Sonora Medical Systems. (9)
	10(qq)		First Amendment to Employment Agreement, dated October 13, 2000, by and between the Company and Michael A. McManus, Jr. (9)
	10(ss)		6 % Secured Convertible Debenture, dated July 31, 2001, by Focus Surgery, Inc. payable to the Company. (11)
	10(tt)		Second Amendment to Employment Agreement dated October 31, 2002 by and between the Company and Michael A. McManus, Jr. (12)
	10(uu)		Amendment No. 4 to the Loan and Security Agreement. (14)
	10(vv)		Letter Agreement dated as of February 13, 2006. (15)
	10(ww)		Amendment No. 5 to the Loan and Security Agreement. (15)
	10(xx)		Letter Agreement dated as of May 12, 2006. (16)
	10(yy)		Amendment No. 6 to the Loan and Security Agreement. (16)
	10(zz)		2005 Employee Equity Incentive Plan. (17)
	10(aaa)		2005 Non-Employee Director Stock Option Plan. (17)
	10(bbb)		Letter Agreement dated as of September 12, 2006. (18)
	10(ccc)		Amendment No. 7 to the Loan and Security Agreement. (18)
	10(ddd)		Letter Agreement dated November 14, 2006. (19)
	10(eee)		Credit and Security Agreement, dated December 29, 2006, By and Between MISONIX, INC., Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated Acting through its Wells Fargo Business Credit operating division. (20)
	10(fff)		Credit and Security Agreement (Ex-Im Subfacility), dated December 29, 2006, By and Between MISONIX, INC., Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated and Wells Fargo Bank, National Association Acting through its Wells Fargo Business Credit operating division. (20)

 

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	10(ggg)		Export-Import Bank of the United States Working Capital Guarantee Program, Borrower Agreement, dated December 29, 2006, made by MISONIX, INC., Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated. (20)
	10(hhh)		Security Agreement, dated as of December 29, 2006, by and between MISONIX, INC. and Wells Fargo Bank, National Association acting through its Wells Fargo Business Credit operating division. (20)
	10(iii)		Patent and Security Agreement, dated as of December 29, 2006, by and between MISONIX, INC. and Wells Fargo Bank, National Association Acting through its Wells Fargo Business Credit operating division. (20)
	10(jjj)		Letter Agreement, dated December 29, 2006, by and between MISONIX, INC. and Bank of America, N.A. (20)
	10(kkk)		Amendment to Credit and Security Agreement dated May 10, 2007, by and among MISONIX, INC., Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated and Wells Fargo Bank, National Association acting through its Wells Fargo Business Credit operating division. (21)
	10(lll)		Settlement Agreement dated as of August 30, 2007, by and between MISONIX, INC. and William H. Phillips. (22)
	14		Code of Ethics. (13)
	21		Subsidiaries of the Company.
	23.1		Consent of Grant Thornton LLP.
	23.2		Consent of Ernst & Young LLP.
	31.1		Rule 13a-14(a)/15d-14(a) Certification.

 

	31.2		Rule 13a-14(a)/15d-14(a) Certification.
	32.1		Section 1350 Certification.
	32.2		Section 1350 Certification.

 

	(1)	Incorporated by reference from the Company’s Registration Statement on Form S-1 (Reg. No. 33-43585).
	(2)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year 1992.
	(3)	Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the fiscal year 1993.
	(4)	Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the fiscal year 1995.
	(5)	Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the fiscal year 1996.
	(6)	Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the fiscal year 1997.
	(7)	Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on February 19, 1997.
	(8)	Incorporated by reference from the Company’s Registration Statement on Form S-8 (Reg. No. 333-78795).
	(9)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001.
	(10)	Incorporated by reference from the Company’s Annual Report on Form 10-K/A for the fiscal year 2001.
	(11)	Incorporated by reference from the Company’s Annual Report on Form 10-K/A for the fiscal year 2002.
	(12)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year 2003.
	(13)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year 2004.
	(14)	Incorporated by reference from the Company’s Current Report on Form 8-k filed on September 30, 2005.
	(15)	Incorporated by reference from the Company’s Current Report on Form 8-k filed on February 17, 2006.
	(16)	Incorporated by reference from the Company’s Current Report on Form 8-k filed on May 18, 2006.
	(17)	Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Stockholders held on December 14, 2005.
	(18)	Incorporated by reference from the Company’s Current Report Form 8-K filed on September 29, 2006.
	(19)	Incorporated by reference from the Company’s Current Report Form 8-K filed on November 20, 2006.
	(20)	Incorporated by reference from the Company’s Current Report Form 8-K filed on January 04, 2007.
	(21)	Incorporated by reference from the Company’s Current Report Form 8-K filed on May 16, 2007.
	(22)	Incorporated by reference from the Company’s Current Report Form 8-K filed on September 7, 2007.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

	MISONIX, INC.
	By:	/s/ Michael A. McManus, Jr.
		Michael A. McManus, Jr.
		President and Chief Executive Officer

 

Date: September 27, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ Michael A. McManus, Jr.		President, Chief Executive		September 27 , 2007
Michael A. McManus, Jr.		Officer, and Director
		(principal executive officer)
/s/ Richard Zaremba		Senior Vice President,		September 27 , 2007
Richard Zaremba		Chief Financial Officer, Treasurer and Secretary
		(principal financial and accounting officer)
/s/ Howard Alliger		Director		September 27 , 2007
Howard Alliger
/s/ T. Guy Minetti		Director		September 27 , 2007
T. Guy Minetti
/s/ Thomas F. O’Neill		Director		September 27 , 2007
Thomas F. O’Neill
/s/ John Gildea		Director		September 27 , 2007
John Gildea
/s/ Charles Miner III		Director		September 27 , 2007
Charles Miner III

 

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Item 15(a)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MISONIX, INC. and Subsidiaries

Year Ended June 30, 2007

	Page
Reports of Independent Registered Public Accounting Firm	52-53
Consolidated Balance Sheets—June 30, 2007 and 2006	54
Consolidated Statements of Operations—Years Ended June 30, 2007, 2006 and 2005	55
Consolidated Statements of Stockholders’ Equity—Years Ended June 30, 2007, 2006 and 2005	56
Consolidated Statements of Cash Flows—Years Ended June 30, 2007, 2006 and 2005	57-58
Notes to Consolidated Financial Statements	59
The following consolidated financial statement schedule is included in Item 15(a)
Schedule II-Valuation and Qualifying Accounts

 

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

 

51

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62

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141 (“SFAS 141”) and 142 (“SFAS 142”), "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS 141 replaced Accounting Principles Board (“APB”) Opinion 16 “Business Combinations” and requires the use of the purchase method for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually and whenever events or circumstances occur that indicate goodwill might be impaired. With the adoption of SFAS 142, as of July 1, 2001, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment, only goodwill was determined to have an indefinite useful life and no adjustments were made to the amortization period or residual values of other intangible assets. The Company completed its annual goodwill impairment tests for fiscal 2007 and 2006 in the respective fourth quarter. There were no indicators that goodwill recorded was impaired.

