FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,2000
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-11625
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MFIC CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-2793022
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
30 Ossipee Road,P.O.Box 9101,Newton,Massachusetts 02464
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(Address of Principal Executive Offices) (Zip Code)
(617)969-5452
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
-
Registrant had 7,574,129 shares of Common Stock, par value $.01 per share,
outstanding on May 8, 2000.
1
MFIC CORPORATION
INDEX PAGE
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NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31,
2000(unaudited) and December 31, 1999 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2000 and March 31, 1999 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2000 and March 31, 1999 6
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFIC CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 2000 December 31,1999
-------------- ----------------
(unaudited)
ASSETS
Cash and cash equivalents $ 116,430 $ 196,172
Accounts receivable (less allowance for doubtful
accounts of $80,321 and $65,321 at March 31,
2000 and December 31,1999) 2,678,440 2,710,684
Other receivables 50,894 108,607
Accounts receivable-related party 18,375 23,252
Inventory 3,817,620 3,477,123
Prepaid expense 235,635 143,252
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Total current assets 6,917,394 6,659,090
Equipment and leasehold improvements, at cost
Furniture, fixtures and
office equipment 469,541 461,852
Machinery and equipment 945,374 929,330
Leasehold improvements 313,190 310,563
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1,728,105 1,701,745
Less: accumulated depreciation and amortization (927,168) (859,875)
------------ ------------
800,937 841,870
Goodwill(net of accumulated amortization of
$665,720 at March 31, 2000,and $554,329
at December 31, 1999 5,498,739 5,610,130
Patents, licenses and other intangible assets (net
of accumulated amortization of $482,569 at March 31,
2000 and $467,389 at December 31, 1999) 200,796 116,226
------------ ------------
Total assets $ 13,417,866 $ 13,227,316
============ ============
(See notes to consolidated financial statements)
3
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
March 31, 2000 December 31,1999
-------------- ----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued expenses $ 1,964,830 $ 1,480,220
Accrued interest - related party 88,000 77,500
Accrued compensation 81,968 119,712
Customer advances 682,687 537,958
Current portion of long term debt--related party 12,500
Current portion of note payable 95,004
Line of credit 2,009,959 3,075,815
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Total current liabilities 4,934,948 5,291,205
Long term debt,
net of current portion--related party 287,500 775,000
Note payable, net of current portion 379,996
Stockholders' equity
Common stock, par value $.01 per share, 20,000,000 shares
authorized; 7,574,129 and 6,061,307 shares issued and
outstanding at March 31, 2000 and at December 31,1999,
respectively 75,741 60,613
Additional paid-in-capital 12,888,116 12,494,839
Accumulated deficit (4,474,328) (4,720,234)
Less: Treasury stock, at cost, 242,719 shares
at March 31, 2000 and December 31, 1999 (674,107) (674,107)
------------ ------------
Total stockholders' equity 7,815,422 7,161,111
------------ ------------
Total liabilities and stockholders' equity $ 13,417,866 $ 13,227,316
============ ============
(See notes to consolidated financial statements)
4
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Three months ended
March 31,
---------
2000 1999
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(unaudited)
Revenues $ 3,732,919 $ 2,597,122
Cost of goods sold 1,981,050 1,665,532
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Gross profit on revenues 1,751,869 931,590
Operating expenses:
Research and development 186,132 239,373
Selling 724,699 597,498
General and administrative 699,692 640,855
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Total operating expenses 1,610,523 1,477,726
Income (loss) from operations 141,346 (546,136)
Interest income 246 3,389
Interest expense 90,186 98,343
Gain on sale of marketable securities 11,864
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Net income(loss) before extraordinary item $ 51,406 $ (629,226)
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Extraordinary item
Gain on subordinated debt restructuring 194,500
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Net income (loss) $ 245,906 $ (629,226)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 6,350,428 5,818,588
Diluted 6,399,177 5,818,588
Basic amounts per common share:
Net income (loss) per share before
extraordinary gain $ 0.01 $ (0.11)
Extraordinary gain per share 0.03 0.00
----------- -----------
Basic net income (loss) per share $ 0.04 $ (0.11)
Diluted amounts per common share:
Net income (loss) per share before
extraordinary gain $ 0.01 $ (0.11)
Extraordinary gain per share 0.03 0.00
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Diluted net income (loss) per share $ 0.04 $ (0.11)
(See notes to consolidated financial statements)
5
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Three months ended
March 31,
---------
2000 1999
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(unaudited)
Cash flows provided by (used in) operating activities:
Net income (loss) $ 245,906 $ (629,226)
Reconciliation of net income to cash
provided by operating activities:
Depreciation and amortization 196,624 181,616
Extraordinary gain on debt restructuring (194,500)
Gain on sale of fixed assets (6,124) (10,992)
Bad debt expense 15,000 3,500
Effects of changes in operating working capital items:
(Increase) decrease in trade and other receivables 22,834 992,981
(Increase) decrease in inventories (340,497) (22,975)
