Form 10-K
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  _____  to  _____ 
Commission file number: 1-10986
MISONIX, INC.
(Exact name of registrant as specified in its charter)
     
New York   11-2148932
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
1938 New Highway, Farmingdale, New York   11735
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (631) 694-9555
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
Common Stock, $.01 par value   Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on December 31, 2009 (computed by reference to the closing price of such stock on such date) was approximately $12,288,189.
There were 7,001,369 shares of Common Stock outstanding at September 24, 2010.
 
 

 

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE
None
With the exception of historical information contained in this Form-10K, content herein may contain “forward looking statements” that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the statements made. The factors include general economic conditions, delays and risks associated with the performance of contracts, risks associated with international sales and currency fluctuations, uncertainties as a result of research and development, acceptable results from clinical studies, including publication of results and patient/procedure data with varying levels of statistical relevance, risks involved in introducing and marketing new products, potential acquisitions, consumer and industry acceptance, litigation and/or contemplated 510 (k) filings, the ability to achieve and maintain profitability in the Company’s business lines, and other factors discussed in this Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company disclaims any obligation to update its forward-looking statements.

 

 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
Item 15(a)
EXHIBIT INDEX
Exhibit 10.2
Exhibit 10.18
Exhibit 10.19
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


Table of Contents

PART I
Item 1. Business.
Overview
MISONIX, INC. (“Misonix” or the “Company”) is a New York corporation which, through its predecessors, was first organized in 1959. The Company designs, manufactures, develops and markets minimally invasive ultrasonic medical device products. These products include the BoneScalpelTM cutting system which is used among other things for surgical procedures of the spine, the SonaStar® Surgical Aspirator which is used to emulsify and remove soft and hard tumors, the SonicOne® Wound Cleansing and Debridement System that offers tissue specific debridement and cleansing of wounds for effective removal of devitalized tissue and fibrin deposits while sparing viable cells, and the AutoSonix ultrasound cutting and coagulating system which is marketed by Misonix through an agreement with Covidien Ltd. Misonix also markets its Lysonix ultrasound assisted liposuction device with Mentor Corporation, a subsidiary of Johnson & Johnson. The Company also develops and markets ductless fume enclosures for filtration of gaseous contaminates in the laboratory and forensic markets.
The Company’s 100% owned subsidiary, Hearing Innovations, Inc. (“Hearing Innovations”), is a development company with patented HiSonic ultrasonic technology for the treatment of profound deafness and tinnitus.
In fiscal 2010, approximately 22% of the Company’s net sales were to foreign markets. These sales had no additional risks as most sales are secured by letters of credit and are remitted to Misonix in U.S. currency.
Discontinued Operations
On April 7, 2009, the Company sold the assets of its Ultrasonics Laboratory Products (“Ultrasonics”) business to iSonix LLC, a wholly owned subsidiary of Sonics and Materials, Inc., for a cash payment of $3.5 million. The results of operations from the Ultrasonic business are shown net of tax from discontinued operations. The net assets and results of Ultrasonics operations have been reported as a discontinued operation for all periods presented.
On August 5, 2009, the Company sold its Labcaire Systems, Ltd. (“Labcaire”) subsidiary to PuriCore International Limited for a total purchase price of up to $5.6 million. The Company received $3.6 million at closing and a promissory note in the principal amount of $1 million, payable in equal installments of $250,000 on the next four anniversaries of the closing. As of September 28, 2010, the Company has received the first installment. The note receivable was discounted over the four years using a 4% imputed interest rate. This rate is consistent with published discounts. The discounted value of the note ($900,000) is used to determine gain or loss on the sale, and is included in other assets in the consolidated balance sheet. The Company will also receive a commission paid on sales for the period commencing on the date of closing and ending on December 31, 2013 of 8% of the pass through Automated Endoscope Reprocessing (“AER”) and Drying Cabinet products, and 5% of license fees from any chemical licenses marketed by Labcaire directly associated with sale of AERs, specifically for the disinfection of the endoscope. The aggregate commission payable to the Company is subject to a maximum payment of $1,000,000. The aggregate commission has zero value in determining the current gain or loss on the sale of Labcaire until the commission is paid. As of June 30, 2010, there were no commissions paid. For the twelve months ended June 30, 2010, the Company recorded an after tax loss on the sale of Labcaire of $376,461. Results of Labcaire operations have been reported as a discontinued operation for all periods presented. On July 19, 2010, the Company received a Dispute Notice from PuriCore PLC (“PuriCore”) with respect to the Agreement for the sale and purchase of shares of Labcaire Systems Limited which was completed on August 4, 2009. The dispute alleges that Misonix breached certain representations and warranties that could result in a reduction to the purchase price of approximately £1.6 million or approximately $2.5 million. The Company believes the notice is without merit and will vigorously defend any claim instituted by PuriCore. There can be no assurance, however, that the Company may not have to pay some amount to resolve PuriCore’s claims.
On October 2, 2009, Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems (“Sonora”) sold substantially all of its assets to Medical Imaging Holdings, Inc. (“Medical Imaging”) for a cash payment of $8,000,000 (subject to a future adjustment based on net working capital at the closing). On April 6, 2010, the Company paid $257,029 to Medical Imaging for the net difference of adjustments of working capital and the effect of income taxes. These amounts are reflected in discontinued operations in the June 30, 2010 financial statements. The Company also purchased at the closing of such transaction, utilizing $1,200,000 of the proceeds, the remaining outstanding 5% of Sonora’s shares. Sonora is engaged in the business of (i) selling, repairing and servicing new and used diagnostic ultrasound systems and consumable accessories used in conjunction therewith, (ii) selling, repairing, servicing and testing diagnostic ultrasound transducers, (iii) developing and selling equipment for testing ultrasound transducers, (iv) selling equipment used for cleaning and disinfecting ultrasound transducers including, but not limited to, transesophogeal echocardiography probes, (v) selling equipment used for testing endoscopic probes, (vi) repairing and servicing MRI systems and parts and subsystems used therein, and (vii) performing training for the service and maintenance of diagnostic ultrasound and MRI systems, in each instance throughout the world. The net assets and results of Sonora operations have been reported as a discontinued operation for all periods presented.

 

 


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On March 3, 2008, the Company, USHIFU, LLC (“USHIFU”), FS Acquisition Company and certain other stockholders of Focus Surgery, Inc. (“Focus”) entered into a Stock Purchase Agreement (the “Focus Agreement”). The closing of the transactions contemplated by the Focus Agreement took place on July 1, 2008. Pursuant to the Focus Agreement, the Company sold to USHIFU the 2,500 shares of Series M Preferred Stock of Focus owned by the Company for a cash payment of $837,500. The Company also received $679,366, fifty percent (50%) of the outstanding principal and accrued interest of loans previously made by the Company to Focus, with the remaining fifty percent (50%) of such amount of $679,366 paid on January 4, 2010. Upon collection, payment was recognized as a gain in other income.
On May 28, 2010, Misonix announced the sale to USHIFU of all of the rights to the High Intensity Focused Ultrasound (“HIFU”) technology previously obtained from Focus, a wholly owned subsidiary of USHIFU, together with other HIFU related assets. In consideration for the sale Misonix will receive up to approximately $5.8 million, paid out of an earn-out of 7% of gross revenues received by USHIFU related to the businesses being sold, up to the time we have received the first $3 million, and thereafter 5% of gross revenues up to the $5.8 million. Misonix will also be paid for 3 units in inventory of new Sonablate®500 machines. The obligation to pay for such machines is secured by a note due December 31, 2010. At the closing of such transaction, USHIFU paid Misonix for inventory associated with manufacturing the Sonablate 500 and reimbursed Misonix for certain monies expended in connection with the HIFU Registry. USHIFU paid Misonix $155,000 in August 2010 for one such Sonablate 500 unit, thereby reducing the outstanding principal of the note. The net assets and results of HIFU operations have been reported as a discontinued operation for all periods presented.
Misonix retained all of its rights associated with the HIFU related intellectual property and development assets recently purchased from ProRhythm. This intellectual property involves the development of new transducers and lenses to be used in the treatment of tissue using HIFU. This technology may be applied on a worldwide basis to a variety of organs not limited to kidney, liver, or breast tissue treatment.
Medical Devices
In October 1996, the Company entered into a twenty-year license agreement (the “USS License”) with United States Surgical, now a unit of Covidien Ltd. (“USS”). The USS License covers the further development 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 and device. Total sales of this device were approximately $3,172,000 and $3,467,000 for the fiscal years ended June 30, 2010 and 2009, respectively. Total royalties from sales of this device were approximately $576,000 and $590,000 for the fiscal years ended June 30, 2010 and 2009, respectively.
In September 2007, the Company entered into a worldwide, royalty-free, distribution agreement with Mentor Corporation, a wholly owned subsidiary of Johnson & Johnson (“Mentor”), for the sale, marketing and distribution of the Lysonix soft tissue aspirator used for cosmetic surgery. Total sales of this device were approximately $919,000 and $818,000 for the fiscal years ended June 30, 2010 and 2009, respectively.
Laboratory and Scientific Products
The Company’s other revenue producing activities consist of the manufacture and sale of Aura™ ductless fume hood products. The Aura ductless fume hood products offer 40 years of experience in providing safe work environments to medical, pharmaceutical, biotech, semiconductor, law enforcement, federal and local government laboratories. We manufacture a complete line of ductless fume enclosures to control and eliminate hazardous vapors, noxious odors and particulates in the laboratory. All fume enclosure products utilize either activated carbon or HEPA filters to capture contaminants and are a cost effective alternative to standard laboratory fume hoods that require expensive ductwork to vent contaminants to the outside. Misonix also offers laminar airflow stations and PCR enclosures. Misonix Ductless Fume Hoods meet or exceed applicable OSHA, ANSI, NFPA, SEFA and ASHRAE standards for ductless fume hoods. School Demonstration Ductless Fume Hoods have proven to be a valuable addition to hundreds of high school science laboratories. Multiple application filters allow for the use of a variety of chemicals and a clear back panel enables students to view demonstrations from all sides.
The technology used in the Aura ductless fume enclosures has also been adapted for specific uses in crime laboratories. The Forensic Evidence Cabinet protects wet evidence from contamination while it is drying and simultaneously protects law enforcement personnel from evidence that can be noxious and hazardous. The Cyanoacrylate (liquid glue) Fuming Chamber is used by fingerprinting experts to develop fingerprints on non-porous surfaces while providing protection from hazardous cyanoacrylate fumes.
Market and Customers
Medical Devices
The Company relies on its licensee, USS, a significant customer, for marketing the ultrasonic AutoSonix surgical device. The Company also relies on other distributors such as Mentor, Aesculap and independent distributors for the marketing of its medical products such as SonaStar, BoneScalpel, and Lysonix 3000, exclusively in the United States. The Company sells its SonicOne Wound Cleansing and Debridement System, and when clinical evaluations are completed the Ultrasonic BoneScalpel, for certain other applications through direct sales persons throughout the United States. All products are sold through distributors outside the United States.

 

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In September 2007, the Company completed an agreement with Mentor for domestic sales of its ultrasound assisted liposuction product, the Lysonix 3000. Mentor agreed to minimum purchase order provisions for the Lysonix 3000 for a one year term commencing September 30, 2007, and successive annual renewals upon mutual agreement by the companies. The agreement with Mentor for the Lysonix 3000 in the United States is in the process of being negotiated for renewal.
The Company also has an exclusive distribution agreement with Aesculap, a member of the B. Braun group of companies, to distribute the BoneScalpel in the United States.
Laboratory and Scientific Products
The Company relies on direct salespersons, distributors, manufacturing representatives and catalog listings for the marketing of its laboratory and scientific products.
The market for the Company’s ductless fume enclosures includes laboratory or scientific environments in which workers may be exposed to noxious fumes or vapors. The products are suited to laboratories in which personnel perform functions which release noxious fumes or vapors (including hospital and medical laboratories), industrial processing (particularly involving the use of solvents) and soldering, and other general chemical processes. The products are particularly suited to users in the pharmaceutical, semiconductor, biotechnology and forensic industries.
In fiscal 2010, approximately 22% of the Company’s net sales were to foreign markets. These sales had no additional risks as most sales are secured by letters of credit and are remitted to Misonix in U.S. currency.
Manufacturing and Supply
Medical Devices
The Company manufactures and assembles its medical device products at its production facility located in Farmingdale, New York. The Company’s products include components manufactured by other companies in the United States. The Company is not dependent upon any single source of supply and has no long-term supply agreements. The Company believes that it will not encounter difficulty in obtaining materials, supplies and components adequate for its anticipated short-term needs.
Laboratory and Scientific Products
The Company manufactures and assembles the majority of its laboratory and scientific products at its production facility located in Farmingdale, New York. The Company’s products include components manufactured by other companies in the United States. The Company is not dependent upon any single source of supply and has no long-term supply agreements. The Company believes that it will not encounter difficulty in obtaining materials, supplies and components adequate for its anticipated short-term needs.
Competition
Medical Devices
Competition in the medical device products and the medical repair and refurbishment industry is rigorous with many companies having significant capital resources, large research laboratories and extensive distribution systems in excess of the Company’s. Some of the Company’s major competitors are Johnson & Johnson, Valley Lab, a division of Tyco Healthcare, Integra Life Sciences, Inc., and Sööring.
Laboratory and Scientific Products
The Company believes that specific advantages of its fume enclosures include efficiency and other product features, such as durability and ease of operation. Ductless fume enclosure advantages are the quality of the product and versatility of applications. The principal competitors for the Company’s ductless fume enclosure are Captair, Inc., Air Science Technologies, and Air Cleaning Systems, Inc.

 

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Regulatory Requirements
The Company’s medical device products are subject to the regulatory requirements of the U.S. Food and Drug Administration (“FDA”). A medical device as defined by the FDA is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component, part, or accessory which is recognized in the official National Formulary or the United States Pharmacopoeia, or any supplement to such listings, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or animals, or intended to affect the structure or any function of the body of man or animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes (a “medical device”). The Company’s products that are subject to FDA regulations for product labeling and promotion comply with all applicable regulations. The Company is listed with the FDA as a Medical Device manufacturer and has the appropriate FDA Establishment Numbers in place. The Company has a post-market monitoring system in place such as Complaint Handling and Medical Device Reporting procedures. All current devices manufactured and sold by the Company have all the necessary regulatory approvals. The Company is not aware of any situations which would be materially adverse at this time and neither has the FDA sought legal remedies available, nor have there been any violations of its regulations alleged, against the Company at present.
Patents, Trademarks, Trade Secrets and Licenses
The Company also owns trademark registrations for Mystaire in both England and Germany.
The following is a list of the U.S. patents which have been issued to the Company:
                 
Number     Description   Issue Date   Expiration Date
  5,248,296    
Wire with sheath — relating to the Company’s Alliger System for reducing transverse motion in its catheters.
  09/23/1993   12/24/2010
       
 
       
  5,306,261    
Guidewire guides — relating to the Company’s Alliger System for a catheter with collapsible wire guide.
  04/26/1994   01/22/2013
       
 
       
  5,443,456    
Guidewire guides — relating to the Company’s Alliger System for a catheter with collapsible wire guide.
  08/22/1995   02/10/2014
       
 
       
  5,371,429 *  
Flow-thru transducer — relating to the Company’s liposuction system and its ultrasonic laboratory and scientific products for an electromechanical transducer device.
  12/06/1994   09/28/2013
       
 
       
  5,397,293    
Catheter sheath — relating to the Company’s Alliger System for an ultrasonic device with sheath and transverse motion damping.
  03/14/1995   11/25/2012
       
 
       
  5,419,761 *  
Liposuction — relating to the Company’s liposuction apparatus and associated method.
  05/30/1995   08/03/2013
       
 
       
  D409 746    
Cannula for ultrasonic probe.
  05/11/1999   05/11/2013
       
 
       
  D408 529    
Cannula for ultrasonic probe.
  04/20/1989   04/20/2013
       
 
       
  D478165    
Cannula for ultrasonic probe.
  08/05/2003   08/05/2017
       
 
       
  5,465,468    
Flow-thru transducer — relating to the method of making an electromechanical transducer device to be used in conjunction with the Company’s soft tissue aspiration system and ultrasonic laboratory and scientific products.
  11/14/1995   12/06/2014
       
 
       
  5,527,273 *  
Ultrasonic probes — relating to an ultrasonic lipectomy probe to be used with the Company’s soft tissue aspiration technology.
  06/18/1996   10/6/2014
       
 
       
  5,769,211    
Autoclavable switch — relating to a medical handpiece with autoclavable rotary switch to be used in medical procedures.
  06/23/1998   01/21/2017
       
 
       
  5,562,609    
Ultrasonic surgical probe.
  10/08/1996   10/07/2014
       
 
       
  5,562,610    
Needle for ultrasonic surgical probe.
  10/08/1996   10/07/2014

 

