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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 September 30, 1997
---------------------------------------------
[ ] 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
I-Flow Corporation
- -------------------------------------------------------------------------------
(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)
20202 Windrow Drive Lake Forest, CA 92630
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(Address of principal executive offices) (Zip Code)
(714) 206-2700
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(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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 September 30, 1997, there were 12,286,689 shares
outstanding of Common Stock and 656,250 shares outstanding of
Series B Preferred Stock.
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I-FLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three and nine-month
periods ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
Part II: Other Information 11
Signatures 12
</TABLE>
2
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I-FLOW CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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ASSETS (Unaudited)
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 353,000 $ 1,651,000
Royalty receivable -- 1,000,000
Accounts receivable, net 5,694,000 3,514,000
Inventories 4,121,000 3,352,000
Prepaids and other 237,000 141,000
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Total current assets 10,405,000 9,658,000
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PROPERTY:
Furniture, fixtures and equipment 4,053,000 3,264,000
Less accumulated depreciation (1,774,000) (1,326,000)
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Property, net 2,279,000 1,938,000
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OTHER ASSETS
Goodwill and other intangibles, net 4,103,000 4,831,000
Notes receivable and other 1,208,000 807,000
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TOTAL $ 17,995,000 $ 17,234,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,415,000 $ 1,156,000
Accrued payroll and related expenses 675,000 1,271,000
Deferred revenue 62,000 429,000
Current portion of long-term debt 1,000,000 1,000,000
Borrowings under line-of-credit 1,000,000 --
Restructuring reserve -- 824,000
Other liabilities -- 73,000
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Total current liabilities 4,152,000 4,753,000
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LONG-TERM DEBT 1,747,000 2,500,000
LONG-TERM RESTRUCTURING RESERVE -- 384,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; 5,000,000 shares authorized; 656,250 series
B shares issued and outstanding at September 30, 1997 and December 31,
1996, 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; 12,286,689 and 12,050,076 shares
issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 33,719,000 33,036,000
Common stock warrants 615,000 615,000
Accumulated deficit (23,732,000) (25,548,000)
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Net shareholders' equity 12,096,000 9,597,000
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TOTAL $ 17,995,000 $ 17,234,000
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</TABLE>
See accompanying notes to consolidated financial statements
3
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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUE:
Net sales $ 4,705,000 $ 2,965,000 $14,068,000 $ 4,695,000
Licensing fees -- 1,000,000 -- 3,600,000
----------- ----------- ----------- -----------
Total revenue 4,705,000 3,965,000 14,068,000 8,295,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 2,085,000 1,140,000 5,891,000 2,045,000
Selling and marketing 827,000 824,000 2,448,000 1,556,000
General and administrative 807,000 982,000 2,724,000 2,259,000
Product development 209,000 334,000 813,000 804,000
In-process research and development 4,900,000 4,900,000
----------- ----------- ----------- -----------
Total costs and expenses 3,928,000 8,180,000 11,876,000 11,564,000
Income (loss) before interest and taxes 777,000 (4,215,000) 2,192,000 (3,269,000)
Interest income (expense) (69,000) (10,000) (212,000) 173,000
Income taxes (29,000) -- (67,000) (35,000)
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NET INCOME (LOSS) $ 679,000 $(4,225,000) $ 1,913,000 $(3,131,000)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.05 $ (0.34) $ 0.14 $ (0.28)
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 13,842,053 11,569,690 13,736,416 11,225,418
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
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I-FLOW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,913,000 $ (3,131,000)
Adjustments to reconcile net income (loss)
to net cash provided by operations:
In-process research and development -- 4,900,000
Depreciation and amortization 1,176,000 172,000
Changes in operating assets and liabilities:
Royalty receivable 1,000,000 --
Accounts receivable (2,180,000) 602,000
Inventories (769,000) (52,000)
Prepaid expenses and other (96,000) (120,000)
Accounts payable, accrued and other liabilities (2,082,000) 653,000
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Net cash provided by (used by) operating activities (1,038,000) 3,024,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (including rental and
demonstration equipment) (789,000) (466,000)
Business acquisition (16,036,000)
Change (increase) in notes receivable (401,000) (147,000)
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Net cash used by investing activities (1,190,000) (16,649,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (payments) on notes payable (753,000) 3,947,000
Proceeds from borrowings on line of credit 1,000,000
Proceeds from exercise of stock options and warrants 683,000 5,574,000
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Net cash provided by financing activities 930,000 9,521,000
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,298,000) (4,104,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,651,000 5,628,000
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 353,000 $ 1,524,000
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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I-FLOW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 September 30,
1997 and the results of its operations and its cash flows for the
nine-month periods ended September 30, 1997 and 1996. 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, 1996 filed with the Securities and Exchange Commission on March 31,
1997.