(Increase) decrease in prepaid expenses (92,383) (12,730)
Increase (decrease) in current liabilities 591,595 (54,857)
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Net cash provided by operating activities 438,455 447,317
Cash flows provided by (used in) investing activities:
Proceeds from sales of fixed assets 18,820 65,125
Excess of cost over assets purchased (Goodwill) (5,988)
Purchase of capital equipment (41,816) (26,474)
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Net cash provided by (used in) investing activities (22,996) 32,663
Cash flows provided by (used in) financing activities:
Payment of subordinated debt (25,000)
Proceeds from new line of credit 2,009,959
Repayment of line of credit (3,075,815) (362,334)
Proceeds from term note 475,000
Payments in connection with debt refinancing (99,750)
Lease termination payment in connection with debt refinancing (58,000)
Issuance of restricted common stock 250,000
Issuance of common stock under employee stock purchase plan 3,405 3,459
6
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------
Three months ended
March 31,
---------
2000 1999
---- ----
(unaudited)
Treasury stock purchased (7,620)
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Net cash provided by (used in) financing activities (495,201) (391,495)
Net increase (decrease)in cash (79,742) 88,485
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Cash and cash equivalents at beginning of period 196,172 550,713
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Cash and cash equivalents at end of period $ 116,430 $ 639,198
========= =========
Supplemental schedule of noncash financing activities
The Company restructured $775,000, plus interest, of subordinated debt at the
closing of its new loan facility and settled various other liabilities as
discussed in Note 6, resulting in an extraordinary gain of $194,500. In
connection with the restructuring the following noncash financing activities
occurred:
Settlement of restructured subordinated debt (including
accrued interest) $ 852,500
Issuance of common stock in connection with debt
restructuring (155,000)
Issuance of subordinated debt (including interest) (388,000)
Accounts receivable write-off settled in connection
with debt restructuring (57,000)
(See notes to consolidated financial statements)
7
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the three months ended March 31, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
2. EARNINGS (LOSS) PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock, unless the effects of dilution would be anti-dilutive. For 1999,
1,304,731 shares were excluded because the effect of such options would be
anti-dilutive. For 2000, 1,725,482 shares were excluded because the effect would
be anti-dilutive.
8
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
March 31, 2000 December 31, 1999
Raw Material $2,727,023 $2,070,913
Work in Progress 341,824 320,151
Finished Goods 748,773 1,086,059
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Total $3,817,620 $3,477,123
========== ==========
4. TAXES
The Company has a federal net operating loss (NOL) tax carryforward of
approximately $4,698,000 and research and development tax credit carryforwards
of approximately $186,000 expiring at various dates beginning in 2001 through
2019. Ownership changes may result in future limitations on the utilization of
net operating losses and research and development tax credit carryforwards.
Based on the financial results known at December 31, 1999, the Company has
established a valuation allowance against a deferred tax asset due to the
uncertainty of earning sufficient taxable income to realize the benefit of these
assets. Therefore, the Company increased the valuation allowance by $323,096 in
1999.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies accounting and reporting standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
9
6. SETTLEMENT AGREEMENT, DEBT RESTRUCTURING AND REFINANCING
On December 20, 1999 the Company signed an agreement in principle (the
"Agreement In Principle") with J.B. Jennings and Bret A. Lewis, the former
owners of the Epworth Mill and Morehouse-COWLES businesses (the "Sellers"), Lake
Shore Industries, Inc., and JLJ Properties, Inc., entities owned and controlled
by the Sellers. The Agreement In Principle set forth understandings among the
parties concerning restructuring of the Company's subordinated debt and
resolution of various disputes. On January 17, 2000 a definitive settlement
agreement incorporating these subject matters was executed between the parties
(the "Settlement Agreement"). Pursuant to this Settlement Agreement, Seller's
subordinated loans totaling $775,000 would be restructured upon the closing of a
new senior loan facility. Such restructuring included all outstanding and unpaid
interest and setoffs to such notes provided for under the terms of the August
14, 1998 Asset Purchase Agreement. At such closing $500,000 of this debt would
be converted to 500,000 shares of Common Stock. The Company retained the right
to repurchase such shares for a 3 year period at a per share price of $1.75. The
remaining $300,000 would be structured as a new subordinated promissory note
with annual interest at 10%, with interest only being paid in the first year,
and the principal together with interest then being amortized over 4 years
starting in the second year. A disputed lease between the Company and one of the
Seller's entities for property located in South Haven, Michigan, which was the
subject of a suit to terminate filed by the Company, was voluntarily dismissed
in return for the payment by the Company of a total of $58,000. The initial
payment in the amount of $30,000 was paid on January 19, 2000 upon execution of
the Settlement Agreement and the balance on February 28, 2000. The Company
dismissed with prejudice by joint stipulation its lawsuit to terminate the
lease. The Company and the Sellers executed a mutual release of liability
related to the August 14, 1998 Asset Purchase Agreement.