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Number     Description   Issue Date   Expiration Date
  6,033,375    
Ultrasonic probe with isolated and Teflon coated outer cannula.
  03/07/2000   12/23/2017
       
 
       
  6,270,471    
Ultrasonic probe with isolated outer cannula.
  08/07/2001   12/23/2017
       
 
       
  6,443,969    
Ultrasonic blade with cooling.
  09/03/2002   08/15/2020
       
 
       
  6,379,371    
Ultrasonic blade with cooling.
  04/30/2002   11/15/2019
       
 
       
  6,375,648    
Infiltration cannula with Teflon coated outer surface.
  04/23/2002   10/02/2018
       
 
       
  6,063,050    
Ultrasonic dissection and coagulation system.
  05/16/2000   10/16/2017
       
 
       
  6,036,667    
Ultrasonic dissection and coagulation system.
  03/14/2000   08/14/2017
       
 
       
  6,582,440    
Non-clogging catheter for lithotrity.
  06/24/2003   12/26/2016
       
 
       
  6,454,730    
Thermal film ultrasonic dose indicator.
  09/24/2002   04/02/2019
       
 
       
  6,613,056    
Ultrasonic probe with low-friction bushings.
  09/02/2003   02/17/2019
       
 
       
  6,648,839    
Ultrasonic medical treatment device for RF cauterization and related method.
  11/18/2003   05/08/2022
       
 
       
  6,660,054    
Fingerprint processing chamber with airborne contaminant containment and adsorption.
  12/09/2003   09/10/2021
       
 
       
  6,736,814    
Ultrasonic medical treatment device for bipolar RF cauterization and related method.
  05/18/2004   02/28/2022
       
 
       
  6,799,729    
Ultrasonic cleaning probe.
  10/05/2004   10/05/2021
       
 
       
  6,869,439    
Ultrasonic dissector.
  03/22/2005   03/22/2022
       
 
       
  6,902,536    
RF cauterization and ultrasonic ablation.
  06/07/2005   06/07/2022
       
 
       
  6,377,693 **  
Tinnitus masking using ultrasonic signals.
  06/23/1994   06/23/2014
       
 
       
  6,173,062 **  
Frequency transpositional hearing aid with digital and single sideband modulation.
  03/16/1994   03/16/2014
       
 
       
  6,169,813 **  
Frequency transpositional hearing aid with single sideband modulation.
  03/16/1994   03/16/2014
       
 
       
  5,663,727 **  
Frequency response analyzer and shaping apparatus and digital hearing enhancement apparatus and method utilizing the same.
  06/23/1995   06/23/2015
       
 
       
  7,442,168    
High efficiency medical transducer with ergonomic shape and method manufacture.
  10/28/2008   04/01/2023
       
 
       
  7,223,267    
Ultrasonic probe with detachable slidable cauterization forceps.
  02/06/2004   02/06/2024
       
 
       
  7,717,913    
Cauterization and ultrasonic ablation instrument with multi hole collar and electrode MTG sleeve.
  05/18/2010   11/04/2024
     
*  
Patents valid also in Japan, Europe and Canada.
 
**  
Owned by Hearing Innovations, Inc.

 

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The following is a list of the U.S. trademarks which have been issued to the Company:
                     
Registration     Registration            
Number     Date   Mark   Goods   Renewal Date
  2,611,532     08/27/2002   Mystaire  
Scrubbers Employing Fine Sprays Passing Through Mesh for Eliminating Fumes and Odors from Gases.
  08/27/2012
               
 
   
  1,219,008     12/07/1982   Sonimist  
Ultrasonic and Sonic Spray Nozzle for Vaporizing Fluid for Commercial, Industrial and Laboratory Use.
  03/22/2013
               
 
   
  1,200,359     04/03/2002   Water Web  
Lamination of Screens to Provide Mesh to be Inserted in Fluid Stream for Mixing or Filtering of Fluids.
  04/03/2013
               
 
   
  2,320,805     02/22/2000   Aura  
Ductless Fume Enclosures.
  02/22/2020
               
 
   
  2,812,718     02/10/2004   Misonix  
Ultrasonic medical devices, namely, ultrasonic surgical aspirators, ultrasonic lithotripters, ultrasonic phacoemulsifiers.
  02/10/2014
               
 
   
  1,195,570     07/14/2002   Astrason  
Portable Ultrasonic Cleaners featuring Microscopic Shock Waves.
  07/14/2012
               
 
   
  3,373,435     01/22/2008   SonicOne  
Ultrasonic Surgical Systems.
  01/22/2018
               
 
   
  3,637,456     06/16/2009   Misonix  
Ultrasonic cleaning units and ultrasonic liquid processors for industrial, domestic and/or laboratory use.
  06/16/2012
               
 
   
  3,583,091     03/03/2009   Osteosculpt  
Surgical devices and instruments, namely, ultrasonic cutters and ablators.
  03/03/2019
               
 
   
  3,775,329     04/13/2010   Sonastar  
Ultrasonic medical devices namely ultrasonic surgical aspirators, ultrasonic scalpels and ultrasonic bone shavers.
  04/13/2020
Backlog
As of June 30, 2010, the Company’s backlog (firm orders that have not yet been shipped) was $1,630,824, as compared to $1,959,712 as of June 30, 2009. The Company’s backlog relating to laboratory and scientific products was $172,153 at June 30, 2010, as compared to $211,000 as of June 30, 2009. The Company’s backlog relating to medical devices was $1,458,671 as compared to $1,748,000 at June 30, 2009.
Employees
As of June 30, 2010, the Company, employed a total of 82 full-time employees, including 26 in management and supervisory positions. The Company considers its relationship with its employees to be good.

 

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Business Segments
The following table provides a breakdown of net sales by business segment for the periods indicated:
                 
    Fiscal year ended June 30,  
    2010     2009  
Medical devices
  $ 10,737,379     $ 9,688,294  
Laboratory and scientific products
    2,633,896       3,024,979  
 
           
Net sales
  $ 13,371,275     $ 12,713,273  
 
           
The following table provides a breakdown of foreign sales by geographic area during the periods indicated:
                 
    Fiscal year ended June 30,  
    2010     2009  
United States
  $ 10,452,705     $ 9,167,834  
United Kingdom
    59,628       1,417,685  
Europe
    1,244,527       1,312,599  
Asia
    756,722       372,929  
Canada and Mexico
    241,045       167,272  
Middle East
    267,929       89,212  
Other
    348,719       185,742  
 
           
 
  $ 13,371,275     $ 12,713,273  
 
           
Website Access Disclosure
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are available free of charge on the Company’s website at www.MISONIX.COM as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).
Also, copies of the Company’s annual report will be made available, free of charge, upon written request.
Item 1A. Risk Factors.
In addition to the other information contained in this Annual Report on Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth immediately prior to the beginning of Item 1 of this Annual Report on Form 10-K. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition or results of operations.
Risks Related to Our Business
We are subject to extensive medical device regulation which may impede or hinder the approval process for our products and, in some cases, may not ultimately result in approval or may result in the recall or seizure of previously approved products.
Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (the “FDC Act”), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the U.S. In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:
   
take a significant period of time;
   
require the expenditure of substantial resources;
   
involve rigorous pre-clinical and clinical testing;
   
require changes to the products; and
   
result in limitations on the indicated uses of the products.

 

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Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. There can be no assurance that we will receive the required clearances from the FDA for new products or modifications to existing products on a timely basis or that any FDA approval will not be subsequently withdrawn. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions and/or criminal prosecution. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products or the withdrawal of product approval by the FDA could have a material adverse effect on our business, financial condition or results of operations.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on our business, financial condition or results of operations.
As a medical device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a medical device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications.
Future intellectual property litigation could be costly and disruptive to us.
We operate in an industry that is susceptible to significant intellectual property litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the patent rights of other companies in order to prevent the marketing of new devices. Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict. Future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may significantly divert the attention of our technical and management personnel. In the event that our right to market any of our products is successfully challenged, and if we fail to obtain a required license or are unable to design around a patent, our business, financial condition or results of operations could be materially adversely affected.
We may not be able to effectively protect our intellectual property rights.
Patents and other proprietary rights are and will be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how, continuing technological innovations, strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive position. We pursue a policy of generally obtaining patent protection in both the U.S. and abroad for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We currently own numerous U.S. and foreign patents. We also are party to various license agreements pursuant to which patent rights have been obtained or granted in consideration for cash or royalty payments. No assurance can be made that any pending or future patent applications will result in issued patents, that any current or future patents issued to, or licensed by, us will not be challenged or circumvented by our competitors, or that our patents will not be found invalid.
In addition, we may have to take legal action in the future to protect our patents, trade secrets or know-how or to assert them against claimed infringement by others. Any legal action of that type could be costly and time consuming to us and no assurances can be made that any lawsuit will be successful.
The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial condition or results of operations.
Future product liability claims and other litigation, including private securities litigation and shareholder derivative suits, may adversely affect our business, reputation and ability to attract and retain customers.
The design, manufacture and marketing of medical device products of the types that we produce entail an inherent risk of product liability claims. A number of factors could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products that we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. These factors could result in product liability claims, a recall of one or more of our products or a safety alert relating to one or more of our products. Product liability claims may be brought by individuals or by groups seeking to represent a class.

 

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We may not be successful in our strategic initiatives to become primarily a medical device company.
Our strategic initiatives intend to further expand our ability to offer customers effective, quality medical devices that satisfy their needs, as well as focus the Company on our medical device platform. If we are unsuccessful in our strategic initiatives, we may be unable to continue to grow our business significantly or may record asset impairment charges in the future.
Our future growth is dependent upon the development of new products, which requires significant research and development, clinical trials and regulatory approvals, all of which are very expensive and time-consuming and may not result in a commercially viable product.
In order to develop new products and improve current product offerings, we focus our research and development programs largely on the development of next-generation and novel technology offerings across multiple programs and opportunities.
As a part of the regulatory process of obtaining marketing clearance from the FDA for new products, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market’s perception of this clinical data, may adversely impact our ability to obtain product approvals from the FDA, our position in, and share of, the markets in which we participate and our business, financial condition, results of operations or future prospects.
New products may not be accepted in the market.
We are now, and will continue to be, developing new products and introducing them into the market. There can be no assurance that any new product will be accepted by the market. New products are sometimes introduced into the market in a prototype format and may need later revisions or design changes before they operate in a manner to be accepted in the market. As a result of the introduction of new products, there is some risk that revenue expectations may not be met and in some cases the product may not achieve market acceptance.
We face intense competition and may not be able to keep pace with the rapid technological changes in the medical devices industry, which could have an adverse effect on our business, financial condition or results of operations.
The medical device product market is highly competitive. We encounter significant competition across our product lines and in each market in which our products are sold from various medical device companies, some of which have greater financial and marketing resources than we do.
Additionally, the medical device product market is characterized by extensive research and development and rapid technological change. Developments by other companies of new or improved products, processes or technologies, in particular in the cancer treatment market, may make our products or proposed products obsolete or less competitive and may negatively impact our revenues. We are required to devote continued efforts and financial resources to develop or acquire scientifically advanced technologies and products, apply our technologies cost-effectively across product lines and markets, attract and retain skilled development personnel, obtain patent and other protection for our technologies and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our products. Failure to develop new products or enhance existing products could have a material adverse effect on our business, financial condition or results of operations.
Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of some suppliers from certain of our significant market segments, which could have an adverse effect on our business, financial condition or results of operations.
The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payers to curb these costs have resulted in a consolidation trend in the healthcare industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.

 

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We may experience disruption in supply due to our dependence on our suppliers to continue to ship product requirements and our inability to obtain suppliers of certain components for our products.
Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions, labor shortages or environmental factors. In addition, we purchase both raw materials used in our products and finished goods from various suppliers and may have to rely on a single source supplier for certain components of our products where there are no alternatives are available. Although we anticipate that we have adequate sources of supply and/or inventory of these components to handle our production needs for the foreseeable future, if we are unable to secure on a timely basis sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find suppliers at an acceptable cost, then the manufacture of our products may be disrupted, which could increase our costs and have a material adverse effect on our business.
If we fail to manage any expansion or acquisition, our business could be impaired.
We may in the future acquire one or more technologies, products or companies that complement our business. We may not be able to effectively integrate these into our business and any such acquisition could bring additional risks, exposures and challenges to our company. In addition, acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities and increase our risk of litigation, all of which could harm our business. If we use cash to acquire technologies, products, or companies, such use may divert resources otherwise available for other purposes. If we use our common stock to acquire technologies, products, or companies, our shareholders may experience substantial dilution. If we fail to manage any expansions or acquisition, our business could be impaired.
Our agreements and contracts entered into with partners and other third parties may not be successful.
We signed in the past and may pursue in the future contracts and agreements with third parties that would assist our marketing, manufacturing, selling, and distribution efforts. We cannot assure you that any agreements or arrangements entered into will be successful.
The current disruptions in the financial markets could affect our ability to obtain debt financing on favorable terms (or at all) and have other adverse effects on us.
The United States credit markets have recently experienced historic dislocations and liquidity disruptions which have caused financing to be unavailable in many cases and even if available caused spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers able to find financing less attractive, and in many cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access debt financing on favorable terms or at all. In addition, Federal legislation to deal with the current disruptions in the financial markets could have an adverse affect on our financial condition and results of operations.
The fluctuation of our quarterly results may adversely affect the trading price of our common stock.
Our revenues and results of operations have in the past and will likely vary in the future from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is likely that in some future quarters, our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.
We may not be able to attract and retain additional key management, sales and marketing and technical personnel, or we may lose existing key management, sales and marketing or technical personnel, which may delay our development and marketing efforts.
We depend on a number of key management, sales and marketing and technical personnel. The loss of the services of one or more key employees could delay the achievement of our development and marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel.
Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse or unexpected revenue fluctuations and affect our reported results of operations.
A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
Adverse litigation results could affect our business.
Litigation can be lengthy, expensive and disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could result in monetary damages or injunctive relief that could affect our financial condition, results of operations and cash flows.
The recently enacted Affordable Healthcare for America Act includes provisions that may adversely affect our business and results of operations, including an excise tax on the sales of most medical devices.
On March 21, 2010, the House of Representatives passed the Affordable Health Care for America Act, which President Obama signed into law on March 23, 2010. While we are continuing to evaluate this legislation and its potential impact on the Company, it may adversely affect our business and results of operations, possibly materially.
Specifically, one of the new law’s components is a 2.3% excise tax on sales of most medical devices, starting in 2013. This tax may put increased cost pressure on medical device companies, including our customers, and may lead our customers to reduce their orders for products we produce or to request that we reduce the prices we charge for products we produce in order to offset the tax.

 

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Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
Effective September 1, 2010, the Company occupies approximately 34,400 square feet at 1938 New Highway, Farmingdale, New York. The rental amount is approximately $23,000 a month and includes a pro rata share of real estate taxes, water, sewer and other charges which are assessed on the leased premises or the land upon which the leased premises are situated. The Company believes that the leased facilities are adequate for its present needs.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Removed.

 

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)  
The Company’s common stock, $.01 par value (“Common Stock”), is listed on the Nasdaq Global Market (“Nasdaq”) under the symbol “MSON”.
The following table sets forth the high and low sales prices for the Common Stock during the periods indicated as reported by Nasdaq.
                 
    High     Low  
Fiscal 2010:
               
First Quarter
  $ 2.63     $ 1.60  
Second Quarter
    2.75       1.74  
Third Quarter
    2.74       1.77  
Fourth Quarter
    2.99       2.08  
                 
    High     Low  
Fiscal 2009:
               
First Quarter
  $ 3.77     $ 1.91  
Second Quarter
    2.35       .58  
Third Quarter
    1.50       .66  
Fourth Quarter
    2.94       .75  
(b)  
As of September 24, 2010, the Company had 7,001,369 shares of Common Stock outstanding and 74 shareholders of record. This does not take into account shareholders whose shares are held in “street name” by brokerage houses.
 
(c)  
The Company has not paid any cash dividends since its inception. The Company does not intend to pay any cash dividends in the foreseeable future, but intends to retain all earnings, if any, for use in its business operations.

