UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For
the fiscal year ended December 31, 2008
|
||
|
or
|
||
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
Commission
File Number: 0-11625
Microfluidics
International Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
|
04-2793022
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
30
Ossipee Road
Newton,
Massachusetts 02464
(Address,
including zip code, of principal executive offices)
Registrant’s telephone number,
including area code: (617) 969-5452
|
Securities
registered pursuant to Section 12(b) of the Act:
|
None
|
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
Common
Stock, par value $0.01 per share
None
|
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes o
No þ
Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No þ
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 þ
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o
No þ
As of
March 25, 2009 and June 30, 2008, 10,371,782 and 10,267,981 shares,
respectively, of the registrant’s Common Stock were outstanding, and the
aggregate market value of the registrant’s Common Stock held by non-affiliates
of the registrant (without admitting that such person whose shares are not
included in such calculation is an affiliate) was approximately $3,889,418 and
$11,294,779, respectively, based on the last sale price as reported by the
Over-the-Counter Bulletin Board on each such date.
MICROFLUIDICS
INTERNATIONAL CORPORATION
TABLE
OF CONTENTS
|
PART
I
|
|||
|
Item
1A.
|
Risk
Factors
|
8
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
11
|
|
|
Item
2.
|
Properties
|
11
|
|
|
Item
3.
|
Legal
Proceedings
|
11
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
11
|
|
|
PART
II
|
12
|
||
|
Item
5.
|
Market
for Registrant’s Common Equity and Related Stockholder
Matters
|
12
|
|
|
Item
6.
|
Selected
Financial Data
|
14
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
20
|
|
|
Item
9.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
36
|
|
|
Item
9A(T).
|
Controls
and Procedures
|
36
|
|
|
Item
9B.
|
Other
Information
|
36
|
|
|
PART
III
|
37
|
||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
37
|
|
|
Item
11.
|
Executive
Compensation
|
37
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
37
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
37
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
37
|
|
|
PART
IV
|
38
|
||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
39
|
|
|
SIGNATURES.
|
40
|
||
-2-
PART
I
Company
Overview
References
herein to “we”, “us”, “our” or “the Company” are to Microfluidics International
Corporation.
We have,
for over 20 years, specialized in manufacturing and marketing a broad line of
materials processing systems, more specifically known as high shear fluid
processing systems, which are systems used in numerous applications in the
chemical, pharmaceutical, biotech, food and cosmetics industries.
Our line
of high shear fluid processor equipment, marketed under our Microfluidizer®
trademark and trade name, process premixed formulations to produce small,
uniform structures, usually of the submicron and nanoscale size (commonly
defined as particles having dimensions less than 100 nanometers) including
nanostructures, microemulsions and nanosuspensions. The equipment
produces commercial quantities of such materials important to producers of
pharmaceuticals, coatings and other products.
Additionally,
our equipment is used for cell disruption to harvest the cultivated contents of
bacterial yeast, mammalian and /or plant cells and for liposomal encapsulation
of materials for the cosmetics and biotech/biopharma industries.
We
continue our efforts to commercialize our proprietary equipment, processes and
technology for the continuous production of precipitated submicron or nanoscale
particles by interaction of discrete streams of reacting materials
(“Microfluidics Reaction Technology” or “MRT”).
In 2008,
we presented at the following events: NSTI-Nanotech 2008, www.nsti.org, Boston
MA, the 17th International Symposium on Industrial Crystallization, September
14-17, 2008 – Maastricht (the Netherlands); and Nanotech Briefs, November 2008,
Boston MA. We also had a publication at Chemical Engineering
Progress, “Nano-Particle Formation via Controlled Crystallization: A “Bottom Up
Approach” by Thomai Panagiotou and Robert J. Fisher, Chemical Engineering
Progress, Vol.104, No. 10, October 2008.
The
technology embodied within our Microfluidizer high shear fluid processor is used
in formulating products that are normally very difficult to mix and
stabilize. Microfluidizer processors, through process
intensification, allow manufacturers in the chemical, pharmaceutical, cosmetic,
and food processing industries to produce higher quality products with better
characteristics, on a more consistent basis, than with other blending, mixing or
homogenizing techniques. Further, we guarantee scale up of
formulations and results on our processor equipment from flow rates as low as
100 to 200 milliliters per minute on our laboratory and bench top models to more
than 15 gallons per minute on our production models.
Our
management believes that future commercialization and growth of nanotechnology
may be, in large part, enabled by the manufacturing capability of our processing
equipment and our Microfluidics Reaction Technology (MRT) which is discussed
below in more detail.
We were
incorporated in Delaware in 1983. The Company, formerly named
Biotechnology Development Corporation, changed its name effective June 8, 1993
to Microfluidics International Corporation, and again changed its name effective
July 12, 1999 to MFIC Corporation. On June 17, 2008, the Company
amended its certificate of incorporation and changed its name back to
Microfluidics International Corporation. We also operated another division,
known as the Morehouse-COWLES Division, ("the Division"), from August, 1998
until February 4, 2004, which manufactured and sold a broad line of mechanical
fluid materials processing systems used for a variety of dispersing, milling,
and mixing applications across a variety of industries. (See "Former Company
Business Division", below for additional discussion on the Division). Our
principal executive offices are located at 30 Ossipee Road, in Newton,
Massachusetts 02464 and our telephone number is (617) 969-5452.
Technologies
Fluid
Processing Equipment.
Microfluidizer
high shear fluid processors differ from conventional mechanical mixing and
processing technologies in that our equipment utilizes highly pressurized liquid
product streams that travel at high velocities in precisely defined
microchannels producing high shear forces. In some configurations the liquid
streams collide at ultra-high velocities in a small, confined space producing
high forces of impact. There are no moving parts in the mixing and
collision zone (“fixed geometry”).
Combined
forces of shear and/or impact in the fixed geometry design act upon products to
cause deagglomeration and particle size reduction. These forces
result in what we believe are smaller, more uniform, highly stable, and
reproducible dispersions and emulsions than can be produced by any other means.
Microfluidizer processors also differ from conventional mixing and
homogenization equipment in that Microfluidizer processors permit a linear scale
up from milliliters per minute to gallons per minute with no basic change in
product formulation or equipment design and engineering.
The
formulations processed may be liquid/liquid or liquid/solid combinations. This
particle size reduction through shear and other forces is achieved through what
we refer to as a “top down” process in which large structures are reduced to far
smaller and uniform size to exhibit and enhanced product characteristics and
performance.
Microfluidics Reaction
Technology (MRT)
MRT
Processor – In 2008 and 2007 we presented at several conferences and published
several articles regarding MRT, and in 2008 we filed a U.S. patent application
for a special co-axially fed Microfluidizer processor that is able to use
varying ratio of reactants and exhibit more control over residence times. This
Microfluidics MRT Processor is better suited to moderate and slower speed
chemical reactions and physical reactions conducted on a continuous basis, such
as crystallization. (See Microfluidics Reaction Technology (MRT) below for
additional discussion on MRT)
Commercial
Applications
Microfluidizer
processor technology allows manufacturers in chemical, pharmaceutical,
biotechnology, cosmetic and food processing to produce higher quality products
with better characteristics, on a more consistent basis, from those produced by
other blending, mixing or homogenizing techniques. Further, the
proprietary equipment enables the manufacture of unique products which cannot
otherwise be produced. Microfluidizer processor equipment is
generally used in the processing of high value-added end-products that require
extremely small and uniform particle sizes. Newer applications
include deagglomeration of carbon nanotubes for subsequent formatting or
alignment for specific uses.
Microfluidizer
equipment is used to mix and formulate stable emulsions, dispersions and
liposomes, and for cell disruption.
