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 June 30,1997
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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MICROFLUIDICS INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-2793022
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
30 Ossipee Road, P.O. Box 9101, Newton, Massachusetts 02164
-----------------------------------------------------------
(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 5,122,396 shares of Common Stock, par value $.01 per share,
outstanding on August 8, 1997.
MICROFLUIDICS INTERNATIONAL CORPORATION
INDEX PAGE
----- NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 3
1997 and December 31, 1996
Consolidated Statements of Operations for the 5
three and six months ended June 30,1997 and June
30,1996
Consolidated Statements of Cash Flows for the 6
six months ended June 30,1997 and June 30,1996
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 4. Submission of matters to a vote of 13
security holders
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, 1997 December 31,1996
-------------- -----------------
(unaudited)
ASSETS
Cash and cash equivalents $3,791,649 $2,786,554
Marketable securities 132,055 67,437
Accounts receivable(less
allowance for doubtful accounts
of $44,601 and $41,076 at June
30,1997 and December 31,1996) 1,179,703 1,605,932
Other receivables 101,274 53,873
Inventory 2,071,331 2,291,768
Prepaid expense 84,708 21,858
---------- ----------
Total current assets 7,360,720 6,827,422
Equipment and leasehold
improvements, at cost
Furniture, fixtures and
Office equipment 324,230 312,664
Machinery and equipment 256,753 226,395
Leasehold improvements 114,883 114,883
---------- ----------
695,866 653,942
Less:accumulated depreciation
and amortization (539,091) (509,091)
---------- ----------
156,775 144,851
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$357,589 at June 30,1997 and
$335,629 at December 31, 1996) 189,091 211,051
---------- ----------
Total assets $7,706,586 $7,183,324
========== ==========
(The accompanying notes are an integral
part of the consolidated financial statements)
Page 3
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
June 30, 1997 December 31,1996
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other
accrued expenses $ 604,903 $ 640,234
Accrued compensation 14,900 36,567
Customer advances 289,975 78,000
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Total current liabilities 909,778 754,801
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
5,122,396 and 5,094,781 shares
issued and outstanding at June 30,
1997 and at December 31,1996,
respectively 51,224 50,948
Additional paid-in-capital 10,416,809 10,374,508
Accumulated deficit (3,193,859) (3,468,416)
Unrealized appreciation on
marketable securities 132,055 67,437
Less: Treasury Stock, at cost,
199,619 and 192,119 shares
at June 30, 1997 and December
31, 1996 respectiviely
( 609,421) ( 595,954)
----------- -----------
Total stockholders' equity 6,796,808 6,428,523
----------- -----------
Total liabilities and
stockholders' equity $ 7,706,586 $ 7,183,324
=========== ===========
(The accompanying notes are an integral
part of the consolidated financial statements)
Page 4
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
Three months ended Six months ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $1,749,489 $1,600,487 $3,464,823 $3,094,947
Cost of goods sold 804,480 710,551 1,625,768 1,441,732
---------- ---------- ---------- ----------
Gross profit on
revenues 945,009 889,936 1,839,055 1,653,215
Operating expenses:
Research and
development 116,742 115,877 229,982 202,579
Selling, general and
administrative 759,603 764,209 1,425,432 1,328,722
---------- ---------- ---------- ----------
Total operating
expenses 876,345 880,086 1,655,414 1,531,301
Income from
operations 68,664 9,850 183,641 121,914
Interest income 38,721 28,569 65,910 51,544
Other income 12,503 12,503 25,006 25,006
---------- ---------- ---------- ----------
Net Income $ 119,888 $ 50,922 $ 274,557 $ 198,464
========== ========== ========== ==========
Income per Common Share:
Primary:
Average shares outstanding 4,999,868 5,000,070 4,999,841 4,989,011
Net income per share $.02 $.01 $.05 $.04
==== ==== ==== ====
Fully Diluted:
Average shares outstanding 4,999,868 5,000,070 4,999,841 4,991,961
Net income per share $.02 $.01 $.05 $.04
==== ==== ==== ====
(The accompanying notes are an integral
part of the consolidated financial statements)
Page 5
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
Six months ended
----------------
June 30,
1997 1996
---- ----
Cash flows from (used by) operating activities:
Net income $ 274,557 $ 198,464
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization 51,960 46,870
Issuance of common stock employee compensation 30,000 24,000
Bad Debt Expense 15,000
Effects of changes in operating working capital items:
Decrease in trade and other receivables 363,828 140,825
Decrease in inventories 220,437 205,399
Increase in prepaid expenses (62,850) (19,612)
Increase in current liabilities 154,977 60,988
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Net cash provided by operating activities 1,047,909 656,934
Cash flows used in investing activities:
Purchase of capital equipment (41,924) (8,885)
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Net cash used in investing activities (41,924) (8,885)
Cash flows used in financing activities:
Issuance of Common Stock option agreements 12,577 7,575
Treasury Stock purchased (13,467) (16,861)
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Net cash used in financing activities (890) (9,286)
Net increase in cash 1,005,095 638,763
Cash and cash equivalents at beginning 2,786,554 1,903,418
---------- ----------
Cash and cash equivalents at end $3,791,649 $2,542,181
========== ==========
(The accompanying notes are an integral
part of the consolidated financial statements)
Page 6
MICROFLUIDICS INTERNATIONAL 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 six months ended June 30, 1997 and 1996 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, 1996.
