Business News

Media Sciences Reports Third Quarter Financial Results

Friday 15. May 2009 - Media Sciences International, Inc. (NASDAQ:MSII), a leading independent manufacturer of color toner cartridges and solid inks for use in color business printers, today announced its quarterly financial results for the period ended March 31, 2009.

Financial results for the quarter ended March 31, 2009 include:

— Net revenues of $5,184,000, representing a $1,290,000 or 20% decrease
year-over-year and a $27,000 or 0.5% increase over the prior quarter.
— Gross margin at 40.6% of net revenues, versus 47.4% for the same
period last year.
— Net loss of $1,496,000 ($0.13 per share), including special charges,
versus net loss of $488,000 ($0.04 per share) year-over-year.

— Positive cash flow generated from operations of $575,000.



The Company’s financial results for the quarter include the following non-cash special charges:

1. Impairment charges totaling $1,121,000 (about $740,000 after tax or
about $0.06 per share) were recognized related to the Company’s
decision to close its not yet operational manufacturing facility in
China. These impairment charges are in addition to the costs the
Company incurred during the quarter as options for the facility were
evaluated.

2. A valuation allowance in the amount of $323,000 (about $0.03 per share)
was established for deferred tax assets previously recorded, as it was
deemed more likely than not that certain State net operating loss carry
forwards and other future deductible temporary differences included in
the Company’s deferred tax assets will not be realized. This valuation
allowance adjustment has no impact on the Company’s cash flows or
future prospects, nor does it alter the Company’s ability to utilize
these tax attributes, which is primarily dependent upon future levels
of taxable income.




Results for the quarter continue to reflect the broader economic climate and sales activity consistent with an economic recession as well as continued turbulence in the currency markets, in particular continued strengthening of the U.S. dollar against the European currencies in which the Company sells to its European customers.

CEO’s Comments

Michael W. Levin, President and CEO of Media Sciences International, Inc., noted the following regarding the quarter, “It appears that the impact of the global recession most significantly impacted Media Sciences during the November through January timeframe. While clearly we are not experiencing the growth we strive to achieve, we are also not seeing a continuation of the step down in revenues we experienced in November.”

Levin continued, “Despite the stabilization of revenues, it is incumbent upon us to be fiscally conservative as the economic environment continues to be uncertain. Consequently, we finalized a decision to close our China facility. While disappointing, the closing of China, along with significant other cost reduction and liquidity efforts, markedly decreases our operating expenses and our working capital requirements.”

“With these cost reduction efforts behind us, and expansion of our partner network and imminent new product introductions, we are well positioned to return to profitability and revenue growth.”

Revenues

For the three months ended March 31, 2009, as compared to the same period last year, net revenues decreased by $1,290,000 or 20% from $6,474,000 to $5,184,000. Adjusting for the effect of currencies, the Company’s net revenues would have been about $5,534,000 or down about $940,000 or about 15% year over year. On a sequential quarterly basis, the Company realized only a nominal increase in revenues. However, as a result of the Company’s European price increase, which became effective January 1, 2009, certain European customers increased their purchases in December to take advantage of lower prices. This put downward pressure on January and February European revenues. Further, in February, U.S. revenues increased from their November through January levels and stabilized. Considering the intra-quarter trends and the impact of the European price increase on buying in December, it appears that the Company’s revenues have rebounded from the November levels and stabilized.

Net revenues for the nine months ended March 31, 2009, as compared with the same period last year, decreased by $2,497,000 or 13% from $18,590,000 to $16,093,000. This decline in net revenues was primarily driven by an increased level of customer rebates, the revenue impact resulting from the significant devaluation of the British Pound and the Euro, and a decrease in revenues from the INKlusive program. Also contributing to the decline was the discontinuance of sales directly to end users by the Company’s Cadapult subsidiary in the comparative year ago period ended September 30, 2007. Year over year, for the nine months, sales of color toner cartridges decreased by about 5% and solid ink product sales decreased by about 8%.

The Company ended the quarter with an order backlog of $334,000, representing a $10,000 decrease over the prior quarter ended December 31, 2008. Since the Company does not recognize revenues until orders are shipped, revenues associated with these unfilled orders were not recognized in the quarter ended March 31, 2009.

