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MSON > SEC Filings for MSON > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for MISONIX INC

Form 10-Q for MISONIX INC


8-May-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 March 31, 2014.

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.

Nine months ended March 31, 2014 and 2013.

Net sales: Net sales increased $414,045 to $11,482,288 for the nine months ended March 31, 2014 from $11,068,243 for the nine months ended March 31, 2013. The increase in sales is due to higher BoneScalpel sales of $365,107, higher SonicOne revenue of $306,031 and higher Lysonix revenue of $53,707, partially offset by lower SonaStar revenue of $10,310, lower service revenue of $287,579 and lower other revenue of $12,911. There were 44 BoneScalpel units consigned in the United States during the nine months ended March 31, 2014 as compared to 10 consigned BoneScalpel units 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 nine months ended March 31, 2014 and 2013:

                                      Nine months ended March 31,
                                  2014             2013          Variance
                BoneScalpel   $  5,196,312     $  4,831,205     $  365,107
                SonicOne         1,733,240        1,427,209        306,031
                SonaStar         3,902,565        3,912,875        (10,310 )
                Other              650,171          896,954       (246,783 )
                              $ 11,482,288     $ 11,068,243     $  414,045

                                       Nine months ended March 31,
                                          2014               2013
                 United States       $     5,667,183     $  5,652,072
                 Australia                   116,158          321,374
                 Europe                    1,587,486        2,299,808
                 Asia                      2,025,492        1,093,479
                 Canada and Mexico           616,172          436,738
                 South America               810,977          578,380
                 South Africa                322,097          363,429
                 Middle East                 336,723          322,963
                                     $    11,482,288     $ 11,068,243

Gross profit: Gross profit increased to 65.1% for the nine months ended March 31, 2014 from 55.2 % for the nine months ended March 31, 2013. The increase is primarily related to the reversal of $439,508 Soma related costs previously accrued in fiscal 2013 in accordance with the PuriCore Settlement Agreement (see Note 8 "Commitments and Contingencies"), in addition to $450,000 of Soma related costs booked in fiscal 2013.

Selling expenses: Selling expenses increased $657,457 to $5,426,324 for the nine months ended March 31, 2014 from $4,768,867. The increase is due to higher sales commission expense of $562,732 and higher depreciation expense of $130,699, partially offset by favorable personnel and travel expenses of $32,850 and other favorable expenses of $3,214.

General and administrative expenses:General and administrative expenses increased $227,617 to $3,518,288 for the nine months ended March 31, 2014 from $3,290,671 for the nine months ended March 31, 2013. The increase is due to the higher non-cash compensation expenses from the issuance of stock options of $152,945, higher accounting expenses of $38,509, higher consulting expenses of $24,056 and other higher expenses of $12,107.

Research and development expenses:Research and development expenses increased $171,048 to $1,314,373 for the nine months ended March 31, 2014 from $1,143,289 for the nine months ended March 31, 2013. The increase in expenses is related to higher product development material expenses of $73,451, higher personnel expenses of $58,430, higher amortization and legal expenses of $37,499 and other higher expenses of $1,668.

Other income (expense): Other income for the nine months ended March 31, 2014 was $2,536,258 as compared to $1,713,415 for the nine months ended March 31, 2013. The increase in other income of $822,843 is primarily related to an increase in royalty income from Covidien plc. of $782,671.

Income taxes: For the nine months ended March 31, 2014, the Company recorded an effective tax rate of (6.0%) versus 4% for the nine months ended March 31, 2013. 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 March 31, 2014 and 2013

Net sales: Net sales increased $1,261,158 to $4,264,645 for the three months ended March 31, 2014 from $3,023,487 for the three months ended March 31, 2013. The increase in sales is due to higher BoneScalpel sales of $613,148, higher SonicOne sales of $330,140 and higher SonaStar sales of $291,625 and higher other revenue of $26,245. There were 20 BoneScalpel units consigned in the United States during the three month period ended March 31, 2014 compared to 5 BoneScalpel units consigned 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 March 31, 2014 and 2013:

                                     Three months ended March 31,
                                 2014            2013          Variance
                BoneScalpel   $ 1,739,432     $ 1,126,284     $   613,148
                SonicOne          728,214         398,074         330,140
                SonaStar        1,578,404       1,286,779         291,625
                Other             238,595         212,350          26,245
                              $ 4,284,645     $ 3,023,487     $ 1,261,158




                                      Three months ended March 31,
                                         2014                2013
                United States       $     2,258,370       $ 1,566,912
                Australia                    40,805            39,700
                Europe                      834,195           579,509
                Asia                        688,432           309,696
                Canada and Mexico           183,827           180,756
                South America               100,373           171,992
                South Africa                156,403            51,162
                Middle East                  22,240           123,760
                                    $     4,284,645       $ 3,023,487

Gross profit: Gross profit increased 66.6% for the three months ended March 31, 2014 from 51% for the three months ended March 31, 2013, an increase of 15.6%. The increase is primarily due to an increase in disposable sales which carry higher margins along with the termination of the Puricore, Inc. contract which eliminated the gross profit margin reimbursement of $189,000 (See Note 8 "Commitments and Contingencies").

Selling expenses: Selling expenses increased $149,077 to $1,913,795 for the three months ended March 31, 2014 from $1,764,718 for the three months ended March 31, 2013. The increase is related to higher sales commission expenses of $318,763 and higher consulting expenses of $41,903, partially offset by lower travel expenses of $135,054, lower personnel related expenses of $76,299 and other favorable expenses of $236.

General and administrative expenses:General and administrative expenses increased $20,434 to $1,176,047 for the three months ended March 31, 2014 from $1,155,613 for the three months ended March 31, 2013. The increase is related to higher bank fees of $22,000 partially offset by other favorable expenses of $1,566.

Research and development expenses:Research and development expenses increased $26,565 to $406,466 for the three months ended March 31, 2014 from $379,901 for the three months ended March 31, 2013. The increase in these expenses is due to higher personnel expenses of $23,157 and other unfavorable expenses of $3,408.

Other income (expense): Other income for the three months ended March 31, 2014 was $825,599 as compared to $999,611 for the three months ended March 31, 2013. The decrease in other income of $174,012 is due to lower royalty income of $194,451 from Covidien plc.

Income taxes: For the three months ended March 31, 2014, the Company recorded an effective tax rate of 5%, compared to 8% for the three months ended March 31, 2013. 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 nine months ended
                                                      March 31,                          March 31,
                                                2014               2013            2014               2013
Revenues                                   $        4,976       $    4,975     $      14,926       $   14,925
Income from discontinued operations,
before tax                                 $        4,976       $    4,975     $      14,926       $   14,768
Gain on sale of discontinued operations           250,000          250,000           250,000          250,000
Income tax expense                                      -          (82,968 )               -          (82,968 )
Net income from discontinued operations,
net of tax                                 $      254,976       $  172,007     $     264,926       $  181,800

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 March 31, 2014 and June 30, 2013 was $10,564,000 and $9,717,000, respectively. For the nine months ended March 31, 2014, cash used in operations totaled $640,074, primarily related to higher inventories of $733,723 partially offset by lower prepaid expenses and other assets of $95,050. For the nine months ended March 31, 2014, cash used in investing activities was $146,344, primarily due to the acquisition of fixed assets and applications for additional patents. For the nine months ended March 31, 2014, cash provided by financing activities was $363,255 from the exercise of stock options. For the nine months ended March 31, 2014, cash provided by discontinued operations was $264,926.

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

See note 11 to our consolidated financial statements included herein.

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