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| MSON > SEC Filings for MSON > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
Selling expenses: Selling expenses decreased $132,441 to $3,454,744 for the six
months ended December 31, 2008 from $3,587,185 for the six months ended
December 30, 2007. Laboratory and scientific products selling expenses decreased
$122,237. Selling expenses for medical device products decreased $10,204,
primarily due to a reduction in expenses attributable to our European sales
efforts. Selling expenses for laboratory products decreased principally at
Labcaire, primarily due to a reduction in exchange rate.
General and administrative expenses: General and administrative expenses
decreased $275,412 from $5,126,076 in the six months ended December 31, 2007 to
$4,850,664 in the six months ended December 31, 2008. General and administrative
expenses decreased for the six months ended December 31, 2008, principally due
to lower employment fees, corporate insurance and salaries.
Research and development expenses: Research and development expenses decreased
$167,570 from $1,645,552 for the six months ended December 31, 2007 to
$1,477,982 for the six months ended December 31, 2008. Laboratory and scientific
products research and development expenses decreased approximately $15,000 due
to decreased product support related to the Ultrasonic and Labcaire products.
Research and development expense for medical device products decreased $152,000,
primarily due to a reduced milestone payment to Focus Surgery, Inc. ("Focus")
related to our HIFU kidney/liver product development efforts.
Litigation expenses: Litigation expenses increased to $100,000 for the six
months ended December 31, 2008, as compared to no litigation expenses for the
six months ended December 31, 2007. The increased expense relates to interest
expense on pending litigation at Acoustic Marketing Research, Inc. d/b/a Sonora
Medical Systems ("Sonora").
Other income (expense): Other income for the six months ended December 31, 2008
was $1,505,566 as compared to $64,780 for the six months ended December 31,
2007. The increase of $1,440,786 was due to the receipt of $1,516,866 from
USHIFU, LLC ("USHIFU") pursuant to the Focus transaction 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. The gain from the Focus transaction was partially offset by
$131,000 of exchange losses related to the weakening of the English Pound
against the U.S. Dollar.
Income taxes: The effective tax rate was 46.2% for the six months ended
December 31, 2008, as compared to an effective tax rate of 29.5% for the six
months ended December 31, 2007. The December 2008 effective income tax rate
differs from the statutory rate due to the impact of permanent differences
between accounting and taxable income for non cash compensation and
entertainment expenses.
Three months ended December 31, 2008 and 2007
Net sales: Net sales of the Company's medical device products and laboratory and
scientific products increased $589,886 to $12,189,939 for the three months ended
December 31, 2008 from $11,600,053 for the three months ended December 31, 2007.
This difference in net sales is due to an increase in sales of medical device
products of $909,413 to $6,947,616 for the three months ended December 31, 2008
from $6,038,203 for the three months ended December 31, 2007. This difference in
net sales is also due to a decrease in laboratory and scientific products sales
of $319,527 to $5,242,323 for the three months ended December 31, 2008 from
$5,561,850 for the three months ended December 31, 2007. The increase in sales
of medical device products is due to an increase in sales of therapeutic medical
device products of approximately $900,000 and an increase of $9,000 in sales of
diagnostic medical device products. The increase in sales of therapeutic medical
device products was primarily attributable to the increase in the Bone Scalpel
and the SonicOne wound debridement system. The increase in sales of diagnostic
medical device products was not attributable to a single customer, distributor
or any other specific factor. The decrease in sales of laboratory and scientific
products was primarily due to an $186,000 decrease in Labcaire products sales, a
decrease in ultrasonic laboratory products sales of $110,000 and a decrease of
$24,000 in ductless fume enclosure products sales. Labcaire sales increased by
$795,000 due to shipments of its new ISIS endoscope cleaning system, endoscope
storage cabinet and increased service revenue, offset by the strengthening of
the U.S. Dollar against the English Pound during the three months ended
December 31, 2008 as compared to the three months ended December 31, 2007 which
had the impact of reducing Labcaire sales reported in U.S. Dollars by
approximately $981,000.
