<PAGE>
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, 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
------------------------------
MICROFLUIDICS INTERNATIONAL CORPORATION
---------------------------------------
(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
-------------
(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 5,142,054 shares of Common Stock, par value $.01 per share,
outstanding on May 4, 1998.
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MICROFLUIDICS INTERNATIONAL CORPORATION
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 3
1998 and December 31, 1997
Consolidated Statements of Income for the 5
three months ended March 31, 1998 and March 31,
1997
Consolidated Statements of Cash Flows for the 6
three months ended March 31, 1998 and March 31,
1997
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
March 31, 1998 December 31,1997
--------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $3,498,430 $4,083,214
Marketable securities 61,953 55,638
Accounts receivable(less
allowance for doubtful accounts
of $40,000 and $48,576 at March
31, 1998 and December 31, 1997) 1,582,261 1,396,088
Other receivables 150,391 140,989
Inventory 2,121,427 2,436,938
Prepaid expense 106,006 26,764
---------- ----------
Total current assets 7,520,468 8,139,631
Equipment and leasehold
improvements, at cost
Furniture, fixtures and
Office equipment 335,467 335,467
Machinery and equipment 268,498 261,592
Leasehold improvements 132,629 125,322
---------- ----------
736,594 722,381
Less:accumulated
depreciation
and amortization (587,555) (570,555)
---------- ----------
149,039 151,826
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$390,529 at March 31, 1998 and
$379,549 at December 31, 1997) 156,151 167,131
Deferred income taxes 413,630 413,630
---------- ----------
Total assets $8,239,288 $8,872,218
========== ==========
</TABLE>
(See notes to consolidated financial statements)
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MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
<TABLE>
<CAPTION>
March 31, 1998 December 31,1997
-------------- -----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 509,772 $ 939,796
Accrued compensation 64,737 76,269
Accrued vacation pay 37,295 37,294
Customer advances 68,829 280,716
----------- -----------
Total current liabilities 680,633 1,334,075
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
5,142,054 and 5,136,804 shares
issued and outstanding at March 31,
1998 and at December 31,1997
respectively 51,421 51,368
Additional paid-in-capital 10,452,702 10,442,840
Accumulated deficit (2,356,077) (2,360,359)
Unrealized appreciation on
marketable securities 61,953 55,638
Less: Treasury Stock, at cost,
220,719 shares at March 31,
1998 and December 31,
1997 respectively ( 651,344) ( 651,344)
----------- -----------
Total stockholders' equity 7,558,654 7,538,143
----------- -----------
Total liabilities and
stockholders' equity $ 8,239,288 $ 8,872,218
=========== ===========
</TABLE>
(See notes to consolidated financial statements)
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MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended
----------------------------
March 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenues $1,811,665 $1,715,334
Cost of goods sold 1,026,531 821,288
---------- ----------
Gross profit on revenues 785,134 894,046
Operating expenses
Research and Development 152,203 113,240
Selling, general and administrative 675,361 665,829
---------- ----------
Total operating expenses 827,564 779,069
---------- ----------
Income(loss)from operations (42,430) 114,977
Interest income 46,712 27,189
Other income 12,503
----------
Net income $ 4,282 $ 154,669
========== ==========
Basic earnings per share:
Average shares outstanding:basic 4,920,802 4,922,479
========== ==========
Net income per share $.00 $ .03
========== ==========
Diluted earnings per share:
Average shares outstanding:diluted 5,044,102 4,970,374
========== ==========
Net income per share $.00 $ .03
========== ==========
</TABLE>
(See notes to consolidated financial statements)
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MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows provided by operations:
Net income $ 4,282 $ 154,669
Reconciliation of net income to cash used by
operations:
Depreciation and amortization 27,980 25,280
Common Stock employee compensation 0 7,500
Bad debt expense 0 7,500
Increase (decrease) in cash due to change in:
Trade and other receivables (195,575) 153,681
Inventories 315,511 91,310
Prepaid expenses (79,242) (38,779)
Current liabilities (653,442) 74,287
---------- ----------
Net cash(used by) provided by operations (580,486) 475,448
Cash flows (used by) investing activities:
Capital equipment (14,213) (23,837)
---------- ----------
Net cash (used by) investing activities (14,213) (23,837)
Cash flows from financing activities
Proceeds from issuance of Common Stock 9,915 927
---------- ----------
Net cash from financing activities 9,915 927
Net increase (decrease)in cash (584,784) 452,538
Cash and cash equivalents at beginning 4,083,214 2,786,554
---------- ----------
Cash and cash equivalents at end $3,498,430 $3,239,092
========== ==========
</TABLE>
(See notes to consolidated financial statements)
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MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 three months ended March 31, 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 EPS data.
