Business News

Media Sciences Reports First Quarter Financial Results

Friday 14. November 2008 - Media Sciences International, Inc. (NASDAQ:MSII), the leading independent manufacturer of color toner cartridges and solid ink sticks for color business printers, today announced its quarterly financial results for the period ended September 30, 2008.

Financial results for the quarter ended September 30, 2008 include:
— Net revenues of $5,752,000, a $105,000 or 2% increase over the prior
quarter and a $678,000 or 11% decrease year-over-year.
— Gross margin at 46% of net revenues, unchanged year-over-year.
— Net income of $477,000 versus net loss of $187,000 year-over-year.
— EPS of $0.04 basic and fully diluted.

The Company’s financial position and results for the quarter were benefited by the following: (1) settlement of litigation and the receipt of non-recurring proceeds totaling $1,500,000; (2) completion of a $1,250,000 convertible debt financing to fund the capital expenditures and working capital requirements associated with the Company’s China based manufacturing operations; (3) implementation of a cost reduction plan; and (4) implementation of an inventory management initiative that helped the Company realize a $1,776,000 or 19% reduction in its inventories from the $9,216,000 reported for the prior quarter ended June 30, 2008.

CEO’s Comments

Michael W. Levin, President and CEO of Media Sciences International, Inc. commented on the Company’s performance during the quarter, “We are very pleased with the success realized during the quarter in significantly improving our financial position. We were successful in raising capital in a very challenging market, and recognized a significant improvement in liquidity as a result of our inventory reduction efforts. The cost reduction plan, put into place in late July, is generating the intended savings, which will become more apparent in our second quarter. We favorably settled long-standing litigation, removing both a financial and managerial distraction. And, we continued the development of our China-based manufacturing capability aimed at increasing our inventory flexibility and improving margins. Taken together, these efforts, along with deepening and maturing relationships with our key customers, should allow us to transition the company towards profitability, and weather the current uncertain economic climate.”

Mr. Levin continued, “During the first quarter our sales team made progress in Europe, and in the office products channel in the United States. Revenues in our first quarter were up sequentially despite an increase in backorders during the quarter and the normal slow summer months in Europe. Year-over-year revenues were adversely impacted by an increase in channel rebates, the continued and expected contraction of the INKlusive program, and the discontinuance a year ago of our direct to end user Cadapult revenues. While rebates are an ordinary and customary facet of vendor programs in the office products channel, we also implement rebate programs outside of the office channel to incent growth and loyalty. With these programs we strive to increase the pace and consistency of our revenue growth.

While our business model should thrive in recessionary periods, as we offer high quality products at a substantial savings to alternative products, that benefit may be mitigated by reduced consumption of color printer supplies due to reduced work forces, reversion to black only printing and a generally slowing pace of business. That said, we remain optimistic about our ability to grow revenues in Europe and the United States through the office products channel in this economic environment.”

Revenues

Net revenues for the three months ended September 30, 2008 compared to the same period last year, decreased by $678,000 or 11% from $6,431,000 to $5,752,000. For the three months ended September 30, 2008 as compared to the same period in 2007, sales of color toner cartridges and solid inks were essentially unchanged. The year-over-year decline in revenues is primarily attributed to an increased level of customer rebates and a decrease in revenues from the Company’s INKlusive program. Also contributing to the decrease was the discontinuance of sales directly to end users by the Company’s Cadapult subsidiary and a stronger dollar impacting the Company’s Pound Sterling denominated revenues.

Net revenues were also impacted by a $263,000 increase in back-orders over the quarter, driven by unforecasted and incremental demand for certain products. At September 30, 2008 backorders totaled $463,000.

Gross Margin

The consolidated gross profit for the three months ended September 30, 2008 compared to the same period last year, decreased by $324,000 or 11% to $2,621,000 from $2,945,000. For the three months ended September 30, 2008 and 2007, gross margins were stable at 46% of net revenues.

