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 30,1998
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 6,056,983 shares of Common Stock, par value $.01 per share,
outstanding on November 12, 1998.
Page 1
MICROFLUIDICS INTERNATIONAL CORPORATION
INDEX PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Operations
(unaudited) for the three and nine months
ended September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 9
ITEM 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Exhibit Index 11
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
1998 1997
-------------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 995,988 $ 4,083,214
Marketable securities 45,024 55,638
Accounts receivable (less
allowance for doubtful accounts
of $80,030 and $40,000 at September
30,1998 and December 31, 1997) 2,109,092 1,396,088
Other receivables 46,686 140,989
Inventory 4,752,879 2,436,938
Prepaid expense 221,533 26,764
------------ ------------
Total current assets 8,171,202 8,139,631
Equipment and leasehold
improvements, at cost
Furniture, fixtures and office equipment 442,897 335,467
Machinery and equipment 770,515 261,592
Leasehold improvements 304,843 125,322
------------ ------------
1,518,255 722,381
Less: accumulated depreciation
and amortization (647,177) (570,555)
------------ ------------
871,078 151,826
Goodwill (net of accumulated
amortization of $50,000 at
September 30, 1998) 6,061,952
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$412,489 at September 30, 1998 and
$379,549 at December 31, 1997) 134,191 167,131
Deferred Income Taxes 413,630 413,630
------------ ------------
Total assets $ 15,652,053 $ 8,872,218
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other
accrued expenses $ 1,227,683 $ 939,796
Accrued compensation 199,907 113,563
Customer advances 145,114 280,716
Corporate income taxes 17,545
Current portion of long term debt 75,000
Total current liabilities 1,665,249 1,334,075
Long term debt,
net of current portion 725,000
Line Of credit 3,947,899
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
6,056,983 and 5,136,804 shares issued
and outstanding at September 30,
1998 and at December 31,1997,
respectively 60,570 51,368
Additional paid-in-capital 12,491,423 10,442,840
Accumulated deficit (2,631,768) (2,360,359)
Unrealized appreciation on
marketable securities 45,024 55,638
Less: Treasury Stock, at cost,
220,719 shares at
September 30, 1998 and December
31, 1997 respectively (651,344) (651,344)
------------ ------------
Total stockholders' equity 9,313,905 7,538,143
------------ ------------
Total liabilities and
stockholders' equity $ 15,652,053 $ 8,872,218
============ ============
(See notes to consolidated financial statements)
Page 3
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $ 2,306,310 $ 1,762,959 $ 5,855,284 $ 5,227,782
Cost of goods sold 1,319,856 738,136 3,055,848 2,363,904
----------- ----------- ----------- -----------
Gross profit on
revenues 986,454 1,024,823 2,799,436 2,863,878
Operating expenses:
Research and
development 271,126 122,757 616,029 352,739
Selling, general and
administrative 1,024,758 754,049 2,479,884 2,179,481
Amortization of Goodwill 50,000 50,000
----------- ----------- ----------- -----------
Total operating
expenses 1,345,884 876,806 3,145,913 2,532,220
Income (loss) from
operations (359,430) 148,017 (346,477) 331,658
Interest income 36,376 45,074 115,972 110,984
Interest expense 40,904 40,904
Other income 12,503 37,509
Gain on sale of
marketable securities 91,863 91,863
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Net income(loss) $ (363,958) $ 297,457 $ (271,409) $ 572,014
=========== =========== =========== ===========
Income (loss) per Common Share:
Basic:
Average shares outstanding 5,032,189 4,919,480 5,129,015 4,918,196
Net income (loss) per share $ (.07) $ .06 $ (.05) $ .12
=========== =========== =========== ===========
Diluted:
Average shares outstanding 5,032,189 5,025,072 5,129,015 5,023,788
Net income(loss) per share $ (.07) $ .06 $ (.05) $ .11
=========== =========== =========== ===========
(See notes to consolidated financial statements)
Page 4
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
Nine months ended
September 30,
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1998 1997
---- ----
Cash flows from (used in) operating activities:
Net income (loss) $ (271,409) $ 572,014
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization 161,651 77,940
Issuance of common stock employee compensation -0- 30,000
Bad debt expense 23,000 22,500
Effects of changes in operating working capital items:
(Increase) decrease in trade and other
receivables 636,912 (101,326)
(Increase) decrease in inventories 464,485 (3,912)
(Increase) decrease in prepaid expenses (105,620) (28,890)
Increase (decrease) in current liabilities (1,672,395) 406,700
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Net cash (used in) provided by operating activities (763,376) 975,026
Cash flows used in investing activities:
Excess of cost over assets purchased (Goodwill) (3,286,952)
Purchase of capital equipment (63,517) (54,568)
Business assets acquired net of cash (3,102,216)
----------- -----------
Net cash used in investing activities (6,452,685) (54,568)
Cash flows used in financing activities:
Proceeds from borrowings to finance acquisition 4,096,050
Issuance of common stock option agreements 32,785 12,577
Treasury stock purchased (55,390)
----------- -----------
Net cash (used in) from financing activities 4,128,835 (42,813)
Net decrease in cash 3,087,226 877,645
Cash and cash equivalents at beginning of
period 4,083,214 2,786,554
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Cash and cash equivalents at end of period $ 995,988 $ 3,664,199
=========== ===========
Supplemental Cash Flow:
Assets acquired in exchange for notes
and common stock $ 2,825,000
===========
(See notes to consolidated financial statements)
Page 5
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 the nine months ended
September 30, 1998 and 1997 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, 1997.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which the Company adopted in the fourth quarter of 1997, as
required. Basic Earnings Per Share (EPS) is computed by dividing income
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 obligations to issue
common stock were exercised or converted into common stock or resulted in
the issuance of common stock. In accordance with the standard, 1997 EPS
data has been restated to conform to SFAS No. 128.
3. INVENTORY
The components of inventories on the following dates were:
September 30, 1998 December 31, 1997
Raw Material $2,181,525 $1,277,094
Work in Progress 1,221,470 649,946
Finished Goods 1,349,884 509,898
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Total $4,752,879 $2,436,938
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4. TAXES
For 1997, the Company utilized net operating loss carryforwards to
substantially offset taxes computed at statutory rates. At December 31,
1997, the Company had available approximately $2.1 million in Federal Net
Operating Loss carryforwards to offset future taxable income. The Company
established a valuation allowance against a portion of the deferred tax
asset due to the uncertainty of earning sufficient taxable income to
realize the full benefit of these assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for reporting annual and interim
operating segment information and is effective for the Company's 1998
annual financial statements and interim reporting beginning in 1999. The
Company has reviewed this new standard and has determined that it has one
business segment, and is reviewing the additional disclosure requirements
of this statement.
6. ACQUISITION OF ASSETS
On August 14, 1998, (the "Closing Date"), the Company purchased
substantially all of the assets (the "Transferred Assets") and assumed
certain liabilities of Epworth Manufacturing Company of South Haven,
Michigan ("Epworth") and Morehouse-COWLES, Inc. of Fullerton, California
("Morehouse" and together with Epworth, the "Sellers") pursuant to an Asset
Purchase Agreement (the "Agreement") dated as of June 19, 1998 by and among
the Company, Epworth and Morehouse. Messrs. J.B. Jennings and Bret A. Lewis
were the sole stockholders of both Epworth and Morehouse (the"Principals").
Epworth and Morehouse each manufactures and distributes a product line of
crushing/grinding, mixing, dissolving and dispersion systems for solid or
solids materials processing that are marketed together under the EMCO
U.S.A. trade name. The Company intends to continue the operations of
Epworth and Morehouse, each as a separate division of the Company, and to
continue the use of the Transferred Assets to manufacture and distribute
crushing/grinding, mixing, dissolving and dispersion systems. The
Transferred Assets included cash and cash equivalents, accounts and notes
receivables, inventories, machinery and equipment, intellectual property
rights, furniture and fixtures and leasehold interests and improvements.
In accordance with the Agreement, the Company paid or delivered to the
Sellers the following as consideration for the purchase price of the
Transferred Assets (the "Purchase Price"): (i) $5,508,480 in cash, (ii) two
subordinated promissory notes in the aggregate principal amount of $800,000
and (iii) 900,000 shares of the Company's restricted common stock, $.01 par
value per share, subject to the restrictions set forth in a Stockholders
agreement among the Company and the Principals dated August 14, 1998 (the
Stockholders Agreement"). The Company also incurred approximately $500,000
in expenses. In addition, the Company assumed approximately $1,930,000 of
accounts payable and accrued liabilities set forth on the Sellers' balance
sheets, certain of which were also paid on the Closing Date. The
consideration paid by the Company for the Transferred Assets was determined
through arms-length negotiations between the Company and the Sellers.