10
Senior Debt Financing
- ---------------------
On February 28, 2000 (the "Closing Date") the Company entered into a revolving
credit and term loan agreement with National Bank of Canada (the "Lender")
providing the Company with a $4,475,000 three-year revolving credit and term
loan facility (the "Credit Facility").
The Credit Facility is comprised of: (i) a $4 million three year revolving line
of credit ("Revolving Credit Line") with advances thereunder bearing interest at
an interest rate equal to the prime rate (the "Prime Rate" for United States
borrowings from the National Bank of Canada as publicly announced from time to
time) plus one-half percent (.50%). All borrowings under the Revolving Credit
Line are evidenced by a $4 million promissory note having a maturity date of
February 28, 2003 (the "Revolving Note"), and (ii) a $475,000 term promissory
note, amortized over a five year period but having a maturity date of February
28, 2003 and bearing interest at an interest rate equal to the Prime Rate plus
three quarters of one percent (.75%). As of March 31, 2000, the revolving line
of credit had an interest rate of 9.5% per annum, and the term note had an
interest rate of 9.0%. Loans under the Credit Facility are secured by a
collateral pledge to the Lender of substantially all the assets of the Company
and its subsidiaries. The Company's Microfluidics Corporation subsidiary has
guaranteed the Company's obligations to the Lender under the Credit Facility.
The Company has pledged to the Lender all shares of Microfluidics Corporation
owned by the Company.
From the proceeds of the initial loan, the Company repaid the outstanding
balance owed to Comerica Bank of approximately $2,585,000, as of February 28,
2000.
As one of the Lender's conditions precedent to the closing of the Finance
Facility, the Company's Chairman, Irwin Gruverman, made at the closing of the
Credit Facility a $250,000 purchase of restricted Common Stock of the Company.
Pursuant to an agreement with the Company approved by the Company's Board of
Directors on December 30, 1999, Mr. Gruverman paid $.25 per share for his stock
purchase and as a result received 1,000,000 MFIC restricted shares of Common
Stock.
In connection with the closing of the Credit Facility, and pursuant to a
Settlement Agreement dated January 17, 2000 with the Company's subordinated debt
holders, the subordinated debt of the Company was restructured in the following
manner. The outstanding August 14, 1998 $500,000 subordinated promissory note,
having a remaining $475,000 principal balance together with accrued interest at
the Closing Date in the approximate amount of $77,500, and accrued
11
interest on the August 14, 1998 $300,000 subordinated note were converted to
500,000 shares of MFIC restricted common stock (the "Conversion Shares"). The
fair market value of the Company's Common Stock on the date of the Agreement In
Principle was $0.31 per share. MFIC was granted the right for a three-year
period to repurchase the Conversion Shares at a purchase price of $1.75 per
share. The August 14, 1998 $300,000 subordinated note was replaced with a new
$300,000 subordinated promissory note dated February 28, 2000 (the "2000
Subordinated Note"). The 2000 Subordinated Note has a maturity date of
February 28, 2005 and bears interest at a rate of ten percent (10%) per annum.
The note is payable interest only in its first year and then is payable in equal
quarterly installments of principal together with outstanding interest thereon
until maturity.
As a result of the debt restructuring and refinancing, the Company recorded
an extraordinary gain of approximately $195,000 in the first quarter of 2000.
12
MFIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. RESULTS OF OPERATIONS
Total Company revenues for the quarter ended March 31, 2000 were $3,732,919, as
compared to revenues of $2,597,122 for the three months ended March 31, 1999,
representing an increase of $1,135,797, or 44%. The increase during this period
is due to an increase in sales of machines of approximately $712,000, and an
increase in sales of spare parts of approximately $391,000.