 

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Equity Compensation Plan Information:
                         
                    Number of securities  
                    remaining for future  
    Number of securities to be     Weighted average exercise     issuance under equity  
    issued upon exercise of     price of outstanding     compensation plans  
    outstanding options,     options, warrants and     (excluding securities  
Plan category   warrants and rights     rights     reflected in column (a))  
    (a)     (b)     (c)  
Equity compensation plans approved by security holders
                       
I. 1991 Plan
    30,000     $ 7.38        
II. 1996 Director’s Plan
    160,000       5.56        
III. 1996 Plan
    71,000       6.48        
IV. 1998 Plan
    275,200       7.25        
V. 2001 Plan
    788,010       5.34       83,684  
 
                 
VI. 2005 Plan
    374,300       4.85       125,700  
 
                 
VII. 2005 Director’s Plan
    150,000       4.04       50,000  
 
                 
VIII. 2009 Plan
                500,000  
 
                 
IX. 2009 Director’s Plan
                200,000  
 
                 
Equity compensation plans not approved by security holders
                 
 
                 
Total
    1,848,510     $ 4.99       959,384  
 
                 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations:
The following discussion and analysis provides information which the Company’s management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. Unless otherwise specified, this discussion relates solely to the Company’s continuing operations.
All of the Company’s sales to date have been derived from the sale of medical device products, which include manufacture and distribution of ultrasonic medical device products, and laboratory and scientific products, which include ductless fume enclosures for filtration of gaseous emissions in laboratories and hospitals.
Fiscal years ended June 30, 2010 and 2009:
Net sales: Net sales increased $658,002 to $13,371,275 in fiscal 2010 from $12,713,273 in fiscal 2009. This difference in net sales is principally due to an increase in medical device products sales of $1,049,085 to $10,737,379 in fiscal 2010 from $9,688,294 in fiscal 2009. The increase in sales of medical device products is principally due to an increase in BoneScalpel revenues of $2,218,352, partially offset by lower Misonix Limited revenues of $1,125,000. This increase was partially offset by a decrease in sales of laboratory and scientific products of $391,083 to $2,633,896 in fiscal 2010 from $3,024,979 in fiscal 2009. The decrease in sales of laboratory and scientific products is due to a decrease in forensic ductless fume enclosure sales and due to current economic conditions in the United States, particularly affecting municipalities to which these products are sold.
Export sales from the United States are remitted in U.S. dollars and export sales for UKHIFU Limited (“UKHIFU”) are remitted in English Pounds and Misonix, Ltd. sales to date have been remitted in English pounds and Euros. To the extent that the Company’s revenues are generated in English Pounds, operating results were translated for reporting purposes into U.S. dollars using weighted average rates of 1.58 and 1.62 for the years ended June 30, 2010 and 2009, respectively. The operating results from UKHIFU and Misonix Limited’s HIFU business LTD are shown in discontinued operations. A weakening of the English Pound and Euro, in relation to the U.S. dollar, will have the effect of increasing recorded revenues and profits, while a weakening of the English Pound and Euro will have the opposite effect. Since the Company’s operations in England generally set prices and bids for contracts in English Pounds, a strengthening of the English Pound, while increasing the value of its UK assets, might place the Company at a pricing disadvantage in bidding for work from manufacturers based overseas. The Company collects its receivables predominately in the currency of the country the subsidiary resides in. The Company has not engaged in foreign currency hedging transactions, which include forward exchange agreements. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”
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,  
    2010     2009  
United States
  $ 10,452,705     $ 9,167,834  
United Kingdom
    59,628       1,417,685  
Europe
    1,244,527       1,312,599  
Asia
    756,722       372,929  
Canada and Mexico
    241,045       167,272  
Middle East
    267,929       89,212  
Other
    348,719       185,742  
 
           
 
               
 
  $ 13,371,275     $ 12,713,273  
 
           

 

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Summarized financial information for each of the segments for the years ended June 30, 2010 and 2009 are as follows:
For the year ended June 30, 2010:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 10,737,379     $ 2,633,896     $     $ 13,371,275  
Cost of goods sold
    4,937,666       1,907,114             6,844,780  
 
                       
Gross profit
    5,799,713       726,782             6,526,495  
Selling expenses
    3,103,019       522,053             3,625,072  
Research and development
    1,457,373       346,151             1,803,524  
General and administrative
                5,055,848       5,055,848  
 
                       
Total operating expenses
    4,560,392       868,204       5,055,848       10,484,444  
 
                       
Income (loss) from continuing operations
  $ 1,239,321     $ (141,122 )   $ (5,055,848 )   $ (3,957,949 )
 
                       
Income (loss) from discontinued operations
  $ (720,325 )   $ 49,307     $     $ (671,018 )
 
                       
For the year ended June 30, 2009:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 9,688,294     $ 3,024,979     $     $ 12,713,273  
Cost of goods sold
    5,368,899       2,126,103             7,495,002  
 
                       
Gross profit
    4,319,395       898,876             5,218,271  
Selling expenses
    2,177,000       442,510             2,619,510  
Research and development
    1,150,477       227,330             1,377,807  
General and administrative
                5,018,143       5,018,143  
 
                       
Total operating expenses
    3,327,477       669,840       5,018,143       9,015,460  
Income (loss) from continuing operations
  $ 991,919     $ 229,036     $ (5,018,143 )   $ (3,797,189 )
 
                       
Income from discontinued operations
  $ 978,930     $ 2,689,848     $     $ 3,668,778  
 
                       
Net sales for the three months ended June 30, 2010 were $4,278,953 compared to $2,994,704 for the three months ended June 30, 2009. The increase of $1,284,249 is due to an increase in medical device products sales of $1,351,418, primarily due to an increase in BoneScalpel sales of $1,043,589 and higher Neuroaspirator sales of $170,676. Laboratory and scientific products sales decreased $67,170 due primarily to a decrease in forensic fume enclosure product sales resulting from the weakened economy and funds available to local law enforcement.

 

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Summarized financial information for each of the segments for the three months ended June 30, 2010 and 2009 are as follows:
For the three months ended June 30, 2010:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 3,604,886     $ 674,067     $     $ 4,278,953  
Cost of goods sold
    1,530,866       453,375             1,984,241  
 
                       
Gross profit
    2,074,020       220,691             2,294,712  
Selling expenses
    832,548       142,825             975,373  
Research and development
    319,691       96,700             416,391  
General and administrative
                1,231,208       1,231,208  
 
                       
Total operating expenses
    1,152,239       239,525       1,231,208       2,622,972  
 
                       
Operating income (loss) from continuing operations
  $ 921,781     $ (18,834 )   $ (1,231,208 )   $ (328,260 )
 
                       
Net income from discontinued operations, net of tax
  $ (596,186 )   $ (277,552 )   $     $ (873,738 )
 
                       
For the three months ended June 30, 2009:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 2,253,467     $ 741,237     $     $ 2,994,704  
Cost of goods sold
    1,163,517       483,950             1,647,467  
 
                       
Gross profit
    1,089,950       257,287             1,347,237  
Selling expenses
    601,850       78,387             680,237  
Research and development
    258,278       61,850             320,128  
General and administrative
                1,173,958       1,173,958  
 
                       
Total operating expenses
    860,128       140,237       1,173,958       2,174,323  
 
                       
Operating income (loss) from continuing operations
  $ 229,822     $ 117,050     $ (1,173,958 )   $ (827,086 )
 
                       
Net income from discontinued operations, net of tax
  $ 553,201     $ 3,053,952     $     $ 3,607,153  
 
                       
Gross profit: Gross profit increased to 48.8% in fiscal 2010 from 41% in fiscal 2009. Gross profit for medical device products increased to 54% in fiscal 2010 from 44.6% in fiscal 2009. Gross profit for therapeutic medical device products was positively impacted by a favorable product mix due to increased sales of the BoneScalpel product in the United States. Gross profit for laboratory and scientific products decreased to 27.6% in fiscal 2010 from 29.7% in fiscal 2009 due to lower volume. Gross profit for the three months ended June 30, 2010 was 53.6% as compared to 45% for the three months ended June 30, 2009. Gross margins for medical device products was 57.5% for the three months ended June 30, 2010 as compared to 48.4% for the three months ended June 30, 2009. Laboratory and scientific products gross margins were 32.7% for the three months ended June 30, 2010 and 34.7% for the three months ended June 30, 2009.
Selling expenses: Selling expenses increased $1,005,562 to $3,625,072 (27.1% of net sales) in fiscal 2010 from $2,619,510 (20.6% of net sales) in fiscal 2009. Laboratory and scientific products selling expenses increased approximately $79,543, primarily due to higher advertising and salary related expenses. Selling expenses for medical device products increased approximately $926,019, principally due to salary expenses for increased personnel of $581,206, increased advertising expense of $100,955, higher travel expenses of $254,131, partially offset by a decrease in other selling expenses of $10,271. Selling expenses for the three months ended June 30, 2010 increased $295,136 to $975,373 (22.8% of net sales) from $680,237 (22.7% of net sales) in the three months ended June 30, 2009. Selling expenses related to medical device products sales increased approximately $230,699 due to increased salary expenses for increased personnel of $166,416, higher travel expenses of $50,918 and clinical expenses of $12,646. Laboratory and scientific products selling expenses increased approximately $64,438 due to increased salary related expenses of $37,437, advertising expenses of $23,281 and other selling expenses of $3,720.

 

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General and administrative expenses: Total general and administrative expenses increased $37,705 in fiscal 2010 to $5,055,848 from $5,018,143 in fiscal 2009 due to increased accounting expense. General and administrative expenses for the three months ended June 30, 2010 increased $57,250 to $1,175,208 from $1,173,958 for the three months ended June 30, 2009 due to increased accounting expense.
Research and development expenses: Research and development expenses increased $425,717 to $1,803,524 in fiscal 2010 from $1,377,807 in fiscal 2009. Research and development expenses for medical device products increased $306,896. Laboratory and scientific products research and development expenses increased $118,821. The increase in research and development expenses related to medical products is mainly related to increased salary related costs of $247,160 relating to increased research and development efforts on developing new technology, legal costs of $28,689, product development material costs of $27,985 and other research and development costs of $3,062. Research and development expenses for the three months ended June 30, 2010 increased $96,263 to $416,391 from $320,128 for the three months ended June 30, 2009. Medical device products research and development costs increased $61,413 and expenses for laboratory and scientific products increased $34,850, primarily due to higher salary related costs relating to increased research and development efforts on developing new technology.
Other income: Other income decreased $1,227,953 in fiscal 2010 to $1,072,311 from $2,300,264 in fiscal 2009. The decrease in other income is due to the receipt in the first quarter of fiscal year 2009 of $1,516,866 from USHIFU pursuant to the Focus tranaction between the Company and USHIFU. This payment consisted of $837,500 for the 2,500 shares of Series M Preferred Stock of Focus owned by the Company and fifty (50%) percent of the outstanding principal and accrued interest of loans previously made by the Company to Focus. During the year, the remaining fifty (50%) of the outsanding principal and accrued interest on the loan was paid which resulted in a gain of $679,336 that was recorded in the third quarter. Other income (expense) decreased $346,613 to $22,094 for the three months ended June 30, 2010 from $368,707 for the three months ended June 30, 2009. The decrease is due to unfavorable foreign exchange of $154,667, gain on disposal of fixed assets at Misonix in fiscal 2009 of $107,639, lower net royalty income of $44,289, lower interest income of $29,596 and other unfavorable expenses of $10,422.
Income taxes: In fiscal 2010 the income tax expense effective tax rate was 24%. The Company established a full valuation allowance against all deferred tax assets due to the net loss from operations over the past 5 years which caused management to conclude that it is more likely than not its deferred tax assets will not be realized.

 

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Discontinued operations:
The following represents the results of Ultrasonics, Sonora, Labcaire, UKHIFU and Misonix HIFU Technologies, which were disposed of during the year and have been reported as a discontinued operation:
                 
    For the year ended  
    June 30,  
    2010     2009  
Revenues
  $ 5,195,005     $ 30,865,551  
 
           
Income from discontinued operations, before tax
  $ 1,256,425     $ 1,102,429  
Gain on sale of Ultrasonics products
          2,670,777  
Loss on sale of Labcaire
    (295,879 )      
Gain on sale of Sonora
    947,374        
Loss on sale of HIFU
    (782,286 )      
Income tax expense
    (1,816,324 )     (79,798 )
 
           
Income (loss) from discontinued operations, net of tax
    (690,690 )     3,693,408  
Noncontrolling interest in discontinued operation
    19,672       (24,630 )
 
           
Income (loss) from discontinued operations, net of tax attributable to Misonix, Inc. shareholders
    (671,018 )     3,668,778  
 
           
Liquidity and Capital Resources:
Working capital at June 30, 2010 and June 30, 2009 was $14,460,000 and $7,744,000, respectively. For the year ended June 30, 2010, cash used in operations totaled $2,344,000. The major use of cash from operations was related to the net loss from continuing operations of $2,191,000 during the year ended June 30, 2010. For the fiscal year 2010, cash used in investing activities totaled $354,000, primarily consisting of the purchase of property, plant and equipment during the regular course of business offset by the proceeds from the collection of the Focus note. For the fiscal year 2010, cash used in financing activities was $2,730,000, primarily consisting of net proceeds from short-term borrowings of $9,515,000, offset by principal payments of approximately $12,232,000 and lease obligations of $13,600. Cash provided by discontinued operations was $11,923,000 primarily relating to the proceeds from the sale of the Sonora and Labcaire operations.
The Company maintains cash balances at various financial institutions. At June 30, 2010, these financial institutions held cash that was approximately $9,526,000 in excess of amounts insured by the Federal Deposit Insurance Corporation and other government agencies.
The Company’s line of credit with Wells Fargo Bank N.A. expired December 28, 2009. There is no present intention to enter into another credit facility with any financial institution.
Commitments
The Company has commitments under a note payable and capital and operating leases that will be funded from operating sources. At June 30, 2010, the Company’s contractual cash obligations and commitments relating to the revolving credit facilities, note payable and capital and operating leases are as follows:
                                         
    Less than                     After        
Commitment   1 year     1-3 years     4-5 years     5 years     Total  
Note payable
    177,679                         177,679  
Capital leases
    14,533       14,274                   28,807  
Operating leases
    348,461       617,528       614,988             1,580,977  
 
                             
 
  $ 540,673     $ 631,802     $ 614,988     $     $ 1,787,463  
 
                             

 

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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.
Critical Accounting Policies:
General: Financial Reporting Release No. 60, which was released by the SEC in December 2001, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report includes a summary of the Company’s significant accounting policies and methods used in the preparation of its financial statements. The Company’s discussion and analysis of its financial condition and results of operations is based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, goodwill, property, plant and equipment and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following are our more critical estimates and assumptions used in the preparation of our consolidated financial statements:
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable, principally trade, are generally due within 30 to 90 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors aging reports, collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee the same credit loss rates will be experienced in the future. The Company writes off accounts receivable when they become uncollectible.
Inventories: Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost (determined by the first-in, first-out method) or market. At each balance sheet date, we evaluate ending inventories for excess quantities and obsolescence. Our evaluation includes an analysis of historical sales by product, projections of future demand by product, the risk of technological or competitive obsolescence for our products, general market conditions, and the feasibility of reworking or using excess or obsolete products or components in the production or assembly of other products that are not obsolete or for which we do not have excess quantities in inventory. To the extent that we determine there are excess or obsolete quantities, we record valuation reserves against all or a portion of the value of the related products to adjust their carrying value to estimated net realizable value. If future demand or market conditions are different from our projections, or if we are unable to rework excess or obsolete quantities into other products, we may change the recorded amount of inventory valuation reserves through a charge or reduction in cost of product revenues in the period the revision is made.
Long Lived Assets: Property, plant and equipment are recorded at cost. The Company capitalizes items in excess of $1,000. Minor replacements and maintenance and repair expenses are charged to expense as incurred. Depreciation of property and equipment is provided using the straight-line method over estimated useful lives ranging from 3 to 5 years. Leasehold improvements are amortized over the life of the lease or the useful life of the related asset, whichever is shorter. Inventory items included in property, plant and equipment are depreciated using the straight line method over estimated useful lives of 3 to 5 years. We evaluate long-lived assets, including property, plant and equipment and intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts of specific assets or group of assets may not be recoverable. When an evaluation is required, we estimate the future undiscounted cash flows associated with the specific asset or group of assets. If the cost of the asset or group of assets cannot be recovered by these undiscounted cash flows, an impairment charge would be recorded. Our estimates of future cash flows are based on our experience and internal business plans. Our internal business plans require judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of an asset or group of assets may materially affect our evaluation of the recoverability of the asset values currently recorded.