Emulsions
are homogenous mixtures of oil and water components (or other normally
immiscible components), which, if mixed properly, do not readily
separate. Emulsions comprise many products, such as food additives,
medicines (including injectable drugs), photographic films and
polymers. We believe that normally an emulsion processed with
Microfluidizer processor equipment will exhibit improved stability and requires
reduced concentrations of costly emulsifying agents that are otherwise needed to
create and/or maintain product stability.
Dispersions
are mixtures of fine solids suspended in liquid so that the two do not separate
readily after processing. Similar to emulsions, dispersions are used in a
variety of consumer and industrial products, including pharmaceutical products
(including injectable drugs), coatings, pigment dispersions for inkjet inks and
toners, phosphorescent coatings for TV screens and fluorescent lamps, and barium
titanate for capacitors and toners.
-3-
Liposomes
are cell-like structures, formed from materials such as cholesterol and
lecithin, which can be used to encapsulate medications or nutrients.
Pharmaceutical and cosmetic manufacturers use liposomes as a delivery system to
target active ingredients for specific anatomical sites and to prolong their
efficacy. To date, liposomes have been used commercially in two
predominant applications: medical diagnostic agents and
cosmetics. Applications include the encapsulation of dye to be used
as a marker in medical diagnostic tests and the encapsulation of ingredients for
deeper skin penetration, or time-release control, as well as pharmaceutical,
food and specialized agricultural applications.
In the
biotechnology industry, Microfluidizer processor equipment is currently used to
harvest, by cell rupture, protein grown in bacteria, plant or mammalian
cells. The controlled forces of shear produced by Microfluidizer
processor equipment allows the cell wall to be ruptured without damage to, or
contamination of, the cell contents. The Microfluidizer processor equipment
eliminates grinding media contamination, thus minimizing downstream processing
requirements.
Microfluidizer
processor equipment is generally used in commercial applications where a
scientist, formulator or chemist is trying to develop or improve a product
formulation for a high value-added end product. We believe that our
laboratory equipment uniquely facilitates modern formulation development and
production capability. Microfluidizer processor equipment is
initially employed in a research laboratory, with the equipment subsequently
being used in scale-up to pilot scale production of new or improved products and
ultimately for production scale volumes as the improved product comes to
market. From laboratory to production, our equipment
produces guaranteed scale-up of formulations and results on our
equipment can range from 10 milliliters per minute on our laboratory and bench
top models to more than 15 gallons per minute on our large production
models.
We
believe that Microfluidics offers the industry’s broadest selection of
laboratory machines and the widest selection of standardized configurations
specific to the pharmaceutical and biotechnology industries. We
currently manufacture and market the following lines of equipment.
Laboratory
Machines
The HC
Series. The HC Series, also known as “Homogenizers,” includes
three pneumatic (air-driven) machines – the HC-2000, HC-5000 and HC-8000 - that
are intended to impart moderate levels of energy into a customer’s product with
greater flow rates than the more energy intensive Microfluidizer processor
devices. Operating pressures of products in our HC Series can range
from 250 psi to as high as 8,000 psi, and will process as much as two liters of
fluid per minute.
The
M-110 Series. The M-110 Series is a laboratory product line
designed primarily for research and development applications.
Pneumatic M-110 Series
Laboratory Machines
Standard
pneumatic M-110 models can generate pressures as high as 23,000 psi and have a
product flow rate on the order of one-half liter per minute. This
series includes the M-110S small volume machine, the M-110L medium pressure
machine, the M-110F reverse flow machine and the M-110Y high pressure
machine.
Electro-Hydraulic M-110
Series Laboratory Machines
The
M-110P was introduced in September 2007. It is a “plug and play”
electro-hydraulic machine that incorporates a 2 HP single phase motor 110v (or
220v). Its only utility requirement is a 20 amp standard electrical
outlet. The M-110P can achieve process pressures of 30,000 psi with
an average flow rate of 120 ml/min. It is a bench-top model that is
air cooled and portable. The M-110P comes equipped with numerous
standard features including a ceramic plunger and diamond interaction chamber,
and is available in CE versions.
The
M-110EH includes an on-board electric-hydraulic drive system for high
performance “lab scale” micro-mixing at processing pressures up to 30,000 psi
and flow rates up to 320 ml/min. The M-110EH requires three phase
60Hz 208/230/460V electrical supply, compressed air, cooling fluids for product,
and hydraulic oil. It has numerous standard features including a ceramic
plunger, diamond interaction chamber, and options including explosion-proof
motor, and steam sterilization.
The
M-140K Series. The M-140K is a laboratory-scale unit developed
for customers that require elevated operating pressures and higher shear forces
to achieve better performance. The M-140K can achieve operating
pressures up to 40,000 psi. The M-140K has a built-in hydraulic
system and utilizes a bi-directional intensifier pump that provides a highly
uniform pressure profile. It has been designed with many accessories
and options including an explosion-proof motor, control package and solvent seal
quench. The M-140K has flow rates up to 500 ml/min.
Production
Machines
The
M-700 Series. The M-700 Series was introduced at the end of
fiscal 1998 and was initially designed, engineered, and constructed for use in
rugged industrial environments such as coatings, paints and pigments research
and manufacturing. This product line was especially designed to
withstand such hazards as dust, grease, and water spray. Through use
of our own proprietary design of an intensifier pump and other components, the
system has also proven to be more cost-effective in many user
applications.
Due to
market demand from the pharmaceutical, biotech and cosmetic industries, the
M-700 product line was upgraded to pharmaceutical-grade components to conform to
the U.S. Food and Drug Administration’s current Good Manufacturing Practices
(cGMP) requirements. (See discussion below under heading “Government
Regulation.”) We also offer Steam-In-Place (SIP) and Clean-In-Place (CIP)
sterilization options on the M-700 Series. Our M-700 series includes
24 standardized configurations specifically designed to meet the diverse needs
of the pharmaceutical and biotech industries.
The M-700
Series equipment is available in a variety of configurations and flow rates
depending upon motor size and the number of intensifier pumps. The
M-700 series equipment can achieve operating pressures up to 40,000
psi. On the low end of the spectrum is the 15 HP, single intensifier
pump M-7115 machine with flow rates ranging from 0.9 gpm (gallons per minute) at
10,000 psi (pounds per square inch) to 0.4 gpm at 30,000 psi. The next size up
is the 25 HP, single intensifier pump, M-7125 machine with flow rates ranging
from 2.3 gpm at 10,000 psi to 0.6 gpm at 30,000 psi. The largest
offering of the M-700 series product line is the 50 HP, dual intensifier pump
M-7250 machine with flow rates ranging from 4.0 gpm at 10,000 psi to 1.2 gpm at
30,000 psi.
In
September 2003, we introduced a new addition to the M-700 series product line
with higher flow rates, the Model M-710. The Model M-710 machine is
equipped with a 100 HP, dual intensifier pump, with flow rates ranging from 15
gpm at 5,000 psi to 3.0 gpm at 30,000 psi.
Additionally,
between 2003 and 2005 we introduced several new equipment features or options
for the M-700 series product offerings including:
(i.) The M-700
Microfluidizer Containment System, which provides a hermetically sealed
stainless steel containment isolator that fully encloses the Microfluidizer
processor’s high-pressure processing area and is utilized for the safety
protection of personnel engaged in the processing of highly toxic cancer
therapeutic drugs and other hazardous and potent materials.
(ii.) The M-700
Microfluidizer Split System configuration (separating the power source from the
mixing/processing apparatus) accommodates demands of limited space within clean
rooms and for noise abatement within pharmaceutical production
facilities. Hazardous environment locations can also benefit by
placing the electrical drive system in a non-hazardous area.
(iii.) Level II
Steam Sterility Option for all pilot and production systems used for production
of injectable and other pharmaceuticals. This option enables
steam-in-place (SIP) capability without need for disassembly and allows
compliance with stringent regulatory production requirements.