2. EARNINGS PER SHARE
Primary and fully diluted earnings per common and common equivalent share are
computed by dividing net income by the weighted average number of shares of
Common Stock and Common Stock Equivalents outstanding during the year. The
calculation of fully diluted income per Common Share assumes a different market
price than the primary earnings per Common Share for the reacquisition of Common
Shares. This calculation does not reflect outstanding warrants as their
inclusion would be anti-dilutive.
Page 7
MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
June 30, 1997 December 31, 1996
Raw Material $1,369,759 $1,525,398
Work in Progress 419,062 434,717
Finished Goods 282,510 331,653
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Total $2,071,331 $2,291,768
========== ==========
4. TAXES
The Company utilized net operating loss carryforwards to fully offset taxes
computed at statutory rates. The Company continues to fully reserve
deferred tax assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per share" ("SFAS
128"), which is effective for fiscal years ending December 15, 1997,
including interim periods. Earlier application is not permitted. However,
an entity is permitted to disclose pro forma earnings per share amounts
computed using SFAS 128 in the notes to financial statements in periods
prior to adoption. SFAS 128 requires restatement of all prior-period
earnings per share data present after the effective date. SFAS 128
specifies the computation, presentation and disclosure requirements for
earnings per share and is substantially similar to the standard recently
issued by the International Accounting Committee entitled International
Accounting Standard, "Earnings Per Share" ("IAS 33"). The Company plans to
adopt SFAS 128 in 1997 and has not yet determined the impact.
Page 8
MICROFLUIDICS INTERNATIONAL 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 June 30, 1997 were $1,749,489,as
compared to revenues of $1,600,487 in the corresponding period last year,
representing an increase of $149,002, or 9.3%. For the six month period ended
June 30, 1997, revenues increased 11.9% to $3,464,823 from $3,094,947 for the
first six months of 1996. The increase in revenue for the three months ended
June 30, 1997 is principally due to an increase in sales of spare parts of
approximately $104,000. The increase in revenue for the six month period ended
June 30, 1997 is principally due to an increase in spare part sales of
approximately $269,000 and an increase in rental revenue of approximately
$102,000. North American sales for the three month period ended June 30, 1997
decreased to $887,111, or 27.5%, from $1,224,089 for the three months ended June
30, 1996. This decrease in revenue was principally due to a decrease in the
sale of a large volume unit, compared to the comparable quarter in 1996. For the
six months ended June 30, 1997, North American sales increased to $2,157,013, or
8.5%, from $1,988,693 for the six months ended June 30, 1996. This increase in
revenue is principally due to an increase in spare part sales of approximately
$377,000, offset by a decrease in machines sold of approximately $283,000.
Foreign sales were $862,378 for the quarter ended June 30,1997, compared to
$376,398 for the quarter ended June 30, 1996, an increase of approximately
$486,000, or 129%. This increase in revenue was principally due to an increase
in the sale of two large volume units for approximately $404,000 compared to the
comparable quarter in 1996. Foreign sales for the six months ended June 30,
1997 increased to $1,307,810, or 18.2%, from $1,106,254 for the six months ended
June 30, 1996. This increase in revenue is due to an increase in sales of
machinery of approximately $245,000.