Cost of goods sold for the three months ended March 31, 2000 was $1,981,050 or
53% of revenue, compared to $1,665,532 or 64% of revenue, for the three months
ended March 31, 1999. The increase in cost of goods sold in absolute dollars for
the three months ended March 31, 2000, reflects the increase in sales generated
by the operating divisions of the Company. The decrease in cost of goods sold as
a percentage of revenue was attributable both to higher gross margins on sales
of machines, and to a decrease in fixed overhead. 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 March 31, 2000 were
$1,610,523 or 43% of revenue, as compared to $1,477,726 or 57% of revenue, for
the three months ended March 31, 1999 which is an increase of approximately
$133,000 or 9%.
Research and development expenses for the three months ended March 31, 2000 were
$186,132 compared to $239,373 for the three months ended March 31, 1999, a
decrease of $53,241 or 22%. The decrease in research and development expenses
was primarily due to decreases in payroll costs of approximately $34,000, and
general research and development costs of approximately $11,000.
13
Selling expenses for the three months ended March 31, 2000 increased
approximately $127,000 or 21%, compared to the three months ended March 31, 1999
from $597,498 to $724,699. The increases were primarily attributable to an
increase in commissions of approximately $66,000, and an increase in salaries of
approximately $61,000.
For the three months ended March 31, 2000, general and administrative expenses
increased by approximately $59,000 from $640,855 to $699,692. The increase in
general and administrative expenses is principally due to an increase in
professional fees of approximately $23,000 and an increase in corporate expenses
of approximately $30,000.
Interest income for the three months ended March 31, 2000 decreased to $246
compared to $3,389 for the three months ended March 31, 1999, a decrease of
approximately $3,100 or 93%. The decrease was due to the decrease in the
amount of cash available to invest.
The Company realized a gain on the sale of a portion of the Company's holdings
in Cardiotech International, Inc. in the amount of $11,864 for the three month
period ended March 31, 1999.
The Company realized a gain of $194,500 for the three months ended March 31,
2000 due to a restructuring of the Company's subordinated debt.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash of $438,455 and $447,317 from operations for the
three months ended March 31, 2000 and 1999, respectively. For the three months
ended March 31, 2000, the Company's principal operating cash requirements were
to fund its increase in inventories and prepaid expenses, offset by an increase
in current liabilities, a decrease in trade and other receivables and net income
from operations. For the three months ended March 31, 1999, the Company's
principal operating cash requirements were to fund its net loss and decrease in
current liabilities offset by a decrease in trade and other receivables.
The Company used cash of $22,996 and generated cash of $32,663 for investing
activities for the three months ended March 31, 2000 and 1999, respectively. Net
cash used for investing activities for the three months ended March 31, 2000
included proceeds from the sale of fixed assets offset by the purchase of
capital equipment. Net cash provided by investing activities for the three
months ended March 31, 1999 consisted of the proceeds from the sale of fixed
assets offset by the purchase of capital equipment. As of March 31, 2000, the
Company had no material commitments for capital expenditures.
14
The Company used cash of $495,201 for the three months ended March 31, 2000,
consisting of the proceeds from the refinancing of the line of credit, and
proceeds from the issuance of common stock offset by the repayment of the
previous line of credit. The Company used cash of $391,495 for the three months
ended March 31, 1999, consisting of payments of the line of credit and
subordinated debt, and the purchase of treasury stock.
As of March 31, 2000, the Company had $116,430 in cash and cash equivalents,
compared to $196,172 as of December 31, 1999.
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.
Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with the credit and
term loan facility, and the existing cash balances, will be sufficient to meet
its working capital requirements for at least the next twelve months.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2000. SFAS No. 133
significantly modifies accounting and reporting standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
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/(R)/ or Zinger/(R)/ 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.
15
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 $2,010,000 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
$9,000 negative effect on the Company's earnings and cash flows.
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Concurrently with the entering into by the Company of its new senior
credit facility with National Bank of Canada ("Bank") on February 28, 2000 and
as required by the Bank, Irwin Gruverman purchased 1,000,000 shares of the
Company's restricted common stock for $250,000. Also, concurrently with the Bank
Closing, $475,000 of the Company's subordinated debt was converted to 500,000
shares of the Company's restricted common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
16
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
/s/ Michael A. Lento
--------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: May 15, 2000
17
EXHIBIT INDEX
Exhibit Description
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11 Statement regarding
computation of per share
earnings.
27 Financial Data Schedule
18