-4-
(iv.) Clean in
Place (CIP) option, which provides the ability to clean-in-place Microfluidizer
processor systems between product batch runs or before storage. This
capability differentiates our Microfluidizer materials processor systems from
all other competitive products.
(v.) A
“Constant Pressure” control option, available on 50 HP or 100 HP versions of
M-7250 or M-710 machines. Maintaining operating pressure to within 5%
of peak operating pressure results in quieter operation, longer component life,
and reduced operating costs (by requiring fewer cycles or passes on the
equipment to achieve a given result).
Microfluidics
Reaction Technology (MRT).
Both
reactors (MMR & MRT Processor) and processes now fall under the umbrella of
Microfluidics Reaction Technology. We have introduced a patented
Multiple Stream High Pressure Mixer-Reactor (MMR) system as a continuous
chemical reactor, which we believe may become a standard device for conducting
high speed chemical reactions, many of which can be configured to produce
nanoparticles. This system produces uniform nanoparticles on a
continuous (versus batch) basis with phase purity previously unachievable with
conventional batch reaction technology. This degree of reaction
chemistry control can lead to cost-effective product improvements and the
development and manufacture of new nanomaterials in scalable
quantities. Applications for the new technology include improving the
performance of catalysts, planarization polishing media, superconductors,
abrasive silica, recording media, photographic media and pigments. It
also may be used in the development and production of unique pharmaceutical
products as well as the conversion of existing insoluble drugs to nanosuspension
forms which are then deliverable by conventional means and with high
bioavailability. This system is constrained by its one-to-one component mixing
ratio and some lack of control of residence time of reactants to cover a broad
range of applications, and we have expanded our existing patented MMR
technology that utilizes our impinging jet technology with a fixed component
feed ratio of one to one for very fast reactions. A newer novel
process and device is a proprietary coaxially fed reactor for moderate and
slower speed reaction and those that require differential ratios of component
feed stocks (our MRT Processor). Our MRT Processor approach introduces the
multiple reactant streams coaxially, rather than by impingement and in selected
differing ratios, which allows the predetermined residence time for slower
reactions.
A recent
breakthrough has allowed the design of our MRT Processor, a modified, coaxially
fed Microfluidizer processor with ability to handle most continuous reaction
applications. This simpler equipment design is expected to result in a lower
cost yet more flexible system which should accelerate interest in MRT
systems.
It has
been reported to the scientific community that our MRT Processor can create high
purity nano-particles to sizes not achievable with conventional particle size
reduction methods, including our own Microfluidizer processors. Conventional
processors, such as wet-milling, high pressure homogenization, micronization,
and other techniques are considered to be “top down” methods that mechanically
reduce particle sizes. Most often these “top-down” processes cannot
produce enough energy to break through nature’s barrier to reduce particles
smaller than the primary crystal size which varies with each material of
interest. This limitation is a roadblock that prevents a growing number of
critical formulations from becoming available to the marketplace.
Use of
our MRT Processor, through chemical and physical processes (such as
crystallization), utilizes a proprietary “bottom up” approach to produce
high purity nanoparticles the size of which are not achievable with any known
“top down” conventional formulation methods. The technology introduces
uniform mixing in the nanometer scale of species that are present
in the chemical or physical processes which enables nanoparticles to be
formed and the rates of the processes to be expedited. We anticipate
commercialization and introduction of MRT equipment in late
2009.
In 2008,
we presented at the following events: NSTI-Nanotech 2008, www.nsti.org, Boston
MA, the 17th International Symposium on Industrial Crystallization, September
14-17, 2008 – Maastricht (the Netherlands), Nanotech Briefs, November 2008,
Boston, Massachusetts. We also had a publication at Chemical
Engineering Progress, “Nano-Particle Formation via Controlled Crystallization: A
“Bottom-up” Approach “ by Thomai Panagiotou and Robert J. Fisher, Chemical
Engineering Progress, Vol.104, No. 10, October 2008.
We are
proceeding with projects involving other companies seeking to optimize or enable
drug delivery, catalysts and coatings products, as well as an internal program
on nanopolymer creation for drug delivery and other
applications. While we cannot accurately assess or anticipate either
the timing of receipt of a customer order or the delivery of our first MRT
Processor system, we believe this event will occur in the foreseeable future. We
believe that the MRT system and technologies will make us a leader in the
provision of systems for continuous production of uniform, reproducible,
microparticles, nanoparticles and nanodroplets involving fast chemical
reactions, crystallization and other reactions.
Former
Company Business Division
Morehouse-COWLES
Division. On February 9, 2004, pursuant to an Asset Purchase Agreement
dated February 5, 2004 between the Company and a wholly owned subsidiary of
NuSil Corporation, a California corporation (NuSil), we sold substantially all
of the assets and selected liabilities of our Morehouse-COWLES Division (the
Division), to NuSil. Other than NuSil's prior purchases of products from the
Division, there were no preexisting relationships between us and
NuSil.
Prior to
February 9, 2004, the Company-operated Division manufactured grinding and
dispersing equipment used in a broad number of industries including the coatings
and ink industries. The products included high-speed single and multi-shaft
dissolvers and dispersers, stone mills, and vertical and horizontal media mills.
As one of the early inventors of dispersers, dissolvers, stone mills, and media
mills, the one hundred-year-old COWLES name is an industry-accepted symbol of
quality, reliable products. The Division manufactures products that are
generally used for blending, mixing, deagglomeration and dispersion of paints
and coatings, inks, adhesives, sealants, and pigment dispersions. These
applications are more conventional whereby the formulations are less expensive
to produce and the volumes of product produced are large. The Division product
lines are used in broader, high volume, lower value-added applications requiring
less stringent particle size reduction.
Marketing
and Sales
Our
marketing and sales activities are conducted through a corporate marketing and
sales group that is responsible for the worldwide marketing and sales of all
products and services.
Corporate
marketing programs include advertising, public relations, direct mail, seminars,
webinars, listings in online buyers’ guides, a website with extensive
educational content, trade shows, speaking engagements and
telemarketing. We may partner on marketing efforts with
non-competitive companies with whom we share customers, as we do through our
partnership with HORIBA Instruments Inc., a world leader in producing and
distributing particle size measurement and analysis equipment. In
addition, we have an active program of field demonstrations. As an
aid to the marketing and sales activity for the equipment, we provide qualified
prospective customers with complimentary lab sample processing in our
application laboratories. These laboratories are located in Newton,
Massachusetts, Irvine, California, and Lampertheim, Germany, and provide
complimentary processing as well as particle size and distribution analysis of a
prospective customer’s sample formulation. Typically, about one third
of laboratory trials result in equipment orders within twelve
months. A prospective customer may pay for subsequent laboratory time
and services on a fee for-services-basis as part of our process development
consulting services. Finally, we have an active equipment
rental program designed to allow customers to use Microfluidizer processor
equipment at their own location to experiment with and develop product
formulations and processes. We have a rental pool of equipment to
service the needs of customers, including laboratory and pilot production
machines. A significant percentage of customers who rent our
equipment elect to purchase the rental equipment or to purchase new
equipment. For our policies on product warranties, see “Critical
Accounting Policies – Product Warranties” under Item 7 of Part II.
-5-
Our
distributors and sales agents worldwide are supported with collateral literature
and trade show materials. These distributors and sales agents may
advertise directly on their own behalf and attend regional and international
trade shows.