Export sales from the United States are remitted in U.S. dollars and export
sales for Labcaire are remitted in English Pounds. UKHIFU sales are remitted in
English Pounds and Misonix, Ltd. sales to date have been remitted in Euros. To
the extent that the Company's revenues are generated in English Pounds, its
operating results were translated for reporting purposes into U.S. dollars using
weighted average rates of 1.74 and 2.04 for the three months ended December 31,
2008 and 2007, respectively. A strengthening of the English Pound, in relation
to the U.S. dollar, will have the effect of increasing recorded revenues and
profits, while a weakening of the English Pound will have the opposite effect.
Since the Company's operations in England generally set prices and bids for
contracts in English Pounds, a strengthening of the English Pound, while
increasing the value of its UK assets, might place the Company at a pricing
disadvantage in bidding for work from manufacturers based overseas. The Company
collects its receivables 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 3.
Quantitative and Qualitative Disclosures About Market Risk."
Gross profit: Gross profit decreased to 40.5% for the three months ended
December 31, 2008 from 44.5% for the three months ended December 31, 2007. Gross
profit for medical device products decreased to 46.3% for the three months ended
December 31, 2008 from 51.0% for the three months ended December 31, 2007. Gross
profit for laboratory and scientific products decreased to 32.9% for the three
months ended December 31, 2008 from 37.4% for the three months ended
December 31, 2007. Gross profit for medical device products was unfavorably
impacted in the three months ended December 31, 2008 due to a fee per use sale
of the SB500 product for prostate cancer in Europe, which carried no initial
margin and an unfavorable mix of high and low product margin deliveries. As the
product is used and we collect our proportionate share of the fee, the margins
for that fee will be as a percentage very favorable. The decrease in gross
profit in the December 2008 quarter for laboratory and scientific products is
due to lower margins at Labcaire due to higher costs related to ISIS units.
Selling expenses: Selling expenses decreased $281,188 to $1,617,487 for the
three months ended December 31, 2008 from $1,898,675 for the three months ended
December 31, 2007. Laboratory and scientific products selling expenses decreased
$103,364. Selling expenses for medical device products decreased $177,824,
primarily due to reduced expenses in European sales efforts. Selling expenses
for laboratory products decreased principally at Labcaire due to lower exchange
rates.
General and administrative expenses: General and administrative expenses
decreased $422,457 from $2,620,316 in the three months ended December 31, 2007
to $2,197,859 in the three months ended December 31, 2008. General and
administrative expenses decreased for the three months ended December 31, 2008,
principally due to lower employment fees, corporate insurance and salaries.
Research and development expenses: Research and development expenses decreased
$233,807 from $935,315 for the three months ended December 31, 2007 to $701,508
for the three months ended December 31, 2008. Laboratory and scientific products
research and development expenses decreased approximately $67,315 due to lower
exchange rates for Labcaire expenses. Research and development expense for
medical device products decreased $166,492, primarily due to reduced milestone
payments to Focus relating to our HIFU kidney/liver product development efforts.
Litigation expenses: Litigation expenses increased to $100,000 for the three
months ended December 31, 2008, as compared to no litigation expenses for the
three months ended December 31, 2007. The increased expense relates to interest
expense on pending litigation at Sonora.
Other income (expense): Other income for the three months ended December 31,
2008 was $33,215 as compared to $85,941 for the three months ended December 31,
2007. The decrease of $52,726 was primarily due to $55,000 of exchange losses
related to the weakening of the English Pound against the U.S. Dollar.
Income taxes: The effective tax rate was 46.2% for the three months ended
December 31, 2007, as compared to an effective tax rate of 43.0% for the three
months ended December 31, 2008. The December 2008 effective income tax rate
differs from the statutory rate due to the impact of permanent differences
between accounting and taxable income for non cash compensation and
entertainment expenses.
Critical Accounting Policies
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
Certain of these accounting policies require the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities,
revenues and expenses. On an ongoing basis, the Company bases its estimates on
historical data and experience, when available, and on various other assumptions
that are believed to be reasonable under the circumstances, the combined results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
The Company evaluates its goodwill for impairment triggering events at each
reporting period in accordance with FAS No. 142. The Company's stock price has
been trading below its book value and tangible book value for two consecutive
quarters. The Company attributes this low stock price to both the overall market
conditions and company specific factors, including low trading volume of the
Company's stock. As of December 31, 2008, the Company believes that based on
operations to date and measures implemented, the amounts used in the discount
cash flow model used in its June 30, 2008 annual impairment test are reasonable.
