<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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 31,1999
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 02464
----------------------------------------------------------
(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 6,061,304 shares of Common Stock, par value $.01 per share,
outstanding on May 18, 1999.
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
PAGE
INDEX NUMBER
----- ------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31,1999 and March 31,1998 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31,1999 and March 31, 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
March 31, 1999 December 31,1998
-------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 639,198 $ 550,713
Marketable securities 0 10,080
Accounts receivable (less
allowance for doubtful accounts
of $91,296 and $100,000 at
March 31,1999 and December 31,1998,
respectively) 1,344,876 2,284,840
Other receivables 34,634 84,845
Accounts Receivable -- Related Party 18,111 24,417
Inventories 4,473,901 4,450,926
Prepaid expenses 177,258 164,528
------------ ------------
Total current assets 6,687,978 7,570,349
Equipment and leasehold
improvements, at cost
Furniture, fixtures and
office equipment 443,361 436,447
Machinery and equipment 846,774 893,388
Leasehold improvements 310,563 310,563
------------ ------------
1,600,698 1,640,398
Less: accumulated depreciation
and amortization (702,540) (644,065)
------------ ------------
898,158 996,333
Goodwill (net of accumulated
amortization of $254,329 at
March 31, 1999, and $154,329
at December 31, 1998, respectively) 5,916,118 6,010,130
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$434,570 at March 31,1999 and
$423,470 at December 31, 1998,
respectively) 112,110 123,210
------------ ------------
Total assets $ 13,614,364 $ 14,700,022
============ ============
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
<TABLE>
<CAPTION>
March 31, 1999 December 31,1998
-------------- ----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other
accrued expenses $ 1,125,362 $ 1,179,163
Accrued compensation 164,121 177,155
Customer advances 178,114 166,136
Current portion of long term debt 125,000 125,000
Line of Credit 3,985,448 4,347,782
Total current liabilities 5,578,045 5,995,236
Long term debt,
net of current portion 650,000 675,000
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
6,061,307 and 6,056,983 shares
issued and outstanding at March 31,
1999 and at December 31,1998,
respectively 60,613 60,570
Additional paid-in-capital 12,494,839 12,491,423
Accumulated deficit (4,495,026) (3,865,800)
Accumulated other
comprehensive income - 10,080
Less: Treasury Stock, at cost,
242,719 and 235,219 shares
at March 31, 1999 and December
31, 1998, respectively (674,107) (666,487)
------------ ------------
Total stockholders' equity 7,386,319 8,029,786
------------ ------------
Total liabilities and
stockholders' equity $ 13,614,364 $ 14,700,022
============ ============
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
-----------------------------
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Revenues $ 2,597,122 $ 1,811,665
Cost of goods sold 1,665,532 1,026,531
----------- -----------
Gross profit on revenues 931,590 785,134
Operating expenses:
Research and development 239,373 152,203
Selling 597,498 447,259
General and administrative 640,855 228,102
----------- -----------
Total operating expenses 1,477,726 827,564
Income (loss) from operations (546,136) (42,430)
Interest income 3,389 46,712
Interest expense 98,343
Gain on sale of
marketable securities 11,864
-----------
Net income(loss) $ (629,226) $ 4,282
=========== ===========
Basic Earnings Per Share
Average shares outstanding:
Basic 5,818,588 4,920,802
Net Income (Loss) Per Share $ (.11) $ .00
=========== ===========
Diluted Earnings Per Share
Average shares outstanding: Diluted 5,818,588 5,044,102
Net income (loss) per share $ (.11) $ .00
=========== ===========
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1999 1998
----------- -----------
unaudited
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (629,226) $ 4,282
Reconciliation of net income to cash
used by operating activities:
Depreciation and amortization 181,616 27,980
Gain on sales of fixed assets (10,992) -
Bad debt expense 3,500
Effects of changes in operating working
capital items:
(Increase) decrease in trade and other
receivables 992,981 (195,575)
(Increase) decrease in inventories (22,975) 315,511
(Increase) decrease in prepaid expenses (12,730) (79,242)
Increase (decrease) in current liabilities (54,857) (653,442)
----------- -----------
447,317 (580,486)
Net cash provided by operating activities
Cash flows used in investing activities:
Proceeds from sales of fixed assets 65,125
Excess of cost over assets purchased
(Goodwill) (5,988)
Purchase of capital equipment (26,474) (14,213)
----------- -----------
Net cash used in investing activities 32,663 (14,213)
Cash flows used in financing activities:
Payment of subordinated debt (25,000)
Issuance of common stock at purchase date 9,915
Paydown on Line of Credit (362,334) -
Issuance of common stock option agreements 3,459 -
Treasury stock purchased (7,620) -
----------- -----------
Net cash used in financing activities (391,495) 9,915
----------- -----------
Net increase (decrease)in cash 88,485 (584,784)
----------- -----------
Cash and cash equivalents at beginning of period 550,713 4,083,214
Cash and cash equivalents at end of period $ 639,198 $ 3,498,430
=========== ===========
</TABLE>
(See Notes to Consolidated Financial Statements)
6
<PAGE>
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 three months ended March 31, 1999 and 1998 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, 1998.