We sell
our equipment and services in the Americas (United States, Central and South
America, Mexico and Canada) through a network of independent manufacturers’
representative firms that are managed by our regional sales
managers. In Europe, the Middle East and Africa (EMEA) we sell our
equipment through a network of independent regional sales agents who are managed
by our Lampertheim-based EMEA sales organization. In Asia and the
Pacific Rim, we sell through a network consisting of a distributor and
independent manufacturer’s representative firms. The sales activities in each of
these three regions are led by a regional sales vice president reporting
directly to our Chief Executive Officer. Spare parts are sold by distributors or
directly by our customer service team.
Customers
The users
of our systems are in various industries, including the chemical,
pharmaceuticals, food, cosmetic and biotechnology industries. Our
customers include end users and distributors. Glaxo Smith Kline and
Subsidiaries accounted for 20.2% of 2008 revenues. No other company
accounted for more than 10% of our revenue. In 2007, no company
accounted for more than 10% of our revenue. In 2006, Teva Pharmaceuticals
Industries Ltd., and its wholly-owned subsidiary, accounted for 15.2% of our
revenue. With regard to sales to distributors, no individual end-user represents
10% or more of our revenues in year 2008, 2007 & 2006.
We sell
our products in various countries. Our revenues from sales in the
United States were approximately $6,811,000 in 2008, $7,707,000 in 2007, and
$7,418,000 in 2006, which accounted for 45.7%, 55.21% and 46.7% of our revenues
in 2008, 2007, and 2006, respectively. Our sales in North America,
including the United States, Canada and Mexico, accounted for approximately
49.9% of our revenues in 2008, 60.4% of our revenues in 2007, and 55.2% of our
revenues in 2006, with almost all of those sales coming from the United States
and Canada. Sales to the rest of the world accounted for
approximately 50.1% of our revenues in 2008; 39.6% of our revenues in 2007; and
44.8% of our revenues in 2006. In particular, approximately 12.2%,
2.7%, and 5.5%, of our net revenues in 2008, 2007, and 2006, respectively,
resulted from sales to Belgium. In addition, approximately 9.8%,
12.9%, and 18.9%, of our net revenues resulted from sales to Japan and Korea in
2008, 2007 and 2006, respectively. For additional information on
revenues, profit or loss and total assets for each of the last three fiscal
years, see “Financial Statements and Supplementary Data” under Item 8 of Part II
below. For risks related to our sales to customers in foreign
countries, see the following “Risk Factors”, under Item 1A of Part I below – “We
may be subjected to increased government regulation which could affect our
ability to sell our products outside of the United States” and “Our
international business operations expose us to a variety of risks”.
Competition
The
Microfluidizer processor equipment product line of high shear fluid processors
has direct competition in its major markets. However we believe that our
products have a larger installed base and performance advantages over products
from our competitors. We also believe that our “fixed-geometry”
interaction chambers, which permit a linear scale up, offer a unique equipment
competitive advantage. In addition, we believe that the
Microfluidizer processor equipment product line offers the highest shear forces
available in the process equipment market today. It has been proven
that for critical formulations, Microfluidizer processors produce repeatable and
uniform higher quality products for our customers.
The M-700
series of fluid processors provides high shear fluid processing capabilities for
sanitary, sterile, and industrial applications. We believe that the
Microfluidizer processor product line provides a distinct advantage over the
product lines of our competitors with respect to the processing of abrasive
slurries or solids dispersed in liquids in large part because of our unique,
wear-resistant, diamond interaction chamber and the special design of the
intensifier pumping system. Incorporation of our developed components
in the M-700 series equipment reduced the cost of these units, and they are
priced competitively with lesser capability processing equipment offered by our
competitors.
MRT may
encounter significant competition and there are other companies that possess
patents and claims to equipment or processes that claim to make production
quantities of nanoparticles.
We face,
and will continue to face, substantial competition from other companies who
manufacture and sell materials processing systems. We are subject to
significant competition from organizations that are pursuing technologies and
products that are similar to our technology and products. Our future
success will depend in large part on maintaining our current technologically
superior product line and competitive position in the fluid processing systems
field. Rapid technological development by us or others may result in
our products or technologies becoming obsolete before we recover the expenses we
incur in connection with their development. Products offered by us
could be made obsolete by less expensive or more effective
technologies. There can be no assurance that we will be able to make
the enhancements to our technology necessary to compete successfully with newly
emerging technologies. We expect competition to intensify in the
materials processing systems field as technical advances are made and become
more widely known.
Competition
for our services is minimal, since other organizations do not possess the
knowledge of Microfluidics processors or the domain expertise around pertinent
processes that Microfluidics’ employees collectively possess and apply in
delivering these services.
Research
and Development
It is our
position that a greater proportion of our sales in the future will be for more
advanced processor production systems that will incorporate features not
currently included in many of the current production machines. In
order to meet such a challenge going forward, it became necessary to hire
additional research and development personnel. It also became necessary, as a
result of this decision, to increase spending in research and
development. Additional resources in both personnel and spending may
be required in the future.
Our
research and development efforts are focused on: (i) developing new processing
applications for the process industries; (ii) further enhancements to the
functionality, reliability and performance of existing products: (iii)
development of the Microfluidics Reaction Technology (MRT) by working with
customers who assist in the development of the system with both applications
knowledge and financial support: and (iv) an internal development program
relating to processor and applications and MRT creation of a variety of
nanomaterials. There can be no assurance that we will be able to meet
the enhancement challenges posed by applications of our core Microfluidizer
processor business. Likewise, there can be no assurance that we will
be able to design and manufacture systems for our Microfluidics Reaction
Technology applications that will deliver the desired result for specific
applications. For the years ended December 31, 2008, 2007 and 2006,
research and development costs for continuing operations were $2,116,000,
$1,863,000 and $1,763,000, respectively.
Cooperative
Research Arrangements
We
subsidize research and development activities centered around Microfluidizer
processor technology at a number of research centers and
universities. Our subsidy of these activities takes the form of
substantial reduction or elimination of the customary rental charges for
Microfluidizer processor equipment provided for use. We have, in past
years, subsidized research and development in the following fields at the
following universities:
|
University
|
Field
of Research/Development
|
|
|
University
of Massachusetts, Lowell
|
Biotechnology
and nanotechnology
|
|
|
Massachusetts
Institute of Technology
|
Nanoemulsions
for biomedical applications
|
|
|
Marine
Biological Laboratory
|
Cell
disruption
|
|
|
University
of Toronto
|
Genomic
research and expression
|
|
|
University
of Karlsruhe
|
Food
formulations and products
|
|
|
Northeastern
University
|
Pharmaceutical
nanotechnology particles
|
|
|
The
Hebrew University of Jerusalem
|
Colloid
chemistry emulsion technology
|
|
|
University
of Vienna
|
Food
formulations and products
|
-6-
In
addition to their research activities, these universities provide us with
contacts at industrial companies that may utilize Microfluidizer processor
technology. We continue to have a research and collaboration
arrangement with the University of Massachusetts, Lowell (UML) to develop new
applications, processes and products in the area of nanomaterials utilizing our
leading-edge materials processing and MRT equipment. To date,
we and UML have funded four research grants, each utilizing the Microfluidizer
processor. Additionally, on occasion, research reports, technical papers, and
doctoral theses may be published, which document the use of Microfluidizer
processor technology. Finally, we engage in many informal
co-operative development efforts with our customers.
Patents
and Proprietary Rights Protection
To
protect our proprietary rights, we rely on trademark laws, trade secrets,
confidentiality agreements, contractual provisions and technical means. Our
United States Microfluidizer processor equipment method patent expired on March
13, 2007 and our device patent expired on August 6, 2002. In
addition, we neither applied for nor obtained patent or trademark protection for
our Microfluidizer processor equipment or our interaction chamber in any country
other than the United States and, as a result, our proprietary rights are not
subject to the protection of patent or trade mark laws of foreign countries
where the equipment is sold. We do not believe that the expiration of our
processing equipment device or method patents has resulted in or will result in
any material detriment to us since we have made many alterations, improvements
and advances to our equipment over the years with such modification and
innovations having been treated by us as trade secrets.