Gross Margin

Consolidated gross profit for the three months ended March 31, 2009, compared to the same period last year, decreased by $962,000 or 31% to $2,103,000 from $3,065,000. For the three months ended March 31, 2009, the Company’s gross margins declined by about 680 basis points to 40.6% from 47.4% in the comparative year ago period. Consolidated gross profit for the nine months ended March 31, 2009, compared to the same period last year, decreased by $1,739,000 or 20% to $6,874,000 from $8,613,000. For the nine months ended March 31, 2009, the Company’s gross margins declined by about 360 basis points to 42.7% from 46.3% in the comparative year ago period.

The decline in gross margins for the quarter was primarily attributed to a year over year increase in the Company’s warranty expense related to a limited segment of our products. A latent issue was determined to have been caused by a change in manufacturing processes by one of the Company’s vendors. While the issue is now resolved, management expects a higher than normal rate of warranty claims in the near future, and has increased the Company’s warranty reserve commensurately. Gross margins were also reduced by greater year-over-year customer rebates, the revenue and margin impact resulting from the significant devaluation of the British Pound and the Euro, and a greater level of customer freight costs borne by the Company. These increases were partially offset by some year-over-year reductions in product costs, particularly inbound freight costs.

Research and Development

Research and development spending for the three months ended March 31, 2009, compared to the same period last year, decreased by $145,000 or 31% to $322,000 from $467,000. For the nine months ended March 31, 2009, as compared to the same period last year, spending decreased by $390,000 or 27% to $1,043,000 from $1,433,000.

The decrease in the Company’s research and development costs was the result of cost reduction efforts. Looking forward, management expects the Company’s research and development spending to represent a similar to slightly declining proportion of net revenues.

Selling, General and Administrative Expense

Selling, general and administrative expense, exclusive of depreciation and amortization, for the three months ended March 31, 2009, compared to the same period last year, decreased by $1,143,000 or 35% to $2,155,000 from $3,298,000. For the nine months ended March 31, 2009, selling, general and administrative expense, exclusive of depreciation and amortization, decreased by $1,435,000 or 16% to $7,432,000 from $8,867,000 for the same period last year.

The decrease in selling, general and administrative expense was primarily driven by lower year over year costs of litigation and the results of the Company’s cost reduction efforts partially offset by greater year over year business formation and start-up costs associated with the China manufacturing operations and foreign currency translation losses.

In response to the challenges of the current economic environment, the Company made significant progress in reducing its costs, and working capital requirements. Some of the measures implemented during the quarter are as follows:

— Closure of the Company’s China facility is expected to help the
Company realize about $900,000 in additional annual run-rate savings.
The Company expects to realize the full financial benefits of these
savings late in its fiscal fourth quarter ended June 30, 2009. In
response to the closing of China, Media Sciences’ management team is
pursuing alternative means of achieving the tactical and strategic
objectives that initially gave rise to the China initiative.
— In January, the Company reduced its personnel by another 7%, in
addition to the approximate 20% staff reduction implemented in July.
These headcount reductions are expected to provide an additional
annual run-rate improvement in pretax operating results of about
$650,000 and an improvement in operating cash flows of about $620,000.
— A company-wide 10% salary, wage and bonus concession was implemented
until certain profitability measures are achieved over a contiguous
six-month period. This temporary measure was implemented in late
January 2009 and is expected to generate about $450,000 in annualized
run-rate savings.
— The Company’s Directors waived their cash compensation until they
determine the present economic uncertainties facing the company have
passed. This temporary action is expected to generate about $123,000
in annualized run-rate savings and benefited the current quarter by
about $31,000.

— Inventories were reduced by a further $633,000 for a year-to-date
total reduction of $2,653,000, representing a 17% reduction in days in
inventory.



Selling, general and administrative expense, exclusive of depreciation and amortization, for the three and nine months ended March 31, 2009 includes about $187,000 and $555,000 of non-cash stock-based compensation expense, respectively. This compares with about $98,000 and $293,000 of stock-based compensation expense in the comparative year ago three and nine months ended March 31, 2008.

Net Loss

For the three and nine months ended March 31, 2009, the Company lost $1,496,000 ($0.13 per share basic and diluted) and $1,535,000 ($0.13 per share basic and diluted). This compares with a net loss of $488,000 ($0.04 per share basic and diluted) and $1,160,000 ($0.10 per share basic and diluted), respectively, generated in the prior year for the three and nine months ended March 31, 2008. Excluding the benefit of the non-recurring litigation settlement, the restructuring and impairment charges associated with the closure of the China facility, and the non-cash charge associated with the establishment of a deferred tax valuation allowance, the Company would have generated a net loss for the nine months ended March 31, 2009 of about $1,462,000 on a pro forma basis.