The Company paid $1,897,509 from its working capital and borrowed
$4,096,050 from Comerica Bank, its primary lender, in order to finance the
purchase and payoff certain of the assumed liabilities. The revolving loan,
security and ancillary agreements with Comerica Bank (the "Revolving Loan
Agreement") provide up to $5,000,000 in loans with monthly interest
payments and the outstanding principal amount due on September 1, 2001. The
line of credit expires on September 1, 2001. The current outstanding
principal balance under the Revolving Loan Agreement is $3,947,899 and
bears interest at a rate of 7.625% per annum.
If the acquisition had occurred as of January 1, 1998, pro-forma
information for the nine months ended September 30, 1998 and 1997 would be
as follows:
Nine months ended
September 30
------------
1998 1997
---- ----
Revenues $11,688,254 $13,826,498
=========== ===========
Income (loss) $(1,146,575) $ 193,391
=========== ===========
Earnings (loss) per share:
Basic $ (.19) $ .03
=========== ===========
Diluted $ (.19) $ .03
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7. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income for the nine months
ended September 30, 1998 and 1997 are as follows:
Nine months ended
September 30
------------
1998 1997
---- ----
Other comprehensive income:
Unrealized gains (losses) on securities $(10,614) $16,416
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Other comprehensive income $(10,614) $16,416
====== ======
The accumulated other comprehensive income balance is as follows:
Unrealized loss
---------------
on Securities
-------------
Beginning balance $55,638
Current-period change (10,614)
------
Ending balance $45,024
======
These amounts have not been tax affected due to the availability of Net
Operating Loss carryovers to offset the unrealized gains.
Page 6
MICROFLUIDICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
Total revenues for the three months ended September 30, 1998 were $2,306,310, as
compared to revenues of $1,762,959 for the three months ended September 30,
1997, representing an increase of $543,351, or 30.8%. For the nine months ended
September 30, 1998, revenues increased 12.0%, to $5,855,284 as compared to
revenues of $5,227,782 for the nine months ended September 30, 1997. The
increases during both of these periods were largely due to the $1,200,000 in
additional revenue generated by the Company's Epworth and Morehouse divisions
during the third quarter, offset by a decrease in sales by the previously sole
operating division of the Company ($660,000 for the third quarter and $580,000
for the nine months ended September 30, 1998).
For the previously sole operating division of the Company, North American sales
for the three months ended September 30, 1998 increased to $979,248, or 9.0% as
compared to North American sales of $898,085 for the three months ended
September 30, 1997. This increase in North American sales was principally due to
an increase in the sale of machines compared to the three months ended September
30, 1997. For the nine months ended September 30, 1998, North American sales
increased to $3,237,052, or 6.0% as compared to North American sales of
$3,055,098 for the nine months ended September 30, 1997. This increase in North
American sales is principally due to an increase in machine sales of
approximately $308,000, offset by a decrease in spare part sales of
approximately $90,000. Foreign sales were $123,756 for the three months ended
September 30, 1998 compared to $864,874 for the three months ended September 30,
1997, a decrease of approximately $741,000, or 86.0%. This decrease in foreign
sales was principally due to a decrease in the sale of machines of approximately
$760,000 compared to the three months ended September 30, 1997. Foreign sales
for the nine months ended September 30, 1998 decreased to $1,409,926, or 35.1%
from $2,172,604 for the nine months ended September 30, 1997. This decrease in
foreign sales is due to a decrease in sales of machinery of approximately
$849,000.
Cost of goods sold for the three months ended September 30, 1998 was $1,319,856,
or 57.2% of revenue, compared to $738,136, or 41.9% of revenue, for the three
months ended September 30, 1997. For the nine months ended September 30, 1998,
cost of goods sold increased to $3,055,848, or 52.1% of revenue as compared to
$2,363,904, or 45.2% of revenue for the nine months ended September 30, 1997.
The increase in cost of goods sold in absolute dollars both for the three and
nine months ended September 30, 1998, reflects the increase in sales generated
by the new Epworth and Morehouse operating divisions of the Company, offset by a
decrease in sales of machines by the previously sole operating division of the
Company. For the previously sole operating division of the Company, for the
three month period ended September 30, 1998, cost of goods sold was $489,036, or
44.3% of sales, compared to $738,136, or 41.8% of sales, for the three months
ended September 30, 1997. For the nine months ended September 30, 1998, cost of
goods sold was $2,225,028, or 47.9% of sales, compared to $2,363,904,or 45.2% of
sales, for the nine months ended September 30, 1997. The decrease in cost of
goods sold was primarily due to reduced foreign sales and spare part 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.