Other Assets and Intangibles

The cost of acquiring or processing patents, trademarks, and other intellectual properties is capitalized at cost. This amount is being amortized using the straight-line method over the estimated useful lives of the underlying assets, which is approximately 17 years. Net patents reported in other assets totaled $421,000 and $351,000 at June 30, 2007 and 2006, respectively. Accumulated amortization totaled $224,000 and $166,000 at June 30, 2007 and 2006, respectively. Amortization expense for the years ended June 30, 2007, 2006 and 2005 was approximately $58,000, $41,000 and $32,000, respectively.

The following is a schedule of estimated future amortization expense as of June 30, 2007:

2008		$	53,750
2009			40,444
2010			35,667
2011			34,850
2012			33,190
Thereafter			223,270
		$	421,171

 

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 and 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.

 

Net (Loss) Income Per Share

Basic (loss) income per common share excludes any dilution. It is based upon the weighted average number of common shares outstanding during the period. Dilutive (loss) income 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:

 

		Year ended June 30,
		2007			2006			2005
Weighted average common shares outstanding			6,942,633			6,868,535			6,788,341
Dilutive effect of stock options			-			-			195,358
Diluted weighted average common shares outstanding			6,942,633			6,868,535			6,983,699

 

Employee stock options covering 88,821, 1,043,256 and 838,195 shares, respectively, for the years ended June 30, 2007, 2006 and 2005 were not included in the diluted net income per share calculation because their effect would have been anti-dilutive.

 

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MISONIX INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

Comprehensive (Loss) Income

The components of the Company’s comprehensive (loss) income are net (loss) income and foreign currency translation adjustments. The foreign currency translation adjustments included in comprehensive (loss) income have not been tax effected as investments in foreign affiliates are deemed to be permanent.

Foreign Currency Translation

The Company follows the policies prescribed by FASB Statement No. 52, “Foreign Currency Translation,” for translation of the financial results of its foreign subsidiaries. Accordingly, assets and liabilities are translated at the foreign currency exchange rate in effect at the balance sheet date. Resulting translation adjustments due to fluctuations in the exchange rates are recorded as other comprehensive income. Results of operations are translated using the weighted average of the prevailing foreign currency rates during the fiscal year. Stockholders’ equity accounts are translated at historical exchange rates. Gains and losses on foreign currency transactions are recorded in other income and expense.

Research and Development

All research and development expenses are expensed as incurred and are included in operating expenses.

Advertising Expense

The cost of advertising is expensed as of the first showing. The Company incurred approximately $360,000, $424,000 and $524,000 in advertising costs during the years ended June 30, 2007, 2006 and 2005, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Shipping and Handling

Shipping and handling fees for the years ended June 30, 2007, 2006 and 2005 were approximately $445,000, $420,000 and $476,000, respectively and are reported as a component of revenues. Shipping and handling costs for the years ended June 30, 2007, 2006 and 2005 were approximately $427,000, $575,000 and $607,000, respectively, and are reported as a component of selling expenses.

Stock-Based Compensation

Prior to July 1, 2005, the Company accounted for stock option plans under SFAS No. 123 (“SFAS No. 123”). As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB Opinion No. 25 (“APB 25”). Effective July 1, 2005, the Company adopted the fair-value recognition provisions of SFAS No. 123R (“SFAS No. 123R”) and Securities and Exchange Commission Staff (the “SEC”) Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. See Note 9 for additional information regarding stock-based compensation.

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

Recent Accounting Pronouncements

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), an amendment of SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to subsequently measure those servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS 156 to have a material effect on the Company’s consolidated financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. It prescribes a recognition threshold and measurement methodology for financial statement reporting purposes and promulgates a series of new disclosures of tax positions taken or expected to be taken on a tax return for which less than all of the resulting tax benefits are expected to be realized. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation in the first quarter of its 2008 fiscal year, which will begin July 1, 2007. The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact of such requirements on the Company’s consolidated financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements. These methods are referred to as the “roll-over” and “iron curtain” method. The roll-over method quantifies the amount by which the current year income statement is misstated. Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated. Exclusive reliance on a balance sheet approach can result in disregarding the effect of errors in the current year income statement that result from the correction of an

error existing in previously issued financial statements.

SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the Company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 2, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

The Company adopted SAB 108 using the cumulative effect transition method in connection with the preparation of our annual financial statements for the year ended June 30, 2007. The provisions of SAB 108 did not have a material effect on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) to eliminate the diversity in practice that exists due to the different definitions of fair value. SFAS No. 157 retains the exchange price notion in earlier definitions of fair value, but clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or liability in the principal or most advantageous market for the asset or liability. SFAS No. 157 states that the transaction is hypothetical at the measurement date, considered from the perspective of the market participant who holds the asset or liability. As such, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price), as opposed to the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price).

 

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Notes to Consolidated Financial Statements

June 30, 2007 and 2006

SFAS No. 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable outputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition.

SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, although earlier application is encouraged. Additionally, prospective application of the provisions of SFAS No. 157 is required as of the beginning of the fiscal year in which it is initially applied, except when certain circumstances require retrospective application. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial position and results of operations.

In June 2006, the FASB ratified the consensus reached by the Emerging Issues Tax Force in Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 also concluded that the presentation of taxes within its scope on either a gross (included in revenues and costs) or net (excluded from revenues) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for periods beginning after December 15, 2006. The Company currently presents these taxes on a net basis and has elected not to change its presentation method.

2. Acquisitions

Hearing Innovations, Inc.

On October 18, 1999, the Company and Hearing Innovations completed the agreement whereby the Company invested an additional $350,000 and cancelled notes receivable aggregating $400,000 in exchange for a 7% equity interest in Hearing Innovations and representation on its Board of Directors. Warrants to acquire 388,680 shares of Hearing Innovations common stock were also part of the agreement. Upon exercise of the warrants, the Company had the right to manufacture Hearing Innovations’ ultrasonic products and also had the right to create a joint venture with Hearing Innovations for the marketing and sale of its ultrasonic tinnitus masker device. As of the date of the acquisition, the cost of the investment was $784,000 ($750,000 plus acquisition costs of $34,000). The Company’s portion of the net losses of Hearing Innovations were recorded since the date of acquisition in accordance with the equity method of accounting. During fiscal 2001, the Company evaluated the investment with respect to the financial performance and the achievement of specific targets and goals and determined that the equity investment was impaired and therefore the Company recorded an impairment loss in the amount of $579,069.

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Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

On September 11, 2000, the Company loaned $108,000 to Hearing Innovations, which together with the then-outstanding loans aggregating $192,000 (with accrued interest) was exchanged for a $300,000, 7% Secured Convertible Debenture due August 27, 2002 and extended to November 30, 2003 (the “Hearing Debenture”). The Company recorded an allowance against the entire balance of principal and accrued interest due in fiscal 2001. The Company believed the Hearing Debenture was impaired since the Company did not anticipate such Debenture to be satisfied in accordance with the contractual terms of the loan agreement.