2. EARNINGS (LOSS) PER SHARE
Basic Earnings (loss) per Share (EPS) is computed by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock, unless the effects of dilution would be anti-dilutive.
7
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
Raw Material $1,925,429 $1,875,881
Work in Progress 1,287,509 1,075,711
Finished Goods 1,260,963 1,499,334
---------- ----------
Total $4,473,901 $4,450,926
========== ==========
</TABLE>
4. TAXES
The Company has a federal net operating tax loss carryforward of
approximately $3,844,000 and research and development tax credit carryforwards
of approximately $188,000 expiring at various dates beginning in 2001 through
2018. Ownership changes may result in future limitations on the utilization of
net operating losses and research and development tax credit carryforwards.
Based on the financial results known at December 31, 1998, the Company has
established a full valuation allowance against a deferred tax asset due to the
uncertainty of earning sufficient taxable income to realize the benefit of these
assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2000. SFAS No. 133
significantly modifies accounting and reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
8
<PAGE>
6. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income for the three months
ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------
1999 1998
-------- ------
<S> <C> <C>
Other comprehensive income:
Reclassification adjustment for gains
included in net income $ 0 $6,315
-------- ------
Other comprehensive income $ 0 $6,315
======== ======
</TABLE>
The accumulated other comprehensive income balance is as follows at
March 31, 1999.
<TABLE>
<CAPTION>
Unrealized loss
on Securities
-------------
<S> <C>
Beginning balance $10,080
Reclassification adjustment
for gains included in net
income (10,080)
--------
Ending balance $ 0
========
</TABLE>
These amounts have not been tax affected due to the availability of Net
Operating Loss carryovers to offset the unrealized gains.
7. SUBORDINATED DEBT AND LINE OF CREDIT
In August 1998, the Company purchased substantially all of the assets and
assumed certain liabilities of two corporations. As part of the transaction, the
Company delivered to the sellers, two subordinated promissory notes in the
aggregate principal amount of $800,000; one for $300,000, and the other for
$500,000. The $300,000 note has interest due quarterly, at 10% per annum, with
principal payments of twelve equal installments of $25,000 each commencing on
September 30, 2001. The $500,000 note has interest due quarterly at 10% per
annum, with principal payments of twenty equal installments of $25,000 each
commencing December 31, 1998.
The Company originally 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" provided up to
9
<PAGE>
$5,000,000 in loans at a rate of prime minus 5/8% with monthly interest payments
and the outstanding principal amount due on September 1, 2001. The line of
credit was secured by substantially all the assets of the Company. The
outstanding principal balance at March 31, 1999 and December 31, 1998 under the
Revolving Loan Agreement was $3,985,448 and $4,347,782, respectively and
currently bears interest at a rate of 7.125% per annum.
In 1998, the Company incurred a net loss of approximately $1,505,000 and
was not in compliance with certain covenants of the Revolving Loan
Agreement. Accordingly, the Company reclassified all amounts due to current
liabilities. On March 23, 1999, the Company's lender advised the Company that it
was in default of the Revolving Loan Agreement and instructed the Company to
cease all payments on the Subordinated Promissory Notes. The lender also
purported to reduce the line of credit to $4,000,000. Until May 7, 1999, the
Company functioned under a standstill agreement. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
On May 7, 1999, the Company and its lender executed a forebearance
agreement to the Revolving Loan Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, management has developed and is executing a
plan to return to profitability and positive cash flow. The plan includes
renegotiating the terms of the Revolving Loan Agreement, if possible, seeking to
obtain sufficient new capital or subordinated debt, manufacturing cost reduction
programs, reductions in the number of personnel at all three Company locations,
reduction in discretionary spending and salaries for key officers and combining
the salesforce for all product lines.
There can be no assurance that the Company will be successful in its
attempt to execute its plan to return to profitability and positive cash flow.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
10
<PAGE>
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, 1999 were
$2,597,122, as compared to revenues of $1,811,665 for the three months ended
March 31, 1998 representing an increase of $785,457, or 43%. The increase during
this period is primarily due to the $1,511,000 in additional revenue generated
by the Company's Epworth Mill and Morehouse-Cowles divisions during the first
quarter, offset by a decrease in sales by the previously sole operating division
of the Company, the Microfluidics division, of $725,000.