Total operating expenses for the three months ended September 30, 1998 were
$1,295,884, or 56.2% of revenue, as compared to $876,806, or 49.7% of revenue,
for the three months ended September 30, 1997, which is an increase of $419,078,
or 49.7%. Operating expenses for the nine months ended September 30, 1998 were
$3,095,913, or 52.9% of revenue, as compared to $2,532,220, or 48.4% of revenue,
for the nine months ended September 30, 1997, an increase of $563,693, or 48.4%.
Research and development expenses for the three months ended September 30, 1998
were $271,126 compared to $122,757 for the three months ended September 30,
1997, an increase of $148,369, or 121%. Excluding research and development
expenses attributable to the new Epworth and Morehouse operating divisions of
the Company that approximated $85,000, the increase in research and development
expenses was primarily due to an increase in payroll costs of approximately
$28,000, and a decrease in grant reimbursement funds of approximately $46,000.
For the nine months ended September 30, 1998, research and development costs
were $616,029, compared to $352,739 for the nine months ended September 30,
1997, an increase of $263,290, or 74.6%. Excluding research and development
expenses attributable to the new Epworth and Morehouse operating divisions of
the Company that approximated $85,000, the increase in research and development
expenses was primarily due to an increase in payroll costs of approximately
$82,000, and a decrease in grant reimbursement funds of approximately $45,000.
Selling, general and administrative expenses for the three months ended
September 30, 1998 increased approximately $270,000, from $754,049 to
$1,024,758, or 35.9%, compared to the three months ended September 30, 1997. For
the nine months ended September 30, 1998, selling, general and administrative
expenses increased approximately $300,000, from $2,179,481 to $2,479,884, or
13.8%. For the three months ended September 30, 1998, excluding selling expenses
of approximately $165,000 attributable to the new Epworth and Morehouse
operating divisions of the Company, selling expenses increased by approximately
$34,000, from $418,550 to $452,735, due to an increase in payroll and related
costs of approximately $36,000. For the nine months ended September 30, 1998,
selling expenses, compared to the nine months ended September 30, 1997,
increased to $1,315,655 from $1,248,508, or $67,147, due principally to an
increase in payroll costs of approximately $59,000. For the three months ended
September 30, 1998, general and administrative expenses, compared to the three
months ended September 30, 1997 increased by approximately $71,000, from
$335,499 to $406,960. Excluding expenses attributable to the new Epworth and
Morehouse operating divisions of the Company of approximately $164,000 for the
three months ended September 30, 1998, general and administrative expenses
decreased approximately $92,000,for the three months ended September 30, 1998,
principally due to a decrease in professional fees of approximately $31,000, and
the capitalization of previously expensed corporate acquisition costs of
approximately $28,000 to goodwill in connection with the acquisition of the new
Epworth and Morehouse operating divisions of the Company. General and
administrative expenses decreased by approximately $104,000 to $835,636 for the
nine months ended September 30, 1998 as compared to $940,135 for the nine months
ended September 30, 1997. The principal reasons for the decrease were: a
decrease in accounting and legal fees of approximately $50,000 and the
capitalization of previously expensed corporate acquisition costs of
approximately $42,000.
Interest income for the three months ended September 30, 1998 decreased to
$36,376 compared to $45,074 for the three months ended September 30, 1997, a
decrease of $8,698 or 19.3%. Interest income increased for the nine months ended
September 30, 1998 to $115,972 compared to $110,984, for the nine months ended
September 30, 1997, an increase of $4,988, or 4.5%. The decrease in the three
months ended and the increase for the nine months ended September 30, 1998 were
due to the amount of cash available to invest for 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 received other income of $12,503 and $37,509 for the three and nine
months ended September 30, 1997, 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 sales backlog of $1,021,884
and $1,758,874 at September 30, 1998 and September 30, 1997, respectively,
consisting of purchase commitments for each divisions' line of equipment.
Page 7
2. LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition of the Epworth and Morehouse divisions, the Company
had financed its operations primarily through the use of cash and cash
equivalents on hand, and cash flow from operations. The Company used cash of
$763,376 and generated cash of $975,026 from operations for the nine months
ended September 30, 1998 and 1997, respectively. For the first nine months of
1998, the Company's principal operating cash requirements were to fund its net
loss and decreases in current liabilities and an increase in prepaid expenses,
offset by decreases in inventory and trade and other receivables. 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 prepaid expenses.