During fiscal 2001, the Company entered into fourteen loan agreements whereby Hearing Innovations was required to pay the Company an aggregate amount of $397,678 due May 30, 2002. The Company recorded an allowance against the entire balance due in fiscal 2001. The Company believed the loans were impaired since the Company did not anticipate that these loans would be paid in accordance with the contractual terms of the loan agreements.

During fiscal 2002, the Company entered into fifteen loan agreements whereby Hearing Innovations was required to pay the Company an aggregate amount of $322,679 due May 30, 2002, extended to November 30, 2003, and $151,230 due November 30, 2003. The Company recorded an allowance against the entire balance due in fiscal 2002. The Company believed the loans and related interest were impaired since the Company did not anticipate that these loans would be paid in accordance with the contractual terms of the loan agreements.

During fiscal 2003, the Company entered into sixteen loan agreements whereby Hearing Innovations is required to pay the Company an aggregate amount of $274,991 due November 30, 2003. The Company recorded an allowance against the entire balance of $274,991 for the above loans as well as accrued interest of $23,241 during fiscal 2003. The Company believed the loans and related interest were impaired since the Company did not anticipate that these loans would be paid in accordance with the contractual terms of the loan agreements. In November 2002, the Company signed a management agreement with Hearing Innovations whereby the Company earns $17,000 per month for those services. These amounts have been fully reserved by the Company, as the collectibility of these amounts was uncertain.

During fiscal 2004, the Company entered into eight loan agreements whereby Hearing Innovations is required to pay the Company an aggregate amount of $199,255, of which $455 was in the fourth quarter and was eliminated in consolidation. The Company recorded an allowance against amounts loaned prior to April 1, 2004, which allowance totaled $198,800. The related expense has been included in loss on impairment of Hearing Innovations in the accompanying consolidated statements of income. The Company believed the loans and related interest were impaired since the Company did not anticipate that these loans would be paid in accordance with the contractual terms of the loan agreements and Hearing Innovations has no predictable cash flows from its product revenue.

The Company previously made the decision not to continue funding Hearing Innovations’ operations, however, during fiscal 2004, the Company loaned Hearing Innovations $199,255 to enable Hearing Innovations to reduce a substantial portion of its long-term debt to certain third parties. The Company continued to believe that Hearing Innovations’ technology could provide a benefit to patients but the products require more improvement and market development. All equity investments and debt in Hearing Innovations were fully reserved for and have a zero basis.

 

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

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 variable interest entity 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 funded Hearing Innovations up to $150,000 for the reorganization plan. Hearing Innovations filed for relief under Chapter 11 of the U.S. Bankruptcy Code in September 2004. The petition was approved and the Company now owns 100% of the outstanding common stock in Hearing Innovations.

Focus Surgery, Inc.

On May 3, 1999, the Company invested $3,050,000 to obtain an approximately 20% equity interest in Focus, a privately-held technology Company and representation on its Board of Directors. Additionally, the Company has options and warrants to purchase an additional 5% of the equity of Focus. The agreement provides for a series of development and manufacturing agreements whereby the Company would upgrade existing Focus products and create new products based on high intensity  focused ultrasound (“HIFU”) technology for the non-invasive treatment of tissue for certain medical applications. The Company has the optional rights to market and sell several other high potential HIFU applications for treatment of both benign and cancerous tumors of the breast, liver and kidney and the right of first refusal to purchase 51% of the equity of Focus. The Company’s portions of the net losses of Focus were recorded since the date of acquisition. During fiscal 2001, the Company evaluated the investment with respect to the financial performance and the achievement of specific targets and goals and determined that the equity investment was impaired and therefore the Company recorded an impairment loss in the amount of $1,916,398. The net carrying value of the investment at June 30, 2007 and 2006 is $0. Under the equity method of accounting, if the equity investment was ever deemed not impaired, the Company would have to record its share of Focus’ losses since 2001 before the Company can record income from Focus. Focus’ unaudited net loss in fiscal year 2006 was $44,000. The Company will start to record its share of Focus’ income when Focus’ income is greater than the net losses from fiscal year 2002 through fiscal 2007, which aggregated to approximately $2,499,000.

On November 7, 2000, the Company purchased a $300,000, 5.1% Secured Cumulative Convertible Debenture from Focus, due December 22, 2002 (the “5.1% Focus Debenture”). The 5.1% Focus Debenture is convertible into 250 shares of Focus preferred stock at the option of the Company at any time after December 22, 2000 for two years at a conversion price of $1,200 per share, if the 5.1% Focus Debenture is not retired by Focus. Interest accrues and is payable at maturity or is convertible on the same terms as the 5.1% Focus Debenture’s principal amount. The 5.1% Focus Debenture is secured by a lien on all of Focus’ right, title and interest in accounts receivable, inventory, property, plant and equipment and processes of specified products whether now existing or hereafter arising after the date of the 5.1% Focus Debenture. The Company recorded an allowance against the entire balance of principal and accrued interest due in fiscal 2001. The 5.1% Focus Debenture is currently in default and the Company is negotiating an extended due date and conversion right. The Company believes the loan is impaired since the Company does not anticipate the 5.1% Focus Debenture will be satisfied in accordance with the contractual terms of the loan agreement.

On April 12, 2001, the Company purchased a $300,000, 6% Secured Cumulative Convertible Debenture from Focus, due May 25, 2003 (the “6% Focus Debenture”). The 6% Focus Debenture is convertible into 250 shares of Focus preferred stock at the option of the Company at any time after May 25, 2003 for two years at a conversion price of $1,200 per share, if the 6% Focus Debenture is not retired by Focus. Interest accrues and is payable at maturity, or is convertible on the same terms as the 6% Focus Debenture’s principal amount. The 6% Focus Debenture is secured by a lien on all of Focus’ right, title and interest in accounts receivable, inventory, property, plant and equipment and processes of specified products whether now existing or hereafter arising after the date of the 6% Focus Debenture. The Company recorded an allowance against the entire balance of principal and accrued interest due in fiscal 2001. The 6% Focus Debenture is currently in default and the Company is negotiating an extended due date and conversion right. The Company believes the loan is impaired since the Company does not anticipate the 6% Focus Debenture will be satisfied in accordance with the contractual terms of the loan agreement.

 

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

On July 31, 2001, the Company purchased a second $300,000, 6% Secured Cumulative Convertible Debenture from Focus, due May 25, 2003 (the “Focus Debenture”). The Focus Debenture is convertible into 250 shares of Focus preferred stock at the option of the Company at any time after the due date for two years at a conversion price of $1,200 per share. The Focus Debenture also contains warrants, deemed nominal in value, to purchase an additional 125 shares to be exercised at the option of the Company. Interest accrues and is payable at maturity or is convertible on the same terms as the Focus Debenture’s principal amount. The Focus Debenture is secured by a lien on all of Focus’ 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 the Focus Debenture. The Company recorded an allowance against the entire balance of principal and accrued interest due in fiscal 2002. The Focus Debenture is currently in default and the Company is negotiating an extended due date and conversion right. The Company believes the loan is impaired since the Company does not anticipate the Focus Debenture will be satisfied in accordance with the contractual terms of the loan agreement.

