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MSON > SEC Filings for MSON > Form 10-Q on 5-Feb-2014All Recent SEC Filings

Show all filings for MISONIX INC

Form 10-Q for MISONIX INC


5-Feb-2014

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 December 31, 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.

Six months ended December 31, 2013 and 2012.

Net sales: Net sales decreased $847,113 to $7,197,643 for the six months ended December 31, 2013 from $8,044,756. The decrease in sales is due to lower BoneScalpel revenue of $248,041, lower SonaStar revenue of $301,935, lower service revenue of $172,451, lower SonicOne revenue of $24,109, lower AutoSonix revenue of $45,059, and other lower revenue of $55,518. However, there were 24 BoneScalpel units consigned in the United States during the six months ended December 31, 2013 compared to 5 BoneScalpel units for the same period in fiscal 2013. This resulted in an increase in domestic disposables.

Set forth below are tables showing the Company's net sales by (i) product category and (ii) geographic region for the six months ended December 31, 2013 and 2012:

                                    Six months ended December 31,
                                  2013          2012        Variance
                 BoneScalpel   $ 3,456,880   $ 3,704,921   $ (248,041)
                 SonicOne        1,005,026     1,029,135      (24,109)
                 SonaStar        2,324,161     2,626,096     (301,935)
                 Other             411,576       684,604     (273,028)
                               $ 7,197,643   $ 8,044,756   $ (847,113)

                                     Six months ended December 31,
                                        2013                2012
              United States       $      3,408,813    $      4,085,160
              Australia                     75,353             281,674
              Europe                       753,291           1,720,299
              Asia                       1,337,060             783,783
              Canada and Mexico            432,345             255,982
              South America                710,604             406,388
              South Africa                 165,694             312,267
              Middle East                  314,483             199,203
                                  $      7,197,643    $      8,044,756

Gross profit: Gross profit increased to 64.2% for the six months ended December 31, 2013 from 56.9% for the six months ended December 31, 2012. The increase is primarily related to the reversal of $439,508 of accrued costs related to the SOMA product in accordance with the Puricore Settlement Agreement (Note 8). The reversal of these costs increased gross profits by 6.12 percentage points.

Selling expenses: Selling expenses increased $508,380 to $3,512,529 for the six months ended December 31, 2013 from $3,004,149 for the six months end December 31, 2012. The increase in expenses is due to higher commission expenses of $243,970, higher depreciation expenses of $88,796, higher personnel expenses of $114,384, higher travel expenses of $51,188 and other higher expenses of $10,042.

General and administrative expenses: General and administrative expenses increased $207,183 to $2,342,241 for the six months ended December 31, 2013 from $2,135,058 for the six months ended December 31, 2012. The increase in general and administrative expenses is due to higher non-cash compensation expenses from the issuance of stock options of $104,271, higher legal expenses of $68,752 and higher accounting expenses of $40,053, partially offset by other lower expenses of $5,893.

Research and development expenses: Research and development expenses increased $144,519 to $907,907 for the six months ended December 31, 2013 from $763,388 for the six months ended December 31, 2012. The increase in expenses is related to higher product development material expenses of $58,494, higher personnel expenses of $45,524, higher amortization and telephone expense of $31,553 and other higher expenses of $9,148.

Other income (expense): Other income for the six months ended December 31, 2013 was $1,710,659 as compared to $713,804 for the six months ended December 31, 2012. The increase in other income of $996,855 is mainly due to an increase in royalty income of $977,122 from Covidien plc.

Income taxes: For the six months ended December 31, 2013, the Company recorded an effective tax rate of (1.0%) and (1.0%) for the six months ended December 31, 2012. The Company estimates its financial statement effective tax rate for the full year, inclusive 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.

Three months ended December 31, 2013 and 2012

Net sales: Net sales increased $647,828 to $4,122,059 for the three months ended December 31, 2013 from $3,474,231 for the three months ended December 31, 2012. The increase in sales is due to higher BoneScalpel sales of $504,532, higher SonaStar sales of $135,033 and higher SonicOne sales of $7,814. There were 12 BoneScalpel units consigned in the United Stated during the three month period ended December 31, 2013 compared to one 1 BoneScalpel unit for the same period in fiscal 2013.