We intend
to pursue patent protection in the United States and select foreign
jurisdictions with respect to proprietary aspects of our Microfluidics Reaction
Technology. U.S. Patent filing commenced in March 2008 and Patent
Convention Treaty (PCT) filing will commence in March 2009 with national patents
to follow in approximately 12-18 months.
In 1997
we completed development of a novel adaptation of our Microfluidizer processor
equipment - a “Multiple Stream High Pressure Mixer/Reactor”,
commercially designated as the Microfluidizer Mixer/Reactor (MMR). In
August 1997, we filed a patent application for the device and its processes with
the United States Patent and Trademark Office (USPTO), and filed a Patent
Cooperation Treaty (PCT) application on May 5, 1998. In July and
November, 2000, the USPTO issued us notices of allowances of utility patent
claims regarding the MMR and the use thereof. On September 18, 2002,
the European Patent Office advised us it would grant our MMR patent
substantially as applied for, including our device and process
claims. We are in the process of pursuing national entry in France,
Germany, Italy, The Netherlands, and the United Kingdom. We are
currently pursuing our MMR patent in Canada.
In order
to afford additional protection to our intellectual property, in November 2006
we added a provision to our standard terms and conditions of
purchase. This provision is an acknowledgement and agreement by the
purchaser of our parts and equipment that certain aspects of our proprietary
intellectual property, including the design, operation and use of the equipment
interaction chamber or reaction chamber, constitutes our trade secret
information. The purchaser agrees that it will not (and will not aid,
assist or permit any other person to): (i) tamper with the equipment, (ii)
utilize imaging equipment or other means to reveal the inner structures and/or
designs of the equipment, (iii) attempt to disassemble or reverse engineer the
equipment, including specifically the interaction or reaction chamber, or (iv)
otherwise attempt to discover and/or utilize any of the trade secret
information. The purchaser is further prohibited from disclosing (or
aiding, assisting or permitting third parties to disclose) any information which
the purchaser may learn or discover about the materials and methods of
construction, design, assembly, functioning, geometries, measurements and
tolerances of the internal components of the equipment. In the event
of a violation of any of the above prohibitions, our standard terms and
conditions further stipulate that the purchaser is liable to us and/or our
subsidiary, Microfluidics Corporation, for any and all actual and potential,
direct, indirect, incidental and consequential damages, including,
without limitation, resulting lost profits, and all available equitable
relief. We have made this provision applicable to purchasers, renters
and subsidized users of the equipment. Despite the protection
afforded by this provision, there can be no assurance that we will be able to
monitor compliance by all users or that if we become aware of a violation that
we will be able to enforce our rights regarding a violation.
We also
maintain confidentiality agreements with our employees and confidentiality
agreements and non-competition agreements with third parties to whom we disclose
non-public technical information relating to our equipment. We
believe that enforcement of the provisions of these agreements should adequately
protect our proprietary information. However, in the event of a
material breach of these agreements our valuable intellectual property may be
disclosed to third parties (including competitors). As a result of
such an event, despite provisions for equitable relief and damages; we may
suffer competitively and be materially and negatively impacted as a result of
any unauthorized disclosure.
Manufacturing
At
present, we subcontract the manufacture and/or machining and finishing of many
of the components of our equipment to third parties, with the remaining
fabrication, assembly and performance testing undertaken by us. We
have selected certain primary suppliers based upon pricing terms, quality of
their products, and the vendor’s delivery and performance record.
The loss
of any primary supplier could have a material, adverse effect on our business,
financial condition, or results of operations. Therefore, we have
identified alternative suppliers for our most critical components (“Alternative
Sources”). There can be no assurance that a transition to such
Alternative Sources will not entail transitional delays, quality assurance and
quality control difficulties, or delivery problems, any or all of which would
likely have an impact on our production of equipment and could have a material
adverse effect on our business, financial condition, or results of
operations.
Government
Regulation
Certain
of our customers utilize our equipment in processes and production that is
subject to government regulation. For example, manufacture of
pharmaceutical products may require approval from the U.S. Food and Drug
Administration (FDA) within the United States and from comparable agencies in
foreign countries. The FDA has established mandatory procedures,
safety standards and protocols that apply to the manufacture, clinical testing
and marketing of new pharmaceutical products in the United
States. The process of obtaining FDA approval of a new product takes
a number of years and often involves the expenditure of substantial resources by
our customers. The FDA approval process can result in long lead times
that are attendant to manufacturing equipment orders for these
applications.
Further,
in addition to product approvals, the FDA imposes requirements on manufacturing
practices, record keeping and reporting (“current Good Manufacturing Practices”
or “cGMP”). cGMP-regulated companies are subject to inspections by
the FDA (inclusive of Microfluidizer processor equipment) and product approvals
may be withdrawn if cGMP are not met.
At
present, our customer base includes companies who use Microfluidizer processor
equipment to manufacture FDA approved drugs, preparations, and products, such as
sunscreens and cosmetic lotions for external use as well as FDA approved
parenteral (injectable) drugs or compounds such as vaccines and
anesthesia.
For our
equipment entering Europe, CE compliance (Regulatory Compliance with European
Safety Standards) is required. All products manufactured for European
customers (and for any others who may request it) by us are CE compliant through
self certification.
Various
laws, regulations and recommendations relating to safe working conditions,
laboratory practices and the purchase, storage, movement, import and export, use
and disposal of harmful or potentially harmful substances that may be used in
connection with our research work are, or may be, applicable to our
activities. These laws include, among others, the United States
Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational
Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations and
other present and possible future local, state or Federal
regulation. The extent of adverse governmental regulation, which
might result from future legislation or administrative action, cannot be
accurately predicted. Certain agreements that may be entered into by
us involving exclusive license rights may also be subject to antitrust
regulatory control, the effect of which cannot be predicted.
To date
we have not been affected by any United States governmental restrictions on
technology transfer, import, export and customs regulations and other present
local, state or Federal regulation. The extent of adverse
governmental regulation, which might result from future legislation or
administrative action, cannot be accurately predicted. In particular,
the USA Patriot Act of 2001 and other governmental regulations may impose export
restrictions on sale of equipment or transfer of technology to certain countries
or groups. There can be no assurance that sale of our equipment will
not be impacted by such legislation or designation. Depending upon
which countries and sales may be designated for trade restriction such action
could have a material adverse effect on our business, financial condition, or
results of operations.
-7-
Backlog
Our sales
order backlog related to continuing operations of accepted and unfilled orders
at March 24, 2009 and March 23, 2008 was approximately $2,200,000 and
$3,567,000, respectively. Backlog represents orders in hand that
typically take between one and six months to deliver. Backlog as of
any particular date should not be relied upon as indicative of our net revenues
for any future period.
Employees
We have
approximately 53 full-time employees as of March 1, 2009. None of our
employees are covered by a collective bargaining agreement, and the Company
considers its relations with its employees to be satisfactory. We
believe that our future success will depend in large part on our ability to
attract and retain highly skilled employees.
Available
Information and Website
Our
website is www.mficcorp.com. Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and exhibits and amendments to those reports files or furnished with
the Securities and Exchange Commission pursuant to Section 13(a) of the Exchange
Act are available for review on our website. Any such materials that
we file with, or furnish to, the Securities and Exchange Commission in the
future will be available on our website as soon as reasonably practicable after
they are electronically filed with, or furnished to, the Securities and Exchange
Commission. The information on our website is not incorporated by
reference into this Annual Report on Form 10-K.