During fiscal 2002, the Company entered into a loan agreement whereby Focus borrowed $60,000 from the Company. This loan matured on May 30, 2002 and was extended to December 31, 2002. The loan bears interest at 6% per annum and contains warrants, which are deemed nominal in value, to acquire additional shares. The loan is secured by a lien on all of Focus’ 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 the loan. The Company recorded an allowance against the entire balance at June 30, 2004 and 2003. The loan is currently in default and the Company is negotiating an extended due date. The Company believes that this loan is impaired since the Company does not anticipate that this loan will be paid in accordance with the contractual terms of the loan agreement.

In May 2004, the Company’s ownership was reduced to 13% due to additional preferred stock issued by Focus.

If the Company were to convert the 5.1% Focus Debenture, 6% Focus Debenture and Focus Debenture, and exercise all warrants, the Company would hold an interest in Focus of approximately 18%.

The Company has subcontracted Focus to perform research and development activities for which the Company paid $44,000, $165,000 and $452,000 to Focus in fiscal 2007, 2006 and 2005, respectively, which is recorded as research and development expenses and selling expense in the accompanying statement of operations.   During fiscal 2004, Focus entered into an exclusive agreement with the Company to distribute the Sonablate® 500 in the European market. The Company has purchased approximately $663,000, $830,000 and $715,000 of product from Focus during fiscal 2007, 2006 and 2005, respectively. Total sales to Focus were approximately $801,000, $459,000 and $702,000 for the fiscal years ended June 30, 2007 and 2006, respectively. Trade accounts receivable due from Focus at June 30, 2007 and 2006 were approximately $4,000 and $56,000, respectively. Accounts payable to Focus Surgery totaled $508,000 at June 30, 2007 and $91,000 at June 30, 2006.

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Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

Summarized unaudited financial information of Focus are as follows:

 

Condensed Statement of Operations Information

 

		Year ended June 30,
		2007			2006			2005
Sales		$	4,020,000		$	3,509,000		$	3,006,000
Gross profit			2,386,000			2,080,000			1,991,000
Net loss			($685,000	)		($44,000	)		($188,000	)

 

Condensed Balance Sheet Information 

 

		June 30,
		2007			2006
Current assets		$	1,960,000		$	1,253,000
Non-current assets			603,000			487,000
Current liabilities			666,000			1,432,000
Non-current liabilities			4,224,000			4,186,000
Preferred stock			6,275,000			4,039,000
Common stockholders’ deficit			(8,602,000	)		(7,917,000	)

UKHIFU Limited

On March 27, 2006 the Company, through its wholly owned subsidiary Misonix Ltd., acquired a 60% equity position in UKHIFU from Imaging Equipment which owns the remaining 40%. UKHIFU is in the business of distributing and servicing equipment for the ablation of cancerous tissue in the prostate.

In addition to the original investment the Company made additional payments of approximately $60,000 to Imaging Equipment during the year ended June 30, 2007. The additional payments were recorded as goodwill.

3. Inventories

Inventories are summarized as follows:

		June 30,
		2007			2006
Raw materials		$	6,593,458		$	5,702,171
Work-in-process			2,624,212			2,250,826
Finished goods			4,599,040			5,456,684
		$	13,816,710		$	13,409,681
Less: valuation reserve			1,913,416			2,102,455
		$	11,903,294		$	11,307,226

 

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Notes to Consolidated Financial Statements

June 30, 2007 and 2006

4. Property, Plant and Equipment

Property, plant and equipment consist of the following:

		June 30,
		2007			2006
Buildings		$	-		$	1,986,947
Machinery and equipment			6,248,247			4,637,864
Furniture and fixtures			1,721,481			1,560,662
Automobiles			1,152,926			1,047,718
Leasehold improvements			789,390			784,097
Demonstration and consignment inventory			1,479,378			1,929,725
			11,391,422			11,947,013
Less: accumulated depreciation and amortization			6,663,055			5,451,159
		$	4,728,367		$	6,495,854

Included in machinery and equipment and furniture and fixtures at June 30, 2007 and 2006 are approximately $117,000 and $167,000, respectively, of data processing equipment and telephone equipment under capital leases with related accumulated amortization of approximately $107,000 and $130,000, respectively. Also, included in automobiles are approximately $781,000 and $823,000, respectively, of automobiles under capital leases with accumulated amortization of approximately $228,000 and $233,000, respectively. The Company leased approximately $536,000, $517,000 and $454,000 of automobiles and equipment under capital lease arrangements during the years ended June 30, 2007, 2006 and 2005, respectively.

Labcaire sold its building in the United Kingdom in June 2007 in a sale and leaseback agreement with TESCO Ltd (“TESCO”). TESCO plans to utilize the property to expand its operations which will require Labcaire to relocate to another facility upon TESCO receiving permission to expand from the local authorities. Labcaire sold the building for $3.6 million and recorded a deferred gain of $1.6 million which will be amortized over the 10 year lease period. Additionally, upon TESCO receiving permission to expand its facilities which is expected in the next 2 to 5 years, TESCO will cancel the lease and require Labcaire to vacate the premises. Upon Labcaire’s vacating the premises, TESCO will pay Labcaire an additional $1.5 million.

Depreciation and amortization of property, plant and equipment totaled approximately $1,407,000, $1,284,000 and $795,000 for the years ended June 30, 2007, 2006 and 2005, respectively.

 

5. Revolving Credit Facilities

Revolving Credit Facilities

Labcaire has a debt purchase agreement with Lloyds TSB Commercial Finance (“Lloyds”). The amount of this facility bears interest at the bank’s base rate (5.5% and 4.5% at June 30, 2007 and 2006, respectively) plus 2%. The agreement expires on September 28, 2008 and covers all United Kingdom and European sales. At June 30, 2007, the balance outstanding under this credit facility was $897,208 and Labcaire is not in violation of financial covenants.

Labcaire had an overdraft facility with Lloyds which was secured by the Labcaire building. All amounts borrowed under this facility were paid when the Labcaire building was sold and the overdraft facility was cancelled.

On December 29, 2006 the Company and its subsidiaries, Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems and Hearing Innovations Incorporated (collectively referred to as the “Borrowers”) and Wells Fargo Bank National Association entered into a (i) Credit and Security Agreement and (ii) Credit and Security Agreement Export-Import Subfacility (collectively referred to as the “Credit Agreements”).