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 December 31,
                                  2013          2012       Variance
                  BoneScalpel $  2,108,292   $ 1,603,760   $ 504,532
                  SonicOne         536,063       528,249       7,814
                  SonaStar       1,188,450     1,053,417     135,033
                  Other            289,254       288,805         449
                              $  4,122,059   $ 3,474,231   $ 647,828



                                    Three months ended December 31,
                                       2013                 2012
             United States       $       1,827,543    $       1,635,550
             Australia                      32,013              141,774
             Europe                        369,701              958,388
             Asia                          870,793              361,556
             Canada and Mexico             347,640               29,922
             South America                 434,983              108,462
             South Africa                   72,118              105,584
             Middle East                   167,268              132,995
                                 $       4,122,059    $       3,474,231

Gross profit: Gross profit increased 70.2% for the three months ended December 31, 2013 from 53.2% for the three months ended December 31, 2012. The increase is primarily related to the reversal of $439,508 of accrued costs related to the SOMA product in accordance with the Puricore Settlement Agreement (Note 8) and a favorable mix of high and low margin deliveries mostly related to disposables. The reversal of these costs increased gross profit by 10.7 percentage points.

Selling expenses: Selling expenses increased $138,114 to $1,683,699 for the three months ended December 31, 2013 from $1,545,585 for the three months ended December 31, 2012. Selling expenses increased due to higher commission expenses of $132,088 due to increases in commissionable sales and other unfavorable expenses of $6,026.

General and administrative expenses: General and administrative expenses increased $28,200 to $1,120,926 for the three months ended December 31, 2013 from $1,092,726 for the three months ended December 31, 2012. The increase is related to higher non-cash compensation costs due to the issuance of stock options of $59,272 and other unfavorable expenses of $2,503, partially offset by lower legal expenses of $17,996 and lower employment fees of $15,579.

Research and development expenses: Research and development expenses increased $68,762 to $435,019 for the three months ended December 31, 2013 from $366,257 for the three months ended December 31, 2012. The increase in these expenses is related to higher temporary help expenses of $29,250, higher consulting expenses of $17,857, higher telephone expenses of $16,006 and other unfavorable expenses of $5,649.

Other income (expense): Other income for the three months ended December 31, 2013 was $804,107 as compared to $502,387 for the three months ended December 31, 2012. The increase in other income of $301,720 is mainly due to an increase in royalty income of $287,007 from Covidien plc.

Income taxes: For the three months ended December 31, 2013, the Company recorded an effective tax rate of .6%, compared to (.4%) for the three months ended December 31, 2012. The Company estimates its financial statement effective tax rate for the full year, inclusive 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"). A reversal of the previously accrued and unpaid contractual minimum gross profit requirement in the amount of $439,508 was made through cost of goods sold in the quarter ended December 31, 2013 as a result of the Settlement Agreement.

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        For the six months ended
                                            December 31,                     December 31,
                                       2013             2012            2013             2012
Revenues                           $       4,975    $       4,975   $       9,950    $       9,950
Income from discontinued
operations, before tax             $       4,975    $       3,475   $       9,950    $       9,793
Income tax expense                             -                -               -                -
Net income from discontinued
operations, net of tax             $       4,975    $       3,475   $       9,950    $       9,793

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 December 31, 2013 and June 30, 2013 was $9,867,000 and $9,717,000, respectively. For the six months ended December 31, 2013, cash used in operations totaled $548,463, primarily related to lower accounts payable and other accrued expenses of $1,262,343, partially offset by depreciation and amortization of $459,449, and lower prepaid expenses and other assets of $226,765. For the six months ended December 31, 2013, cash used in investing activities was $364,953, primarily due to the acquisition of fixed assets and applications for additional patents. For the six months ended December 31, 2013, cash provided by financing activities was $130,555 from the exercise of stock options. For the six months ended December 31, 2013, cash provided by discontinued operations was $9,950.

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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