Certain amounts previously reported have been reclassified to
conform with the presentation at September 30, 1997.
2. BANK FINANCING
The Company has a financing agreement with a bank which
provides for a working capital line of credit of $4,000,000 expiring in
July 1998.
3. EARNINGS PER SHARE
In 1997, earnings per share is based on the modified treasury
stock method. Under this method, earnings per share is based on the
weighted average number of common shares outstanding during the year,
the assumed exercise of all options and warrants, the use of proceeds
of such assumed exercises to acquire 20% of the common stock with any
remaining proceeds being used to retire Company debt.
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4. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share (EPS)", was issued in February 1997. Under FAS 128,
the Company will be required to disclose basic EPS and diluted EPS for
all periods for which an income statement is presented, which will
replace disclosure currently being made for primary EPS and
fully-diluted EPS. FAS 128 requires adoption for fiscal periods ending
after December 15, 1997. Pro forma disclosures of basic EPS and diluted
EPS for the current reporting and comparable periods in the prior year
are as follows:
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Earnings Per Share:
Basic $0.05 $(0.34) $0.15 $(0.28)
Diluted $0.05 $(0.34) $0.14 $(0.28)
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain disclosures made by the Company in this report and in other
reports and statements released by the Company are and will be
forward-looking in nature, such as comments which express the Company's
opinions about trends and factors which may impact future operating
results. Disclosures which use words such as the Company "believes,"
"anticipates," or "expects" or use 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 from those expected and readers are cautioned not to place undue
reliance on these forward-looking statements. 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 in this report which seek to advise interested parties of the
risks and other factors that affect the Company's business, as well as
in the Company's periodic reports on Forms 10-K, 10-Q, and 8-K filed
with the Securities and Exchange Commission. The risks affecting the
Company's business include reliance on the success of the Home Health
Care Industry, the reimbursement system currently in place, competition
in the industry, technological changes and product availability. Any
such forward-looking statements, whether made in this report or
elsewhere, should be considered in context with the various disclosures
made by the Company about its business.
RESULTS OF OPERATIONS
Net sales during the three and nine-month periods ended September 30,
1997 were $4,705,000 and $14,068,000, respectively, compared to
$2,965,000 and $4,695,000 for the same periods in the prior year.
During the three and nine-month periods ended September 30, 1996, the
Company also received licensing fees of $1,000,000 and $3,600,000,
respectively which brought total revenues for these periods to
$3,965,000 and $8,295,000, respectively. The increase in net sales for
the three and nine-month periods ended September 30, 1997 was primarily
due to sales of products from Block Medical, Inc. ("Block") of
approximately $3,200,000 and $10,000,000, respectively. Block was
acquired by the Company on July 22, 1996.
Notwithstanding the year-to-year increase, net sales for the quarter
were less than anticipated due to lower than forecasted sales from one
of the Company's primary international distributors. This distributor
is currently undergoing certain changes within its internal
organization and seeking to finalize the acquisition of a major
European homecare company. These changes within the distributor have
created a shortfall in current sales to the distributor that may
continue through at least the
8
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remainder of this year. Management believes, however, that these
efforts by the distributor will ultimately increase the sales of I-Flow
products into the European market.
In March 1996, SoloPak Pharmaceuticals, Inc. ("SoloPak") purchased the
exclusive right and license to manufacture and sell certain of the
Company's products in the United States and Puerto Rico. Pursuant to
the agreement, SoloPak paid the Company $1.3 million in consideration
of the license in March 1996 and 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 SoloPaks' net
sales of the products for the 1997 and 1998 calendar years. Royalties
due for the quarter ended September 30, 1997 were not significant. 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.
Cost of sales of $2,085,000 and $5,891,000 were incurred during the
three and nine-month periods ended September 30, 1997, respectively. As
a percentage of net sales, cost of sales were relatively unchanged
compared to the same periods in the prior year.
Selling and marketing expenses for the three-month period ended
September 30, 1997 were consistent with those for the same period in
the prior year. Selling and marketing expenses for the nine-month
period ended September 30, 1997 increased over the same period in the
prior year by $892,000, or 57%. This increase for the nine-month period
is primarily a result of an increase in the internal sales force which
increased from four to 15 people as a result of the acquisition of
Block in July 1996.
General and administrative expenses for the three-month period ended
September 30, 1997 decreased $175,000 or 18% from the same period in
the prior year due to the consolidation of the operations of Block into
the operations of the Company. These expenses primarily represent costs
for administrative personnel, facilities and other administrative items
which management has made continuous efforts to reduce since the
acquisition of Block. General and administrative expenses for the
nine-month period ended September 30, 1997 increased over the same
period in the prior year by $465,000, or 21%. This increase was
primarily the result of the acquisition of Block in July 1996 and thus
the duplication of facilities and certain personnel in the early months
following the acquisition.
