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MSON > SEC Filings for MSON > Form 10-K on 24-Sep-2013All Recent SEC Filings

Show all filings for MISONIX INC

Form 10-K for MISONIX INC


24-Sep-2013

Annual Report


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 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 laboratory and forensic markets. See "Item 1. Business - Discontinued Operations - Laboratory and Forensic Safety Products Business."

Fiscal years ended June 30, 2013 and 2012:

Net sales:

Net sales decreased $850,774 to $14,827,226 in fiscal 2013 from $15,678,000 in fiscal 2012. The decrease is due to lower AutoSonic revenue of $1,383,862, lower Lysonix revenue of $994,335, lower SonaStar revenue of $573,498, along with lower revenue from service contracts of $53,877, partially offset by higher BoneScalpel revenue of $1,578,890 and higher SonicOne revenue of $560,761.

Set forth below are tables showing the Company's net sales by (i) product category and (ii) geographic region for the years ended June 30, 2013 and June 30, 2012:

                                      For the years ended June 30,
                                 2013             2012           Variance
               BoneScalpel   $  6,343,146     $  4,764,256     $  1,578,890
               SonicOne         1,857,396        1,296,635          560,761
               SonaStar         5,311,043        5,884,541         (573,498 )
               Other            1,315,641        3,732,568       (2,416,927 )
                             $ 14,827,226     $ 15,678,000     $   (850,774 )




                                      For the years ended June 30,
                                         2013                2012
                United States       $     7,649,041      $  9,297,719
                Australia                   358,509           238,926
                Europe                    3,062,307         2,495,582
                Asia                      1,619,255         1,430,708
                Canada and Mexico           516,088           499,162
                South America               735,060           775,309
                South Africa                489,756           425,084
                Middle East                 397,210           515,510
                                    $    14,827,226      $ 15,678,000

Net sales for the three months ended June 30, 2013 were $3,758,983, a decrease of $1,541,537. The sales decrease is mainly due to lower AutoSonic revenue of $659,747, lower SonaStar revenue of $338,795, lower Lysonix revenue of $243,515, lower BoneScalpel sales of $141,840, lower SonicOne revenue of $87,387 and lower service revenue of $57,106.

Set forth below are tables showing the Company's net sales by (i) product category and (ii) geographic region for the three months ended June 30, 2013 and June 30, 2012:

                                      Three months ended June 30,
                                 2013            2012           Variance
                BoneScalpel   $ 1,511,941     $ 1,653,781     $   (141,840 )
                SonicOne          430,187         517,574          (87,387 )
                SonaStar        1,398,168       1,736,963         (338,795 )
                Other             418,687       1,392,202         (973,515 )
                              $ 3,758,983     $ 5,300,520     $ (1,541,537 )




                                       Three months ended June 30,
                                          2013               2012
                 United States       $     1,996,969      $ 3,607,418
                 Australia                    37,135           73,856
                 Europe                      762,499          576,074
                 Asia                        525,776          377,720
                 Canada and Mexico            79,350          152,846
                 South America               156,680          320,684
                 South Africa                126,327          171,834
                 Middle East                  74,247           20,088
                                     $     3,758,983      $ 5,300,520

Gross profit:

Gross profit decreased to 49.9% in fiscal 2013 from 58.8% in fiscal 2012. The decrease is primarily related to the increase in minimum gross profit accrual related to the Soma product, along with increased inventory reserves for both Soma and Anika products due to their reaching their expiration dates. The inventory reserves had a 5.5% adverse effect on gross profit.

Gross profit decreased to 34.2% for the three months ended June 30, 2013 from 57.7% for the three months June 30, 2012. The decrease in gross profit is primarily due to the increase in the gross profit accrual related to the Soma product along with increased inventory reserves. These items had a 24% adverse impact on gross profit.

Selling expenses:

Selling expenses increased $1,744,373 to $6,776,204 (46% of sales) in fiscal 2013 from $5,031,831 (32% of sales) in fiscal 2012. The increase in selling expenses is related to higher personnel expenses of $942,983, higher commissions of $404,369, higher travel expenses of $154,102, higher advertising expenses of $82,514, higher training, depreciation, freight and consulting expenses of $155,130 and other expenses of $5,275.

Selling expenses for the three months ended June 30, 2013 increased $595,585 to $2,007,337 (53% of sales) from $1,411,752 (27% of sales). The increase in selling expenses is due to higher personnel costs of $235,620, higher commissions of $248,291, higher travel, advertising and depreciation expense of $95,391 and other unfavorable expenses of $6,283.