Based on our evaluation, there was no impairment of goodwill in the second
fiscal quarter ended December 31, 2008. Due to the recent economic volatility,
including fluctuations in interest rates, growth rates and changes in demand for
our products, there could be a change in the valuation of goodwill when the
Company conducts its annual impairment test.
Actual results may differ from these estimates. There have been no material
changes in the Company's critical accounting policies and estimates from those
discussed in Item 7 of the Company's Annual Report on Form 10-K for the year
ended June 30, 2008.
Recent Accounting Pronouncements
Effective July 1, 2008, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles in the United States
("GAAP"), and expands disclosures about fair value measurements. SFAS 157
applies whenever other standards require, or permit, assets or liabilities to be
measured at fair value. The adoption of SFAS 157 did not have an impact on our
consolidated results of operations, financial position and cash flows.
Effective July 1, 2008, the Company adopted SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to elect to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. The adoption of
SFAS 159 did not have an impact on our consolidated results of operations,
financial position and cash flows.
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141(R), "Business Combination" ("SFAS 141R"). This Statement significantly
changes the financial accounting and reporting of business combination
transactions in the Company's consolidated financial statements. SFAS 141R is
effective for fiscal years beginning after December 15, 2008 and prohibits early
adoption. The Company is currently evaluating the impact of adopting SFAS 141R
on our consolidated results of operations, financial position and cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 significantly changes the accounting for and reporting of
noncontrolling (minority) interests in the Company's consolidated financial
statements. SFAS 160 is effective for fiscal years beginning after December 15,
2008 and prohibits early adoption. The Company is currently evaluating the
impact of adopting SFAS 160 on our consolidated results of operations, financial
position and cash flows.
In April 2008, the FASB issued Staff Position No. FAS 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 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 SFAS 142. FSP FAS 142-3 is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141R,
and other U.S. GAAP. FSP FAS 142-3 applies to all intangible assets and is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The Company is
currently evaluating the impact of adopting FSP FAS 142-3 on our consolidated
results of operations, financial position and cash flows.
Forward Looking Statements
This Report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Although the Company
believes that the assumptions underlying the forward looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward looking statements
contained in this Report will prove to be accurate. Factors that could cause
actual results to differ from the results specifically discussed in the forward
looking statements include, but are not limited to, the absence of anticipated
contracts, higher than historical costs incurred in performance of contracts or
in conducting other activities, product mix in sales, results of joint ventures
and investments in related entities, future economic, competitive and market
conditions, and the outcome of legal proceedings as well as management business
decisions.
Liquidity and Capital Resources
Working capital at December 31, 2008 and June 30, 2008 was $9,828,156 and
$8,841,000, respectively. For the six months ended December 31, 2008, cash used
in operations totaled $998,272. Cash used in operations was primarily due to a
reduction in customer deposits and VAT payable at Labcaire. For the six months
ended December 31, 2008, cash provided by investing activities totaled
$1,331,327. The major source of cash from investing activities was the receipt
of $1,516,866 from USHIFU pursuant to the Focus transaction 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 percent (50%) of the
outstanding principal and accrued interest of loans previously made by the
Company to Focus. The cash received from the Focus transaction was partially
offset by the purchase of property, plant and equipment during the regular
course of business. For the six months ended December 31, 2008, cash used in
financing activities was $770,800, primarily consisting of principal payments on
capital lease obligations and short-term borrowings of $14,982,196, partially
offset by proceeds from short-term borrowings of $14,211,396.
We regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations,
available borrowings under bank lines of credit and possible future public or
private debt and/or equity offerings. At times, we evaluate possible
acquisitions of, or investments in, businesses that are complementary to ours,
which may require the use of cash. We believe that our cash, other liquid
assets, credit arrangements, and access to equity capital markets, taken
together, provide adequate resources to fund ongoing operating expenditures. In
the event that they do not, we may require additional funds in the future to
support our working capital requirements or for other purposes and may seek to
raise such additional funds through the sale of public or private equity and/or
debt financings, divestiture of current business lines as well as from other
sources. No assurance can be given that additional financing will be available
in the future or that if available, such financing will be obtainable on terms
favorable when required.