 

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Revenue Recognition: The Company records revenue upon shipment for products shipped F.O.B. shipping point. Products shipped F.O.B. destination points are recorded as revenue when received at the point of destination. Shipments under agreements with distributors are not subject to return, and payment for these shipments is not contingent on sales by the distributor. The Company recognizes revenue on shipments to distributors in the same manner as with other customers. Fees from exclusive license agreements are recognized ratably over the terms of the respective agreements. Service contract and royalty income are recognized when earned.
Goodwill: Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Company’s acquisitions of assets of Fibra Sonics, Inc.
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Nos. 805 (“ASC 805”) and 350 (“ASC 350”), “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively.
Goodwill and intangible assets with indefinite useful lives are not amortized. We review goodwill and identifiable intangible assets with indefinite lives for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur and determination of our weighted-average cost of capital. Changes in the projected cash flows and discount rate estimates and assumptions underlying the valuation of identifiable intangible assets, in-process research and development, and goodwill could materially affect the determination of fair value at acquisition or during subsequent periods when tested for impairment. The Company completed its annual goodwill impairment tests for fiscal 2010 and 2009 in the respective fourth quarter. There were no indicators that goodwill recorded was impaired.
Income Taxes: Income taxes are accounted for in accordance with ASC No. 740, “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 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: The Company previously accounted for stock option plans under ASC No. 817. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB No. 25. The Company subsequently adopted the fair-value recognition provisions of ASC No. 817 “Share-Based Payment” (“ASC 817”) and SEC Staff Accounting Bulletin No. 107 using the modified-prospective transition method; therefore, prior periods have not been restated. The fair value of the stock options is estimated based upon option price, volatility, the risk free rate, and the average time the shares are held. It is then amortized over the vesting period. See Note 9 of the Company’s consolidated financial statements for additional information regarding stock-based compensation.
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.
Foreign Exchange Rates:
Since approximately 0.4% of the Company’s revenues in fiscal 2010 were received in British Pounds and the remaining foreign sales are remitted in U.S. Dollars, the Company does not face foreign exchange risks.
Item 8. Financial Statements and Supplemental Data.
The report of the 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 34.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.

 

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Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Annual Report, under the supervision and with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of that date. This is in accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 (“SOX”) because the Company is a smaller reporting company under the SEC’s rules. We are not required to be in compliance with SOX 404(b), which requires attestation by a company’s independent auditors.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, the principal executive officer and principal financial officer, and effected by the board of directors and management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US Generally Accepted Accounting Principles (“GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and the directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that internal control over financial reporting was effective as of June 30, 2010.
This Annual Report does not include an attestation report of the Company’s current independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s current independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.

 

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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 next Annual Meeting of Shareholders. The following table contains information regarding all Directors and executive officers of the Company:
                     
                Director  
Name   Age   Principal Occupation   Since  
 
                   
John Gildea
    67     Director     2004  
 
                   
Howard Alliger
    83     Director     1971  
 
                   
Dr. Charles Miner III
    59     Director     2005  
 
                   
T. Guy Minetti
    59     Director     2003  
 
                   
Thomas F. O’Neill
    64     Director     2003  
 
                   
Michael A. McManus, Jr.
    67     Director, President and Chief Executive Officer     1998  
 
                   
Richard Zaremba
    55     Senior Vice President, Chief Financial Officer, Secretary and Treasurer    
 
                   
Michael C. Ryan
    64     Senior Vice President, Medical Division        
 
                   
Dan Voic
    48     Vice President of Research and Development and Engineering    
 
                   
Ronald Manna
    56     Vice President of New Product Development and Regulatory Affairs    
 
                   
Frank Napoli
    53     Vice President of Operations    
The following is a brief account of the business experience 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.
Mr. Gildea has extensive experience as an investment banker. The Board believes this experience qualifies him to serve as a director.
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.
Mr. Alliger has extensive experience as an inventor and is the founder of the Company. The Board believes this experience qualifies him to serve as a director.
Dr. Charles Miner III currently practices internal medicine in Darien, Connecticut. Dr. Miner is on staff at Stamford and Newark Hospitals and since 1982 has held a teaching position at Columbia Presbyterian Hospital. 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.
Dr. Miner is an experienced physician. The Board believes this experience qualifies him to serve as a director.

 

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T. Guy Minetti is Chief Executive Officer of TwigTek, LLC, which is engaged in the remarketing and recycling of used electronics. Prior to joining TwigTek in November 2009, he founded and was the Managing Director of Senior Resource Advisors LLC, a management consulting firm, from 2005 through 2008. 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.
Mr. Minetti has extensive experience as an investment banker and as a director of a public company. The Board believes this experience qualifies him to serve as a director.
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 Managing Director at Bear Stearns and Co-Manager of the Financial Services 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.
Mr. O’Neill has extensive experience as an investment banker and as a director of public companies. The Board believes this experience qualifies him to serve as a director.
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: A. Schulman, 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.
Mr. McManus’ extensive first-hand knowledge of the business and historical development of the Company, as well as his executive, management and leadership experience and achievement, give him highly valued insights into our Company’s challenges, opportunities and business. Mr. McManus also possesses broad knowledge related to equity and capital markets that the Board believes are invaluable to the Board’s discussions of the Company’s capital and liquidity needs and qualify him to serve on the Board.
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.
Michael C. Ryan became Senior Vice President, Medical Division in October 2007. Prior thereto, he served as Senior Vice President and General Manager for Nomos Radiation Oncology from 2006 to October 2007. From 1992 to 2005, Mr. Ryan was Executive Vice President, Business Development for Inter V. Mr. Ryan holds a Bachelor of Arts in Economics from John F. Kennedy College.
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 15 years experience in both medical and laboratory and scientific products development. Mr. Voic holds an M.S. degree in mechanical engineering from Polytechnic University “Traian Vuia” of Timisoara, Romania and an 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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Executive officers are elected annually by, and serve at the discretion of, the board of directors.
                         
    DIRECTOR COMPENSATION FOR THE 2010  
    FISCAL YEAR  
    Fees Earned or Paid in     Option        
Name   Cash ($)     Awards ($)     Total  
Michael A. McManus, Jr.
                 
 
                       
John Gildea
    18,500             18,500  
 
                       
Howard Alliger
    13,500             13,500  
 
                       
Dr. Charles Miner III
    18,500             18,500  
 
                       
T. Guy Minetti
    23,500             23,500  
 
                       
Thomas F. O’Neill
    18,500             18,500  
Outstanding options at fiscal year end for Messrs. O’Neill and Minetti are 75,000 shares each; Mr. Alliger is 70,000 shares and Messrs. Gildea and Miner are 45,000 shares each. Each non-employee director receives an annual fee of $15,000. The Chairman of the Audit Committee receives an additional $10,000 per year cash compensation and other members of the Audit Committee receive an additional $5,000 per year cash compensation. Each non-employee director is also reimbursed for reasonable expenses incurred while traveling to attend meetings of the Board of Directors or while traveling in furtherance of the business of the Company.
Section 16 (a) Beneficial Ownership Reporting Compliance of the Securities Exchange Act
Section 16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who own more than 10% of a registered class of the Company’s equity securities (“Reporting Persons”) to file reports of ownership and changes in ownership on Forms 3, 4, and 5 with the SEC. These Reporting Persons are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file with the SEC. Based solely on the Company’s review of the copies of the forms it has received, the Company believes that all Reporting Persons complied on a timely basis with all filing requirements applicable to them with respect to transactions during fiscal year 2010.
Code of Ethics
The Company has adopted a code of ethics that applies to all of its directors, officers (including its Chief Executive Officer, Chief Financial Officer, Controller and any person performing similar functions) and employees. The Company has filed a copy of this Code of Ethics as Exhibit 14 to this Form 10-K. The Company has also made the Code of Ethics available on its website at www.MISONIX.COM.
Audit Committee
The Company has a separately-designated standing audit committee established in accordance with section 3(a) (58) (A) of the Exchange Act. The members of the Audit Committee are Messrs. Gildea, Miner, Minetti and O’Neill. The Board of Directors has determined that each member of the Audit Committee is “independent” not only under the Corporate Governance Requirements applicable to Nasdaq listed companies but also within the definition contained in a final rule of the SEC. Furthermore, the Board of Directors has determined that Messrs. Gildea, Minetti and O’Neill are “audit committee financial experts” within the definition contained in a final rule adopted by the SEC.

 

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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 Company’s shareholders.
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’s 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 recommendations from the Chief Executive Officer are 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 and 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 but is not based on a specific formula and is discretionary.
Stock Option Awards
Stock option awards are intended 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. ISO’s have potential income tax advantage for executives if the executive disposes of the acquired shares 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.
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
Our Individual Deferred Tax and Savings Plan (the “401 (k) plan”) is a tax qualified retirement savings plan pursuant to which all of the Company’s U.S. employees may defer compensation under Section 401 (k) of the Internal Revenue Code of 1986, as amended (the “Code”). The Company contributes an amount equal to 10% of salary contributed under the 401 (k) plan by an eligible employee, up to the maximum allowed under the Code. We do not provide any supplemental retirement benefits to executive officers.

 

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Change in Control benefits
Change in control benefits are intended to diminish the distraction 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’ employment agreement provides that after a change in control of the Company, he is entitled to a one-time additional compensation payment equal to two times his total compensation (annual salary plus bonuses) at the highest rate paid during his employment payable within 60 days of termination. Mr. Zaremba has an agreement for the payment of six months of annual base salary upon a change in control of the Company.
Tax deductibility of Executive Compensation
Section 162 (m) of the 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 2010, there was no executive officer’s compensation that exceeded $1,000,000.
The following table sets forth information concerning the compensation awarded to, earned by or paid to our named executive officers during fiscal 2010 for services rendered to the Company:
SUMMARY COMPENSATION TABLE FOR THE 2010 FISCAL YEAR
                                         
Name and Principal   Fiscal Year                     Options        
Position   Ended June 30,     Salary ($)     Bonus ($)     Awards ($)     Total ($)  
 
                                       
Michael A. McManus, Jr.
    2010       286,458       200,000       101,075       587,533  
President and Chief
    2009       275,000       11,458       107,000       393,458  
Executive Officer
    2008       275,000       200,000             475,000  
 
                                       
Richard Zaremba
    2010       196,154       34,000       48,516       278,670  
Senior Vice President,
    2009       192,100       8,000       23,032       223,132  
Chief Financial Officer,
    2008       189,303       24,000       23,430       236,733  
Secretary and Treasurer
                                       
 
                                       
Michael Ryan
    2010       236,001       12,000       48,516       296,517  
Senior Vice President-Medical
    2009       225,000       8,000       23,032       256,032  
Division
    2008       152,677             43,500       196,177  
Employment Agreements
Effective July 1, 2008, the Company entered into an amended and restated employment agreement with its President and Chief Executive Officer. The agreement was amended effective January 1, 2010. The agreement is in effect through June 30, 2011 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. The agreement provides for an annual base compensation of $283,250 and a Company-provided automobile. The agreement also provides for a discretionary bonus based upon achievement of his annual goals and objectives as determined by the Compensation Committee of the Board of Directors.
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. Zaremba has an agreement for the payment of six months’ annual base salary upon a change in control of the Company. Mr. McManus is entitled in the event of a change of control to payment of two times his total compensation (annual base salary plus bonus) at the highest rate paid during the period of employment, payable in a lump sum written 60 days of termination of employment. 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.

 

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OUTSTANDING EQUITY AWARDS FOR THE 2010 FISCAL YEAR
                                 
    Number of Securities     Number of Securities              
    Underlying Unexercised     Underlying Unexercised              
    Options (#)     Options (#)     Option Exercise        
Name   Exercisable     Unexercisable     Price ($)     Option Expiration Date  
Michael A. McManus, Jr.
    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  
 
    50,000       50,000 (5)     1.91       11/04/18  
 
    12,500       37,500 (7)     2.44       09/09/19  
 
          100,000 (1)     1.82       09/07/20  
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  
 
    12,000             8.00       09/15/14  
 
    8,000             7.60       09/27/15  
 
    4,000             5.82       02/07/16  
 
    12,000       (1)     3.45       10/20/16  
 
    7,500       2,500 (2)     4.04       09/04/17  
 
    9,000       9,000 (4)     2.04       09/26/18  
 
    2,500       2,500 (6)     .85       12/11/18  
 
    8,000       16,000 (7)     2.44       09/09/19  
 
            30,000 (1)     1.82       09/07/20  
Dan Voic
    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  
 
    12,000             8.00       09/15/14  
 
    5,000             7.60       09/26/15  
 
    2,500             5.82       02/07/16  
 
    8,000             3.45       10/20/16  
 
    2,500       2,500 (2)     4.04       09/04/17  
 
    2,000       2,000 (4)     2.04       09/26/18  
 
    2,000       2,000 (6)     .85       12/11/18  
 
    4,500       13,500 (7)     2.44       09/09/19  
 
            25,000 (1)     1.82       09/07/20  
Ronald Manna
    15,000             7.3125       08/09/10  
 
    10,000             6.07       10/17/11  
 
    5,000             5.10       09/30/12  
 
    5,000             4.70       09/16/13  
 
    4,000             8.00       09/15/14  
 
    2,000             7.60       09/15/15  
 
    1,000             5.82       02/07/16  
 
    3,000             3.45       10/20/16  
 
    3,750       1,250 (2)     4.04       09/04/17  
 
    3,500       3,500 (4)     2.04       09/26/18  
 
    500       500 (6)     .85       12/11/18  
 
    1,250       3,750 (7)     2.44       09/09/19  
 
            5,000 (1)     1.82       09/07/20  
Frank Napoli
    2,000             7.60       09/26/15  
 
    1,000             5.82       02/07/16  
 
    4,000             3.45       10/20/16  
 
    3,000       1,000 (2)     4.04       09/04/17  
 
    3,000       1,500 (4)     2.04       09/26/18  
 
    500       500 (6)     .85       12/11/18  
 
    1,750       5,250 (7)     2.44       09/09/19  
 
            6,000 (1)     1.82       09/07/20  
Michael Ryan
    11,250       3,750 (3)     4.98       11/06/17  
 
    9,000       9,000 (4)     2.04       09/26/18  
 
    2,500       2,500 (6)     .85       12/11/18  
 
    6,000       18,000 (7)     2.44       09/09/19  
 
            30,000 (1)     1.82       09/07/20  

 

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(1)  
Options issued 09/07/10 and vest equally over 4 years
 
(2)  
Options issued 09/5/07 and vest equally over 4 years
 
(3)  
Options issued 11/7/07 and vest equally over 4 years
 
(4)  
Options issued 09/29/08 and vest equally over 4 years
 
(5)  
Options issued 11/4/08 and vest equally over 4 years
 
(6)  
Options issued 12/11/08 and vest equally over 4 years
 
(7)  
Options issued 09/09/09 and vest equally over 4 years
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, 2010, 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). There are no shares available for future grants.
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, 2010, options to purchase 71,000 shares were outstanding at exercise prices ranging from $5.18 to $7.60 per share with a vesting period of immediate to three years under the 1996 Plan and options to acquire 160,000 shares were outstanding at exercise prices ranging from $3.21 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2010, options to purchase 138,295 shares under the 1996 Plan have been exercised and options to purchase 392,650 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2010, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised and options to purchase 90,000 shares have been forfeited (of which none have been reissued). There are no shares available for future grants.
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, 2010, options to purchase 275,200 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.45 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2010, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 217,227 shares under the 1998 Plan have been forfeited (of which options to purchase 79,702 shares have been reissued). At June 30, 2010, there were no shares available for future grants.
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, 2010, options to purchase 788,010 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, 2010, options to purchase 128,306 shares under the 2001 Plan have been exercised and options to purchase 251,950 shares under the 2001 Plan have been forfeited (of which 159,577 options have been reissued). At June 30, 2010, there were 83,684 shares available for future grants.
In September 2005, the Board of Directors adopted, and in December 2005, the shareholders approved, the 2005 Employee Equity Incentive Plan (the “2005 Plan”) covering an aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director Stock Option Plan (the “2005 Directors Plan”) covering an aggregate of 200,000 shares of Common Stock. At June 30, 2010, there were options to purchase 374,300 shares outstanding under the 2005 Plan at exercise prices ranging from $.85 to $4.98 per share with a vesting period of four years. At June 30, 2010, there were no options exercised under the 2005 Plan and 34,000 shares have been forfeited (of which no options have been reissued). At June 30, 2010, 125,700 shares were available for future grants under the 2005 Plan. At June 30, 2010, options to purchase 150,000 shares were outstanding under the 2005 Directors Plan at an exercise price ranging from $2.66 to $5.42 with a vesting period over three years. At June 30, 2010, there were no options exercised and 50,000 shares were available for future grants under the 2005 Directors Plan.
In December 2009, the Board of Directors and shareholders adopted the 2009 Employee Equity Incentive Plan (the “2009 Plan”) covering an aggregate of 500,000 shares of Common Stock and the 2009 Non-Employee Director Stock Option Plan (the “2009 Directors Plan”) covering an aggregate of 200,000 shares of Common Stock. At June 30, 2010 there were no options outstanding, exercised, or forfeited under the 2009 Plan. At June 30, 2010, 500,000 shares were available for future grants under the 2009 plan. At June 30, 2010 there were no options outstanding, exercised, or forfeited under the 2009 Directors Plan. At June 30, 2010, 200,000 shares were available for future grants under the 2009 Directors 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 Corporate Governance Requirements applicable to Nasdaq-listed companies. 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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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth as of September 24, 2010, certain information with regard to the ownership of the Company’s Common Stock by (i) each beneficial owner of 5% or more of the Company’s Common Stock; (ii) each director; (iii) each executive officer named in the “Summary Compensation Table” above; and (iv) all executive officers and directors of the Company as a group. Unless otherwise stated, the persons named in the table have sole voting and investment power with respect to all Common Stock shown as beneficially owned by them.
                 