The year-over year consistency of margins reflects a similar product (ink to toner) mix in the comparative quarters, and the substitution of higher shipping costs in the quarter ended September 30, 2007 with increased customer rebates in the quarter ended September 30, 2008. The Company’s margins reflect a portfolio of products. Generally, solid ink products generate greater margins than do toner based products. While margins within the solid ink product line are very consistent, margins within the toner-based product line vary quite significantly. As a result, the Company’s margins can vary materially, not only as a function of the solid ink to toner sales mix, but of the sales mix within the toner-based product line itself. The Company expects to see changes in margins, both favorable and unfavorable, as a result of changes in sales mix.

Research and Development

Research and development spending for the three months ended September 30, 2008, compared with the same period last year, decreased by $124,000 or 25% to $373,000 from $497,000. As compared with the prior quarter ended June 30, 2008, the Company’s research and development spending decreased by $51,000, or 12% to $373,000 from $424,000.

The quarter-over-quarter and year-over-year decrease in the Company’s research and development costs was the result of cost reduction efforts. Looking forward, we expect our research and development spending to represent a similar to slightly declining proportion of the Company’s net revenues.

Selling, General and Administrative Expense

Selling, general and administrative expense, exclusive of depreciation and amortization, for the three months ended September 30, 2008 compared to the same period last year, increased by $61,000 or 2% to $2,753,000 from $2,692,000.

The increase in selling, general and administrative expense was primarily driven by greater year-over-year business formation and start-up costs associated with the Company’s China manufacturing operations and losses recognized from foreign currency transactions. These cost increases were partially offset by lower year-over-year costs of litigation and the results of the Company’s cost reduction efforts. During the quarter, formation and start-up costs associated with the Company’s manufacturing operations in China totaled $299,000 as compared with $155,000 for the year ago quarter ended September 30, 2007. For the quarter, selling, general and administrative expense includes $100,000 of foreign currency transaction losses as the result of the U.S. dollar strengthening against the euro and the British pound. In the year ago quarter ended September 30, 2007, the Company had no material foreign exchange gains or losses as it did not begin selling in euro and pound denominated transactions until late in its fiscal second quarter ending December 31, 2007. For the three months ended September 30, 2008, litigation costs totaled $184,000, down $57,000 or 24% from the $241,000 incurred in the comparative year ago period.

Selling, general and administrative expense, exclusive of depreciation and amortization, for the three months ended September 30, 2008 includes about $163,000 of non-cash stock-based compensation expense. This compares with about $82,000 of stock-based compensation expense in the comparative year ago quarter ended September 30, 2007.

Litigation Settlement

On August 6, 2008, an agreement was reached to settle litigation with the Company’s former insurance broker. Under the terms of the agreement, the Company received a one-time payment in the amount of $1,500,000. The settlement is recorded as a reduction to operating expense during the quarter ended September 30, 2008. The settlement received represents a recovery of legal fees incurred to pursue the action and a partial recovery of product warranty expense the Company incurred during its fiscal 2002 year.

Net Income

For the three months ended September 30, 2008, the Company generated net income of $477,000 ($0.04 per share basic and diluted). This compares with a net loss of $187,000 ($0.02 per share basic and diluted) generated in the prior year for the three months ended September 30, 2007. Excluding the benefit of the non-recurring litigation settlement recognized during the quarter, the Company would have generated a net loss of about $390,000 on a pro forma basis.

China Based Manufacturing

In early October, with the proceeds of the convertible debt financing, the Company began ordering the manufacturing and related support equipment for its China based manufacturing facility and recruiting additional personnel for its operations. The Company expects the equipment and personnel to be in place by the end of December, with production beginning just after the Chinese New Year, in February 2009.

In its second phase, the Company expects these operations will provide the potential to improve toner-based product margins by an additional 700 to 1,100 basis points. The Company anticipates achieving these economies, on a gradual and progressive basis, late in its Fiscal 2010 year.