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 September 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
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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 02164
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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 5,122,396 shares of Common Stock, par value $.01 per share,
outstanding on November 7, 1997.
Page 1
MICROFLUIDICS INTERNATIONAL CORPORATION
PAGE
INDEX NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 1997 and December 31, 1996
Consolidated Statements of Operations for the 5
three and nine months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Cash Flows for the 6
nine months ended September 30, 1997 and
September 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 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, 1997 December 31, 1996
------------------- -----------------
(unaudited)
ASSETS
Cash and cash equivalents $3,664,199 $2,786,554
Marketable securities 83,853 67,437
Accounts receivable (less
allowance for doubtful accounts
of $51,351 and $41,076 at September
30, 1997 and December 31, 1996) 1,662,306 1,605,932
Other receivables 76,325 53,873
Inventory 2,295,680 2,291,768
Prepaid expense 50,748 21,858
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Total current assets 7,833,111 6,827,422
Equipment and leasehold
improvements, at cost
Furniture, fixtures and
office equipment 327,817 312,664
Machinery and equipment 265,810 226,395
Leasehold improvements 114,883 114,883
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708,510 653,942
Less: accumulated depreciation
and amortization (554,091) (509,091)
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154,419 144,851
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$368,569 at September 30, 1997 and
$335,629 at December 31, 1996) 178,111 211,051
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Total assets $8,165,641 $7,183,324
========== ==========
(The accompanying notes are an integral part of the consolidated financial
statements)
Page 3
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
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September 30, 1997 December 31, 1996
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other
accrued expenses $ 736,505 $ 640,234
Accrued compensation 26,900 36,567
Customer advances 398,096 78,000
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Total current liabilities 1,161,501 754,801
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 September 30,
1997 and at December 31, 1996,
respectively 51,224 50,948
Additional paid-in-capital 10,416,809 10,374,508
Accumulated deficit (2,896,402) (3,468,416)
Unrealized appreciation on
marketable securities 83,853 67,437
Less: Treasury Stock, at cost,
220,719 and 192,119 shares
at September 30, 1997 and December
31, 1996 respectively (651,344) (595,954)
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Total stockholders' equity 7,004,140 6,428,523
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Total liabilities and
stockholders' equity $ 8,165,641 $ 7,183,324
=========== ===========
(The accompanying notes are an integral part of the consolidated financial
statements)
Page 4
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three months ended Nine months ended
September 30, September 30,
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1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $1,762,959 $1,525,395 $5,227,782 $4,620,342
Cost of goods sold 738,136 642,328 2,363,904 2,084,060
---------- ---------- ---------- ----------
Gross profit on
revenues 1,024,823 883,067 2,863,878 2,536,282
Operating expenses:
Research and
development 122,757 113,817 352,739 316,396
Selling, general and
administrative 754,049 666,040 2,179,481 1,994,762
---------- ---------- ---------- ----------
Total operating
expenses 876,806 779,857 2,532,220 2,311,158
Income from
operations 148,017 103,210 331,658 225,124
Interest income 45,074 22,355 110,984 73,899
Other income 12,503 12,503 37,509 37,509
Gain on sale of
marketable securities 91,863 91,863
---------- ---------- ---------- ----------
Net Income $ 297,457 $ 138,068 $ 572,014 $ 336,532
========== ========== ========== ==========
Income per Common Share:
Primary:
Average shares outstanding 5,025,072 4,980,439 5,023,788 4,989,185