Cost of goods sold for the three months ended June 30, 1997 was $804,480, or
46.0% of revenue, compared to $710,551, or 44.4% of revenue, for the same period
last year. For the six month period ended June 30, 1997, cost of goods sold,
increased to $1,625,768 from $1,441,732 for the comparable period in 1996. For
the six month period ended June 30, 1997, cost of goods sold, as a percentage of
sales, was approximately the same as cost of goods sold for the six month period
ended June 30, 1996. The increase in the absolute dollar amount of cost of goods
sold for both the three and six month periods ended June 30, 1997 primarily
reflects the increased volume of sales.
The Company's three 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. Also, the cost of
sales as a percent of revenue will differ between laboratory and pilot plant
units sold, due to the difference in costs between air driven and electric-
hydraulic units.
Page 9
Operating expenses for the three months ended June 30, 1997 were $876,345, or
50.1% of revenue, as compared to $880,086, or 55.0% of revenue,for the same
period last year, which is a decrease of $3,741, or .4%. Operating expenses for
the six months ended June 30, 1997 were $1,655,414, or 47.8% of revenue, as
compared to $1,531,301, or 49.5% of revenue, for the same period last year, an
increase of $124,113, or 8.1%. Research and development expenses for the three
months ended June 30, 1997 were flat compared to the three months ended June 30,
1996. For the six months ended June 30,1997, research and development expenses
increased by $27,403, primarily due to a $30,000 increase in costs related to a
research project, offset by a decrease in payroll costs of approximately $8,000.
Selling, general and administrative expenses for the three months ended June 30,
1997 were flat, compared to the three months ended June 30, 1996. For the six
months ended June 30, 1997, the cost of marketing and sales decreased by
approximately $39,000, from $860,274 to $820,800, due to a decrease in
commission expense of approximately $90,000, offset by an increase in payroll
and related costs of approximately $55,000,from the comparable period last year.
General and administrative expenses increased by approximately $136,000, from
$468,448 to $604,632 for the six months ended June 30, 1997. The principal
reasons for the increase were: accounting and legal fees of approximately
$42,000,and payroll and related expense of approximately $21,000.
Interest income for the three months ended June 30, 1997 increased 35.5% to
$38,721 from $28,569 for the three months ended June 30, 1996. Interest income
increased for the six months ended June 30, 1997 to $65,910 from $51,544 in the
same period last year, an increase of $14,366, or 27.9%. These increases are due
to an increase in the amount of cash available for investment during each
period.
The Company utilized net operating loss carryforwards to fully offset taxes
computed at statutory rates. The Company continues to fully reserve deferred tax
assets.
The Company received other income of $12,503 and $25,006 for the three and six
months ended June 31, 1997 and 1996, respectively. The other income resulted
from royalty income of $4,168 per month due to the sale of the Company's
Dermasome/(R)/ product line in December, 1995. The Company had a backlog of
$847,166 and $36,762 at June 30, 1997 and June 30, 1996, respectively,
consisting of purchase commitments for Microfluidizer equipment.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its' operations primarily through the use of cash and
cash equivalents on hand, and cash flow from operations.
The Company generated cash of $1,047,909 and $656,934 from operations for the
six months ended June 30, 1997 and 1996, respectively. For the first six months
of 1997, this amount was principally the result of income from operations,
decreases in trade and other receivables and inventories,and an increase in
current liabilities, partially offset by an increase in prepaid expenses. For
the first six months of 1996, this amount was principally the result of income
Page 10
from operations and decreases in trade and other receivables and inventories,
an increase in current liabilities, partially offset by an increase in prepaid
expenses.
The Company utilized $41,924 and $8,885 for investing activities for the six
months ended June 30, 1997 and 1996, respectively. Net cash used for investing
activities in each period related to the purchase of capital equipment. As of
June 30, 1997, the Company had no material commitments for capitalexpenditures.
For financing activities, the Company utilized cash of $890 and $9,286 for the
six months ended June 30,1997 and 1996,respectively. These amounts were
composed of the purchase of treasury stock of $13,467 and $16,861 for the six
months ended June 30, 1997 and 1996, respectively, partially offset by the
issuance of Common Stock pursuant to the exercise stock option agreements
pursuant to the Company's employee stock purchase plan and stock option plan of
$12,577 and $7,575, respectively in the comparable periods.