            Percent  
    Common Stock     of  
Name and Address (1)   Beneficially Owned     Class  
 
               
Michael A. McManus, Jr.
    1,086,751 (2)     13.4  
Dimensional Fund Advisors LP
    511,011       6.8  
Howard Alliger
    251,508 (3)     3.5  
Richard Zaremba
    161,500 (4)     2.3  
T. Guy Minetti
    102,000 (5)     1.4  
Dan Voic
    101,658 (6)     1.4  
Thomas F. O’Neill
    77,000 (7)     1.1  
Ronald Manna
    79,394 (8)     1.1  
John W. Gildea
    40,000 (9)     *  
Charles Miner
    40,000 (10)     *  
Michael Ryan
    38,750 (11)     *  
Frank Napoli
    16,250 (12)     *  
 
               
All executive officers and Directors as a group (eleven people)
               
 
               
 
    1,994,811 (13)     22.2  
     
*  
Less than 1%
 
(1)  
Except as otherwise noted, the business address of each of the named individuals in this table is c/o MISONIX, INC., 1938 New Highway, Farmingdale, New York 11735. Dimensional Fund Advisors LP has a principal business office at 1299 Ocean Avenue, Santa Monica, CA 90401.
 
(2)  
Includes 862,500 shares which Mr. McManus has the right to acquire upon exercise of stock options which are currently exercisable.
 
(3)  
Includes 65,000 shares which Mr. Alliger has the right to acquire upon exercise of stock options which are currently exercisable.
 
(4)  
Includes 135,000 shares which Mr. Zaremba has the right to acquire upon exercise of stock options which are currently exercisable.
 
(5)  
Includes 70,000 shares which Mr. Minetti has the right to acquire upon exercise of stock options which are currently exercisable.
 
(6)  
Includes 79,910 shares which Mr. Voic has the right to acquire upon exercise of stock options which are currently exercisable.
 
(7)  
Includes 70,000 shares which Mr. O’Neill has the right to acquire upon exercise of stock options which are currently exercisable.
 
(8)  
Includes 54,000 shares which Mr. Manna has the right to acquire upon exercise of stock options which are currently exercisable.
 
(9)  
Includes 40,000 shares which Mr. Gildea has the right to acquire upon exercise of stock options which are currently exercisable.
 
(10)  
Includes 40,000 shares which Dr. Miner has the right to acquire upon exercise of stock options which are currently exercisable.
 
(11)  
Includes 28,750 shares which Mr. Ryan has the right to acquire upon exercise of stock options which are currently exercisable.
 
(12)  
Includes 15,750 shares which Mr. Napoli has the right to acquire upon exercise of stock options which are currently exercisable.
 
(13)  
Includes the shares indicated in notes (2), (3), (4), (5), (6), (7), (8), (9), (10), (11) and (12).
Item 13. Certain Relationships and Related Transactions.
None.

 

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Item 14. Principal Accountant Fees and Services.
Audit Fees:
Grant Thornton LLP (“Grant Thornton”) billed the Company $383,467 and $379,361 in the aggregate for services rendered for the audit of the Company’s 2010 and 2009 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 2010 and 2009 fiscal years, respectively.
Audit-Related Fees:
Grant Thornton did not render any audit-related services, as defined by the SEC, to the Company for the fiscal years 2010 and 2009.
Tax Fees:
Grant Thornton did not render any tax related services, as defined by the SEC, to the Company for the fiscal years 2010 and 2009.
All Other Fees:
Grant Thornton did not render any other services to the Company for the fiscal years 2010 and 2009.
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 Audit Committee.

 

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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. (2)
       
 
  10.1    
Stock Option Plan. (3)
       
 
  10.2    
Form of Director’s Indemnification Agreement.
       
 
  10.3    
Development and Option Agreement dated August 27, 1996 between the Company and United States Surgical Corporation. (4)
       
 
  10.4    
License Agreement dated October 16, 1996 between the Company and United States Surgical Corporation. (4)
       
 
  10.5    
1996 Non-Employee Director Stock Option Plan. (5)
       
 
  10.6    
1996 Employee Incentive Stock Option Plan. (5)
       
 
  10.7    
1998 Employee Stock Option Plan. (6)
       
 
  10.8    
2005 Employee Equity Incentive Plan. (7)
       
 
  10.9    
2005 Non-Employee Director Stock Option Plan. (7)
       
 
  10.10    
Asset Purchase Agreement, dated as of April 7, 2009, between iSONIX LLC, MISONIX, INC. and Sonics & Materials, Inc. (8)
       
 
  10.11    
Employment Agreement dated as of July 1, 2009, by and between MISONIX, INC. and Michael A. McManus, Jr. (9)
       
 
  10.12    
Share Purchase Agreement, dated August 4, 2009, between MISONIX, INC., Puricore International Limited and Puricore Plc. (10)
       
 
  10.13    
Loan Note Instrument, dated August 4, 2009, between Puricore International Limited and Labcaire Systems Limited and Puricore Plc. (10)
       
 
  10.14    
2009 Employee Equity Incentive Plan. (11)
       
 
  10.15    
2009 Non-Employee Director Stock Option Plan. (11)
       
 
  10.16    
Asset Purchase Agreement, dated October 2, 2009, among Acoustic Marketing Research, Inc., MISONIX, INC. and Medical Imaging Holdings, Inc. (12)

 

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  10.17    
Asset Purchase Agreement, dated as of May 28, 2010, among MISONIX, INC., MISONIX HIFU TECHNOLOGIES LIMITED, MISONIX LIMITED and USHIFU, LLC. (13)
       
 
  10.18    
First Amendment to Amended and Restated Employment Agreement between the Company and Michael A. McManus, Jr.
       
 
  10.19    
Lease Modification Agreement, dated as of June 30, 2010, between Sanwood Realty Co. and the Company.
       
 
  14    
Code of Ethics. (14)
       
 
  21    
Subsidiaries of the Company.
       
 
  23.1    
Consent of Grant Thornton 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-8 (Reg. No. 333-165088).
 
(2)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 9, 2008.
 
(3)  
Incorporated by reference from the Company’s Registration Statement on Form S-1 (Reg. No. 33-43585).
 
(4)  
Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the fiscal year 1997.
 
(5)  
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on February 19, 1997.
 
(6)  
Incorporated by reference from the Company’s Registration Statement on Form S-8 (Reg. No. 333-78795).
 
(7)  
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on December 14, 2005.
 
(8)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on April 10, 2009.
 
(9)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on July 14, 2009.
 
(10)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on August 6, 2009.
 
(11)  
Incorporated by reference from the Company’s definitive proxy statement for the Annual Meeting of Shareholders held on December 8, 2009.
 
(12)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 8, 2009.
 
(13)  
Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 4, 2010.
 
(14)  
Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year 2004.

 

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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 28, 2010
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.
 
Michael A. McManus, Jr.
  President, Chief Executive Officer, and Director (principal executive officer)   September 28, 2010
 
       
/s/ Richard Zaremba
 
Richard Zaremba
  Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
(principal financial and accounting officer)
  September 28, 2010
 
       
/s/ Howard Alliger
 
Howard Alliger
  Director   September 28, 2010
 
       
/s/ T. Guy Minetti
 
T. Guy Minetti
  Director   September 28, 2010
 
       
/s/ Thomas F. O’Neill
 
Thomas F. O’Neill
  Director   September 28, 2010
 
       
/s/ John Gildea
 
John Gildea
  Director   September 28, 2010
 
       
/s/ Charles Miner III
 
Charles Miner III
  Director   September 28, 2010

 

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Item 15(a)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MISONIX, INC. and Subsidiaries
For the Two Years Ended June 30, 2010
         
    Page  
    F-1  
 
       
    F-2  
 
       
    F-3  
 
       
    F-4  
 
       
    F-5  
 
       
    F-7  
 
       
The following consolidated financial statement schedule is included in Item 15(a)
       
 
       
    F-29  
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.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
MISONIX, INC. and Subsidiaries
We have audited the accompanying consolidated balance sheets of MISONIX, INC. and Subsidiaries (the “Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MISONIX, INC. and Subsidiaries as of June 30, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Melville, New York
September 28, 2010

 

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Table of Contents

MISONIX INC. and Subsidiaries
Consolidated Balance Sheets
                 
    June 30,  
    2010     2009  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 9,900,605     $ 3,415,813  
Accounts receivable, less allowance for doubtful accounts of $123,346 and $334,399, respectively
    2,335,653       3,301,551  
Inventories, net
    2,699,717       3,678,743  
Deferred income taxes
          591,140  
Prepaid expenses and other current assets
    515,427       715,589  
Note receivable
    1,075,105        
Current assets of discontinued operations
          9,290,724  
 
           
Total current assets
    16,526,507       20,993,560  
 
               
Property, plant and equipment, net
    500,215       588,191  
Goodwill
    1,701,094       2,016,941  
Other assets
    1,730,339       757,551  
Assets of discontinued operations
          10,687,914  
 
           
Total assets
  $ 20,458,155     $ 35,044,157  
 
           
Liabilities and stockholders’ equity
               
Current liabilities:
               
Revolving credit facilities
  $     $ 2,633,059  
Notes payable
    177,679       261,485  
Accounts payable
    888,654       690,004  
Other accrued expenses and other current liabilities
    1,000,523       855,577  
Liabilities of discontinued operations
          8,809,535  
 
           
Total current liabilities
    2,066,856       13,249,660  
 
               
Capital lease obligations
    14,274       27,716  
Deferred lease liability
          38,607  
Deferred income taxes
          109,353  
Deferred income
    250,739       177,207  
Liabilities of discontinued operations
          457,826  
 
           
Total liabilities
    2,331,869       14,060,369  
 
               
Stockholder’s equity:
               
Misonix, Inc. stockholders’ equity:
               
Common stock, $.01 par value-shares authorized 20,000,000; 7,079,169 issued and 7,001,369 outstanding, respectively
    70,792       70,792  
Additional paid-in capital
    25,502,717       25,251,412  
Accumulated deficit
    (7,034,799 )     (4,172,939 )
Treasury stock, at cost, 77,800 shares
    (412,424 )     (412,424 )
 
           
Total Misonix, Inc. stockholders’ equity
    18,126,286       20,736,841  
Noncontrolling interest
          246,947  
 
           
Total stockholders’ equity
    18,126,286       20,983,788  
 
           
Total liabilities and stockholders’ equity
  $ 20,458,155     $ 35,044,157  
 
           
See Accompanying Notes to Consolidated Financial Statements

 

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MISONIX INC. and Subsidiaries
Consolidated Statements of Operations
                 
    Year ended June 30,  
    2010     2009  
Net sales
  $ 13,371,275     $ 12,713,273  
Cost of goods sold
    6,844,780       7,495,002  
 
           
Gross profit
    6,526,495       5,218,271  
Operating expenses:
               
Selling expenses
    3,625,072       2,619,510  
General and administrative expenses
    5,055,848       5,018,143  
Research and development expenses
    1,803,524       1,377,807  
 
           
Total operating expenses
    10,484,444       9,015,460  
 
           
Operating loss from continuing operations
    (3,957,949 )     (3,797,189 )
 
           
Other income (expense):
               
Interest income
    28,227       67,170  
Interest expense
    (53,194 )     (158,007 )
Royalty income and license fees
    614,663       616,336  
Royalty expense
    (117,630 )     (24,822 )
Recovery of Focus Surgery, Inc. investment
    693,044       1,516,866  
Other
    (92,799 )     282,721  
 
           
Total other income
    1,072,311       2,300,264  
 
           
Loss from continuing operations before income taxes
    (2,885,638 )     (1,496,925 )
Income tax (benefit) expense
    (694,796 )     76,329  
 
           
Net loss from continuing operations
    (2,190,842 )     (1,573,254 )
 
           
Discontinued operations:
               
Net income from discontinued operations, net of income tax expense of $457,382 and $90,481, respectively
    769,536       1,011,648  
Net (loss) income from sale of discontinued operations , net of income tax expense of $1,358,942 and tax benefit of $10,683, respectively
    (1,460,226 )     2,681,760  
Noncontrolloing interest in discontinued operations, net of income taxes
    19,672       (24,630 )
 
           
Total net (loss) income from discontinued operations
    (671,018 )     3,668,778  
 
           
Net (loss) income attributable to Misonix, Inc. shareholders
  $ (2,861,860 )   $ 2,095,524  
 
           
Net loss per share from continuing operations attributable to Misonix, Inc. shareholders — Basic
  $ (0.31 )   $ (0.22 )
Net (loss) income per share from discontinued operations — Basic
    (0.10 )     0.52  
 
           
Net (loss) income per share attributable to Misonix, Inc. shareholders — Basic
  $ (0.41 )   $ 0.30  
 
           
Net loss per share from continuing operations attributable to Misonix, Inc. shareholders — Diluted
  $ (0.31 )   $ (0.22 )
Net (loss) income per share from discontinued operations — Diluted
    (0.10 )     0.52  
 
           
Net (loss) income per share attributable to Misonix, Inc. shareholders — Diluted
  $ (0.41 )   $ 0.30  
 
           
Weighted average shares — Basic
    7,001,369       7,001,369  
Weighted average shares — Diluted
    7,001,369       7,001,369  
See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
                                                                 
    Common Stock                                    
    $.01 Par Value     Treasury Stock     Additional                     Total  
    Number             Number             paid-in     Accumulated     Noncontrolling     stockholders’  
    of Shares     Amount     of shares     Amount     capital     deficit     interest     equity  
 
                                                               
Balance, June 30, 2008
    7,079,169     $ 70,792       (77,800 )   $ (412,424 )   $ 25,052,539     $ (6,268,463 )   $ 199,237     $ 18,641,681  
Net income
                                  2,095,524       47,710       2,143,234  
 
                                                             
Comprehensive income
                                              2,143,234  
Stock-based compensation
                            198,873                   198,873  
 
                                               
 
                                                               
Balance, June 30, 2009
    7,079,169       70,792       (77,800 )     (412,424 )     25,251,412       (4,172,939 )     246,947       20,983,788  
Net loss
                                  (2,861,860 )     19,672       (2,842,188 )
 
                                               
Comprehensive loss
                                              (2,842,188 )
Disposal of noncontrolling interest
                                        (266,619 )     (266,619 )
Stock-based compensation
                            251,305                   251,305  
 
                                               
 
                                                               
Balance, June 30, 2010
    7,079,169     $ 70,792       (77,800 )   $ (412,424 )   $ 25,502,717     $ (7,034,799 )   $     $ 18,126,286  
 
                                               
See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Consolidated Statements of Cash Flows
                 
    Year ended June 30,  
    2010     2009  
Operating activities
               
 
               
Net loss from continuing operations
  $ (2,190,842 )   $ (1,573,254 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization and other non-cash items
    452,884       471,629  
Bad debt expense
    (235,416 )     203,856  
Deferred income taxes
    (495,914 )     450,311  
Loss on disposal of property, plant and equipment
          (331,171 )
Stock-based compensation
    251,305       198,873  
Deferred income
    73,533       (24,312 )
Deferred leasehold costs
    (38,607 )     (18,546 )
Recovery of Focus Surgery, Inc. investment
    (693,044 )     (1,516,866 )
 
               
Changes in operating assets and liabilities:
               
Accounts receivable
    1,120,126       117,996  
Inventories
    1,025,300       843,441  
Income taxes
    16,761       (11,448 )
Prepaid expenses and other current assets
    (874,944 )     (197,735 )
Accounts payable and accrued expenses
    112,860       260,988  
Foreign income taxes payable
    (4,106 )     3,106  
Other
    (863,628 )     (299,087 )
 
           
Net cash used in operating activities
    (2,343,732 )     (1,422,219 )
 
           
 
               
Investing activities
               
 
               
Acquisition of property, plant and equipment
    (1,047,500 )     (74,251 )
Recovery of Focus Surgery, Inc. investment
    693,044       1,516,866  
 
           
Net cash (used in) provided by investing activities
    (354,456 )     1,422,615  
 
           
(continued on next page)

 

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Table of Contents

MISONIX INC. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
                 
    Year ended June 30,  
    2010     2009  
Financing activities
               
Proceeds from short-term borrowings
  $ 9,514,892     $ 27,895,516  
Payments of short-term borrowings
    (12,231,757 )     (27,992,555 )
Principal payments on capital lease obligations
    (13,604 )     (13,673 )
 
           
Net cash used in financing activities
    (2,730,469 )     (110,712 )
 
           
 
               
Cash flows from discontinued operations
               
Net cash provided by (used in) operating activities
    860,699       (569,076 )
Net cash provided by investing activities
    12,927,480       2,607,151  
Net cash used in financing activities
    (1,865,000 )      
 
           
Net cash provided by discontinued operations
    11,923,179       2,038,075  
 
           
 