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MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
March 31, 1998 December 31, 1997
Raw Material $ 1,291,062 $1,277,094
Work in Progress 576,673 649,946
Finished Goods 253,692 509,898
---------- ----------
Total 2,121,427 $2,436,938
========== ==========
4. TAXES
The Company utilized net operating loss carry forwards 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 PRONOUNCEMENT
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 .
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6. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income for the quarters
ended March 31, 1998 and 1997 are as follows:
Three months ended
March 31,
---------
1998 1997
------ ------
Other comprehensive income:
Unrealized gains on securities 6,315 $14,863
------ -------
Other comprehensive income 6,315 $14,863
------ -------
The accumulated other comprehensive income balance is as follows:
Unrealized gain
---------------
on securities
-------------
Beginning balance $55,638
Current-period change 6,315
-------
Ending balance $61,953
=======
These amounts have not been tax effected due to the availability of Net
Operating Loss carryovers to offset the unrealized gains.
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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 March 31, 1998 were $1,811,665 as
compared to revenues of $1,715,334 in the corresponding period last year,
representing an increase of $96,331, or 5.6%. North American sales for the
three month period ended March 31, 1998 decreased to $1,109,101, or 12.7%, from
$1,269,902 for the three months ended March 31, 1997. This decrease in revenue
was principally due to a decrease in spare part sales of approximately $110,000.
Foreign sales were $702,564 for the quarter ended March 31, 1998, compared to
$445,432 for the quarter ended March 31, 1997, an increase of $257,132, or
57.7%. This increase in revenue was due to the sale of a large volume production
machine for approximately $363,000. Management believes that the increased
foreign revenues were due to an increase in the demand in the various foreign
markets for the Company's products. There can be no assurance that these market
conditions will continue to generate increased revenues. These two custom
designed units were the largest systems built to date by the Company and as such
presented several technical challenges. The Company ultimately realized
abnormally low profit margins on the sale of these systems.
Cost of goods sold for the three months ended March 31, 1998 was $1,026,531 or
56.7% of revenue, compared to $821,288, or 47.9% of revenue, for the same period
last year. The increase in the cost of goods sold both as a percentage of
revenue and in the absolute dollar amount for the three months ended March 31,
1998 primarily reflects the sale of two large volume production units.
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.
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Operating expenses for the three months ended March 31, 1998 were $827,564, or
45.7% of revenue, as compared to $779,069, or 45.4% of revenue for the same
period last year, an increase of $48,495 or 6.2%. Research and Development
expenses increased by $38,963, from $113,240 to $152,203, of which approximately
$28,000 was due to an increase in payroll and related costs.
The cost of selling expenses increased by approximately $62,432 from $384,828 to
$447,260. The main increase of approximately $42,000 was for payroll and related
expenses. General and administrative expenses decreased from $281,001, to
$228,101, or $52,900, for the three months ended March 31, 1998 as compared to
the same period last year. The principal reasons for the decrease are a $12,000
decrease in legal fees, a decrease in the accounts receivable reserve account of
$7,500, and a decrease in telephone expense of approximately $12,500.
Interest income for the three months ended March 31, 1998 increased 71.8% to
$46,712 from $27,189 for the three months ended March 31, 1997. This increase is
due to both an increase in the amount of cash available for investment and
higher average interest rates.