Net income per share $.06 $.03 $.11 $.07
========== ========== ========== ==========
Fully Diluted:
Average shares outstanding 5,025,072 4,980,439 5,023,788 4,989,185
Net income per share $.06 $.03 $.11 $.07
========== ========== ========== ==========
(The accompanying notes are an integral part of the consolidated financial
statements)
Page 5
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
Nine months ended
September 30,
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1997 1996
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Cash flows from (used in) operating activities:
Net income $ 572,014 $ 336,532
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization 77,940 71,250
Issuance of common stock employee compensation 30,000 24,000
Bad Debt Expense 22,500
Effects of changes in operating working capital items:
(Increase) decrease in trade and other
receivables (101,326) 39,799
(Increase) decrease in inventories (3,912) 210,283
(Increase) decrease in prepaid expenses (28,890) 17,265
Increase (decrease) in current liabilities 406,700 (110,863)
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Net cash provided by operating activities 975,026 588,266
Cash flows used in investing activities:
Purchase of capital equipment (54,568) (16,272)
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Net cash used in investing activities (54,568) (16,272)
Cash flows used in financing activities:
Issuance of common stock option agreements 12,577 15,095
Treasury stock purchased (55,390) (83,316)
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Net cash used in financing activities (42,813) (68,221)
Net increase in cash 877,645 503,773
Cash and cash equivalents at beginning of
period 2,786,554 1,903,418
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Cash and cash equivalents at end of period $3,664,199 $2,407,191
========== ==========
(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 nine months ended September 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:
September 30, 1997 December 31, 1996
Raw Material $1,388,279 $1,525,398
Work in Progress 678,581 434,717
Finished Goods 228,820 331,653
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Total $2,295,680 $2,291,768
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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 on or after 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 presented 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 September 30, 1997 were
$1,762,959,as compared to revenues of $1,525,395 in the corresponding period
last year, representing an increase of $237,564, or 15.6%. For the nine month
period ended September 30, 1997, revenues increased 13.1% to $5,227,782 from
$4,620,342 for the first nine months of 1996. The increase in revenue for the
three months ended September 30, 1997 is due to an increase in sales of
machines. The increase in revenue for the nine month period ended September 30,
1997 is due to an increase in machine sales of approximately $260,000, spare
part sales of approximately $270,000 and an increase in rental revenue of
approximately $93,000. North American sales for the three month period ended
September 30, 1997 decreased to $898,085, or 26.8%, from $1,227,622 for the
three months ended September 30, 1996. This decrease in revenue was principally
due to a decrease in the sale of machines compared to the comparable quarter in
1996. For the nine months ended September 30, 1997, North American sales
decreased to $3,055,098, or 5.0%, from $3,216,315 for the nine months ended
September 30, 1996. This decrease in revenue is principally due to a decrease in
machine sales of approximately $669,000, offset by an increase in spare part
sales of approximately $351,000. Foreign sales were $864,874 for the quarter
ended September 30,1997, compared to $297,773 for the quarter ended September
30, 1996, an increase of approximately $567,000, or 190%. This increase in
revenue was principally due to an increase in the sale of machines of
approximately $619,000 compared to the comparable quarter in 1996. Foreign
sales for the nine months ended September 30, 1997 increased to $2,172,684, or
54.8%, from $1,404,027 for the nine months ended September 30, 1996. This
increase in revenue is due to an increase in sales of machinery of approximately
$989,000.