               
Effect of exchange rate changes on cash
    (9,730 )     (44,929 )
 
           
Net increase in cash and cash equivalents
    6,484,792       1,882,830  
Cash and cash equivalents at beginning of year
    3,415,813       1,532,983  
 
           
Cash and cash equivalents at end of year
  $ 9,900,605     $ 3,415,813  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid for:
               
Interest
  $ 53,194     $ 335,179  
 
           
Income taxes paid
  $ 3,397     $ 63,763  
 
           
See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
1. Basis of Presentation, Organization and Business and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of MISONIX, INC. (“Misonix” or the “Company”) include the accounts of Misonix and its 100% owned subsidiaries, Misonix Limited, and Hearing Innovations, Inc. (“Hearing Innovations”). All significant intercompany balances and transactions have been eliminated.
Organization and Business
Misonix was incorporated under the laws of the State of New York on July 31, 1967 and its principal revenue producing activities, from 1967 to date, have been the manufacture and distribution of proprietary ultrasound equipment for scientific and industrial purposes and environmental control equipment for the abatement of air pollution. Misonix’s products are sold worldwide. In October 1996, the Company entered into licensing agreements to further develop one of its medical devices (see Note 13).
In fiscal 2010 and 2009, approximately 22% and 28%, respectively of the Company’s net sales were to foreign markets. Sales by the Company in other major industrial countries are made primarily through distributors.
Hearing Innovations is located in Farmingdale, New York and is a development company with patented HiSonic ultrasonic technology for the treatment of profound deafness and tinnitus.
Misonix Limited was incorporated in the United Kingdom on July 19, 1993. Misonix Limited operates in the U.K. and invoices in Euros and its sales represented 0% and 5% of net sales to foreign markets for fiscal 2010 and fiscal 2009, respectively. This business is the sales, marketing, distribution and servicing arm for the Company’s medical device products in Europe.
Discontinued Operations
On April 7, 2009, the Company sold the assets of its Ultrasonics Laboratory Products (“Ultrasonics”) business to iSonix LLC, a wholly owned subsidiary of Sonics and Materials, Inc., for a cash payment of $3.5 million. The gain on the sale and the results of operations from the Ultrasonic business are shown net of tax from discontinued operations. The net assets and results of Ultrasonics operations have been reported as a discontinued operation for all periods presented.
On August 5, 2009, the Company sold its Labcaire Systems, Ltd. (“Labcaire”) subsidiary to PuriCore International Limited for a total purchase price of up to $5.6 million. The Company received $3.6 million at closing and a promissory note in the principal amount of $1 million, payable in equal installments of $250,000 on the next four anniversaries of the closing. As of September 28, 2010, the Company has received the first installment. The note receivable was discounted over the four years using a 4% imputed interest rate. This rate is consistent with published discounts. The discounted value of the note ($900,000) is used to determine gain or loss on the sale, and is included in other assets in the consolidated balance sheet. The Company will also receive a commission paid on sales for the period commencing on the date of closing and ending on December 31, 2013 of 8% of the pass through Automated Endoscope Reprocessing (“AER”) and Drying Cabinet products, and 5% of license fees from any chemical licenses marketed by Labcaire directly associated with sale of AERs, specifically for the disinfection of the endoscope. The aggregate commission payable to the Company is subject to a maximum payment of $1,000,000. The aggregate commission will not be recognized in determining the current gain or loss on the sale of Labcaire until the commission is paid. As of June 30, 2010, there were no commissions paid. For the twelve months ended June 30, 2010, the Company recorded an after tax loss on the sale of Labcaire of $376,461. Results of Labcaire operations have been reported as a discontinued operation for all periods presented. On July 19, 2010, the Company received a Dispute Notice from PuriCore PLC (“PuriCore”) with respect to the Agreement for the sale and purchase of shares of Labcaire Systems Limited which was completed on August 4, 2009. The dispute alleges that Misonix breached certain representations and warranties that could result in a reduction to the purchase price of approximately £1.6 million or approximately $2.5 million. The Company believes the notice is without merit and will vigorously defend any claim instituted by PuriCore. There can be no assurance, however, that the Company may not have to pay some amount to resolve PuriCore’s claims.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
On October 2, 2009, Acoustic Marketing Research, Inc. d/b/a Sonora Medical Systems (“Sonora”) sold substantially all of its assets to Medical Imaging Holdings, Inc. (“Medical Imaging”) for a cash payment of $8,000,000 (subject to a future adjustment based on net working capital, at the closing). On April 6, 2010, the Company paid $257,029 to Medical Imaging for the net difference of adjustments of working capital and the effect of income taxes. These amounts are reflected in discontinued operations in the June 30, 2010 financial statements. The Company also purchased at the closing of such transaction, utilizing $1,200,000 of the proceeds, the remaining outstanding 5% of Sonora’s shares. Sonora is engaged in the business of (i) selling, repairing and servicing new and used diagnostic ultrasound systems and consumable accessories used in conjunction therewith, (ii) selling, repairing, servicing and testing diagnostic ultrasound transducers, (iii) developing and selling equipment for testing ultrasound transducers, (iv) selling equipment used for cleaning and disinfecting ultrasound transducers including, but not limited to, transesophogeal echocardiography probes, (v) selling equipment used for testing endoscopic probes, (vi) repairing and servicing MRI systems and parts and subsystems used therein, and (vii) performing training for the service and maintenance of diagnostic ultrasound and MRI systems, in each instance throughout the world. The net assets and results of Sonora operations have been reported as a discontinued operation for all periods presented.
On May 28, 2010, Misonix announced the sale to USHIFU, LLC (“USHIFU”) of all of the rights to the High Intensity Focused Ultrasound (“HIFU”) technology together with other HIFU related assets. In consideration for the sale, Misonix will receive up to approximately $5.8 million, paid out of an earn-out of 7% of gross revenues received by USHIFU related to the businesses being sold, up to the time we have received the first $3 million, and thereafter 5% of gross revenues up to the $5.8 million. Misonix will also be paid for 3 units in inventory of new Sonablate500® machines. The obligation to pay for such machines is secured by a note due December 31, 2010. At the closing of such transaction, USHIFU paid Misonix for inventory associated with manufacturing the Sonablate500 and reimbursed Misonix for certain monies expended in connection with the HIFU Registry. The net assets and results of HIFU operations have been reported as a discontinued operation for all periods presented. Misonix retained all of its rights associated with the HIFU-related intellectual property and development assets recently purchased from ProRhythm, Inc. This intellectual property involves the development of new transducers and lenses to be used in the treatment of tissue using HIFU. This technology may be applied on a worldwide basis to a variety of organs not limited to kidney, liver, or breast tissue treatment.
Unless otherwise specified, disclosures in the notes relate solely to Company’s continuing operations.
Reclassification
Certain prior period amounts in the accompanying financial statements and related notes have been reclassified to conform to the current period’s presentation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash balances outside the United States totaled $103,219 and $108,533 at June 30, 2010 and 2009, respectively.
The Company maintains cash balances at various financial institutions. At June 30, 2010, these financial institutions held cash that was approximately $9,526,000 in excess of amounts insured by the Federal Deposit Insurance Corporation and other government agencies.
Major Customers and Concentration of Credit Risk
Included in sales of the medical devices segment are sales to United States Surgical Corporation (“USS”), a unit of Covidien Ltd., of $3,172,000 and $3,467,000, Aesculap of $3,224,010 and $2,407,876, and Mentor/Byron (a Johnson & Johnson Company) of $983,000 and $875,369 for the fiscal years ended June 30, 2010 and 2009, respectively. Total royalties from USS related to their sales of the Company’s ultrasonic cutting product which uses high frequency sound waves to coagulate and divide tissue for both open and laproscopic surgery, were approximately $576,000 and $590,000 during the fiscal years ended June 30, 2010 and 2009, respectively. Accounts receivable from USS were approximately $137,000 and $382,000, Aesculap of $327,847 and $429,134 and Mentor/Byron of $83,900 and $210,045 at June 30, 2010 and 2009, respectively. At June 30, 2010 and 2009, the Company’s accounts receivable with customers outside the United States were approximately $602,422 and $1,496,000, respectively.
Accounts Receivable
Accounts receivable, principally trade, are generally due within 30 to 90 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors aging reports, collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that the same credit loss rates will be experienced in the future. The Company writes off accounts receivable when they become uncollectible.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and consist of raw materials, work-in-process and finished goods. Management evaluates the need to record adjustments for impairments of inventory on a quarterly basis. The Company’s policy is to assess the valuation of all inventories, including raw materials, work-in-process and finished goods. Inventory items used for demonstration purposes, rentals or on consignment are classified in property, plant and equipment.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company capitalizes items in excess of $1,000. Minor replacements and maintenance and repair expenses are charged to expense as incurred. Depreciation of property and equipment is provided using the straight-line method over estimated useful lives ranging from 3 to 5 years. Leasehold improvements are amortized over the life of the lease or the useful life of the related asset, whichever is shorter. The Company’s policy is to periodically evaluate the appropriateness of the lives assigned to property, plant and equipment and make adjustments if necessary. Inventory items included in property, plant and equipment are depreciated using the straight line method over estimated useful lives of 3 to 5 years.
Fair Value of Financial Instruments
The book values of cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these instruments.
Revenue Recognition
The Company records revenue upon shipment for products shipped F.O.B. shipping point. Products shipped F.O.B. destination point are recorded as revenue when received at the point of destination. Shipments under agreements with distributors are not subject to return, and payment for these shipments is not contingent on sales by the distributor. The Company recognizes revenue on shipments to distributors in the same manner as with other customers. Fees from exclusive license agreements are recognized ratably over the terms of the respective agreements. Service contracts and royalty income are recognized when earned. Fee for use revenue is recognized when the procedure is performed.
Long-Lived Assets
The carrying values of intangible and other long-lived assets, excluding goodwill, are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization and depreciation period, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. No such impairment existed at June 30, 2010 and 2009.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Company’s acquisitions of assets of Fibra Sonics, Inc.
Goodwill and intangible assets with indefinite useful lives are not amortized. We review goodwill and identifiable intangible assets with indefinite lives for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgments, including estimation of cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur and determination of our weighted-average cost of capital. Changes in the projected cash flows and discount rate estimates and assumptions underlying the valuation of goodwill could materially affect the determination of fair value at acquisition or during subsequent periods when tested for impairment. The Company completed its annual goodwill impairment tests for fiscal 2010 and 2009 in the respective fourth quarter. There were no indicators that goodwill recorded was impaired.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
Other Assets and Intangibles
The cost of acquiring or processing patents 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 $517,735 and $591,550 at June 30, 2010 and 2009, respectively. Accumulated amortization totaled $355,678 and $284,314 at June 30, 2010 and 2009, respectively. Amortization expense for the years ended June 30, 2010 and 2009 was approximately $71,000 and $56,000, respectively.
The following is a schedule of estimated future amortization expense as of June 30, 2010:
         
2011
  $ 55,000  
2012
    53,000  
2013
    49,000  
2014
    46,000  
2015
    46,000  
Thereafter
    269,000  
 
     
 
  $ 517,000  
 
     
Income Taxes
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.
The Company would record a valuation allowance when based on the weight of available evidence, it is more likely than not that the amount of future tax benefit would not be realized. While the Company believes that it is positioned for long-term growth, the volatility in our industry and markets has made it increasingly difficult to predict sales and operating results on a short-term basis, and when coupled with the cumulative losses reported over the last five fiscal years, the Company was no longer able to conclude that, based upon the weight of available evidence, it was “more likely than not” that its previously recorded deferred tax asset of $5.1 million would be realized. Therefore, the Company has established a full valuation allowance against net deferred tax assets.
The Company currently presents taxes collected from customers and remitted to governmental authorities in the statement of operations on a net basis.
The Company recognizes a the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company classifies income tax related interest and penalties as a component of income tax expense.
Net Income (Loss) Per Share
Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per common share (“Diluted EPS”) is computed by dividing net income (loss) by the weighted average number of common shares and the dilutive common share equivalents and convertible securities then outstanding. Diluted EPS for all years presented is the same as Basic EPS, as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive. For this reason, excluded from the calculation of Diluted EPS for the two years ended June 30, 2010 and 2009 were options to purchase 1,848,510 shares and 1,799,918 shares, respectively.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
Comprehensive Loss
The components of the Company’s comprehensive loss are net loss and foreign currency translation adjustments. The foreign currency translation adjustments included in comprehensive loss have not been tax effected as investments in foreign affiliates are deemed to be permanent.
Foreign Currency Translation
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 in the period the advertising first takes place. The Company incurred approximately $105,000 and $121,000 in advertising costs during the years ended June 30, 2010 and 2009, 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, 2010 and 2009 were approximately $72,000 and $88,000, respectively, and are reported as a component of net sales. Shipping and handling costs for the years ended June 30, 2010 and 2009 were approximately $85,000 and $138,000, respectively, and are reported as a component of selling expenses.
Stock-Based Compensation
The Company measures compensation cost for all share based payments at fair market value and recognizes cost over the vesting period.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified under Accounting Standards Codification (“ASC”) Topic 105-10, which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). ASC Topic 105-10 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. Upon adoption of this guidance under ASC Topic 105-10, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The guidance under ASC Topic 105-10 became effective for the Company as of September 30, 2009. References made to authoritative FASB guidance throughout this Report have been updated to the applicable Codification section.
In December 2007, the FASB issued guidance now codified under ASC Topic 810-10. ASC Topic 810-10 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance under ASC Topic 810-10 became effective as of July 1, 2009 for the Company. In connection with the adoption of the guidance now codified under ASC Topic 810-10, the Company has reclassified amounts in the accompanying consolidated balance sheets, consolidated statements of operations, consolidated statement of stockholders’ equity and consolidated statements of cash flows related to noncontrolling interests.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
In December 2007, the FASB issued guidance now codified under ASC Topic 805. ASC Topic 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Also, in April 2009, the FASB issued guidance, now codified under ASC Topic 805-20, to address some of the application issues under ASC Topic 805. ASC Topic 805-20 deals with the initial recognition and measurement of an asset acquired or a liability assumed in a business combination that arises from a contingency (provided the fair value on the date of the acquisition of the related asset or liability can be determined). Both the guidance under ASC Topics 805 and 805-20 became effective as of July 1, 2009 for the Company. Accordingly, any business combination completed prior to July 1, 2009 was accounted for pursuant to ASC 805. Business combinations completed subsequent to July 1, 2009 will be accounted for pursuant to ASC Topics 805 and 805-20. The impact that ASC Topics 805 and 805-20 will have on the Company’s consolidated financial statements will depend upon the nature, terms and size of such business combinations, if any.
In September 2006, the FASB issued guidance now codified under ASC Topic 820. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Under ASC Topic 820, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It also clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. ASC Topic 820 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, ASC Topic 820 does not require any new fair value measurements.
The adoption of the guidance now codified under ASC Topic 820 for nonfinancial assets and nonfinancial liabilities which include goodwill, intangible assets, and long-lived assets measured at fair value for impairment assessments, and nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination, became effective for the Company on July 1, 2009. The adoption of the guidance under ASC Topic 820 for nonfinancial assets and nonfinancial liabilities did not have an impact on the Company’s condensed consolidated financial statements.
In April 2009, the FASB issued guidance, now codified under ASC Topic 825-10, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. ASC Topic 825-10 also amends the disclosure requirements of ASC Topic 270-10 to require those disclosures in summarized financial information at interim reporting periods. The guidance under ASC Topic 825-10 became effective for the Company during the quarter ended September 30, 2009 and we have included the required additional interim disclosures in the financial statements.
In April 2009, the FASB issued guidance, now codified under ASC Topics 350-30 and 275-10, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC Topic 350. The guidance under ASC Topics 350-30 and 275-10 became effective as of July 1, 2009 for the Company. The adoption of ASC Topics 350-30 and 275-10 did not have a material effect on the Company’s consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value”, which provides clarification that in circumstances where a quoted market price in an active market for an identical liability is not available, a reporting entity must measure fair value of the liability using one of the following techniques: (a) the quoted price of the identical liability when traded as an asset, (b) quoted prices for similar liabilities or similar liabilities when traded as assets, or (c) another valuation technique, such as a present value technique or the amount that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability that is consistent with the provisions of ASC Topic 820. The adoption of ASU No. 2009-05 on October 1, 2009 did not have a material effect on the Company’s consolidated financial statements.
In October 2009, the FASB issued an accounting pronouncement which amends revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of a selling price for individual elements of an arrangement when vendor specific objective evidence, vendor objective evidence or third-party evidence is unavailable. Full retrospective application of the new guidance is optional. The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued an accounting pronouncement which amends fair value measurements and disclosures. The reporting entity must disclose information that enables the users of its financial statements to assess both (a) for assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to internal recognition, the valuation techniques and inputs used to develop there measurement and (b) for recurring fair value measurement using significant unobservable inputs, the effect of the measurements on earnings for this period. The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2010, the FASB issued an accounting update that addresses subsequent events. Specifically, the requirements to disclose the date that the financial statements are issued potentially conflicts with some of the SEC guidelines. The update addresses both the interaction of the requirements of this topic with the SEC’s reporting requirements and the intended breadth of the reissuance disclosure provision related to subsequent events. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
2. Discontinued operations
The following amounts related to the Sonora, Labcaire, UKHIFU Limited (“UKHIFU”), and Misonix HIFU Technologies Limited (“Misonix HIFU”) have been segregated from the Company’s continuing operations and are reported as “assets of discontinued operations” in the consolidated balance sheet:
         