The Company received other income of $12,503 for the three months ended March
31, 1997. 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 $348,159 and $721,272 at March 31, 1998 and March 31,
1997, 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 flows from operations.
The Company utilized cash of $580,486 and generated cash of $475,448 from
operations for the three months ended March 31, 1998 and 1997, respectively.
In the first quarter of 1998, this amount was principally the result of net
income from operations and decreases in inventories, partially offset by a
decrease in current liabilities and an increase in trade and other receivables
and prepaid expenses. In the first quarter of 1997, this amount was principally
the result of net 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.
The Company utilized $14,213 and $23,837 for investing activities for the three
months ended March 31, 1998 and 1997, respectively. Net cash used for investing
activities in each period related to the purchase of capital
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equipment. As of March 31, 1998, the Company had no material commitments for
capital expenditures.
For financing activities, the Company received cash of $9,915 and $927 for the
three months ended March 31,1998 and 1997,respectively,from the issuance of
Common Stock pursuant to the exercise of stock option agreements pursuant to the
Company's employee stock purchase plan and stock option plan.
The cash and cash equivalents balance of the Company was $3,498,430 at March 31,
1998, a decrease of $584,784 from the December 31, 1997 balance of $4,083,214.
The Company continues to maintain a line of credit with a bank. 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 March
31, 1998 and May 4,1998, 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 may, from time to time, consider an acquisition of complementary
businesses, products, or technologies, although it has no present
understandings, commitments, or agreements with respect to any such
acquisitions.
3. NEW ACCOUNTING PRONOUNCEMENT
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.
4. YEAR 2000 DISCLOSURE
The Company has considered the potential problems that may arise because of the
Year 2000 as it relates to the Company's internal information systems. It is
the Company's opinion that, having considered the systems that the company
presently utilizes, the Year 2000 should not present material problems nor
material costs with respect to its own internal information systems. To date,
the Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's
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operations or financial condition will not be identified; that the systems of
other companies with which the Company transacts business will be corrected on a
timely basis; or that a failure by such entities to correct a Year 2000 problem
or a correction which is incompatible with the Company's information systems
would not have a material adverse effect on the Company's operations or
financial condition.
5. 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 impact of government regulation, the uncertainty that
existing patents will be held valid if challenged, that any additional patents
will be issued or that the scope of any patent protection will exclude
competitors; the availability of alternate manufacturing sources and suppliers;
the availability of additional capital to fund expansion on acceptable terms, if
at all; and general market and economic conditions.
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MICROFLUIDICS INTERNATIONAL CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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.
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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: May 7, 1998
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EXHIBIT INDEX
Exhibit Description
------- -----------
11 Statement regarding
computation of per share
earnings.
27 Financial Data Schedule
Page 16
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Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Three Months Ended March 31
---------------------------
1998 1997
---------- ----------
Average shares outstanding:Basic 4,920,802 4,922,479
========== ==========
Net income 4,282 154,669
========== ==========
Net income per share $ .00 $ .03
========== ==========
Effect of dilutive stock
options 123,300 47,895
---------- ----------
Average shares outstanding:
Diluted 5,044,102 4,970,374
========== ==========
Net income per share $ .00 $ .03
========== ==========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,498,430
<SECURITIES> 61,953
<RECEIVABLES> 1,732,652
<ALLOWANCES> 0
<INVENTORY> 2,127,427
<CURRENT-ASSETS> 7,520,468
<PP&E> 736,594
<DEPRECIATION> 587,555
<TOTAL-ASSETS> 8,239,288
<CURRENT-LIABILITIES> 680,633
<BONDS> 0
0
0
<COMMON> 51,421
<OTHER-SE> 7,507,234
<TOTAL-LIABILITY-AND-EQUITY> 8,239,288
<SALES> 1,811,665
<TOTAL-REVENUES> 1,811,665
<CGS> 1,026,531
<TOTAL-COSTS> 1,854,095
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,282
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,282
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
