In May 2001, the Company engaged a consultant to provide services to the Company for an initial period of one year, with an effective date of June 1, 2001 (the “Agreement”). The initial term is subject to cancellation by the Company at any time upon 30 days written notice. As compensation for the services provided, the Company will pay a monthly fee of $2,500 in cash and 4,167 shares of Company common stock. The shares issued under the terms of the Agreement are subject to certain restrictions and are not registered. The Company recognizes as an expense the fair market value of the issued common stock in connection with this arrangement.
In addition to the monthly fee, the Agreement provides for the issuance of warrants for the purchase of Company common stock as follows: (i) 50,000 shares at an exercise price of $0.75 per share upon execution of the agreement and exercisable upon the effectiveness of a registration statement under the Securities Act of 1933 (the “Securities Act”) through the first anniversary date of the Agreement; (ii) 50,000 shares at an exercise price of $1.25 per share to be issued upon the six month anniversary of the Agreement (unless there is a prior cancellation of the Agreement) and exercisable upon the later of the effectiveness of a registration statement under the Securities Act or the third anniversary of the Agreement, and (iii), 100,000 shares at an exercise price of $2.00 per share to be issued on the one-year anniversary of the Agreement (unless there is a prior cancellation of the Agreement) and exercisable upon the later of the effectiveness of a registration statement under the Securities Act or the fourth anniversary of the Agreement.
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
1. RESULTS OF OPERATIONS
Total Company revenues for the quarter ended June 30, 2001 were $3,436,749, as compared to revenues of $3,951,979 in the corresponding period last year, representing a decrease of $515,230, or 13%. For the six month period ended June 30, 2001, revenues increased $201,475, or 3%, to $7,886,373 from $7,684,898 for the first six months of 2000. The decrease in revenue for the three months ended June 30, 2001 is due to a decrease in the sale of machines of approximately $569,000. The increase in revenue for the six month period ended June 30, 2001 is due to an increase in the sale of machines of approximately $494,000, offset by a decrease in the sales of spare parts of approximately $293,000.
Cost of goods sold for the three months ended June 30, 2001 was $1,964,361, or 57% of revenue, compared to $2,205,625, or 56% of revenue, for the same period last year. For the six month period ended June 30, 2001, cost of goods sold was $4,186,899, or 53% of revenue, compared to $4,186,675 or 54% of revenue, for the comparable period in 2000. The decrease in cost of goods sold in absolute dollars for the three months ended June 30, 2001, reflects the decrease in sales generated by the Company.
The Company’s major product lines have different profit margins, as well as multiple profit margins within each product line. In the course of the periods compared, there may be significant changes in the cost of revenues as a percentage of revenue depending on the mix of product sold.
Total operating expenses for the three months ended June 30, 2001 were $1,630,931 or 48% of revenue, as compared to $1,642,635 or 42% of revenue for the same period last year, which is a decrease of $11,704 or 1%. Operating expenses for the six months ended June 30, 2001 were $3,278,437 or 42% of revenue, as compared to $3,253,158 or 42% of revenue, for the same period last year, an increase of $25,279 or 1%.
Research and development expenses for the three months ended June 30, 2001 were $195,646 compared to $211,162 for the three months ended June 30, 2000, a decrease of $15,516 or 7%. The decrease in research and development expenses was primarily due to the reduction of expenses of approximately $16,000 at the Epworth Mill Division operation, due to the transfer of the division’s engineering operations to the Morehouse-COWLES Division in October of fiscal 2000.
Research and development expenses for the six months ended June 30, 2001 were $371,382 compared to $397,294 for the six months ended June 30, 2000, a decrease of $25,912 or 6%. The decrease in research and development expenses was primarily due to the reduction of expenses of approximately $32,000 at the Epworth Mill Division operation, due to the transfer of the division’s engineering operations to the Morehouse-COWLES Division in October of fiscal 2000.
Selling expenses for the three months ended June 30, 2001 decreased $58,625 or 7%, compared to the three months ended June 30, 2000, from $826,139 to $767,514.The principal decreases in selling expenses were due to decreased payments to consultants of $17,000 and the reduction of selling expenses of approximately $93,000 at the Epworth Mill Division offset partially by increases in commissions of approximately $17,000 and payroll costs of $42,000.