The Company utilized $6,452,685 and $54,568 for investing activities for the
nine months ended September 30, 1998 and 1997, respectively. Net cash used for
investing activities for the nine months ended September 30, 1998 included the
excess cost of assets purchased in the acquisition of the Epworth and Morehouse
divisions over their fair value, business assets acquired net of cash, as well
as the purchase of capital equipment. Net cash used for investing activities for
the nine months ended September 30, 1997 consisted of the purchase of capital
equipment. As of September 30, 1998, the Company had no material commitments for
capital expenditures.
The Company generated cash of $4,128,835 for the nine months ended September 30,
1998, consisting of proceeds from borrowings to finance the acquisition of the
Epworth and Morehouse divisions. The Company utilized cash of $42,813 for the
nine months ended September 30, 1997, composed primarily of the purchase of
treasury stock, partially offset by the issuance of Common Stock pursuant to the
exercise of stock options pursuant to the Company's employee stock purchase plan
and stock option plan.
As of September 30, 1998, the Company had approximately $995,988 in cash and
cash equivalents, compared to $4,083,214 as of December 30, 1997. This decrease
primarily resulted from the Company's purchase of the Epworth and Morehouse
divisions. The Company maintains a line of credit with Comerica Bank. The line
of credit facility provides for maximum borrowing of $5,000,000. As of September
30, 1998 and November 13, 1998 the Company had borrowings of $3,947,899 and
$4,123,426 respectively.
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.
In view of the fact that the above financial results reflect the combined
operations of the Company for the period between August 14, 1998 and September
30, 1998 and that the Company issued 900,000 shares of Common Stock in
connection with the acquisition of the Epworth and Morehouse divisions, the
Company believes that period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
3. POSSIBLE NASDAQ DELISTING
The Company's Common Stock is currently listed on the Nasdaq National
Market (the "National Market") under the symbol "MFIC." The Company has been
notified by the National Market that, as of October 19, 1998, the Company was
not in compliance with the National Market requirements for the continued
listing of its Common Stock because the public float of the Common Stock was
less than $5,000,000 for more than thirty consecutive days. Nasdaq calculates
the market value of a company's common stock by multiplying the closing bid
price of the stock by the number of shares held by non-affiliates. The Company
estimates that 3,886,673 shares are currently held by non-affiliates. The notice
from the National Market further stated that the Company's Common Stock would be
delisted as of January 18, 1999 if the public float was not $5,000,000 or more
for a period of ten consecutive trading days during the ninety-day period from
October 19, 1998 to January 17, 1999. As of November 16, 1998, the Company had
not satisfied this public float requirement. Further, as of September 30, 1998,
the Company fell below another of the National Market's continued listing
requirement; its net tangible assets (total assets minus goodwill and total
liabilities) had fallen below $4,000,000 to $3,251,953. In the event that the
Company is unable to meet the National Market continued listing requirements,
the Company intends to request a hearing before the National Market to delay or
avoid the delisting of its Common Stock. However, there can be no assurance that
the Common Stock will not be delisted by the National Market. In the event that
the Common Stock is delisted by the National Market, the Company will seek to
have the Common Stock listed on the Nasdaq SmallCap Market (the "SmallCap
Market"). However, since the Company only meets the continued listing
requirements of the SmallCap Market and does not meet the initial listing
requirements, there can be no assurance that Nasdaq will permit the Common Stock
to be listed on the SmallCap Market. If the Company cannot list its Common Stock
on the SmallCap Market, the Common Stock will trade in the over-the-counter
markets. The liquidity of such securities may be impaired not only in the number
of shares that could be bought or sold, but also through delays in the timing of
transactions, reductions in securities analysts' and media coverage of the
Company, and lower prices than might otherwise be attained.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997 the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for reporting annual and interim operating segment
information and is effective for the Company's 1998 annual financial statements
and interim reporting beginning in 1999. The Company has reviewed this new
standard and has determined that it has one business segment, and is reviewing
the additional disclosure requirements of this statement.
5. YEAR 2000 DISCLOSURE
The "Year 2000 Problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs may
recognize a year that ends in "00" as the Year 1900 rather than the Year 2000.
This could result in a significant disruption of operations and an inability to
process certain transactions.
Strategic Plan
The Company has recently been engaged in an assessment of its internal
information technology systems. The Company contacted providers of its internal
technology systems and it was determined that, because its computer applications
use four digits to identify a year in the field date, the Company's information
technology systems were in fact internally compliant with Year 2000
requirements. The Company is also currently reviewing proposals for a full
compliance audit of the Company's network system and its components. The
Company anticipates that such audit will occur in January 1999. If any Year
2000 problems arise, the Company expects to implement a plan by the end of
January 1999 and to begin to fix such problems during the first and second
quarters of 1999, with a view to correcting all Year 2000 problems by the end of
the second quarter of 1999.