General and administrative expenses:

General and administrative expenses increased $69,935 to $4,446,489 in fiscal 2013 from $4,376,554. The increase is due to higher stockholder relation expenses of $62,772 and other unfavorable expenses of $7,163. For the three months ended June 30, 2013, general and administrative expenses increased $53,489 to $1,155,818 from $1,102,320. The increase in expense is mainly due to higher non-cash compensation expenses of $45,445 and other unfavorable expenses of $8,053.

Research and development expenses:

Research and development expenses increased $203,833 to $1,496,058 in fiscal 2013 from $1,292,225 in fiscal 2012. The increase in expenses is due to higher salary expense of $125,835, higher product development expenses of $69,715, and other unfavorable expenses of $8,283. For the three months ended June 30, 2013, research and development expenses increased $7,528 to $352,769 from $345,241 from the three months ended June 30, 2012.

Other income:

Other income increased $1,710,640 in fiscal 2013 to $2,396,829 from $686,186 in fiscal 2012. The increase is due to higher royalty revenue of $1,893,142, partially offset by higher royalty expenses of $109,361. The increase in royalty expense is due to a net fee recovery of $182,000 of the BoneScalpel royalty expense which we were not obligated to pay in the second quarter of fiscal 2012. For the three months ended June 30, 2012, other income increased $546,646 due to higher royalty income of $584,442.

Income taxes: In fiscal 2013 the income tax benefit for continuing operations had an effective tax rate of 3%. Overall, when considering discontinued operations, the Company had minimal income tax expense. In prior years the Company established a valuation allowance against 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 that its deferred tax assets may not be fully realized.

Discontinued operations:

The following represents the results of the Laboratory and Forensic Safety Products business along with legal and other expenses associated with Labcaire and Misonix HIFU Technologies Limited which are included in discontinued operations:

                                                              For the years ended
                                                                   June 30,
                                                             2013           2012
  Revenues                                                 $  19,901     $ 1,552,153
  Income/(loss) from discontinued operations, before tax   $   5,449     $  (535,223 )
  Gain on sale of discontinued operations                    250,000       1,705,414
  Income tax expense                                         (79,667 )      (195,101 )
  Net income from discontinued operations net of tax       $ 175,782     $   975,090

Refer to Note 1 of the Notes to Consolidated Financial Statements included in Item 8 for further discussion of the nature of discontinued operations.

Liquidity and Capital Resources:

Working capital at June 30, 2013 and June 30, 2012 was $9,717,000 and $11,734,000, respectively. For the fiscal year ended June 30, 2013, cash used in operations totaled $396,045, due to the net loss from continuing operations of $2,846,747 partially offset by higher accounts payable and accrued expenses of $895,337, higher depreciation, amortization and other non-cash items of $785,437, higher stock-based compensation of $488,472, lower accounts receivable of $124,541, lower inventory of $92,926 and higher allowance for bad debt of $58,902. For the fiscal year 2013, cash used in investing activities totaled $615,961, primarily consisting of the purchase of property, plant and equipment and increased demonstration equipment for the BoneScalpel during the regular course of business along with the purchase of assets from Aesculap. For the fiscal year 2013, cash provided by financing activities was $369,646. Cash provided by discontinued operations was $175,782.

As of June 30, 2013, the Company had a cash balance of $5,806,437 and believes it has sufficient cash to finance operations for at least the next 12 months.

The Company maintains cash balances at various financial institutions. At June 30, 2013, these financial institutions held cash that was approximately $5,569,117 in excess of amounts insured by the Federal Deposit Insurance Corporation.

Commitments



The Company has commitments under operating leases that will be funded from
operating sources. At June 30, 2013, the Company's contractual cash obligations
and commitments relating to operating leases are as follows:



                   Less than                                      After
Commitment           1 year       1-3 years       4-5 years      5 years        Total
Operating leases      326,572        392,846           7,540            -       726,958
                   $  326,572     $  392,846     $     7,540            -     $ 726,958

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.

Critical Accounting Policies:

General: 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, stock based compensation 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. 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.

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. Accordingly, the Company recognizes revenue on shipments to distributors in the same manner as with other customers. Service contract income is recognized when earned.

Goodwill: Goodwill is not amortized. We review goodwill 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 2013 and 2012 in the respective fourth quarter. No impairment of goodwill was deemed to exist.

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 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. Significant judgment is required in determining the realizability of deferred tax assets including estimates of future sufficient taxable income to support the recovery of tax assets.

Financial accounting standards establish guidance for the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefits 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 positions should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Financial accounting standards also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosures requirements.

Stock-Based Compensation: The fair value of the Company's outstanding 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 7 of Notes to Consolidated Financial Statements for additional information regarding stock-based compensation.

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