The cash and cash equivalents balance of the Company was $3,791,649 at June 30,
1997, an increase of $1,005,095 from the December 31, 1996 balance of
$2,786,554. The Company continues to maintain a line of credit with BankBoston,
N.A. The line of credit facility provides for maximum borrowing equal to the
lesser of: $750,000 or 80% of the domestic accounts receivable less than 60 days
old. As of June 30, 1997 and August 8, 1997, the Company had no borrowings
outstanding under its line of credit.
Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with existing cash
balances, will be sufficient to meet its working capital requirements for at
least the next twelve months.
The Company is actively seeking, from time to time, an acquisition of
complementary businesses, products, or technologies. There can be no assurance
that the Company will be able to identify an appropriate acquisition candiate or
that, if identified, that such acquisition candiadate will be available under
favorable terms.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per share" ("SFAS 128"), which
is effective for fiscal years ending December 15, 1997, including interim
periods. Earlier application is not permitted. However, an entity is permitted
to disclose pro forma earnings per share amounts computed using SFAS 128 in the
notes to financial statements in periods prior to adoption. SFAS 128 requires
restatement of all prior-period earnings per share data present after the
effective date. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Committee entitled International
Accounting Standard, "Earnings Per Share" ("IAS 33"). The Company plans to adopt
SFAS 128 in 1997 and has not yet determined the impact.
Page 11
4. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties. These forward-looking
statements include statements regarding the Company's liquidity and potential
strategic arrangements. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the forward-
looking statements. Such factors and uncertainties include, but are not limited
to, the uncertainty that the performance advantages of the Microfluidizer
equipment will be realized commercially or that a commercial market for
Microfluidizer equipment will continue to develop; the dependence by the Company
on key customers; the loss of the services of one or more of the Company's key
employees, which could have a material adverse impact on the Company; the
development of competing or superior technologies and products from other
manufacturers, many of which have substantially greater financial, technical and
other resources than the Company; the cyclical nature of the materials
processing industry, which has historically negatively affected the Company's
sales of Microfluidizer equipment during industry downturns and which could do
so in the future; the availability of additional capital to fund expansion on
acceptable terms, if at all; and general economic conditions.
Page 12
MICROFLUIDICS INTERNATIONAL CORPORATION
PART II- OTHER INFORMATION
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 27, 1997, The Company held its annual meeting of its stockholders.
The following matters were voted on at the annual meeeting:
1. The election of, Irwin J. Gruverman, Robert L. Bogomolny, Vincent B.
Cortina, Michael A.Lento and James N. Little;
2. The amendment of the 1988 Stock Plan; and
3. The ratification of the appointment of Coopers & Lybrand L.L.P. as auditors
for the Company for the fiscal year ending December 31,1997.
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 4,060,120 72,915 N/A N/A
Election of Mr. Bogomolny 4,064,595 68,440 N/A N/A
Election of Mr. Cortina 4,060,208 72,827 N/A N/A
Election of Mr. Lento 4,072,381 60,654 N/A N/A
Election of Mr. Little 4,064,820 68,215 N/A N/A
Amendment of 1988
Stock Plan 1,802,642 371,389 64,236 1,894,768
Appointment of Coopers &
Lybrand L.L.P. 4,110,379 17,693 4,963 N/A
Page 13
MICROFLUIDICS INTERNATIONAL CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a) Lease for 30 Ossipee Road, Newton, Massachusetts dated May
23, 1997 between Microfludics International Corporation and King Real
Estate Corp; Trustee of 1238 Chestnut Street Trust under declaration of
trust dated May 23, 1969, recorded with Middlesex South Registry of
Deeds in Book 11682, Page 384.
Exhibit 11 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
report.
Page 14
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.
MICROFLUIDICS INTERNATIONAL CORPORATION
/s/ Michael A. Lento
---------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: August 8, 1997
Page 15
EXHIBIT INDEX
Exhibit Description
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10(a) Lease for 30 Ossipee Road, Newton, Massachusetts
dated May 23, 1997 between Microfluidics
International Corporation and King Real Estate
Corp; Trustee of 1238 Chestnut Street Trust under
declaration of trust dated May 23, 1969, recorded
with Middlesex South Registry of Deeds in Book
11682, Page 384.
11 Statement regarding computation of per share
earnings.
27 Financial Data Schedule
Page 16