For the Microfluidics division, North American sales for the three month
period ended March 31, 1999 decreased to $839,173, a decrease of $269,928, or
24%, as compared to North American sales of $1,109,101 for the three months
ended March 31, 1998. This decrease in North American sales was principally due
to a decrease in the sale of machines compared to the three months ended March
31, 1998. Foreign sales were $246,932 for the three months ended March 31,1999
compared to $702,564 for the three months ended March 31, 1998, a decrease of
approximately $456,000 or 65.0%. This decrease in foreign sales was due to a
decrease in the sale of machines of approximately $544,000 compared to the three
months ended March 31, 1998.
Cost of goods sold for the three months ended March 31, 1999 was $1,665,532
or 64% of revenue, compared to $1,026,531 or 57% of
11
<PAGE>
revenue, for the three months ended March 31, 1998. The increase in cost of
goods sold in absolute dollars for the three months ended March 31, 1999,
reflects the increase in sales generated by the Epworth Mill and Morehouse-
Cowles operating divisions of the Company, offset by a decrease in sales of
machines by the Microfluidics division of the Company. For the Microfluidics
division of the Company, for the three month period ended March 31, 1999, cost
of goods sold was $407,521, or 38% of division sales, compared to $1,026,531 or
57% of sales for the three months ended March 31, 1998. The decrease in cost of
goods sold was primarily due to reduced foreign sales and a decrease in large
machine 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 March 31, 1999 were
$1,477,726, or 57% of revenue, as compared to $827,564, or 46% of revenue, for
the three months ended March 31, 1998 which is an increase of $650,162 or 79%.
Research and development expenses for the three months ended March 31, 1999
were $239,373 compared to $152,203 for the three months ended March 31, 1998, an
increase of $87,170 or 57%. Excluding research and development expenses
attributable to the new operating divisions of the Company that approximated
$106,000, the decrease in research and development expenses was primarily due to
a decrease in payroll costs of approximately $25,000.
Selling expenses for the three months ended March 31, 1999 increased
approximately $150,000 or 34%, compared to the three months ended March 31, 1998
from $447,259 to $597,498. For the three months ended March 31, 1999 excluding
selling expenses of approximately $207,000 attributable to the new divisions of
the Company, selling expenses decreased by approximately $57,000 from $447,259
to $390,607, due to a decrease in commissions of approximately $64,000.
For the three months ended March 31, 1999, general and administrative
expenses increased by approximately $413,000 from $228,101 to $640,855.
Excluding expenses attributable to the new
12
<PAGE>
operating divisions of the Company of approximately $264,000 for the three
months ended March 31, 1999, general and administrative expenses increased
approximately $49,000 for the three months ended March 31, 1999 principally due
to an increase in professional fees of approximately $34,000.
Interest income for the three months ended March 31, 1999 decreased to
$3,389 compared to $46,712 for the three months ended March 31, 1998, a decrease
of approximately $43,000 or 92%. The decrease is due to a reduction in the
amount of cash available to invest.
The Company realized a gain on the sale of the Company's holdings in
Cardiotech International, Inc. in the amount of $11,864 for the three month
period ended March 31, 1999.
2. Liquidity and Capital Resources
Prior to the acquisition of the Epworth Mill and Morehouse-Cowles
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
generated cash of $447,317 and used cash of $580,486 from operations for the
three months ended March 31, 1999 and 1998 respectively. The Company's principal
operating cash requirements were to fund its net loss and decreases in current
liabilities, increase in inventories, and an increase in prepaid expenses,
offset by decreases in trade and other receivables. For the first three months
of 1998, this amount was principally the result of income from operations and a
decrease in inventories, partially offset by a decrease in current liabilities,
and an increase in trade and other receivables and prepaid expenses.
The Company generated cash of $32,663 and utilized cash of $14,213 for
investing activities for the three months ended March 31, 1999 and 1998,
respectively. Net cash used for investing activities for the three months ended
March 31, 1999 consisted primarily of the purchase of capital equipment. Net
cash used for investing activities for the three months ended March 31, 1998
consisted of the purchase of capital equipment. As of March 31, 1999, the
Company had no material commitments for capital expenditures.
The Company used cash of $391,495 for financing activities for the three
months ended March 31, 1999, consisting of payments on the line of credit,
payments of subordinated debt, and the purchase of treasury stock. The Company
generated cash of
13
<PAGE>
$9,915 for the three months ended March 31, 1998, composed solely of 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 March 31, 1999, the Company had $639,198 in cash and cash
equivalents, compared to $550,713 as of December 31, 1998.
In 1998, the Company incurred a net loss of approximately $1,505,000 and
was not in compliance with certain covenants of its Revolving Credit Loan
Agreement with Comerica Bank ("Loan Agreement"). On March 23, 1999, the Comerica
Bank advised the Company that the Company was in default of the Loan Agreement
and instructed the Company to cease all payments on the Subordinated Promissory
Notes. The lender also purported to reduce the line of credit to $4,000,000. The
Company had been functioning under a standstill agreement until May 7, 1999.