Cost of goods sold for the three months ended September 30, 1997 was $738,136,
or 41.9% of revenue, compared to $642,328, or 42.1% of revenue, for the same
period last year. For the nine month period ended September 30, 1997, cost of
goods sold increased to $2,363,904 from $2,084,060 for the comparable period in
1996. For the nine month period ended September 30, 1997, cost of goods sold, as
a percentage of sales, was approximately the same as cost of goods sold for the
nine month period ended September 30, 1996 (42%). The increase in the absolute
dollar amount of cost of goods sold for both the three and nine month periods
ended September 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 September 30, 1997 were $876,806,
or 49.7% of revenue, as compared to $779,857, or 51.1% of revenue,for the same
period last year, which is an increase of $96,949, or 12.4%. Operating expenses
for the nine months ended September 30, 1997 were $2,532,220, or 48.4% of
revenue, as compared to $2,311,158, or 50.0% of revenue, for the same period
last year, an increase of $221,062, or 9.6%. Research and development expenses
for the three months ended September 30, 1997 were flat compared to the three
months ended September 30, 1996. For the nine months ended September 30,1997,
research and development expenses increased by $36,343, primarily due to a
$45,000 increase in costs related to a research project. Selling, general and
administrative expenses for the three months ended September 30, 1997 increased
by approximately $88,000, from $666,040 to $754,049, or 13.2%, compared to the
three months ended September 30, 1996. For the nine months ended September 30,
1997, selling, general and administrative costs increased approximately
$185,000, from $1,994,762 to $2,179,481, or 9.3%. For the three months ended
September 30, 1997, selling expenses increased by approximately $33,000, from
$385,976 to $418,550, due to an increase in payroll and related costs of
approximately $59,000 offset by a reduction in commission expense of
approximately $29,000. For the nine months ended September 30, 1997, selling
expenses were flat, compared to the comparable period last year, decreasing by
approximately $6,900, from $1,246,250 to $1,239,346. For the three months ended
September 30, 1997, general and administrative costs increased by approximately
$55,000, from $280,064 to $335,499, due to an increase in accounting and legal
fees of approximately $11,000, and an increase in payroll and related costs of
approximately $31,000. General and administrative expenses increased by
approximately $192,000, from $748,512 to $940,135 for the nine months ended
September 30, 1997. The principal reasons for the increase were: accounting and
legal fees of approximately $53,000,and payroll and related expenses of
approximately $52,000.
Interest income for the three months ended September 30, 1997 increased 101.6%
to $45,074 from $22,355 for the three months ended September 30, 1996. Interest
income increased for the nine months ended September 30, 1997 to $110,984 from
$73,899 in the same period last year, an increase of $37,085, or 50.2%. These
increases are due to an increase in the amount of cash available for investment
during each period.
The Company realized a gain on the sale of a portion of the Company's holdings
in PolyMedica Industries, Inc. in the amount of $91,863 for the three month
period ended September 30, 1997.
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 $37,509 for the three and nine
months ended September 30, 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 $1,758,894 and $101,357 at September 30, 1997 and September 30, 1996,
respectively, consisting of purchase commitments for Microfluidizer equipment.
Page 10
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 $975,026 and $588,266 from operations for the nine
months ended September 30, 1997 and 1996, respectively. For the first nine
months of 1997, this amount was principally the result of income from operations
and an increase in current liabilities, partially offset by an increase in trade
and other receivables and in prepaid expenses. For the first nine months of
1996, this amount was principally the result of income from operations and
decreases in trade and other receivables, inventories, and prepaid expenses,
partially offset by an decrease in current liabilities.
The Company utilized $54,568 and $16,272 for investing activities for the nine
months ended September 30, 1997 and 1996, respectively. Net cash used for
investing activities in each period related to the purchase of capital
equipment. As of September 30, 1997, the Company had no material commitments for
capital expenditures.
For financing activities, the Company utilized cash of $42,813 and $68,221 for
the nine months ended September 30,1997 and 1996, respectively. These amounts
were composed of the purchase of treasury stock of $55,390 and $83,316 for the
nine months ended September 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 $15,095, respectively in the comparable periods.
The cash and cash equivalents balance of the Company was $3,664,199 at September
30, 1997, an increase of $877,645 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 September 30, 1997 and November 7, 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 candidate
or that, if identified, that such acquisition candidate 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"),
Page 11
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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 13
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
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Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 7, 1997
Page 14
EXHIBIT INDEX
Exhibit Description
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11 Statement regarding
computation of per share
earnings.
27 Financial Data Schedule
Page 15
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30
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1997 1996
---- ----
Weighted Average Common
Stock Outstanding 4,917,646 4,989,185
Options Outstanding 105,592
Options Exercised 550
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5,023,788 4,989,185
Income 572,014 336,532
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Income Per Share .11 .07
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Page 16