Product development expenses for the three-month period ended September
30, 1997 decreased over the same period in the prior year by $125,000,
or 37% and remained relatively stable for the nine-month period ended
September 30, 1997 compared to the same period in the prior year. With
the acquisition of Block, the Company increased its engineering staff
but has since decreased the overall engineering costs by consolidating
the Block engineering efforts with its own. The
9
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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 nine-month period ended September 30, 1997, funds of
$1,038,000 were used by operating activities consisting of net income
of $1,913,000 plus non-cash expenses of $1,176,000 less net changes in
operating assets and liabilities of $4,127,000. These changes in
operating assets and liabilities consisted of: (1) a decrease in
royalties receivable of $1,000,000, less (2) a net increase in accounts
receivable of $2,180,000 due to the increase in net sales, (3) an
increase in inventories, prepaid expenses and other of $865,000 due to
the growth in the Company's operations and (4) a reduction in accounts
payable and other liabilities of $2,082,000 due to a decrease in
accrued payroll related expenses based on a reduction in the number of
personnel and due to the payment of 1996 year-end bonuses in February
1997.
The Company recorded a restructuring charge of $1,552,000 at December
31, 1996 to provide for expenses related to consolidating Block's
operations with its own in 1997. The restructuring charge was comprised
of expenses for severance, relocation, moving and lease abandonment.
During the nine-month period ended September 30, 1997 charges to the
restructuring reserve were made for such costs, there was no reserve
balance remaining as of September 30, 1997 and no further charges are
expected to occur.
The Company used funds for investing activities during the nine-month
period ended September 30, 1997 by acquiring leasehold improvements,
furniture, fixtures, equipment and other assets aggregating $1,190,000
for use in its operations.
During the nine-month period ended September 30, 1997, funds of
$930,000 were provided by financing activities consisting primarily of
proceeds from borrowings on the line of credit and the exercise of
stock options and warrants net of payments on notes payable.
As of September 30, 1997, the Company had cash funds of $353,000 and
net receivables of $5,694,000. To date, the Company has financed its
operations and working capital requirements primarily through equity
financings and bank borrowings. Management believes the Company's funds
are sufficient to provide for its projected needs for operations for
the next fiscal year.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. - Not Applicable
10
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PART II - OTHER INFORMATION
Items 1. - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - (See Index to Exhibits)
(b) During the quarter ended September 30, 1997,
the Company filed no Current Reports on Form
8-K.
11
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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
------------------
(Registrant)
Date: November 12, 1997 /s/ Donald M. Earhart
----------------------------------
Donald M. Earhart,
Chairman, President and CEO
Date: November 12, 1997 /s/ Gayle L. Arnold
----------------------------------
Gayle L. Arnold,
Vice President, Finance,
Chief Financial Officer
12
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INDEX TO EXHIBITS
Set forth below is a list of the exhibits included or incorporated by
reference as part of this report:
Exhibit No. Exhibit
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3.1 (1) Restated Articles of Incorporation of the Company
3.2 (2) Certificate of Amendment to Restated Articles of
Incorporation dated June 14, 1991
3.3 (3) Certificate of Amendment to Restated Articles of
Incorporation dated May 12, 1992
27 Financial Data Schedule
(1) Incorporated by reference to exhibit with this title filed with the
Company's Form 10-K for its fiscal year ended September 30, 1990.
(2) Incorporated by reference to exhibit with this title filed with the
Company's Registration Statement (#33-41207-LA) declared effective
August 8, 1991.
(3) Incorporated by reference to exhibit with this title filed with the
Company's Post Effective Amendment to its Registration Statement
(#33-41207-LA) declared effective November 6, 1992.
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 353
<SECURITIES> 0
<RECEIVABLES> 5,694
<ALLOWANCES> 0
<INVENTORY> 4,121
<CURRENT-ASSETS> 10,405
<PP&E> 4,053
<DEPRECIATION> 1,774
<TOTAL-ASSETS> 17,995
<CURRENT-LIABILITIES> 4,152
<BONDS> 0
0
1,494
<COMMON> 33,719
<OTHER-SE> 615
<TOTAL-LIABILITY-AND-EQUITY> 17,995
<SALES> 14,068
<TOTAL-REVENUES> 14,068
<CGS> 5,891
<TOTAL-COSTS> 11,876
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212
<INCOME-PRETAX> 1,980
<INCOME-TAX> 67
<INCOME-CONTINUING> 1,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,913
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