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

The aggregate credit limit under the Credit limit under the Credit Agreements is $8,000,000 consisting of a revolving facility in the amount of up to $8,000,000. Up to $1,000,000 of the revolving facility is available under the Export-Import Agreements as a subfacility for Export-Import working capital financing. All credit facilities under the Credit Agreements mature on December 29, 2009. Payment of amounts outstanding under the Credit Agreements may be accelerated upon to occurrence of an Even of Default (as defined in the Credit Agreements). All loans and advances under the Credit Agreements are secured by a first priority security interest in all of the Borrowers’ accounts receivable, deposit accounts, property, plant and equipment, general intangibles, intellectual property, inventory, letter-of-credit rights, and all other business assets. The Borrowers have the right to terminate or reduce the credit facility prior to December 29, 2009 by paying a fee based on the aggregate credit limit (or reduction, as the case may be) as follows: (i) during year one of the Credit Agreements, 3%; (ii) during year two of the Credit Agreements, 2%; and (iii) during year three of the Credit Agreements, 1%.

The Credit Agreements contain financial covenants requiring that the Borrowers (i) on a consolidated basis not have a Net Loss (as defined in the Credit Agreements) of more than $150,000 for the fiscal quarter ending June 30, 2007; and (ii) not incur or contract to incur Capital Expenditures (as defined in the Credit Agreements) of more that $1,000,000 in the aggregate in any fiscal year or more than $1,000,000 in any one transaction. At June 30, 2007, the Borrowers were in compliance with the financial covenants.

The available amount under the Credit Agreements is the lesser of $8,000,000 or the amount calculated under the Borrowing Base (as defined in the Credit Agreements). The Borrowers must maintain a minimum outstanding amount of $1,250,000 under the Credit Agreements at all times and pay a fee equal to the interest rate set forth on any such shortfall. Interest on amounts borrowed under payable monthly in arrears. The default rate of interest is 3% higher than the rate otherwise payable. A fee of ½ % per annum on the Unused Amount (as defined in the Credit Agreements) is payable monthly in arrears. At June 30, 2007, the balance outstanding under the Credit Agreements was $3,133,572. The amounts available to be borrowed are determined based on specified percentages of the Borrowers eligible trade receivables and inventories. An additional $331,000 was available to be borrowed at June 30, 2007.

6. Debt

On January 22, 1999, Labcaire purchased a manufacturing facility in North Somerset, England to house its operations. The purchase price was approximately $2,100,000 and was partially financed with a mortgage loan of $1,283,256. On July 1, 2002, Labcaire transferred its mortgage loan on their facility to Lloyds TSB from HSBC Bank plc. The property loan of £670,000 was repayable over 180 months with interest at base rate (4.50% at June 30, 2006) plus 1.75% and was collateralized by a security interest in certain assets of Labcaire. As of June 30, 2006, £548,000 ($990,000) was outstanding on this loan. The building was sold during June 2007 and the mortgage balance of approximately £518,000 was paid ($1,036,000).

7. Accrued Expenses and Other Current Liabilities

The following summarizes accrued expenses and other current liabilities:

		June 30,
		2007			2006
Accrued payroll and vacation		$	567,296		$	549,933
Accrued VAT and sales tax			118,176			94,813
Accrued VAT on sale of Labcaire building			631,229			-
Accrued commissions and bonuses			484,022			446,165
Customer deposits and current deferred contracts			1,084,412			870,760
Accrued professional and legal fees			47,413			208,650
Litigation expense			419,000			419,000
Other			606,095			374,441
		$	3,957,643		$	2,963,762

 

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Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

8. Leases

Misonix has entered into several noncancellable operating leases for the rental of certain manufacturing and office space, equipment and automobiles expiring in various years through 2017. The principal building leases provide for a monthly rental amount of approximately $84,000. The Company also leases certain office equipment and automobiles under capital leases expiring through fiscal 2012.

 

The following is a schedule of future minimum lease payments, by year and in the aggregate, under capital and operating leases with initial or remaining terms of one year or more at June 30, 2007:

		Capital			Operating
		Leases			Leases
2008		$	327,000		$	1,124,000
2009			149,000			1,136,000
2010			47,000			1,124,000
2011			13,000			598,000
2012			1,000			240,000
2013 and thereafter			-			1,200,000
Total minimum lease payments		$	537,000		$	5,422,000
Amounts representing interest			(66,000	)
Present value of net minimum lease payments			471,000
Less current maturities			(294,000	)
		$	177,000

Certain of the leases provide for escalation clauses, renewal options and the payment of real estate taxes and other occupancy costs. Rent expense for all operating leases was approximately $1,050,000, $1,148,000 and $882,000 for the years ended June 30, 2007, 2006 and 2005, respectively.

9. Stock-Based Compensation Plans

Prior to July 1, 2005, the Company accounted for escalation clauses, stock option plans under SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB 25. Effective July 1, 2005, the Company adopted the fair-value recognition provisions of SFAS No. 123R and SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. Compensation cost recognized in the years ended June 30, 2007 and 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of, July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Stock options are granted with exercise prices not less than the fair market value of our common stock at the time of the grant, with an exercise term (as determined by the Committee administering the applicable option plan (the “Committee”) not to exceed 10 years. The Committee determines the vesting period for the Company’s stock options. Generally, such stock options have vesting periods of immediate to four years. Certain option awards provide for accelerated vesting upon meeting specific retirement, death or disability criteria, and upon change of control during the years ended June 30, 2007 and 2006, the Company granted options to purchase 127,400 and 89,560 shares of the Company’s common stock, respectively.

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

No stock-based compensation cost related to stock options was recognized in the statements of operations for the year ended June 30, 2005 as all options granted in this period had an exercise price equal to the market price at the date of grant. As a result of adopting SFAS No. 123R, the Company’s loss before income taxes and net loss for the years ended June 30, 2007 and 2006 were approximately $184,000 and $163,000 and $509,000 and $413,000 higher, respectively, than if we had continued to account for stock-based compensation under APB No. 25. Compensation expense is recognized in the general and administrative expenses line item of the Company’s statements of operations on a straight-line basis over the vesting periods. There are no capitalized stock-based compensation costs at June 30, 2007 and 2006. As of June 30, 2007, there was approximately $389,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 2.3 years.

  

The total cash received from the exercise of stock options was $134,570 and $381,513 for the years ended June 30, 2007 and 2006, respectively, and are classified as financing cash flows. SFAS No. 123R required that tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows.

The table below presents the pro-forma effect on net income and basic and diluted loss per share if the Company had applied the fair value recognition provision to options granted under its stock option plans for the year ended June 30, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods.