    June 30,  
    2009  
Cash
  $ 275,209  
Accounts receivable
    5,357,009  
Inventory
    3,413,573  
Other current assets
    538,644  
Property, plant and equipment — net
    4,958,503  
Deferred taxes
    1,160,363  
Other assets
    116,466  
Goodwill
    4,759,495  
 
     
Total assets of discontinued operations
  $ 20,579,262  
 
     
Revolving credit facility
  $ 1,820,891  
Accounts payable
    2,268,505  
Accrued expenses and other current liabilities
    2,692,683  
Tax payable
    785,466  
Gain from sale of building
    1,054,543  
Capital leases
    167,447  
Deferred lease
    235,894  
Other liabilities
    44,758  
 
     
Total liabilities of discontinued operations
  $ 9,070,187  
 
     
Noncontrolling interest in discontinued operations
  $ 266,619  
 
     

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
The following represents the results of Ultrasonics, Sonora, Labcaire, UKHIFU and Misonix HIFU Technologies Limited which have been reported as income from discontinued operations in the consolidated statement of operations:
                 
    For the year ended June 30,  
    2010     2009  
Revenues
  $ 5,195,005     $ 30,865,551  
 
           
Income from discontinued operations, before tax
  $ 1,226,918     $ 1,102,429  
Gain on sale of Ultrasonics products
          2,670,777  
Loss on sale of Labcaire
    (295,879 )      
Gain on sale of Sonora
    947,374        
Loss on sale of HIFU
    (752,779 )      
Income tax expense
    (1,816,324 )     (79,798 )
 
           
(Loss) income from discontinued operations, net of tax
    (690,690 )     3,693,408  
Noncontrolling interest in discontinued operation
    19,672       (24,630 )
 
           
(Loss) income from discontinued operations, net of tax attributable to Misonix, Inc. shareholders
  $ (671,018 )   $ 3,668,778  
 
           
3. Fair Value of Financial Instruments
We follow a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect assumptions that market participants would use in pricing an asset or liability.
The following is a summary of the carrying amounts and estimated fair values of our financial instruments:
                                 
    June 30, 2010     June 30, 2009  
            Fair             Fair  
    Carrying     Value     Carrying     Value  
    Amount     (Level 1)     Amount     (Level 1)  
Cash
    9,900,605       9,900,605       3,415,813       3,415,813  
Trade accounts receivable
    2,335,653       2,335,653       3,301,551       3,301,551  
Trade accounts payable
    888,654       888,654       690,004       690,004  
Note receivable
    1,075,105       1,075,105              
Note payable
    177,679       177,679       261,485       261,485  

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value, all are considered Level 1 inputs:
Cash
The carrying amount approximates fair value because of the short maturity of those instruments.
Trade Accounts Receivable
The carrying amount of trade receivables reflects net recovery value and approximates fair value because of their short outstanding terms.
Trade Accounts Payable
The carrying amount of trade payables approximates fair value because of their short outstanding terms.
Note Receivable
The carrying amount of the note receivable approximates fair value because the discount rate is fair market value.
Note Payable
The carrying amount of the note payable approximates fair value because the discount rate is fair market value.
4. Inventories
Inventories are summarized as follows:
                 
    June 30,  
    2010     2009  
Raw materials
  $ 1,997,730     $ 2,380,827  
Work-in-process
    947,924       876,918  
Finished goods
    304,168       1,199,230  
 
           
 
    3,249,822       4,456,975  
 
               
Less valuation reserve
    550,105       778,232  
 
           
 
               
 
  $ 2,699,717     $ 3,678,743  
 
           

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
                 
    June 30,  
    2010     2009  
 
               
Machinery and equipment
  $ 1,767,668     $ 3,046,453  
Furniture and fixtures
    1,061,408       1,080,335  
Automobiles
    58,807       60,224  
Leasehold improvements
    346,225       317,948  
Demonstration and consignment inventory
    528,481       194,739  
 
           
 
    4,041,589       4,699,699  
Less: accumulated depreciation and amortization
    3,262,374       4,111,508  
 
           
 
  $ 500,215     $ 588,191  
 
           
Depreciation and amortization of property, plant and equipment totaled approximately $373,000 and $403,000 for the years ended June 30, 2010 and 2009, respectively.
6. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
                 
    June 30,     June 30,  
    2010     2009  
Accrued payroll and vacation
  $ 455,052     $ 378,933  
Accrued VAT and sales tax
    21,693       30,227  
Accrued commissions and bonuses
    245,852       245,852  
Accrued professional fees
    24,176       12,062  
Accrued royalty expense
    103,162       8,319  
Foreign income taxes payable
    18,676       10,363  
Deferred income
    24,000       24,000  
Current maturities of capital lease obligations
    14,533       13,523  
Other
    93,379       132,298  
 
           
 
               
 
  $ 1,000,523     $ 855,577  
 
           

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
7. 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 2015. The principal building leases provide for a monthly rental amount of approximately $23,000. 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, 2010:
                 
    Capital     Operating  
    Leases     Leases  
2011
  $ 16,000     $ 348,000  
2012
    15,000       310,000  
2013
          308,000  
2014
          310,000  
2015
          305,000  
2016 and thereafter
           
 
           
Total minimum lease payments
  $ 31,000     $ 1,581,000  
 
             
 
               
Amounts representing interest
    (2,000 )        
 
             
 
               
Present value of net minimum lease payments
    29,000          
 
               
Less current maturities
    (15,000 )        
 
             
 
               
 
  $ 14,000          
 
             
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 $603,000 and $610,000 for the years ended June 30, 2010 and 2009, respectively.
8. Revolving Credit Agreement
On December 29, 2006, the Company and its subsidiaries, Sonora and Hearing Innovations and Wells Fargo Bank entered into a (i) Credit and Security Agreement and (ii) Credit and Security Agreement Export — Import Subfacility. The aggregate credit under these agreements was $8,000,000 consistently of a revolving facility in the amount of up to $8,000,000. The credit facilities expired on December 29, 2009 and were not renewed.
9. Stock-Based Compensation Plans
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, 2010 and 2009, the Company granted options to purchase 148,300 and 303,150 shares of the Company’s common stock, respectively.
Compensation expense is recognized in the general and administrative expenses line item of the Company’s statements of operations on a straight-line basis over the vesting periods. There are no capitalized stock-based compensation costs at June 30, 2010 and 2009. As of June 30, 2010, there was approximately $444,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 1.8 years.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
There was no cash received from the exercise of stock options for the year ended June 30, 2010 and 2009. Cash flows from tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows.
The weighted average fair value at date of grant for options granted during the years ended June 30, 2010 and 2009 was $2.02 and $1.14 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:
                 
    2010     2009  
Risk-free interest rates
    3.1 %     3.1 %
Expected option life in years
    6.5       6.5  
Expected stock price volatility
    81.94 %     54.49 %
Expected dividend yield
    0       0  
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, par value $.01 per share (“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, 2010, 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). There are no shares available for future grants.
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, 2010, options to purchase 71,000 shares were outstanding at exercise prices ranging from $5.18 to $7.60 per share with a vesting period of immediate to three years under the 1996 Plan and options to acquire 160,000 shares were outstanding at exercise prices ranging from $3.21 to $7.60 per share with a vesting period of immediate to three years under the 1996 Directors Plan. At June 30, 2010, options to purchase 138,295 shares under the 1996 Plan have been exercised and options to purchase 392,650 shares have been forfeited (of which options to purchase 182,945 shares have been reissued). At June 30, 2010, options to purchase 808,500 shares under the 1996 Directors Plan have been exercised and options to purchase 90,000 shares have been forfeited (of which none have been reissued). There are no shares available for future grants.
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, 2010, options to purchase 275,200 shares were outstanding under the 1998 Plan at exercise prices ranging from $3.45 to $7.60 per share with a vesting period of immediate to three years. At June 30, 2010, options to purchase 72,848 shares under the 1998 Plan have been exercised and options to purchase 217,227 shares under the 1998 Plan have been forfeited (of which options to purchase 79,702 shares have been reissued). At June 30, 2010, there were no shares available for future grants.
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, 2010, options to purchase 788,010 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, 2010, options to purchase 128,306 shares under the 2001 Plan have been exercised and options to purchase 251,950 shares under the 2001 Plan have been forfeited (of which 159,577 options have been reissued). At June 30, 2010, there were 83,684 shares available for future grants.
In September 2005, the Board of Directors adopted, and in December 2005, the shareholders approved, the 2005 Employee Equity Incentive Plan (the “2005 Plan”) covering an aggregate of 500,000 shares of Common Stock and the 2005 Non-Employee Director Stock Option Plan (the “2005 Directors Plan”) covering an aggregate of 200,000 shares of Common Stock. At June 30, 2010, there were 374,300 options to purchase shares outstanding under the 2005 Plan at exercise prices ranging from $.85 to $4.98 per share with a vesting period of four years. At June 30, 2010, there were no options exercised under the 2005 Plan and 34,000 shares have been forfeited (of which no options have been reissued). At June 30, 2010, 125,700 shares were available for future grants under the 2005 Plan. At June 30, 2010, options to purchase 150,000 shares were outstanding under the 2005 Directors Plan at an exercise price ranging from $2.66 to $5.42 with a vesting period over three years. At June 30, 2010, there were no options exercised and 50,000 shares were available for future grants under the 2005 Directors Plan.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
In December 2009, the Board of Directors and shareholders adopted the 2009 Employee Equity Incentive Plan (the “2009 Plan”) covering an aggregate of 500,000 shares of Common Stock and the 2009 Non-Employee Director Stock Option Plan (the “2009 Directors Plan”) covering an aggregate of 200,000 shares of Common Stock. At June 30, 2010 there were no options outstanding, exercised, or forfeited under the 2009 Plan. At June 30, 2010, 500,000 shares were available for future grants under the 2009 plan. At June 30, 2010 there were no options outstanding, exercised, or forfeited under the 2009 Directors Plan. At June 30, 2010, 200,000 shares were available for future grants under the 2009 Directors 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 Corporate Governance Requirements applicable to Nasdaq-listed companies. 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 become exercisable at such time and in such installments as provided in the terms of each individual option agreement.
The following table summarizes information about stock option activity during 2010 and 2009:
                                 
    Options  
                    Weighted Average        
                    Remaining        
    Number of     Weighted Average     Contractual Life     Aggregate Intrinsic  
    Shares     Exercise Price     Years     Value  
Outstanding as of June 30, 2008
    1,822,841     $ 5.71                  
Granted
    303,150       2.03                  
Exercised
                           
Forfeited
    (25,795 )     5.35                  
Expired
    (300,278 )     4.99                  
 
                           
Outstanding as of June 30, 2009
    1,799,918     $ 5.21       5.4     $ 44,651  
 
                       
Exercisable at June 30, 2009
    1,374,603     $ 5.93       4.3     $  
 
                       
Vested at June 30, 2009
    1,374,603     $ 5.93       4.3     $  
 
                       
 
                               
Outstanding as of June 30, 2009
    1,799,918     $ 5.21                  
Granted
    148,300       2.44                  
Exercised
                           
Forfeited
    (99,708 )     5.10                  
Expired
                           
 
                       
Outstanding as of June 30, 2010
    1,848,510     $ 4.99       5.1     $ 75,711  
 
                       
Exercisable at June 30, 2010
    1,459,948     $ 5.69       4.6     $ 18,928  
 
                       
Vested at June 30, 2010
    1,459,948     $ 5.69       4.6     $ 18,928  
 
                       

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
The following table summarizes information about stock options outstanding at June 30, 2010:
                                         
    Options Outstanding     Options Exercisable  
            Weighted     Weighted             Weighted  
Range of           Average     Average             Average  
Exercise           Contractual Life     Exercise             Exercise  
Price   Number     (Yrs)     Price     Number     Price  
$.85 – 2.66     421,950       8.6     $ 2.20       68,413     $ 2.06  
$3.21 – 4.99
    322,750       5.9     $ 4.37       287,725     $ 4.41  
$5.10 – 8.00
    1,103,810       2.7     $ 6.25       1,103,810     $ 6.25  
 
                             
 
    1,848,510       5.1     $ 4.99       1,459,948     $ 5.69  
 
                             
As of June 30, 2010 and 2009, 1,848,510 and 1,799,918 shares are reserved for issuance under outstanding options and 959,384 and 323,351 shares are reserved for the granting of additional options, respectively. All outstanding options expire between August 2010 and September 2019 and vest immediately or over periods of up to four years.
10. Commitments and Contingencies
Employment Agreement
Effective July 1, 2009, the Company entered into a new Employment Agreement with Michael A. McManus, Jr., the Company’s President and Chief Executive Officer (the “Employment Agreement”). The Employment Agreement was amended effective January 1, 2010. The Employment Agreement expires June 30, 2011 and renews for successive one-year periods thereafter unless terminated by either party not less then 90 days prior to the end of the annual term. The Employment Agreement provides for an annual base salary of $283,250, and an annual bonus based on Mr. McManus’ achievement of annual goals and objectives as determined by the Compensation Committee of the Company’s Board of Directors. Effective January 1, 2010 the Board approved a three percent increase for Mr. McManus. Mr. McManus is entitled under the Employment Agreement to participate in or receive additional benefits. He is entitled to participate in any plans and programs made available to the executive employees of the Company generally. In addition to termination for cause (including disability) and death, Mr. McManus can terminate the Employment Agreement for good reason (including a change of control of the Company). If Mr. McManus terminates the Employment Agreement for good reason the Company must pay him an amount equal to two times his total compensation (annual base salary plus bonus) at the highest rate paid during the period of his employment, payable in a lump sum within sixty days of termination of employment. Mr. McManus has also agreed in the Employment Agreement to an eighteen month post-termination covenant not to compete, as well as other customary covenants concerning non-solicitation and non-disclosure of confidential information of the Company.
Purchase Commitments
As of June 30, 2010 and 2009 the Company had inventory related purchase commitments totaling approximately $1,437,000 and $1,103,000, respectively.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
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 AuraTM ductless fume enclosure. Medical device products include the AutoSonix 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 decision maker. Summarized financial information for each of the segments for the years ended June 30, 2010 and 2009 are as follows:
For the year ended June 30, 2010:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 10,737,379     $ 2,633,896     $     $ 13,371,275  
Cost of goods sold
    4,937,666       1,907,114             6,844,780  
 
                       
Gross profit
    5,799,713       726,782             6,526,495  
Selling expenses
    3,103,019       522,053             3,625,072  
Research and development
    1,457,373       346,151             1,803,524  
General and administrative
                5,055,848       5,055,848  
 
                       
Total operating expenses
    4,560,392       868,204       5,055,848       10,484,444  
 
                       
Income (loss) from continuing operations
  $ 1,239,121     $ (141,422 )   $ (5,055,848 )   $ (3,957,949 )
 
                       
Income (loss) from discontinued operations
  $ (720,325 )   $ 49,307     $     $ (671,018 )
 
                       
For the year ended June 30, 2009:
                                 
    Medical     Laboratory and     Corporate and        
    Devices     Scientific Products     Unallocated     Total  
Net sales
  $ 9,688,294     $ 3,024,979     $     $ 12,713,273  
Cost of goods sold
    5,368,899       2,126,103             7,495,002  
 
                       
Gross profit
    4,319,395       898,876             5,218,271  
Selling expenses
    2,177,000       442,510             2,619,510  
Research and development
    1,150,477       227,330             1,377,807  
General and administrative
                5,018,143       5,018,143  
 
                       
Total operating expenses
    3,327,477       669,840       5,018,143       9,015,460  
 
                       
Income (loss) from continuing operations
  $ 991,919     $ 229,036     $ (5,018,143 )   $ (3,797,189 )
 
                       
Income (loss) from discontinued operations
  $ 978,930     $ 2,689,848     $     $ 3,668,778  
 
                       

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
There are two major customers for medical devices. Sales to USS were approximately $3,172,000 and $3,467,000 for the years ended June 30, 2010 and 2009, respectively. Sales to Aesculap Inc., USA were approximately $3,224,000 and $2,408,000 during the fiscal years ended June 30, 2010 and 2009, respectively. There were no significant concentrations of sales or accounts receivable for laboratory and scientific products for the years ended June 30, 2010 and 2009, 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,  
    2010     2009  
United States
  $ 10,452,705     $ 9,167,834  
United Kingdom
    59,628       1,417,685  
Europe
    1,244,527       1,312,599  
Asia
    756,722       372,929  
Canada and Mexico
    241,045       167,272  
Middle East
    267,929       89,212  
Other
    348,719       185,742  
 
