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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 31,1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number: 0-18338
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I-Flow Corporation
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(Exact name of registrant as specified in its charter)
California 33-0121984
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2532 White Road, Irvine, CA 92714
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(Address of principal executive offices) (Zip Code)
(714)553-0888
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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. [ x ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of March 31, 1996, there were 10,104,687 shares outstanding of
Common Stock and 656,250 shares outstanding of Series B Preferred
Stock.
<PAGE>
I-FLOW CORPORATION
FORM 10-Q
MARCH 31, 1996
TABLE OF CONTENTS
Page
----
Part I: Financial Information
Balance Sheets as of March 31, 1996 (Unaudited) and
December 31, 1995 3
Statements of Operations for the three-month
periods ended March 31, 1996 and 1995 (Unaudited) 4
Statements of Cash Flows for the three-month periods
ended March 31, 1996 and 1995 (Unaudited) 5
Notes to Financial Statements 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II: Other Information 12
Signatures 13
2
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I-FLOW CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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ASSETS (Unaudited)
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,947,000 $ 5,628,000
Accounts receivable, net 501,000 1,567,000
Inventories 1,334,000 1,067,000
Prepaids and other 88,000 75,000
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Total current assets 10,870,000 8,337,000
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PROPERTY:
Furniture, fixtures and equipment 1,552,000 1,494,000
Rental and demonstration equipment 150,000 156,000
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Total property 1,702,000 1,650,000
Less accumulated depreciation (1,210,000) (1,155,000)
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Property, net 492,000 495,000
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OTHER ASSETS 278,000 275,000
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TOTAL $11,640,000 $ 9,107,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $329,000 $260,000
Accrued payroll and related expenses 322,000 553,000
Deferred revenue 290,000 516,000
Other liabilities 43,000 50,000
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Total current liabilities 984,000 1,379,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares
authorized; 656,250 series B shares issued
and outstanding at March 31, 1996 and
1995, respectively (aggregate preference on
liquidation is $1,575,000) 1,494,000 1,494,000
Common stock - no par value; 40,000,000 shares
authorized; 10,104,687 shares issued and
outstanding at March 31, 1996, 8,201,834
shares issued and outstanding at March 31, 1995 26,662,000 24,278,000
Accumulated deficit (17,500,000) (18,044,000)
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Net shareholders' equity 10,656,000 7,728,000
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TOTAL $11,640,000 $ 9,107,000
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</TABLE>
See accompanying notes to financial statements
3
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I-FLOW CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Net sales $ 717,000 $2,053,000
Rental income 19,000 24,000
Interest income 69,000 26,000
Licensing fee 1,300,000
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Total revenues 2,105,000 2,103,000
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COSTS AND EXPENSES:
Cost of sales 370,000 876,000
Selling and marketing 287,000 418,000
General and administrative 673,000 537,000
Product development 232,000 212,000
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Total costs and expenses 1,562,000 2,043,000
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NET INCOME $ 543,000 $ 60,000
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NET INCOME PER SHARE $0.05 $0.01
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WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 13,163,201 8,901,834
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---------- -----------
</TABLE>
See accompanying notes to financial statements
4
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I-FLOW CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 543,000 $ 60,000
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 55,000 56,000
Changes in operating assets and liabilities:
Accounts receivable 1,066,000 911,000
Inventories (267,000) (284,000)
Prepaid expenses and other (13,000) (8,000)
Accounts payable and accrued liabilities (395,000) (500,000)
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Net cash provided by operating activities 989,000 235,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (including rental and
demonstration equipment) (52,000) (31,000)
Change in other assets (3,000) (35,000)
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Net cash used by investing activities (55,000) (66,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and warrants 2,385,000
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Net cash provided by financing activities 2,385,000
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NET INCREASE IN CASH AND CASH EQUIVALENTS 3,319,000 169,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 5,628,000 1,834,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,947,000 $2,003,000
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</TABLE>
See accompanying notes to financial statements
5
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I-FLOW CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements contain all
adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to present fairly the
financial position of the Company at March 31, 1996 and the results of
its operations and its cash flows for the three-month periods ended
March 31, 1996 and 1995. Certain information and footnote disclosures
normally included in financial statements have been condensed or
omitted pursuant to rules and regulations of the Securities and
Exchange Commission although the Company believes that the disclosures
in the financial statements are adequate to make the information
presented not misleading.
The financial statements included herein should be read in conjunction
with the financial statements of the Company, included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 filed with the Securities and Exchange Commission on March 27,
1996.
Certain amounts previously reported have been reclassified to conform
with the presentation at March 31, 1996.
2. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
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<S> <C> <C>
Raw Materials $ 994,000 $ 928,000
Work in Process 181,000 63,000
Finished Goods 349,000 241,000
Reserve for Obsolescence (190,000) (165,000)
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$1,334,000 $1,067,000
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</TABLE>
3. COMMON STOCK OPTIONS AND WARRANTS
The Company has stock option plans which currently provide for the
granting of options to employees, officers, consultants and directors.
Stock option activity for the three-month period ended March 31, 1996
is summarized as follows:
6
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<TABLE>
<CAPTION>
Shares Exercise
Subject to Price per
Options Share
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<S> <C> <C>
Balance, December 31, 1995 2,478,888 $0.25-$5.15
Granted 60,000 $5.38
Exercised (140,715) $1.31-$1.65
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Balance, March 31, 1996 2,398,173 $0.25-$5.38
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</TABLE>
Options to purchase 1,372,493 shares of the Company's common stock
were exercisable at March 31, 1996 at exercise prices ranging from
$0.25 to $5.15 per share.
Outstanding warrants as of March 31, 1996 are summarized below.
During the three-month period ended March 31, 1996, Series G Warrants
to purchase 704,747 shares of the Company's Common Stock were
exercised raising net proceeds of $2,114,241.
<TABLE>
<CAPTION>
Shares
Subject to Exercise Price
Description Warrants Per Share Expiration Date
----------- ----------- -------------- ---------------
<S> <C> <C> <C>
Underwriter Warrants 46,051 $6.79 February 1997
Series F Warrants 607,032 $2.40 to $4.80 October 1997
Series G Warrants 1,305,208 $3.00 December 1996
Series H Warrants 150,000 $2.75 to $3.25 March 1997
</TABLE>
4. BANK FINANCING
During the year ended December 31, 1995, the Company entered into a
financing agreement with a bank which provides for a working line of
credit expiring in August 1996. Under the line of credit, the Company
may borrow up to the lesser of $1,500,000 or 75% of eligible accounts
receivable, as defined, at a bank's prime rate plus 1% (10% at March
31, 1996). There were no borrowings under the line during the quarter
ended March 31, 1996.
5. LICENSING FEE
In November 1994, the Company signed an exclusive national
distribution agreement with SoloPak Pharmaceuticals Inc. (SoloPak) for
the SIDEKICK, PARAGON and ELITE product lines. In February 1996, this
agreement was superseded with a new agreement in which SoloPak
purchased the exclusive right and license to
7
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manufacture and sell the products in the United States and Puerto
Rico. Pursuant to the new agreement, SoloPak paid the Company $1.3
million in consideration of the license in February 1996 and will pay
the Company guaranteed royalties of $1.0 million during each of the
three succeeding quarters in 1996. Additionally, SoloPak will pay
I-Flow a royalty equal to two percent of its net sales of the products
for the 1997 and 1998 calendar years. Per the terms of the agreement,
I-Flow has the right of first refusal to supply SoloPak with services
and assistance in assembling the completed products until February
1988. The Company retained the rights to sell the products outside
the United States and Puerto Rico.
6. SUBSEQUENT EVENT
On April 23, 1996, the Company entered into a binding letter of intent
to acquire substantially all of the assets of Block Medical, Inc., a
wholly-owned subsidiary of Hillenbrand Industries, Inc. Closing of
the transaction is subject to several conditions including regulatory
approval and a successful financing by the Company of a portion of the
purchase price.
Under the terms of the letter agreement, the Company will acquire the
Block Medical assets for approximately $15 million in cash, $2 million
of the Company's Common Stock, and five-year, non-callable warrants to
acquire 250,000 shares of the Company's Common Stock with an exercise
price equal to the common stock price at the closing date. The
Company agreed to seek registration of the $2 million of common shares
within six months of the closing. Subject to certain acceleration
provisions, the warrants are not exercisable until January 1, 1999.
In the event the transaction does not close solely as a result of the
Company's inability to successfully complete the financing or as a
result of the Company's breach, Hillenbrand will be entitled to a $1
million termination payment.
8
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I-FLOW CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
When used in this discussion, the words "believes", "anticipates" and
similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially
from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to republish
revised forward-looking statements to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and
consider the various disclosures made by the Company which seek to
advise interested parties of the factors that affect the Company's
business in this report, as well as in the Company's periodic reports
on Forms 10-K, 10Q and 8K filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Net sales were $717,000 during the three-month period ended March 31,
1996 compared to $2,053,000 for the same period in the prior year.