 

		2005
Net income - As reported:		$	935,705
Stock based compensation determined under SFAS 123			(1,163,462	)
Net (loss) income - Pro forma:		$	(227,757	)
Net income (loss) per share - Basic:
As reported		$	.14
Pro forma		$	(.03	)
Diluted:
As reported		$	.13
Pro forma		$	(.03	)

The weighted average fair value at date of grant for options granted during the years ended June 30, 2007, 2006 and 2005 was $2.57, $3.82 and $3.56 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model utilizing the following assumptions:

		2007			2006			2005
Risk-free interest rates			4.7%			4.43			3.50% - 4.04%
Expected option life in years			6			5-7			5
Expected stock price volatility			53.8%			54.7%			73-100%
Expected dividend yield			-0-			-0-			-0-

 

During fiscal 2005, the Company accelerated the vesting of all unvested stock options awarded to employees and officers which had an exercise price greater than $8.00 per share. Options to purchase 101,000 shares became exercisable immediately as a result of the vesting acceleration. The Company sought to balance the benefit of eliminating the requirement to recognize compensation expense in future periods with the need to continue to motivate employee performance through previously issued, but currently unvested, stock option grants. With those factors being considered, management determined it to be appropriate to accelerate only those unvested stock options where the strike price was reasonably in excess of the Company’s then current stock price.

The effect of the acceleration was an increase in pro-forma stock based employee compensation expense for the year ended June 30, 2005 of approximately $300,000, net of taxes ($.04 per basic and diluted share). As the Company adopted SFAS 123R, “Share-Based Payment,” in the first quarter of fiscal 2006, the decision to accelerate the identified stock options reduced the Company’s share-based compensation, net of taxes by approximately $137,000 in fiscal 2006 and fiscal 2007 and $16,000 in fiscal 2008.

 

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

In September 1991, in order to attract and retain persons necessary for the success of the Company, the Company adopted a stock option plan (the "1991 Plan") which covers up to 375,000 shares of the Company’s Common Stock (“Common Stock”). Pursuant to the 1991 Plan, officers, directors, consultants and key employees of the Company are eligible to receive incentive and/or non-incentive stock options. At June 30, 2007, options to purchase 30,000 shares were outstanding under the 1991 Plan at an exercise price of $7.38 per share with a vesting period of two years, options to purchase 327,750 shares have been exercised and options to purchase 47,250 shares have been forfeited (of which options to purchase 30,000 shares were reissued) prior to July 1, 2005 and no shares remain available for future granting.

In March 1996, the Board of Directors adopted and, in February 1997, the shareholders approved the 1996 Employee Incentive Stock Option Plan covering an aggregate of 450,000 shares (the “1996 Plan”) and the 1996 Non-Employee Director Stock Option Plan (the “1996 Directors Plan”) covering an aggregate of 1,125,000 shares of Common Stock. At June 30, 2006, options to purchase 291,278 shares were outstanding at exercise prices ranging from $3.07 to $18.50 per share with a vesting period of immediate to two years under the 1996 Plan and options to acquire 175,000 shares were outstanding at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2007, options to purchase 144,295 shares under the 1996 Plan have been exercised and 197,372 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2007, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised, options to purchase 90,000 shares have been forfeited (of which none have been reissued) and no shares remain available for future granting.

In October 1998, the Board of Directors adopted and, in January 1999, the shareholders approved the 1998 Employee Stock Option Plan (the “1998 Plan”) covering an aggregate of 500,000 shares of Common Stock. At June 30, 2007, options to purchase 385,675 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.07 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2007, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 106,752 shares under the 1998 Plan have been forfeited (of which options to purchase 69,275 shares have been reissued).

In October 2000, the Board of Directors adopted and, in February 2001, the shareholders approved the 2001 Employee Stock Option Plan (the “2001 Plan”) covering an aggregate of 1,000,000 shares of Common Stock. At June 30, 2007, options to purchase 845,613 shares were outstanding under the 2001 Plan at exercise prices ranging from $3.45 to $8.00 per share with a vesting period of one to four years. At June 30, 2007, options to purchase 128,306 shares under the 2001 Plan have been exercised and options to purchase 106,752 shares under the 2001 Plan have been forfeited (of which 69,275 options have been reissued).

In September 2005, the Board of Directors adopted and, in December, 2005, the shareholders approved the 2005 Employee Equity Incentive Plan covering an aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director Option Plan covering an aggregate of 200,000 shares of Common Stock. At June 30, 2007, there were options to purchase 75,000 shares outstanding under the 2005 Non-employee Director Plan. The selection of participants, allotments of shares and determination of price and other conditions relating to options are determined by the Board of Directors or a committee thereof, depending on the Plan, and in accordance with Rule 4350(c) of the Qualitative Listing Requirements of the NASDAQ Global Market. Incentive stock options granted under the plans are exercisable for a period of up to ten years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the plans to a shareholder owning more than 10% of the outstanding Common Stock may not exceed five years and its exercise price may not be less than 110% of the fair market value of the Common Stock on the date of grant. Options shall become exercisable at such time and in such installments as provided in the terms of each individual option agreement.

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

The following table summarizes information about stock option activity during 2007, 2006 and 2005:

		Options
		Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life Years			Aggregate Intrinsic Value
Outstanding as of June 30, 2004			1,790,240		$	5.53
Granted			293,500			6.37
Exercised			(86,499	)		4.04
Forfeited			(89,166	)		6.75
Outstanding as of June 30, 2005			1,908,075		$	5.66			6.0		$	1,314,000
Exercisable at June 30, 2005			1,832,575		$	5.66			6.1		$	1,246,000
Vested at June 30, 2005			1,832,575		$	5.66			6.1		$	1,246,000
Outstanding as of June 30, 2005			1,908,075		$	5.66
Granted			89,560			7.19
Exercised			(74,417	)		5.06
Forfeited			(84,245	)		6.62
Outstanding as of June 30, 2006			1,837,973		$	5.72			5.7		$	1,111,000
Exercisable at June 30, 2006			1,694,869		$	5.63			4.9		$	1,081,000
Vested at June 30,2006			1,694,869		$	5.63			4.9		$	1,081,000
Outstanding as of June 30, 2006			1,837,973		$	5.72
Granted			127,400			4.61
Exercised			(101,000	)		1.33
Forfeited			(61,807	)		6.01
Outstanding as of June 30, 2007			1,802,566		$	5.88			5.4		$	1,239,000
Exercisable at June 30, 2007			1,629,133		$	5.91			4.9		$	1,075,000
Vested at June 30, 2007			1,629,133		$	5.91			4.9		$	1,075,000

The following table summarizes information about stock options outstanding at June 30, 2007:

		Options Outstanding									Options Exercisable
Range of Exercise Price		Number			Weighted Average Contractual Life (Yrs)			Weighted Average Exercise Price			Number			Weighted Average Exercise Price
$ 3.07 - 4.99			322,400			7.8		$	4.26			280,000		$	4.38
$ 5.06 - 8.00			1,455,166			5.0		$	6.09			1,324,133		$	6.07
$ 12.33 - 18.50			25,000			.3		$	14.80			25,000		$	14.80
			1,802,566			5.4		$	5.88			1,629,133		$	5.91

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

As of June 30, 2007 and 2006, 1,802,566 and 1,837,973 shares are reserved for issuance under outstanding options and 666,477 and 772,578 shares are reserved for the granting of additional options, respectively. All outstanding options expire between October 2007 and February 2017 and vest immediately or over periods of up to four years.