Selling expenses for the six months ended June 30, 2001 decreased approximately $87,000 or 6% compared to the six months ended June 30, 2000, from $1,550,838 to $1,464,167. The decreases were due principally to the reduction of selling expenses at the Epworth Mill Division of approximately $179,000 partially offset by increases of $63,000 in commission expenses, $34,000 in payroll costs, and $14,000 in advertising expense.
For the three months ended June 30, 2001, general and administrative expenses increased by approximately $76,000, or 16%, from $486,132 to $561,771. The increase in general and administrative expenses is principally due to an increase in payroll costs of approximately $38,000, an increase in media costs of approximately $98,000 offset by a decrease in professional fees of approximately $63,000.
For the six months ended June 30, 2001, general and administrative expenses increased by approximately $156,000 or 15%, from $1,074,524 to $1,230,888. The increase in general and administrative expenses is principally due to an increase in payroll costs of approximately $117,000, an increase in media costs of approximately $184,000, partially offset by a decrease in bad debt expense of approximately $25,000, and a reduction of general and administrative costs of approximately $112,000 at the Epworth Mill Division, due to the sale of the business.
Interest income both for the three and six months ended June 30, 2001 increased to $1,783 compared to $2 and $248 for the three and six months ended June 30, 2000, respectively, an increase of $1,781 and $1,535, respectively. The increase is due to interest earned on the note receivable arising from the sale of the Ball Mill operation.
Interest expense for the three months ended June 30, 2001 increased approximately $600 or 1%, to $75,671 compared to $75,067 for the three months ended June 30, 2000. The increase is due to an increase in debt as a result of the transaction with J. M. Huber Corporation, offset by a reduction in the interest rate paid as a result of the lowering of the interest paid on the term note and line of credit due to a reduction in the prime rate.
Interest expense for the six months ended June 30, 2000 decreased approximately $7,000, or 4%, to $158,196 from $165,253 for the six months ended June 30, 2000. The decrease is due both to a reduction of the interest rate paid as a result of the refinancing of the debt, offset partially by the increase in debt due to the transaction with J. M. Huber Corporation.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company utilized cash of $153,302 and $161,213 from operations for the six months ended June 30, 2001 and 2000, respectively. For the first six months of 2001, this amount was principally the result of the Company’s net income from operations, (net of depreciation and amortization), the sale of the Ball Mill repair business assets, a decrease in trade and other receivables, offset by an increase in inventory, prepaid expenses, and other current assets, and a decrease in current liabilities. For the first six months of 2000, this amount was principally the result of the Company’s net income from operations (net of depreciation, amortization, and the extraordinary gain from the debt restructuring), a decrease in trade and other receivables, offset by an increase in inventories and prepaid expenses.
The Company utilized cash of $20,624 and $40,931 for investing activities for the six months ended June 30, 2001 and 2000, respectively. Cash generated for the first six months ended June 30, 2001 resulted from the sale of assets from the Ball Mill operation offset by the issuance of a note receivable in connection with the sale of the Ball Mill operation, and the purchase of the fixed assets. Cash used for 2000 reflected the purchase of fixed assets partially offset by the proceeds from the sale of fixed assets. As of June 30, 2001, the Company had no material commitments for capital expenditures.
For financing activities, the Company utilized cash of $112,411 and generated cash of $109,400 for the six months ended June 30, 2001 and 2000, respectively. Cash used in 2001 reflected the payments of the line of credit term note, and subordinated debt, partially offset by the proceeds from the issuance of common stock. Cash generated in 2000 reflected the proceeds from refinancing of the line of credit and the proceeds from the issuance of common stock, offset by the payment of the previous line of credit.
The cash and cash equivalents balance of the Company was $18 at June 30, 2001, a decrease of $286,337 from the December 31, 2000 balance of $286,355.
On February 28, 2000, the Company entered into a revolving credit and term loan agreement with National Bank of Canada (“Bank”), providing the Company with a $4,475,000 three-year revolving credit and term loan facility (“Credit Facility”).