However, during the three month period ended March 31, 1996, the
Company received a licensing fee of $1,300,000 which brought total
revenues for the three-month period ended March 31, 1996 to $2,105,000
compared to $2,103,000 for the same period in the prior year.
In November 1994, the Company signed an exclusive distribution
agreement with SoloPak Pharmaceuticals Inc. (SoloPak) for the
SIDEKICK, PARAGON, and ELITE product lines. Sales to SoloPak were
$1,224,000 for the three month period ended March 31, 1995, whereas
there were no sales to SoloPak during the most recent quarter
In February 1996, this agreement was superseded with a new agreement
in which SoloPak purchased the exclusive right and license to
manufacture and sell the products in the United States and Puerto
Rico. Pursuant to the new agreement, SoloPak paid the Company $1.3
million in consideration of the license in February 1996 and will pay
the Company guaranteed royalties of $1.0 million during each of the
three succeeding quarters in 1996. Additionally, SoloPak will pay
I-Flow a royalty equal to two percent of its net sales of the products
for the 1997 and 1998 calendar years. Per the terms of the agreement,
I-Flow has the right of first refusal to supply SoloPak with services
and assistance in assembling the products until February 1998. The
Company retained the right to sell the products outside the United
States and Puerto Rico.
9
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Cost of sales were $370,000 during the three-month period ended March
31, 1996 compared to $876,000 for the same period in the prior year.
As a percentage of net sales, cost of sales increased compared to the
same period in the prior year by 9%. This decrease in gross profit on
sales is primarily the result of the lower sales volume.
Selling and marketing expenses for the three-month period ended March
31, 1996 decreased over the same period in the prior year by $131,000,
or 31%. This decrease was due primarily to a reduction in the
Company's internal sales force, as the Company currently generates
most of its sales through outside distributors.
General and administrative expenses for the three-month period ended
March 31, 1996 increased over the same period in the prior year by
$136,000, or 25%. These expenses primarily represent costs for
administrative personnel, facilities and other miscellaneous items.
These costs have increased primarily as a result of increased costs
for investor relations and professional fees.
Product development expenses for the three-month period ended March
31, 1996 increased compared to those for the same period in the prior
year by $20,000, or 9%. The Company will continue to incur product
development expenses as it continues its efforts to introduce new
improved-technology, cost-efficient products into the market.
FINANCIAL CONDITION
During the three-month period ended March 31, 1996, funds of $989,000
were provided by operating activities primarily from net income of
$543,000, plus non-cash expenses of $55,000 for depreciation and net
changes in operating assets and liabilities of $391,000. The changes
in operating assets and liabilities consisted primarily of a decrease
in accounts receivable of $1,066,000 less an increase in inventories,
prepaid expenses and other of $280,000 and a reduction in accounts
payable and accrued liabilities of $395,000.
The Company used funds for investing activities during the three-month
period ended March 31, 1996 by acquiring property (including rental
and demonstration equipment) and other assets aggregating $55,000.
During the three-month period ended March 31, 1996, funds of
$2,385,000 were provided by financing activities consisting of
proceeds from the exercise of stock options and Series G Warrants.
10
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As of March 31, 1996, the Company had available funds of $8,947,000
and net receivables of $501,000. To date, the Company has financed
its operations and working capital requirements primarily through
equity financings. Management believes the Company's funds are
sufficient to provide for its short-term projected needs for
operations. Should the Company complete the acquisition of Block
Medical (Note 6 of Notes to Financial Statements) additional financing
of approximately $5 to $8 million would be required. The Company is
currently evaluating financing alternatives in this regard, including
bank borrowings, a public offering of debt or equity securities or
some combination of both.
11
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PART II - OTHER INFORMATION
Items 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) During the quarter ended March 31, 1996, the
Company filed no Current Reports on Form 8-K.
12
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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.
I-FLOW CORPORATION
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(Registrant)
Date: May 2, 1996 Donald M. Earhart /s/
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Donald M. Earhart,
Chairman, President and CEO
Date: May 2, 1996 Gayle L. Arnold /s/
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Gayle L. Arnold,
Vice President, Finance
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,947,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 11,640,000
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 984,000
<LONG-TERM> 0
0
1,494,000
<COMMON> 26,662,000
<OTHER-SE> (17,500,000)
<TOTAL-LIABILITIES-AND-EQUITY> 11,640,000
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 69,000
<INTEREST-TOTAL> 69,000
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 69,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 543,000
<INCOME-PRE-EXTRAORDINARY> 543,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 543,000
<EPS-PRIMARY> $.05
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
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<LOANS-TROUBLED> 0
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</TABLE>