10. Commitments and Contingencies

Legal Proceedings

A jury in the District Court of Boulder County, Colorado has returned a verdict against Sonora Medical Systems in the amount of $419,000 which was recorded by the Company during the fourth quarter of fiscal 2005. The case involved royalties claimed on recoating of transesophogeal probes, which is a process performed by Sonora. Approximately 80% of the judgment was based on the jury estimate of royalties for potential sales of the product in the future. Sonora has moved for judgment notwithstanding the verdict based on, among other things, the award of damages for future royalties. Sonora has also moved for a new trial in the case.

The Company is a defendant in claims and lawsuits arising in the ordinary course of business. The Company believes that it has meritorious defenses to such claims and lawsuits and is vigorously contesting them. Although the outcome of litigation cannot be predicted with certainty, the Company believes that these actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Employment Agreement

11. 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 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 less general and administrative expenses and litigation (recovery) settlement expenses, which are maintained at the corporate headquarters (corporate). The Company does not allocate assets by segment as such information is not provided to the chief operating decision maker. Summarized financial information for each of the segments for the years ended June 30, 2007, 2006 and 2005 are as follows:

For the year ended June 30, 2007:

		Medical  Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	23,540,628		$	18,891,277		$	-		$	42,431,905
Cost of goods sold			13,336,430			11,388,084			-			24,724,514
Gross profit			10,204,198			7,503,193			-			17,707,391
Selling expenses			5,002,878			2,593,276			-			7,596,154
Research and development			1,953,872			1,159,392			-			3,113,264
General and administrative			-			-			9,417,038			9,417,038
Total operating expenses			6,956,750			3,752,668			9,417,038			20,126,456
Income (loss) from operations		$	3,247,448		$	3,750,525			($9,417,038	)		($2,419,065	)

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

For the year ended June 30, 2006:

		Medical  Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	20,928,052		$	18,559,241		$	-		$	39,487,293
Cost of goods sold			12,456,746			12,337,537			-			24,794,283
Gross profit			8,471,306			6,221,704			-			14,693,010
Selling expenses			4,739,079			2,689,076			-			7,428,155
Research and development			2,200,380			1,427,022			-			3,627,402
General and administrative			-			-			10,211,492			10,211,492
Total operating expenses			6,939,459			4,116,098			10,211,492			21,267,049
Income (loss) from operations		$	1,531,847		$	2,105,606			($10,211,492	)		($6,574,039	)

For the year ended June 30, 2005:

 

		Medical  Devices			Laboratory and Scientific Products			Corporate and Unallocated			Total
Net sales		$	25,050,944		$	21,322,032		$	-		$	46,382,976
Cost of goods sold			13,787,186			13,082,050			-			26,869,236
Gross profit			11,263,758			8,249,982			-			19,513,740
Selling expenses			3,372,930			3,214,178			-			6,578,108
Research and development			2,437,466			1,048,597			-			3,486,063
General and administrative			-			-			8,881,228			8,881,228
Total operating expenses			5,810,396			4,262,775			8,881,228			18,954,399
Income from operations		$	5,453,362		$	3,987,207			($8,881,228	)	$	559,341

There are two major customers for medical devices. Sales to USS were approximately $4,464,000, $4,461,000 and $5,778,000 for the years ended June 30, 2007, 2006 and 2005, respectively. Sales to Aesculap Inc, USA were approximately $1,605,000, $1,410,000 and $613,000 during the fiscal years ended June 30, 2007, 2006 and 2005, respectively. There were no significant concentrations of sales or accounts receivable for laboratory and scientific products for the years ended June 30, 2007, 2006 and 2005, respectively.

The Company’s revenues are generated from various geographic regions. The following is an analysis of net sales by geographic region:

		Year ended June 30,
		2007			2006			2005
United States		$	24,333,025		$	25,049,212		$	29,402,657
Canada and Mexico			452,641			640,009			864,878
United Kingdom			11,536,440			9,392,592			11,421,335
Europe			3,713,012			2,210,668			2,823,169
Asia			1,673,480			1,268,799			899,274
Middle East			115,020			307,810			279,514
Other			608,277			618,203			692,149
		$	42,431,905		$	39,487,293		$	46,382,976

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

Total assets, by geographic area, are as follows:

 

		June 30,
		2007			2006
United States
Long-lived assets		$	7,896,908		$	7,753,893
Other assets			18,447,310			16,502,088
			26,344,218			24,255,981
United Kingdom
Long-lived assets			2,573,478			3,928,118
Other assets			9,828,048			6,363,401
			12,401,526			10,291,519
Total Assets		$	38,745,744		$	34,547,500

12. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

 

		June 30,
		2007			2006
Deferred tax liabilities:
Depreciation and amortization			($300,206	)		($282,455	)
Total deferred tax liabilities			(300,206	)		(282,455	)
Deferred tax assets:
Bad debt reserves			84,522			85,417
Accruals and allowances			199,984			202,142
Inventory valuation			585,634			691,171
License fee income			77,357			85,958
Investments			1,697,856			1,697,856
Stock-based compensation			128,592			258,570
Litigation			149,164			149,164
Tax credits and net operating loss carry forwards			3,314,864			2,278,855
Deferred lease liability			83,747			72,888
Deferred gain from sale and leaseback of Labcaire building			596,525			-
Other			9,684			9,684
Total deferred tax assets			6,927,929			5,531,705
Valuation allowance			(3,071,932	)		(3,071,932	)
Net deferred tax asset		$	3,555,791		$	2,177,318
Recorded as:
Current deferred tax asset		$	1,028,988		$	1,419,949
Non-current deferred tax asset			2,827,009			1,039,824
Non-current deferred tax liability			(300,206	)		(282,455	)
		$	3,555,791		$	2,177,318

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

As of June 30, 2007, the valuation allowance was determined by estimating the recoverability of the deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this assessment, the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies in making this assessment. Based on the level of historical income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2007. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are not realized.

At June 30, 2007, the Company had a net operating loss carryforward (“NOL”) of approximately $9,400,000 available to reduce future New York state taxable income. This NOL begins to expire in fiscal year 2022. The Company has provided a full valuation allowance on the deferred tax asset related to this loss.

In prior years, the Company recorded a deferred tax asset in connection with the loss on impairment of equity investments which included the carrying value of the investments and related notes and debentures. The deferred tax asset related to this impairment of equity investments totaled $1,697,856 at June 30, 2007 and 2006. During fiscal 2006, the Company recorded a deferred tax asset related to operating loss carryovers incurred by its wholly-owned subsidiary Hearing Innovations in the amount of $1,337,743. The Company recorded a full valuation allowance against these assets in accordance with the provisions of SFAS No. 109. Based upon the capital nature of the deferred tax asset and the Company’s projections for future capital gains in which the deferred tax asset would be deductible, management did not deem it more likely than not that the asset would be recoverable at June 30, 2007 and 2006.