As discussed in Note 6 to the accompanying financial statements, the Company notified the Bank that it was in violation of the tangible net worth and liabilities to worth ratio agreement governing the Credit Facility for the quarter ended March 31, 2001, and the tangible net worth, liabilities to net worth ratio, and the minimum debt service ratio covenants for the quarter ended June 30, 2001. On April 13, 2001, and on August 10, 2001, the Company received waivers of these violations from the Bank, for the respective quarters, but is required to meet all covenant requirements thereafter. The Company’s ability to continue planned operations is dependent upon access to financing under its Credit Facility, which is potentially impacted by the Company’s ability to achieve future compliance with the financial covenants. Given the terms of the financial covenants and historical results, it is at least reasonably possible that the Company will be in violation of the financial covenants in the future. Management of the Company is executing plans for a return to profitability, including the recent sale of selected assets of its Epworth Mill Division and the concentration of manufacturing operations in an effort to improve costs and marketing leverage; however, there can be no assurance that the Company will be successful in implementing these plans.
Assuming that there is no significant change in the Company’s business, the Company believes that cash flows from operations, together with the Credit Facility, and the existing cash balances, will be sufficient to meet its working capital requirements for at least the next twelve months.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, which was amended to be effective for fiscal years beginning after June 15, 2000 by Statement of Financial Accounting Standards No. 137 (“SFAS 137”), “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133.” SFAS No. 133 requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The standard was effective for the Company on January 1, 2001. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 (“SFAS 138”), “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133.” The standard clarifies certain elements of SFAS No. 133. The implementation of SFAS No. 133 did not have an impact on the Company’s financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations.
4. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements that are subject to certain risks and uncertainties including statements to achieve revenue growth, to maintain and/or increase operating profitability, and to attain net income profitability. Such statements are based on the Company’s current expectations and are subject to a number of factors and uncertainties that could cause actual results achieved by the Company to differ materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that the actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following risks and uncertainties: (i) whether the performance advantages of the Company’s Microfluidizer® or Zinger® materials processing equipment will be realized commercially or that a commercial market for the equipment will continue to develop, and (ii) whether the Company will have access to sufficient working capital through continued and improving cash flow from sales and ongoing borrowing availability, the latter being subject to the Company’s ability to comply with the covenants and terms of the Company’s loan agreement with its senior lender.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s fixed rate debt is not exposed to cash flow or interest rate changes but is exposed to fair market value changes in the event of refinancing this fixed rate debt.
The Company had approximately $3,000,000 of variable rate borrowings outstanding under its revolving credit agreement. A hypothetical 10% adverse change in interest rates for this variable rate debt would have an approximate $16,000 negative effect on the Company’s earnings and cash flows, for the six months ended June 30, 2001.
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 19, 2001, the Company held its annual meeting of its stockholders. The following matters were voted on at the annual meeting:
| | 1. | The election of, Irwin J. Gruverman, Vincent B. Cortina, Edward T. Paslawski, Leo Pierre Roy and James N. Little, as directors of the Company; |
| | | |
| | 2. | The ratification of the board of director’s selection of Deloitte & Touche LLP as independent public accountants for the Company for the fiscal year ending December 31, 2001. |
The following chart shows the number of votes cast for or against, as well as the number of abstentions and broker nonvotes, as to each matter voted on at the special meeting:
| Matter | | For | | Against | | Abstain | | Broker
Nonvotes | |
| |
| |
| |
| |
| |
| Election of Mr. Gruverman | | 6,452,634 | | 26,850 | | N/A | | N/A | |
| Election of Mr. Paslawski | | 6,454,334 | | 25,150 | | N/A | | N/A | |
| Election of Mr. Cortina | | 6,454,734 | | 24,750 | | N/A | | N/A | |
| Election of Mr. Roy | | 6,449,334 | | 30,150 | | N/A | | N/A | |
| Election of Mr. Little | | 6,454,734 | | 24,750 | | N/A | | N/A | |
| Selection of Deloitte & Touche LLP | | 6,426,282 | | 47,500 | | 5702 | | N/A | |
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| | (a) | EXHIBITS |
| | | |
| | | Exhibit 11 Statement regarding computation of Per Share Earnings |
| | | |
| | (b) | The Registrant did not file any reports on Form 8-K during the quarter ended June 30, 2001. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | MFIC CORPORATION |
| | |
| | |
| | Irwin J. Gruverman |
| |
|
| | Irwin J. Gruverman |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| Date: August 14, 2001 | |
