Business News

Media Sciences Reports Third Quarter Fiscal Year 2010 Financial Results

Friday 14. May 2010 - Media Sciences International, Inc. (NASDAQ:MSII), the leading independent manufacturer of color toner cartridges and solid inks for use in color business printers, today announced its quarterly financial results for the three and nine months ended March 31, 2010. The Company will host an investor conference call Friday morning at 8:45 a.m. EDT to discuss its quarterly results.

Financial results for the quarter ended March 31, 2010 include:

— Net revenues of $5,175,000, representing a $9,000 or 0.2% decrease
year-over-year and a $411,000 or 7% decrease over the prior quarter.
— Gross margin at 36.3% of net revenues, versus 40.6% for the same
period last year.
— Net loss of $2,703,000 ($0.22 per share), versus a net loss of
$1,496,000 ($0.13 per share) in the year ago quarter.

Our third quarter results were impacted by and include the following significant cash and non-cash items:

— Valuation Allowance. A non-cash charge in the amount of $2,033,000
(about $0.17 per share) was established for deferred tax assets
previously recorded and related effects, as it was deemed more likely
than not that the remaining federal 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.
— Other Income. We recognized $214,000 of non-recurring income from the
purchase of a foreign liquidating entity. We had no similar items in
the comparative year ago periods.
— Foreign Currency Effects. Year-over-year appreciation of the pound
and euro combined with price increases implemented in January 2009,
helped benefit our top-line revenues and margins by about $170,000.
However, these effects were offset by $165,000 of exchange rate losses
recognized as a result of recent depreciation of the euro and pound
over the quarter from levels of the preceding quarter.
— Stock-Based Compensation. Our operating results include $126,000 of
non-cash stock-based compensation expense (about $0.01 per share)
recognized under authoritative guidance.

CEO’s Comments

Michael W. Levin, President and CEO of Media Sciences International, Inc., noted the following regarding the quarter, “We are disappointed that we did not meet our top-line expectations for the quarter. In addition to some historic seasonality we typically experience during January, our sales volumes were adversely impacted by European and U.S. weather in January and February, and delays in volume shipments of our newly commercialized industrial inks. During the quarter, we also continued to experience attrition of more price sensitive and less quality oriented U.S. imaging channel volume, which has generally been offset by the growth we continue to experience in our U.S. office product and technology distribution channels as well as continued growth of our European business.”

Levin continued, “During the quarter, significant effort and resources were applied to the recently announced transformative acquisition of Master Ink. During the call we will review the many significant strategic benefits the acquisition is expected to provide us, as well as the improved scalability, operating leverage and margin improvement we anticipate. Upon closing, we expect to quickly enjoy the benefits of the combination, including a reduction in the cost of our existing toner based product line.”

Revenues

For the three months ended March 31, 2010, as compared to the same period last year, net revenues declined by $9,000 or 0.2% to $5,175,000 from $5,184,000. Year-over-year for the three months, sales of color toner cartridges increased by about 11% and solid ink product sales decreased by about 10%.

For the nine months ended March 31, 2010, as compared to the same period last year, net revenues increased by $175,000 or 1% to $16,268,000 from $16,093,000. This increase in net revenues was primarily driven by the revenue impact of greater year-over-year sales of toner-based products and continued rapid growth of our European sales, partially offset by attrition in our sales volumes to the price sensitive and less quality oriented imaging channel. Year-over-year for the nine months, sales of color toner cartridges increased by about 11% and solid ink product sales decreased by about 8%.

Price increases we implemented in January 2009 helped to materially offset the effects of currency exchange rates for the first six months of our fiscal year versus the comparable year ago periods. However, the appreciation of the euro and pound during the comparative three months ended March 31, 2010, helped benefit our top line revenues and margins by about $170,000 for the three and nine months ended March 31, 2010.

We ended the quarter with an order backlog of $434,000, representing a $107,000 increase over the prior quarter ended December 31, 2009. For the comparative year ago period, we had $334,000 of order backlog at March 31, 2009.

Gross Profit

Consolidated gross profit for the three months ended March 31, 2010, compared to the same period last year, decreased by $224,000 or 11% to $1,879,000 from $2,103,000. For the three months ended March 31, 2010, our gross margins decreased by 430 basis points to 36.3% from 40.6% in the comparative year ago period. The year-over-year decrease in our gross profit and margins for the quarter was attributed to a number of factors including: sales mix, in particular a decreased level of solid ink sales volume, an increased volume of industrial ink sales, and an increase in our inventory obsolescence reserves. These effects were partially offset by a decreased level of customer rebates and lower tool and die depreciation.

Consolidated gross profit for the nine months ended March 31, 2010, compared to the same period last year, decreased by $353,000 or 5% to $6,520,000 from $6,874,000. For the nine months ended March 31, 2010, our gross margins decreased by 260 basis points to 40.1% from 42.7% in the comparative year ago period. The year-over-year decrease in our gross profit and margins for the nine months was primarily attributed to an increase in our warranty expense and sales mix, partially offset by lower year-over-year customer rebates and lower tool and die depreciation.

Our margins reflect a portfolio of products. Generally, our non-industrial solid ink products generate greater margins than do toner-based products or our industrial inks. While margins within the solid ink product line are very consistent, margins within the toner-based product line vary quite significantly. As a result, our 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 and the significance of industrial solid ink volumes. We expect to see changes in our margins, both favorable and unfavorable, as a result of continued changes in our sales mix.

Research and Development

Research and development spending for the three months ended March 31, 2010, compared to the same period last year, increased by $45,000 or 14% to $367,000 from $322,000. For the nine months ended March 31, 2010, compared to the same period last year, spending increased by $37,000 or 4% to $1,080,000 from $1,043,000. The year-to-date increase in our research and development costs is primarily attributed to additional travel cost associated with product manufacturing efforts in China with our contract vendors. Looking forward, we expect our research and development spending to represent a similar proportion of our net revenues.

Selling, General and Administrative

Selling, general and administrative expense, exclusive of depreciation and amortization, for the three months ended March 31, 2010, compared to the same period last year, increased by $72,000 or 3% to $2,227,000 from $2,155,000. For the nine months ended March 31, 2010, selling, general and administrative expense, exclusive of depreciation and amortization, as compared to the same period last year, decreased by $1,255,000 or 17% to $6,177,000 from $7,432,000.

The decrease in selling, general and administrative expense for the nine months ended March 31, 2010 over the year ago period was primarily driven by our cost reduction efforts, lower year-over-year costs of litigation, improvements in our currency translation loss experience, and the absence of business formation and start-up costs, offset by direct and indirect costs associated with the Master Ink acquisition including legal and extensive travel expenses.

In January 2009, we implemented a company-wide 10% salary, wage and bonus concession. In the fall of 2008, our directors also waived their cash compensation. Effective October 1, 2009, half of these temporary concessions were reinstated and are reflected in our operating results. For the three and nine months ended March 31, 2010, the savings associated with these temporary concessions were about $65,000 and $261,000, respectively. Effective April 19, 2010, all remaining temporary concessions were reinstated.

Net Loss

For the three and nine months ended March 31, 2010, we lost $2,703,000 ($0.22 per share basic and diluted) and $3,013,000 ($0.25 per share basic and diluted). This compares with a net loss of $1,496,000 ($0.13 per share basic and diluted) and $1,535,000 ($0.13 per share basic and diluted), respectively, for the three and nine months ended March 31, 2009.