           
 
               
 
  $ 13,371,275     $ 12,713,273  
 
           
Total assets, by geographic area, are as follows:
                 
    June 30,  
    2010     2009  
United States
               
Long-lived assets
  $ 3,882,982     $ 6,860,969  
Long-lived assets of discontinued operations
          1,469,551  
Other assets
    16,330,428       10,889,541  
Other assets of discontinued operations
          3,741,386  
 
           
 
    20,213,410       22,961,447  
 
           
United Kingdom
               
Long-lived assets
  $ 48,666     $ 5,372,444  
Long-lived assets of discontinued operations
          908,185  
Other assets
    196,079       1,543,311  
Other assets of discontinued operations
            4,258,770  
 
           
 
    244,745       12,082,710  
 
           
Total assets
  $ 20,458,155     $ 35,044,157  
 
           

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
12. Income Taxes
There are no federal, state or foreign income tax audits in process as of June 30, 2010. Open tax years related to federal and state income tax filings are for the years ended June 30, 2007, 2008, 2009 and 2010. The Company files state tax returns in New York and Colorado and its tax returns in those states have never been examined. The Company’s foreign subsidiaries, Misonix, Ltd. and UKHIFU file tax returns in England. The England Inland Revenue Service has not examined these tax returns.
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,  
    2010     2009  
Deferred tax liabilities:
               
Depreciation and amortization
  $ (245,100 )   $ (228,602 )
 
           
Total deferred tax liabilities
    (245,100 )     (228,602 )
 
               
Deferred tax assets:
               
Bad debt reserves
    15,706       70,134  
Accruals and allowances
    13,862       204,501  
Inventory valuation
    278,935       305,706  
License fee income
    53,787       62,114  
Investments
          205,706  
Stock-based compensation
    214,432       190,781  
Deferred gain — HIFU and Labcaire
    416,085        
Tax credits and net operating loss carry forwards
    3,686,839       3,601,787  
Deferred lease liability
          13,279  
Deferred gain from sale and leaseback of Labcaire building
           
Other
    13,520       3,698  
 
           
Total deferred tax assets
    4,693,166       4,666,706  
Valuation allowance
    (4,448,066 )     (3,956,317 )
 
           
Net deferred tax asset
  $     $ 481,787  
 
           
 
               
Recorded as:
               
Current deferred tax asset
  $     $ 591,140  
Non-current deferred tax liability, net
          (109,353 )
 
           
 
  $     $ 481,787  
 
           
As of June 30, 2010, 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 not realize the benefits of these deductible differences, net of the existing valuation allowances at June 30, 2010.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
At June 30, 2010, the Company had a net operating loss carryforward (“NOL”) of approximately $12,000,000 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. On July 1, 2008, the Company closed the transaction for the sale of its Focus Surgery, Inc. (“Focus”) equity to USHIFU in addition to receiving payment for one half of the outstanding debt due from Focus for a total of $1,516,866 pursuant to the terms of the Focus Stock Purchase Agreement. The balance of the debt plus accumulated interest was repaid in January 2010. On April 7, 2009, the Company sold its assets of its Ultrasonics Laboratory products business to iSonix for a cash payment of $3.5 million. As a result of this transaction, the Company recorded a capital gain on the transaction of $2,670,777. As a result of these transactions, the Company reversed $918,747 of the valuation allowance related to the impairment of equity investments. The valuation allowance related to this impairment of equity investments totaled $0 and $205,706 at June 30, 2010 and 2009, respectively.
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, 2010 and 2009, respectively.
As of June 30, 2010, the Company had approximately $4,166,245 of U.S. federal net operating loss carryforwards and unused tax credit carryforwards which are available to offset future taxable income. These carryforwards expire in the tax years between 2023 and 2028, if not utilized.
Significant components of the income tax (benefit) expense attributable to operations are as follows:
                 
    Years ended June 30,  
    2010     2009  
Current:
               
Federal
  $ (1,187,107 )   $  
State
    10,524       6,669  
Foreign
           
FIN 48 adjustment
          (250,748 )
 
           
Total current
    (1,176,583 )     (244,079 )
 
           
 
               
Deferred:
               
Federal
    481,787       314,981  
State
          5,427  
Foreign
           
 
           
Total deferred
    481,787       320,408  
 
           
 
  $ (694,796 )   $ 76,329  
 
           

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
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,  
    2010     2009  
Tax at federal statutory rates
  $ (962,077 )   $ (508,955 )
State income taxes, net of federal benefit
    6,946       6,669  
Research credit
          (29,012 )
Foreign taxes
          8,916  
Stock-based compensation
    57,854       31,566  
FIN 48 adjustment
          (250,748 )
Valuation allowance
    176,027       798,880  
Travel and entertainment
    12,399       17,707  
Other
    14,055       1,306  
 
           
 
  $ (694,796 )   $ 76,329  
 
           
During the year ended June 30, 2010, the Company recorded an adjustment to reverse a previously established a reserve pursuant to FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) due to the closing of certain statutes from prior years’ tax returns. At June 30, 2010, the Company no longer has a FIN 48 reserve on its books.
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 $593,000 and $592,000 for the fiscal years ended June 30, 2010 and 2009, respectively.
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 (the “Code”), for all full time employees. Participants may contribute a percentage of compensation not to exceed the maximum allowed under the Code, which was $16,500 or $21,500 if the employee was over 50 years of age for the year ended June 30, 2010. The plan provides for a matching contribution by the Company of 10% of annual eligible compensation contributed by the participants based on years of service, which amounted to $33,628 and $64,470 for the years ended June 30, 2010 and 2009, respectively.
15. Focus Surgery
On March 3, 2008, the Company, USHIFU, FS Acquisition Company and certain other stockholders of Focus Surgery, Inc. (“Focus”) entered into a Stock Purchase Agreement (the “Focus Agreement”). The closing of the transactions contemplated by the Focus Agreement took place on July 1, 2008. Pursuant to the Focus Agreement, the Company sold to USHIFU the 2,500 shares of Series M Preferred Stock of Focus owned by the Company for a cash payment of $837,500. The Company also received $679,366, fifty percent (50%) of the outstanding principal and accrued interest of loans previously made by the Company to Focus, with the remaining fifty percent (50%) of such amount of $679,366 paid on January 4, 2010. Upon collection, payment was recognized as a gain.
16. Subsequent Event
On July 19, 2010, the Company received a Dispute Notice from PuriCore PLC (“PuriCore”) with respect to the Agreement for the sale and purchase of shares of Labcaire Systems Limited which was completed on August 4, 2009. The dispute alleges that Misonix breached certain representations and warranties that could result in a reduction to the purchase price of approximately £1.6 million or approximately $2.5 million. The Company believes the notice is without merit and will vigorously defend any claim instituted by PuriCore. There can be no assurance, however, that the Company may not have to pay some amount to resolve PuriCore’s claims.

 

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Table of Contents

MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
17. Quarterly Results (unaudited)
                                         
    FISCAL 2010  
    Q1     Q2     Q3     Q4     YEAR  
Net sales
  $ 2,631,017     $ 3,148,174     $ 3,313,131     $ 4,278,953     $ 13,371,275  
Cost of goods sold
    1,621,893       1,642,382       1,596,264       1,984,241       6,844,780  
 
                             
Gross profit
    1,009,124       1,505,792       1,716,867       2,294,712       6,526,495  
 
                                       
Operating expenses:
                                       
Selling expenses
    919,607       1,058,879       671,213       975,373       3,625,072  
General and administrative expenses
    1,312,680       1,490,484       1,021,476       1,231,208       5,055,848  
Research and development expenses
    422,469       523,571       441,093       416,391       1,803,524  
 
                             
Total operating expenses
    2,654,756       3,072,934       2,133,782       2,622,972       10,484,444  
 
                             
Loss from operations
    (1,654,632 )     (1,567,142 )     (416,915 )     (328,260 )     (3,957,949 )
 
                                       
Other (expense) income:
                                       
Interest income
    14,025       14,052       101       49       28,227  
Interest expense
    (28,088 )     (17,571 )     (2,517 )     (5,018 )     (53,194 )
Royalty income and license fees
    156,623       152,260       172,534       133,246       614,663  
Royalty expense
          (65,056 )     (18,870 )     (33,704 )     (117,630 )
Recovery of Focus Surgery, Inc. investment
                693,044             693,044  
Other
    10,164       (18,875 )     (11,609 )     (72,479 )     (92,799 )
 
                             
Total other income
    152,724       64,810       832,683       22,094       1,072,311  
 
                             
 
                                       
Income (loss) from continuing operations before income taxes
    (1,492,908 )     (1,502,332 )     415,768       (306,166 )     (2,885,638 )
 
                                       
Income tax (benefit) expense
    (245,764 )     (936,913 )     206,242       281,639       (694,796 )
 
                             
 
                                       
Net (loss) income from continuing operations
  $ (1,247,144 )   $ (565,419 )   $ 209,526     $ (587,805 )   $ (2,190,842 )
 
                             
Discontinued operations:
                                       
Net income (loss) from discontinued operations net of income taxes expense (benefit) of $470,397, $0, ($111,763) and $98,748
    527,493       237,724       (258,850 )     263,169       769,536  
Net (loss) income from sale of discontinued operations net of income tax of $957,937, $0, $0 and $401,005
    (195,716 )     82,897       (257,029 )     (1,090,378 )     (1,460,226 )
Noncontrolling interest in discontinued operations, net of income taxes
    20,255       21,085       24,861       (46,529 )     19,672  
 
                             
Net income (loss) from discontinued operations
    352,032       341,706       (491,018 )     (873,738 )     (671,018 )
 
                             
Net loss attributable to Misonix, Inc. shareholders
  $ (895,112 )   $ (223,713 )   $ (281,492 )   $ (1,461,543 )   $ (2,861,860 )
 
                             
Net income (loss) per share from continuing operations — Basic
  $ (.18 )   $ (.08 )   $ .03     $ (.08 )   $ (.31 )
 
                                       
Net income (loss) per share from discontinued operations — Basic
    .07       .03       (.06 )     (.12 )     (.10 )
 
                             

 

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MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
                                         
    FISCAL 2010  
    Q1     Q2     Q3     Q4     YEAR  
Net loss per share — Basic
  $ (.11 )   $ (.05 )   $ (.04 )   $ (.20 )   $ (.41 )
 
                             
 
                                       
Net income (loss) per share from continuing operations — Diluted
  $ (.18 )   $ (.08 )   $ .03     $ (.08 )   $ (.31 )
 
                                       
Net income (loss) per share from discontinued operations — Diluted
    .07       .03       (.06 )     (.12 )     (.10 )
 
                             
 
                                       
Net loss per share — Diluted
  $ (.11 )   $ (.05 )   $ (.04 )   $ (.20 )   $ (.41 )
 
                             
 
                                       
Weighted average shares — Basic
    7,001,369       7,001,369       7,001,369       7,001,369       7,001,369  
Weighted average shares — Diluted
    7,001,369       7,001,369       7,001,369       7,001,369       7,001,369  
                                         
    FISCAL 2009  
    Q1     Q2     Q3     Q4     YEAR  
Net sales
  $ 2,921,581     $ 4,499,600     $ 2,297,388     $ 2,994,704     $ 12,713,273  
Cost of goods sold
    1,838,745       2,695,852       1,312,938       1,647,467       7,495,002  
 
                             
Gross profit
    1,082,836       1,803,748       984,450       1,347,237       5,218,271  
 
                                       
Operating expenses:
                                       
Selling expenses
    756,739       600,622       581,912       680,237       2,619,510  
General and administrative expenses
    1,469,840       1,219,412       1,156,933       1,171,958       5,018,143  
Research and development expenses
    320,632       377,697       359,350       320,128       1,377,807  
Litigation settlement expenses
                (2,000 )     2,000        
 
                             
Total operating expenses
    2,547,211       2,197,731       2,096,195       2,174,323       9,015,460  
 
                             
Loss from operations
    (1,464,375 )     (393,983 )     (1,111,745 )     (827,086 )     (3,797,189 )
 
                                       
Other (expense) income:
                                       
Interest income
    31,034       4,402       2,089       29,645       67,170  
Interest expense
    (45,596 )     (46,369 )     (33,965 )     (32,077 )     (158,007 )
Royalty income and license fees
    176,227       139,736       148,453       151,920       616,336  
Royalty expense
    (3,584 )     (12,918 )     (300 )     (8,020 )     (24,822 )
Recovery of Focus Surgery, Inc. investment
    1,516,866                         1,516,866  
Other
    (24,242 )     49,300       30,424       227,239       282,721  
 
                             
Total other income
    1,650,705       134,151       146,701       368,707       2,300,264  
 
                             
 
                                       
Income (loss) from continuing operations before income taxes
    186,330       (259,832 )     (965,044 )     (458,379 )     (1,496,925 )
 
                                       
Income tax (benefit) expense
    132,924       (91,817 )     (672,242 )     707,465       76,329  
 
                             
Net income (loss) from continuing operations
  $ 53,406     $ (168,015 )   $ (292,802 )   $ (1,165,844 )   $ (1,573,254 )
 
                             
Discontinued operations:
                                       
Net (loss) income from discontinued operations net of income tax expense (benefit) of ($10,200), ($128,894), $157,415 and $72,160
    (20,165 )     (284,481 )     383,143       933,151       1,011,648  
Net  income from sale of discontinued operations net of income tax benefit of $0, $0, $0 and ($10,683)
    0       0       0       2,681,760       2,681,760  

 

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MISONIX INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the two years ended June 30, 2010
                                         
    FISCAL 2009  
    Q1     Q2     Q3     Q4     YEAR  
Noncontrolling interest in discontinued operations, net of income taxes
    (5,800 )     (9,701 )     (1,371 )     (7,750 )     (24,630 )
 
                             
Total net (loss) income from discontinued operations
    (25,965 )     (294,182 )     381,772       3,607,153       3,668,778  
 
                             
Net income (loss) attributable to Misonix, Inc. shareholders
    27,441       (462,197 )     88,970       2,441,309       2,095,524  
 
                             
Net income (loss) per share from continuing operations attributable to Misonix, Inc. shareholders — Basic
  $ .01     $ (.02 )   $ (.04 )   $ (.17 )   $ (.22 )
 
                                       
Net income (loss) per share from discontinued operations — Basic
          (.04 )     .05       .52       .52  
 
                             
 
                                       
Net income (loss) per share attributable to Misonix, Inc. shareholders — Basic
  $ .01     $ (.06 )   $ .01     $ .35     $ .30  
 
                             
Net income (loss) per share from continuing operations attributable to Misonix, Inc. shareholders — Diluted
  $ .01     $ (.02 )   $ (.04 )   $ (.17 )   $ (.22 )
 
                                       
Net income per share from discontinued operations — Diluted
          (.04 )     .05       .52       .52  
 
                             
 
                                       
Net income per share — attributable to Misonix, Inc. shareholders — Diluted
  $ .01     $ (.06 )   $ .01     $ .35     $ .30  
 
                             
 
                                       
Weighted average shares — Basic
    7,001,369       7,001,369       7,001,369       7,001,369       7,001,369  
Weighted average shares — Diluted
    7,022,226       7,001,369       7,001,369       7,001,369       7,016,299  

 

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Table of Contents

Schedule II
MISONIX INC. and Subsidiaries
Valuation and Qualifying Accounts
For the years ended June 30, 2010 and 2009
                                 
            Column C              
            Additions              
    Column B     (Recoveries)     Column D     Column E  
    Balance at     Charged (Credited)     Additions     Balance at  
Column A   Beginning     to cost and     (deductions)-     end of  
Description   of period     expenses     describe     period  
 
                               
Allowance for doubtful accounts:
                               
Year ended June 30:
                               
 
                               
2010
  $ 334,399     $ 165,527     $ (376,580 )(A)   $ 123,346  
 
                               
2009
  $ 136,643     $ 179,188     $ (18,568 )   $ 334,399  
     
(A)  
Reduction in allowance for doubtful accounts due to write off of certain accounts receivable balances.

 

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Table of Contents

EXHIBIT INDEX
         
Exhibit No.   Description
       
 
  10.2    
Form of Director’s Indemnification Agreement.
       
 
  10.18    
First Amendment to Amended and Restated Employment Agreement between the Company and Michael A. McManus, Jr.
       
 
  10.19    
Lease Modification Agreement, dated as of June 30, 2010, between Sanwood Realty Co. and the Company.
       
 
  21    
Subsidiaries of the Company.
       
 
  23.1    
Consent of Grant Thornton 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.