Item
1A. Risk Factors
You
should carefully consider the risks and uncertainties described below and the
other information in this filing before deciding to purchase our common
stock. If any of these risks or uncertainties occurs, our business,
financial condition or operating results could be materially
harmed. In that case the trading price of our common stock could
decline and you could lose all or part of your investment. The risks
and uncertainties described below are not the only ones we may
face. We believe that this filing contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are subject to regulatory risks
and clinical uncertainties. Such statements are based on management’s
current expectations and are subject to facts that could cause results to differ
materially from the forward-looking statements. For further
information you are encouraged to review our filings with the Securities and
Exchange Commission, including our Quarterly Reports on Form 10-Q for the
periods ended March 31, 2008, June 30, 2008 and September 30, 2008.
We
have experienced operating losses from continuing operations in three of our
last five fiscal years, including the fiscal year ended December 31, 2008,
and we may not be able to achieve consistent profitability in the
future.
For three of the past
five fiscal years, as well as the twelve months ended December 31, 2008, we have
experienced losses from continuing operations. During the year ended
December 31, 2008 and the year ended December 31, 2007, we had a net loss
of $4,011,000 and $1,507,000, respectively. It is anticipated
that, even with the expenses changes implemented in first quarter in 2009, the
Company will have a net loss in the current fiscal
year.
The
Company must become cash-flow positive prior to exhausting its credit
facilities.
We have
concluded that our existing cash and anticipated credit facilities should be
sufficient to meet our working capital requirements for the next twelve
months. In the first quarter of 2009 we have initiated an aggressive cost
reduction program that includes headcount reductions as well as the elimination
of all non-essential discretionary spending such as travel, consulting and
marketing programs. However, if we sustain a revenue shortfall that
we can’t compensate for through additional cost cuts, or our potential credit
facility is withdrawn, it is possible that we could face unsustainable liquidity
pressures. This concern is accentuated by the fact that current
credit markets, coupled with our history of losses, has made it possible
that we would not be able to obtain alternative or additional
financing. Under these circumstances, it is possible that we could
default under our financing agreements, which default could force us to seek
protection under the bankruptcy laws and cause our investors to sustain a loss
of their investment in our shares.
The
current credit and financial market conditions may exacerbate certain risks
affecting our business.
Increased
concerns about credit markets, consumer confidence, economic conditions,
volatile corporate profits and reduced capital spending could negatively impact
demand for our products. We may experience in the future, reduced
demand for our products because of the uncertainty in the general economic
environment in which our customers and we operate. The current
tightening of credit in financial markets may adversely affect the ability of
our customers and suppliers to obtain financing, which could result in a
decrease in, or deferrals or cancellations of, the sale of our
products. If global economic and market conditions, or economic
conditions in the United States, remain uncertain or persist, spread, or
deteriorate further, we may experience a material adverse effect on our
business, operating results and financial condition. Unstable
economic, political and social conditions make it difficult for our customers,
our suppliers and us to accurately forecast and plan future business
activities. If such conditions persist, our business, financial
condition and results of operations could suffer. We cannot project
the extent of the impact of the economic environment specific to our
industry.
The
failure of any banking institution in which we deposit our funds or the failure
of such banking institution to provide services in the current economic
environment could have a material adverse effect on our results of operations,
financial condition or access to borrowings.
The capital
and credit markets have been experiencing extreme volatility and
disruption. In recent months, the volatility and disruption have
reached unprecedented levels. In some cases, the markets have exerted
downward pressure on stock prices and credit capacity for certain issuers, as
well as pressured the solvency of some financial institutions. Some
of these financial institutions, including banks, have had difficulty performing
regular services and in some cases have failed or otherwise been largely taken
over by governments. If we are unable to access some or all of our cash on
deposit, either temporarily or permanently, or are unable to access additional
credit, it could have a negative impact on our operations, including our
reported net income, or our financial position, or both.
The
occurrence of an event of default under our financing could result in
substantial losses to our stockholders.
The
$5,000,000 in financing that we received in November, 2008 (the “Financing”)
would become immediately due and payable upon the occurrence of an Event of
Default under the Financing documents. See “Sales of Unregistered
Securities” in Part II, Item 5 below for further discussion of the
Financing. See also the Form 8-K filed by the Company with the
Securities and Exchange Commission on November 20, 2008 (the “Financing 8-K”)
for a full discussion of the events that constitute an Event of
Default. Although most of the Events of Default are standard
provisions relating to timely payments, accuracy of representations, solvency,
and the absence of a change of control, an Event of Default will also occur if
our stockholders fail to approve an increase in our authorized shares to a
number sufficient to allow the Warrant (defined and discussed under “Sales of
Unregistered Securities” in Part II, Item 5) to be exercised in full, which
event is entirely beyond the control of management. If any Event of
Default occurs, there can be no assurance that we would be able to repay the
Financing or be able to raise additional funds to make such
payment. Failure to repay the Financing could force us to reorganize
our debts, possibly in bankruptcy, in which event our common stock could likely
become worthless.
-8-
We
face intense competition in many of our markets.
Our
Microfluidizer product line of high-shear fluid processors has direct
competition in its major markets, including its most important markets in the
pharmaceutical, biotechnology and coatings/chemical industries. The severity of
the competition that we confront requires that we continuously invest in
research and development in order to keep our product line competitive. Despite
such expenditures, however, there can be no assurance that we will be able to
meet the enhancement challenges posed by our competitors, or that we will be
able to create or exploit the kinds of innovations, such as our Microfluidics
Reaction Technology, needed to drive future sales.
In
addition, we face, and will continue to face, intense competition from other
companies who manufacture and sell fluid processing systems used in particle
size reduction, mixing, milling, dispersing, homogenizing, cell disruption and
liposomal encapsulation applications. We expect competition to intensify in the
fluid processing systems field as technical advances are made and become more
widely known, and such increased competition may have a material adverse effect
upon our business.
Our
future success will depend in large part on our ability to maintain a
technologically superior product line. Rapid technological development by
us or others may result in our products or technologies becoming obsolete before
we recover the expenses we incur in connection with their development. Products
offered by us could be made obsolete by less expensive or more effective
technologies. There can be no assurance that we will be able to make the
enhancements to our technology necessary to compete successfully with newly
emerging technologies.
We
may experience uncertain economic trends that adversely impact our
business.
We
may experience in the future reduced demand for our products as a result of the
uncertainty in the general economic environment in which our customers and we
operate. We cannot project the extent of the impact of the economic environment
specific to our industry. If economic conditions worsen or if an economic
slowdown occurs, we may experience a material adverse effect on our business,
operating results and financial condition.
We
rely on suppliers, vendors and subcontractors.
We do not
manufacture most of the components contained in our Microfluidizer materials
processor equipment, but rather subcontract the manufacture of most
components. Based on quality, price, and performance, we have selected
certain suppliers, vendors, and subcontractors that provide parts,
subassemblies, machining and finishing of components that are assembled by our
production staff. It is possible that, as a result of the current economic
slowdown or other reasons, one or more of our suppliers, vendors or
subcontractors could go out of business, or not ship on open account, or
otherwise be unable to supply our needs. Although we have identified
alternate sources for parts, components, machining and finishing integral to the
manufacture of our products, there can be no assurance that a transition to an
alternative source would not entail quality assurance or quality control
difficulties, on-time delivery problems, or other transition problems, any or
all of which could have an impact on our production of equipment and could have
a material adverse effect on our business, financial condition, or results of
operations.
Many
of our current and potential customers are from the pharmaceutical and
biotechnology industries and are subject to risks faced by those
industries.
We derive
a substantial portion of our revenues from pharmaceutical and biotechnology
companies. We expect that pharmaceutical and biotechnology companies will
continue to be one of our major sources of revenues for the foreseeable future.