With respect to the Company's non-information technology systems, the Company is
aware that some of the equipment that the Company leases may not be Year 2000
compliant. While it is understood by the Company that the potential effect on
results of operations could be serious and could have a material adverse affect
on the Company's business or financial condition, at this time management has
not determined the entire potential level of risk associated with its non-
compliant non-information technology systems and has not yet formulated a plan
for remediating such problems.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include financial institutions, vendors, payroll service
providers, distributors, customers, and equipment manufacturers. If any of
these third parties encounter Year 2000 problems, it could have a potentially
significant outcome on the ability of the Company to effectively continue its
normal daily operations.
The initial stage to be immediately undertaken by the Company will include
distribution of inquiry letters to its most significant third parties, followed
by a subsequent internal evaluation of the responses received. Upon learning
that certain third parties are not Year 2000 compliant, the Company may be
required to manually process transactions, delay vendor payments, and/or issue
manual checks to employees in place of direct deposits. These processes, if
necessary, would be a part of the second stage - implementation, in which the
Company would correct and/or replace any vendors or vendor software that is not
Year 2000 compliant, as soon as it is feasible. The Company anticipates
completing this initial stage by the end of the first quarter of 1999.
Costs
There have been no historical costs incurred to date by the Company related to
Year 2000 compliance. As stated above, the Company expects to complete its Year
2000 strategic plan by the end of the second quarter of 1999. The total cost of
implementing the plan is not expected to exceed $25,000. Any costs associated
with such plan will be incorporated into the Company's 1999 budgeting process.
In addition, while the Company cannot predict what impact the Year 2000 problem
may have on third parties, it does not currently believe that it will incur
material costs in the implementation stage of resolving potential Year 2000
problems of third parties with whom it interacts.
Risks
Until the initial stage of the Company's strategic plan is complete, the Company
cannot accurately assess the potential risks associated with non-compliance of
its non-information technology systems or external third parties. While it is
understood by the Company that the potential effect on results of operations
could be serious and could have a material adverse affect on the Company's
business or financial condition, at this time management has not determined the
entire potential level of risk.
Contingency Plan
At the present time, a contingency plan has not been developed. The Company
will continue to monitor the need for a contingency plan based on the results of
its Year 2000 compliance strategic plan.
6. 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, the possibility
of the Company's Common Stock being delisted by Nasdaq and the Company's Year
2000 readiness. 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 8
MICROFLUIDICS INTERNATIONAL CORPORATION
PART II- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 14, 1998, the Company purchased substantially all of the
assets of Epworth Manufacturing Company and Morehouse-COWLES, Inc. As part of
the consideration paid by the Company in connection with the purchase, the
Company issued and delivered 900,000 shares of its restricted Common Stock, $.01
par value per share, to J.B. Jennings and Bret A. Lewis, the sole stockholders
of Epworth Manufacturing Company and Morehouse-COWLES, Inc. Such sale was made
in reliance upon an exemption from the registration provisions of the Securities
Act of 1933, as amended, set forth in Section 4(2) thereof relative to sales by
an issuer not involving any public offering or the rules and regulations
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1
Revolving Credit Loan Agreement between Comerica Bank and the Company
dated August 12, 1998.
Exhibit 11 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On August 27, 1998, the Company filed a Form 8-K announcing the
purchase of substantially all of the assets of two established U.S.
manufacturing firms, Epworth Manufacturing Company of South Haven,
Michigan, and Morehouse-COWLES, Inc. of Fullerton, California, as of
August 14, 1998.
On September 11, 1998, the Company filed Amendment No. 1 on Form 8-K/A
amending its filing of August 27, 1998.
On October 28, 1998, the Company filed Amendment No. 2 on Form 8-K/A
amending the previous filings of August 27, 1998, and September 11,
1998 which included pro forma financial statements required in
connection with the Company's acquisition of substantially all of the
assets of Epworth Manufacturing Company and Morehouse-COWLES, Inc.
Page 9
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: November 16, 1998
Page 10
EXHIBIT INDEX
Exhibit Description
------- -----------
10.1 Revolving Credit Loan Agreement between Comerica
Bank and the Company dated August 12, 1998.
11 Statement regarding computation of
per share earnings.
27 Financial Data Schedule