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MSON > SEC Filings for MSON > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for MISONIX INC


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Management's Discussion and Analysis of Financial Condition and Results of Operations of Misonix and its subsidiaries, in which we refer to the Company as "Misonix", "we", "our" and "us" should be read in conjunction with the accompanying unaudited financial statements included in "Item 1. Financial Statements" of this Report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC") on September 24, 2013, for the fiscal year ended June 30, 2013 ("2013 Form 10-K"). Item 7 of the 2013 Form 10-K describes the application of our critical accounting policies, for which there have been no significant changes as of September 30, 2013.

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 the performance of contracts or in conducting other activities, product mix in sales, future economic, competitive and market conditions, and the outcome of legal proceedings as well as management business decisions.

Three months ended September 30, 2013 and 2012.

Net sales: Net sales decreased $1,494,941 to $3,075,584 for the three months ended September 30, 2013 from $4,570,525 for the three months ended September 30, 2012. The decrease in sales is related to lower BoneScalpel revenue of $752,573, lower SonaStar revenue of $436,968, lower SonicOne revenue of $31,923, lower Lysonix revenue of $102,157, lower service revenue of $106,558 and other lower revenue of $64,761. However, there were twelve units consigned in the United States during the three months ended September 30, 2013 compared to four units for the same period in fiscal 2013. This resulted in an increase in domestic disposables excluding Aesculap, Inc. accounts.

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

                                  Three months ended September 30,
                                 2013          2012         Variance
                BoneScalpel   $ 1,348,588   $ 2,101,161   $   (752,573)
                SonicOne          468,963       500,886        (31,923)
                SonaStar        1,135,710     1,572,678       (436,968)
                Other             122,323       395,800       (273,477)
                              $ 3,075,584   $ 4,570,525   $ (1,494,941)




                                    Three months ended September 30,
                                       2013                 2012
             United States       $       1,581,270    $       2,449,610
             Australia                      43,340              139,900
             Europe                        383,590              761,911
             Asia                          466,267              422,227
             Canada and Mexico              84,705              226,060
             South America                 275,621              297,926
             South Africa                   93,576              206,683
             Middle East                   147,215               66,208
                                 $       3,075,584    $       4,570,525

Gross profit: Gross profit decreased to 56.3% for the three months ended September 30, 2013 from 59.7% for the three months ended September 30, 2012. The decrease is related to unabsorbed factory costs due to lower sales volume, along with an unfavorable sales channel mix, as there was a shift to higher foreign sales.

Selling expenses: Selling expenses increased $370,266 to $1,828,830 for the three months ended September 30, 2013 from $1,458,564 for the three months ended September 30, 2012. Selling expenses increased due to higher personnel costs of $111,945, primarily from an increase in headcount for customer service and support (including severance), higher travel expenses of $50,621, higher commission expense of $111,881 due to increases in commissionable sales, higher advertising expenses of $41,045, higher depreciation expenses of $42,486 and other unfavorable expenses of $12,288.

General and administrative expenses: General and administrative expenses increased $178,983 to $1,221,211 for the three months ended September 30, 2013 from $1,042,332 for the three months ended September 30, 2012. The increase is primarily related to higher non-cash stock-based compensation expense of $44,999, higher legal expense of $86,748 and higher accounting expense of $27,025 and other unfavorable expenses of $20,211.

Research and development expenses: Research and development expenses increased $75,757 to $472,888 for the three months ended September 30, 2013 from $397,131 for the three months ended September 30, 2012. The increase is primarily due to higher product development costs of $50,709, higher temporary help expense of $16,076 and other unfavorable expenses of $8,972.

Other income (expense): Other income for the three months ended September 30, 2013 was $906,552 as compared to $211,417 for the three months ended September 30, 2012. The increase in other income of $695,135 is mainly due to an increase in royalty income of $690,115 from Covidien plc.

Income taxes: For the three months ended September 30, 2013, the Company recorded an effective tax rate of (.3%), compared to 3.7%, for the three months ended September 30, 2012. The Company estimates its financial statement effective tax rate for the full year, inconclusive of discontinued operations to be approximately 1%. The actual effective rate for continuing operations may vary materially based on several factors including the realization of earn-outs recorded in discontinued operations and the related intraperiod tax allocation, the ratio of permanent differences to pretax income (loss), and a change in the valuation allowances as well as other factors.

PuriCore Settlement:

As previously disclosed, the Company had entered into a Product License and Distribution Agreement, dated as of July 19, 2011 (the "Distribution Agreement"), with PuriCore, Inc. ("PuriCore"). Pursuant to the Distribution Agreement, the Company had the right to distribute PuriCore's Vashe solutions product in the United States on a private label basis under the name "Soma." Disputes between the Company and Puricore were finally resolved on October 11, 2013 when the parties executed a Settlement Agreement pursuant to which the Distribution Agreement was terminated with no additional payments required to be made by either Misonix or PuriCore (the "Settlement Agreement"). As a result of entering into the Settlement Agreement, the Company is no longer obligated to pay PuriCore the remaining minimum gross profit requirement in the amount of $439,508 in the second quarter of fiscal 2014. Previously, all appropriate amounts had been recorded by the Company for the fiscal year ending June 30, 2013.

Discontinued Operations

See Note 1 of the notes to consolidated financial statements included in Part I,
Item 1 of this Report for a description of the discontinued operations. The
following summarizes the results of the discontinued operations:

                                                        For the three months ended
                                                              September 30,
                                                          2013             2012
Revenues                                              $       4,975    $       4,975
Income from discontinued operations, before tax       $       4,975    $       6,318
Income tax expense                                                -                -
Net income from discontinued operations, net of tax   $       4,975    $       6,318

Liquidity and Capital Resources

We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations 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 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, and 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 favorable terms when required.

Working capital at September 30, 2013 and June 30, 2013 was $9,278,000 and $9,717,000, respectively. For the three months ended September 30, 2013, cash used in operations totaled $1,240,452, primarily related to operating losses of $888,977, lower accounts payable and other accrued expenses of $855,675, partially offset by depreciation and amortization of $231,271, stock-based compensation of $143,944 and lower prepaid expenses and other assets of $117,120. For the three months ended September 30, 2013, cash used in investing activities was $34,352, primarily due to applications for additional patents. For the three months ended September 30, 2013, cash provided by financing activities was $116,905 from the exercise of stock options. For the three months ended September 30, 2013, cash provided by discontinued operations was $4,975.

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 are material to the Company.

Other

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

New Accounting Pronouncements

There have been no recently issued pronouncements that have or are expected to have a material impact on our financial statements. See note 11 to our consolidated financial statements included herein.

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