As a result, we are subject to risks and uncertainties that affect the
pharmaceutical and biotechnology industries, such as pricing pressures as
third-party payers continue challenging the pricing of medical products and
services, government regulation, ongoing consolidation and uncertainty of
technological change, and to reductions and delays in research and development
expenditures by companies in these industries.
In
particular, the biotechnology industry is dependent on raising capital to fund
operations. If biotechnology companies are unable to obtain the financing
necessary to purchase our products, our business and results of operations could
be materially adversely affected. As it relates to both the biotechnology
and pharmaceutical industries, many companies have significant patents that have
expired or are about to expire, which could result in reduced revenues for those
companies. If pharmaceutical companies suffer reduced revenues as a result
of these patent expirations, they may be unable to purchase our products, and
our business and results of operations could be materially adversely
affected.
In
addition, we are dependent, both directly and indirectly, upon general health
care spending patterns, particularly in the research and development budgets of
the pharmaceutical and biotechnology industries, as well as upon the financial
condition and purchasing patterns of various governments and government
agencies. Many of our customers, including universities, government
research laboratories, private foundations and other institutions, obtain
funding for the purchase of products from grants by governments or government
agencies. There exists the risk of potential decrease in the level of
governmental spending allocated to scientific and medical research, which could
substantially reduce or even eliminate these grants. If
government funding necessary to purchase our products were to decrease, our
business and results of operations could be materially adversely
affected.
Lastly,
because our Financing was provided by an affiliate of a pharmaceutical company
that competes with other pharmaceutical companies, it is possible that the other
companies might decide against doing business with us in the future for
competitive reasons. If a significant number of pharmaceutical
companies were to reduce their purchases of our products for this or any other
reason, our business and results of operations could be materially adversely
affected.
We
have only one manufacturing facility.
We have a
single manufacturing facility located in Newton, Massachusetts. Our success
depends on the efficient and uninterrupted operation of that facility. Whether
as a result of a fire, natural disaster, or other cause, any disruption to our
manufacturing operations would significantly impair our ability to operate our
business on a day-to-day basis. Although we maintain business interruption
insurance, our business would be injured by any extended interruption of the
operations of our manufacturing facility. Further, although we carry property
and business interruption insurance, our coverage may not be adequate to
compensate us for all losses that may occur. This insurance may not continue to
be available to us. Finally, if we seek to replicate our manufacturing
operations at another location, we will face a number of technical as well as
financial challenges, which we may not be able to address
successfully.
We
rely on our trade secrets to protect our technology.
Our
Microfluidizer processor equipment method patent expired on March 13, 2007
and our device patent expired on August 6, 2002. In addition, we have
neither sought patent protection for our Microfluidizer processor or our
interaction chamber nor trademark protection of our Microfluidizer trade name in
any country other than the United States. As such, our proprietary rights
are not subject to the protection of patent or trademark laws of foreign
countries where our equipment is sold. Although we have made many
alterations, improvements and advances to our equipment over the years and
continue to make such advancements with such modifications and innovations
having been and being treated by us as trade secrets, the lack of our patent
protections will expose us to potential competition that would likely have a
material adverse effect on us.
To
protect our proprietary rights, we rely on a combination of trademark laws,
trade secrets, confidentiality agreements, contractual provisions and technical
means. In the event of a breach of these protections, there can be no
assurance that these measures will prove to have been adequate to protect our
interests, or that we will have sufficient resources to prosecute or prevail in
an action against a third party.
-9-
We
may be subjected to increased government regulation which could affect our
ability to sell our products outside of the United
States.
Although
United States governmental restrictions on technology transfer, import, export
and customs regulations and other present local, state or federal regulation,
have not had a significant effect on us historically, any future legislation or
administrative action restricting our ability to sell our products to certain
countries outside the United States could significantly affect our ability to
make certain foreign sales. The extent of adverse governmental regulation,
which might result from future legislation or administrative action, cannot be
accurately predicted. In particular, the USA Patriot Act and other
governmental regulations may impose export restrictions on sale of equipment or
transfer of technology to certain countries or groups. There can be
no assurance that sale of our equipment will not be impacted by any such
legislation or designation. Depending upon which countries and sales
may be designated for trade restriction such action could have a material
adverse effect on our business, financial condition, or results of
operations. Also, certain agreements that may be entered into by us
involving exclusive license rights may also be subject to national or
supranational antitrust regulatory control, the effect of which cannot be
predicted.
We
rely on our top management and technical
personnel.
Our
continued operation, innovation and growth are to some significant degree
reliant on the continued services of our executive officers and leading
technical personnel. There can be no assurance that we will be able to retain
such management and technical personnel if employment is offered by other
companies better able to pay higher compensation, provide more and better
benefits, or willing to offer longer term job security by entering into
employment contracts with our employees. Further, there can be no
assurance that key executive officers and leading technical personnel will not
leave our employment or either die or become disabled to an extent that they
cannot render their services to us. Though we believe that we can identify
and recruit replacement key management and technical personnel, there can be no
assurance as to such availability, the length of time required to obtain such
replacement management and technical personnel, the salary level that may have
to be paid to obtain their respective services, or the impact on operations that
may be experienced through the interim absence of such key management and
technical personnel. The loss of our top management or leading technical
personnel could, therefore, have a material adverse effect on our business,
financial condition, or results of operations.
Our
stock is listed on the OTC Bulletin Board and our stockholders may have limited
liquidity.
Our
common stock is quoted on the OTC Bulletin Board, which provides significantly
less liquidity than a securities exchange (such as the American or New York
Stock Exchanges or The NASDAQ Stock Market). In general, over the past two
years, fewer than 20,000 shares of our common stock have traded on a daily
basis.
Our
quarterly revenues and stock performance are variable.
The
timing of orders including completion of our factory acceptance testing can
impact the actual shipment date, which will significantly affect quarterly
revenues and net income results for particular quarters which may cause
increased volatility in both our revenues and stock price.
We
allow our customers to lease some of our products and those leases may not turn
into sales.
We
sometimes rent our products to our customers prior to or instead of selling a
product to a customer. Our products are expensive, and customers
frequently want to test out a product’s capabilities prior to
purchase. We have had reasonable success in converting rentals into
subsequent sales of the same or a newer product; however, there is no guarantee
that we will continue to be able to convert any of our leases into
sales.
We
may be subject to product liability claims from our customers or by persons
harmed by our customers’ products.
We
maintain what we deem to be reasonable levels of product liability coverage
through insurance policies with a reasonably small
deductible. Nonetheless, inasmuch as we sell our equipment to a
number of customers who make pharmaceutical preparations and consumer cosmetics,
there can be no assurance that if a consumer of end products is injured or dies
from such product that a suit by an injured party (or a class of similar
situated plaintiffs) will not include us as well as the maker of the drug or
cosmetic. Although we may have no control over the manufacture of
end-products made on our equipment, we may not be able to bar a plaintiff’s
claims against all parties whose products and equipment were involved in the
manufacturing process under a variety of legal theories of liability. We
may be required to present a vigorous and costly defense if we cannot be
dismissed from such an action. The cost of such legal defense may significantly
impact our cash flow.
Our
international business operations expose us to a variety of risks.
For
the years ended December 31, 2008, 2007, and 2006, shipments outside of North
America accounted for approximately 50.1%, 39.6%, and 44.8%, respectively, of
our net revenues in those periods. In particular, approximately
12.2%, 2.7%, and 5.5%, of our net revenues in 2008, 2007, and 2006,
respectively, resulted from sales to Belgium. In addition,
approximately 9.8%, 12.9%, and 18.9%, of our net revenues resulted from sales to
Japan and Korea in 2008, 2007 and 2006, respectively. We expect that
shipments outside of North America will continue to account for a significant
portion of our total net product revenues.