Significant components of the income tax expense (benefit) attributable to operations are as follows:

             

		Years ended June 30,
		2007			2006			2005
Current:
Federal		$	-			($1,112,327	)	$	185,410
State			17,048			10,000			46,000
Foreign			615,347			35,131			(57,942	)
Total current			632,395			(1,067,196	)		173,468
Deferred:
Federal			(628,658	)		(816,918	)		74,487
State			(8,208	)		(7,472	)		21,006
Foreign			(660,324	)		(382,713	)		23,778
Total deferred			(1,297,190	)		(1,207,103	)		119,271
			($664,795	)		($2,274,299	)	$	292,739

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rates to income tax expense (benefit) is as follows:

		Year ended June 30,
		2007			2006			2005
Tax at Federal statutory rates			($698,784	)		($2,047,205	)	$	422,135
State income taxes, net of Federal benefit			11,252			(872	)		30,360
Research credit			(145,090	)		(5,877	)		(116,000	)
Extraterritorial income exclusion			(4,180	)		25,149			(61,540	)
Foreign taxes			35,304			125,130			(30,181	)
Stock-based compensation			59,573			74,270			-
State rate adjustment			-			53,918			-
Valuation allowance			-			(629,560	)		-
Travel and entertainment			31,094			18,199			6,971
Other			46,036			112,549			40,994
			($664,795	)		($2,274,299	)	$	292,739

13. Licensing Agreements for Medical Technology

In October 1996, the Company entered into a License Agreement (the “USS License”) with USS for a twenty-year period, covering the further development and commercial exploitation of the Company’s medical technology relating to ultrasonic cutting, which uses high frequency sound waves to coagulate and divide tissue for both open and laproscopic surgery.

The USS License gives USS exclusive worldwide marketing and sales rights for this technology. The Company received $100,000 under the option agreement preceding the USS License. This amount was recorded into income in fiscal 1997. Under the USS License, the Company has received $475,000 in licensing fees (which are being recorded as income over the term of the USS License), plus royalties based upon net sales of such products. Total royalties from sales of this device were approximately $827,000 and $810,000 for the fiscal years ended June 30, 2007 and 2006, respectively.

In June 2002, the Company entered into a ten-year worldwide, royalty-free, distribution agreement with Byron Medical, Inc., a wholly owned subsidiary of Mentor Corporation (“Mentor”) for the sale, marketing and distribution of the Lysonix 2000 soft tissue aspirator used for cosmetic surgery. This agreement is a standard agreement for such distribution in that it specifies the product to be distributed, the terms of the agreement and the price to be paid for product covered under the agreement. In June 2007, the Company terminated the supply and distribution agreement by and between Mentor and Misonix due to Mentor’s breach of the agreement. The Company entered into a new agreement in September.

14. Employee Profit Sharing Plan

The Company sponsors a retirement plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended, for all full time employees. Participants may contribute a percentage of compensation not to exceed the maximum allowed under the Code, which was $15,500 or $20,500 if the employee was over 50 years of age for the year ended June 30, 2007. The plan provides for a matching contribution by the Company of 10%-25% of annual eligible compensation contributed by the participants based on years of service, which amounted to $124,746, $109,757 and $104,904 for the years ended June 30, 2007, 2006 and 2005, respectively.

 

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

 

15. Quarterly Results (unaudited)

		FISCAL 2007
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,642,878		$	10,639,086		$	10,583,924		$	11,566,017		$	42,431,905
Gross profit			3,931,866			4,786,755			4,459,997			4,528,773			17,707,391
Operating expenses			4,821,739			5,055,433			5,353,185			4,896,099			20,126,456
Loss from operations			(889,873	)		(268,678	)		(893,188	)		(367,326	)		(2,419,065	)
Other income			133,658			141,417			81,267			7,477			363,819
Minority interest in net income (loss) of consolidated subsidiaries			31,339			(5,840	)		(38,318	)		(28,115	)		(40,934	)
Income tax benefit			(245,138	)		(144,975	)		(244,567	)		(30,115	)		(664,795	)
Net income (loss)			($542,416	)	$	23,554			($529,036	)		($301,619	)		($1,349,517	)
Net income (loss) per share-Basic			($.08	)	$	-			($.08	)		($.04	)		($.19	)
Net income (loss) per share -Diluted			($.08	)	$	-			($.08	)		($.04	)		($.19	)

		FISCAL 2006
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	9,213,486		$	10,376,318		$	10,279,301		$	9,618,188		$	39,487,293
Gross profit			3,538,445			3,971,453			4,062,525			3,120,587			14,693,010
Operating expenses			5,315,150			4,932,445			5,353,095			5,666,359			21,267,049
Income (loss) from operations			(1,776,705	)		(960,992	)		(1,290,570	)		(2,545,772	)		(6,574,039	)
Other income			174,859			139,332			144,143			94,515			552,849
Minority interest in net income (loss) of consolidated subsidiaries			16,339			2,785			(6,465	)		(113	)		12,546
Income tax benefit			(312,822	)		(317,340	)		(310,844	)		(1,333,293	)		(2,274,299	)
Net loss			($1,305,363	)		($507,105	)		($829,118	)		($1,117,851	)		($3,759,437	)
Net loss per share-Basic			($.19	)		($.07	)		($.12	)		($.16	)		($.55	)
Net loss per share -Diluted			($.19	)		($.07	)		($.12	)		($.16	)		($.55	)

 

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MISONIX, INC. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2007 and 2006

		FISCAL 2005
		Q1			Q2			Q3			Q4			YEAR
Net sales		$	10,605,456		$	10,747,686		$	10,998,745		$	14,031,089		$	46,382,976
Gross profit			4,516,130			4,557,132			4,668,288			5,772,190			19,513,740
Operating expenses			4,027,861			4,483,401			4,798,292			5,644,865			18,954,399
Income (loss) from operations			488,269			73,731			(129,984	)		127,325			559,341
Other income			203,339			150,554			195,111			133,329			682,233
Minority interest in net income (loss) of consolidated subsidiaries			15,439			11,807			29,083			(43,199	)		13,130
Income tax provision (benefit)			259,902			34,142			32,683			(33,998	)		292,739
Net income		$	416,267		$	178,336		$	3,361		$	337,741		$	935,705
Net income per share-Basic		$	.06		$	.03		$	.00		$	.05		$	.14
Net income per share -Diluted		$	.06		$	.03		$	.00		$	.05		$	.13

 

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MISONIX, INC.

Valuation and Qualifying Accounts

Years ended June 30, 2007, 2006 and 2005

 

Schedule II

Column A   Description		Column B Balance at Beginning of period			Column C Additions (Recoveries) Charged (Credited) to cost and expenses			Column D Additions (deductions)- describe			Column E Balance at end of period
Allowance for doubtful accounts: Year ended June 30:
2007		$	256,309		$	135,986		$	(78,314) (A	)	$	313,981
2006		$	405,998		$	112,633		$	(262,322) (A	)	$	256,309
2005		$	457,016		$	25,171		$	(76,189) (A	)	$	405,998

(A)	Reduction in allowance for doubtful accounts due to write-off of accounts receivable balance.

 

84

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