These matters raise substantial doubt about the Company's ability to continue as
a going concern.
On May 7, 1999, the Company and Comerica Bank executed a forbearance
agreement (the "Forbearance Agreement") to the Loan Agreement, pursuant to which
Comerica Bank agreed to forbear the Company's defaults until July 15, 1999 (the
"Forbearance Period"), subject to earlier termination in certain circumstances.
In addition, the line of credit under the Loan Agreement was reduced from
$5,000,000 to $4,000,000, of which $1,000,000 represents an over-formula amount
(the "Over-Formula Amount"). The interest rate under the Loan Agreement is the
prime rate (as defined in the Loan Agreement) plus one percent. The Company has
also agreed to pay the lender each month an "over-formula fee" of eight percent
of the Over-Formula Amount. To induce Comerica Bank to enter into the
Forbearance Agreement, the Company agreed to use its best efforts to procure
sufficient new capital or subordinated debt on reasonable terms and conditions
in order to eliminate the Over-Formula Amount and to prevent any further
defaults. The Company and Comerica Bank have also agreed to work toward an
extension of the Forbearance Period. There can be no assurance that the Company
and Comerica will enter into an extension to the Forbearance Period or that such
extension will be on terms suitable to the Company. There can also be no
assurance that the Company will be able to raise sufficient new capital or
subordinated debt on reasonable terms or at all.
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 six months, provided the line of credit is maintained with the
lender.
In view of the fact that the above financial results reflect the combined
operations of the Company only for the period January 1, 1999 to March 31, 1999,
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.
14
<PAGE>
3. NASDAQ DELISTING
The Company was advised on April 22, 1999 that the Nasdaq Listings
Qualifications Panel determined to delist the Company's common stock from the
Nasdaq National Stock market effective with the close of business April 22,
1999.
This delisting decision means that the Company's securities will now trade
on the OTC Bulletin Board of the over-the-counter market. The delisting may make
it more difficult to trade in the Company's common stock or to liquidate an
investor's holdings. Also, such delisting may make it more difficult for the
Company to raise additional capital.
4. New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2000. SFAS No. 133
significantly modifies Accounting and Reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
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.
15
<PAGE>
Strategic plan
The Company has 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 had reviewed proposals for a full compliance audit of
the Company's network systems and its components. Such an audit had been
completed on the network systems and applications. As a result of the audit, the
Company has begun implementation of a plan to replace its current network
hardware and operating system. Although the Company expected to have all
system-wide applications fully compliant by April 30, 1999, due to unanticipated
delays, the Company now expects to have all system-wide applications fully
compliant by September 30, 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 included the distribution of inquiry letters to its most
significant third parties. The Company is now in the process of completing 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.
16
<PAGE>
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 third quarter of 1999. The total
cost of implementing the plan is not expected to exceed $75,000. Any costs
associated with such plan have been 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 implementation 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
ability of the Company to enter into an extension of the Forbearance Period, the
ability of the Company to raise sufficient new capital or subordinate debt 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 actions of the Company's current and future lenders, the failure of
the Company to meet its obligations under the Forbearance Agreement, the failure
of the Company to successfully negotiate an extension to the Forbearance
Agreement on commercially reasonable terms, if at all, or to enter into a new
credit facility on acceptable terms, if at all; 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; and general economic
conditions.
17
<PAGE>
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) The Registrant did not file any Reports on Form 8-K during the quarter
ended March 31, 1999.
18
<PAGE>
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 24, 1999
19
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule
20
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Weighted Average Common
Stock Outstanding 5,818,588 4,920,802
Options Outstanding 0 123,300
Options Exercised 0 0
--------- ---------
5,818,588 5,044,102
========= =========
Income (loss) (629,226) 4,282
========= =========
Income (loss) Per Share $ (.11) $ .00
========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 639,198
<SECURITIES> 0
<RECEIVABLES> 1,397,621
<ALLOWANCES> 0
<INVENTORY> 4,473,901
<CURRENT-ASSETS> 6,687,978
<PP&E> 1,600,698
<DEPRECIATION> (702,540)
<TOTAL-ASSETS> 13,614,364
<CURRENT-LIABILITIES> 5,578,045
<BONDS> 0
0
0
<COMMON> 60,613
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,614,364
<SALES> 2,597,122
<TOTAL-REVENUES> 2,597,122
<CGS> 1,665,532
<TOTAL-COSTS> 3,143,258
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (546,136)
<INTEREST-EXPENSE> 98,343
<INCOME-PRETAX> (629,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> (629,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (629,226)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