Revolving Credit Facilities
On December 29, 2006, the Company and its subsidiaries, Sonora and Hearing
Innovations, Inc. (collectively referred to as the "Borrowers") and Wells Fargo
Bank entered into a (i) Credit and Security Agreement and a (ii) Credit and
Security Agreement Export-Import Subfacility (collectively referred to as the
"Credit Agreements"). The aggregate credit limit under the Credit Agreements is
$8,000,000 consisting of a revolving facility in the amount of up to $8,000,000.
Up to $1,000,000 of the revolving facility is available under the Export-Import
Agreement as a subfacility for Export-Import working capital financing. All
credit facilities under the Credit Agreements mature on December 29, 2009.
Payment of amounts outstanding under the Credit Agreements may be accelerated
upon the occurrence of an Event of Default (as defined in the Credit
Agreements). All loans and advances under the Credit Agreements are secured by a
first priority security interest in all of the Borrowers' accounts receivable,
letter-of-credit rights, and all other business assets. The Borrowers have the
right to terminate or reduce the credit facility prior to December 29, 2008 by
paying a fee based on the aggregate credit limit (or reduction, as the case may
be) as follows: (i) during year one of the Credit Agreements, 3%; (ii) during
year two of the Credit Agreements, 2%; and (iii) during year three of the Credit
Agreements, 1%.
The Credit Agreements contain financial covenants requiring that the Borrowers
on a consolidated basis (a) not have a net loss of more than $185,000 for the
fiscal quarter ending December 31, 2008, (b) have net income of not less than
(i) $100,000 for the fiscal quarter ending March 31, 2009 and (ii) $130,000 for
the fiscal quarter ended June 30, 2009, and (c) not incur or contract to incur
Capital Expenditures (as defined in the Credit Agreements) of more than
$1,000,000 in the aggregate in any fiscal year or more than $1,000,000 in any
one transaction. At December 31, 2008, the Borrowers were in compliance with
these financial covenants.
The available amount under the Credit Agreements is the lesser of $8,000,000 or
the amount calculated under the Borrowing Base (as defined in the Credit
Agreements). The Borrowers must maintain a minimum outstanding amount of
$1,250,000 under the Credit Agreements at all times and pay a fee equal to the
interest rate set forth on any such shortfall. Interest on amounts borrowed
under the Credit Agreements is payable at Wells Fargo's prime rate of interest
plus 1% per annum floating, payable monthly in arrears. The default rate of
interest is 3% higher than the rate otherwise payable. A fee of 1/2% per annum
on the Unused Amount (as defined in the Credit Agreements) is payable monthly in
arrears. At December 31, 2008, the balance outstanding under the Credit
Agreement is $2,150,777. An additional $1,609,227 was available to be borrowed
at December 31, 2008.
On September 29, 2008, Labcaire entered into a debt purchase agreement with RBS
(the "RBS Agreement"). The RBS Agreement replaced the debt purchase agreement
with Lloyds TSB Commercial Finance which expired September 28, 2008. The amount
of this facility bears interest at the RBS base rate plus 2.0%. The RBS
Agreement expires December 31, 2010. The available amount under the RBS
Agreement is the lesser of $3,000,000 or the amount calculated under the
borrowing base provided for by the RBS Agreement. The agreement covers all
United Kingdom and European sales. At December 31, 2008, the balance outstanding
under this credit facility was $1,422,591 and Labcaire was not in violation of
the financial covenants contained in the RBS Agreement.
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
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk:
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are interest rates
on short-term investments and foreign exchange rates, which generate translation
gains and losses due to the English Pound to U.S. Dollar conversion of Labcaire,
Misonix, Ltd. and UKHIFU.
Foreign Exchange Rates:
Approximately 37.1% of the Company's revenues in the six month period ended
December 31, 2008 were received in English Pounds currency. To the extent that
. . .
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