We
attempt to reduce some of our risk related to sales and shipments outside of the
United States by requiring that our contracts generally be paid in United States
Dollars. Nevertheless, a downturn in the economies of Japan, Korea or
Europe might reduce investment in new technology or products while a weakening
of foreign currency against the United States Dollar would make our products
more expensive, each of which could have a substantial impact on our operating
results.
In
addition, a significant portion of our total net revenue is subject to the risks
associated with shipping to foreign markets in general, including unexpected
changes in legal and regulatory requirements; seasonality of our revenue in
Europe; changes in tariffs; political and economic instability; risk of
terrorism; difficulties in managing distributors and representatives;
difficulties in protecting our intellectual property overseas; and natural
disasters, any of which could have a negative impact on our operating
results.
We
may experience difficulties in the future in complying with Sarbanes-Oxley
Section 404 (“Section 404”); and continued implementation and
maintenance of internal controls necessary for continued compliance with
Section 404 may result in our incurring of additional
costs.
We are
required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002. We were also required to furnish a report by
our management on our internal controls over financial reporting beginning with
our annual report on Form 10-K for the fiscal year ended December 31,
2008. Such report contains, among other matters, an assessment of the
effectiveness of our internal control over financial reporting as of the end of
our fiscal year, including a statement as to whether or not our internal control
over financial reporting is effective. While we have completed our
self-assessment as to the effectiveness of internal control over financial
reporting for the year ended December 31, 2008, which did not identify
material weaknesses in our internal control systems, there can be no assurance
that future material weaknesses in our internal control systems will not be
identified as a result of changing financial or operating conditions. In
addition, although we are currently not required to subject our internal
controls to audit by our independent registered public accounting firm until at
least our fiscal year ending December 31, 2009, there can be no assurance
that an audit of our internal controls will not result in the identification of
a material weakness. If we fail to maintain proper and effective internal
controls in future periods, it could adversely affect our operating results,
financial condition and our ability to run our business effectively and could
cause investors to lose confidence in our financial reporting. In the
event that it is determined that our internal control over financial reporting
is not effective, as defined under Section 404, investor confidence in us
may be adversely affected and could cause a decline in the market price of our
stock.
-10-
Future changes in
financial accounting standards may adversely affect our reported results of
operations.
A change
in accounting standards can have a significant effect on our reported financial
results. New accounting pronouncements and varying interpretations of accounting
pronouncements have occurred and may occur in the future. These new
accounting pronouncements may adversely affect our reported financial
results.
If
our accounting estimates are not correct, our financial results could be
adversely affected.
Management
judgment and estimates are necessarily required in the application of our
Critical Accounting Policies beginning on page 31. We discuss these
estimates in the subsection entitled Critical Accounting Policies included in
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations section of our Annual and Quarterly Reports with the Securities and
Exchange Commission. If our estimates are incorrect, our future financial
operating results and financial condition could be adversely
affected.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
corporate headquarters are in Newton, Massachusetts. We also maintain
a sales office and laboratory facility in Lampertheim, Germany, and a sales and
laboratory office in Irvine, California. We rent approximately 36,000
square feet of offices, production and research and development facilities at
these locations for administrative, development and production
activities. The lease terms expire at various times through December
2012 (with options under which we can extend the lease at the Newton facility
through October 31, 2015). We believe these facilities will be
adequate for operations for the next five years.
Item
3. Legal Proceedings
We are
not a party to any legal proceedings, other than ordinary routine litigation
incidental to our business, which we believe will not have a material affect on
our financial position or results of operations.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of our security holders during the quarter
ended December 31, 2008.
-11-
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market
Our
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
MFLU. The following table sets forth the range of quarterly high and
low bid quotations for the last two fiscal years, as furnished by the National
Association of Securities Dealers Automated Quotation System. The
quotations represent interdealer quotations without adjustment for retail
markups, markdowns, or commissions, and may not necessarily represent actual
transactions.
|
Fiscal
Year 2008
|
||||||||
|
High
|
Low
|
|||||||
|
4th
Quarter
|
$ | 0.84 | $ | 0.35 | ||||
|
3rd
Quarter
|
1.19 | 0.64 | ||||||
|
2nd
Quarter
|
1.21 | 1.00 | ||||||
|
1st
Quarter
|
1.29 | 1.00 | ||||||
|
Fiscal
Year 2007
|
||||||||
|
High
|
Low
|
|||||||
|
4th
Quarter
|
$ | 1.39 | $ | 1.02 | ||||
|
3rd
Quarter
|
1.67 | 1.15 | ||||||
|
2nd
Quarter
|
1.80 | 1.50 | ||||||
|
1st
Quarter
|
2.65 | 1.45 | ||||||
As of
March 30, 2009, there were approximately 356 holders of record of our
common stock.
Sales
of Unregistered Securities
On March
30, 2004, we completed a private placement of investment units (each unit
consisting of one share of common stock and a 3-year warrant to purchase an
additional ½ share of common stock). A total of 1,426,616 units were
sold, yielding gross proceeds of approximately $3,567,000. The units
were priced at $2.50 each and the associated warrants to purchase 713,308 shares
of common stock were exercisable at $3.05. Additionally, the
placement agent for the offering received five-year warrants to purchase 213,992
shares of common stock at an exercise price of $3.20 per share. The
value of the warrants granted to the placement agent was approximately
$351,000. The investment units and warrants were issued pursuant to
the exemption to the registration requirements of the Securities Act of 1933, as
amended, available under Section 4(2) of that Act. The placement
agent and the purchasers of the units were “accredited investors” pursuant to
the rules of the Securities and Exchange Commission. We filed a
registration statement on Form SB-2, which was declared effective on May 13,
2004, for purposes of registering the shares of common stock underlying the
units and warrants. The warrants associated with the purchases of
these units expired March 30, 2007. The warrants issued to the placement agent
may be exercised in whole or in part at any time prior to their termination date
in March, 2009. In addition, the warrants issued to the placement
agent provide for certain adjustments to the exercise price upon the issuance by
us of certain securities at a price below $3.20.
On
November 14, 2008, we sold a convertible debenture (the “Debenture”) and a
warrant (the “Warrant”) to Global Strategic Partners, LLC, a Delaware limited
liability company (“GSP”) pursuant to a Debenture and Warrant Purchase Agreement
(the “Agreement”).
At the
election of GSP, the Debenture, which has a principal face value of $5,000,000,
is convertible in whole or part on any of the maturity date, the date that any
interest payment is due, or the date on which a change of control occurs into a
number of shares of our common stock equal to the quotient of (i) the
outstanding principal amount of the Debenture, divided by
(ii) $1.25.
The
Warrant has a term of the earlier to occur of: (i) the seventh anniversary
of the date of the Agreement, (ii) the third anniversary of the date of the
Agreement in the event that we have retired the Debenture on or before the third
anniversary of the Agreement (the “Third Anniversary”) or (iii) such time
as GSP has acquired fifty percent (50%) of the total number of shares of
our common stock then outstanding on a fully diluted basis. The Warrant is
exercisable in two (2) tranches. The first tranche is exercisable in whole
or in part at $2.00 per share. The aggregate number of shares of our common
stock (the “Tranche one Maximum”) that may be purchased in tranche one (the
“Tranche One Exercise”) is forty percent (40%) of our common stock then
outstanding on a fully diluted basis, minus that number of shares of our common
stock that were issuable upon exercise of the conversion feature of the
Debenture. Notwithstanding the preceding sentence, if all or any portion of the
principal amount of the Debenture has been prepaid by us prior to the Third
Anniversary, then the Tranche One Maximum will also include a number of shares
of our common stock equal to the quotient of: (i) the amount of the Debenture’s
principal amount that was so repaid by the Third Anniversary, divided by (ii)
$1.25 (the “Prepayment Shares”). The Warrant’s second tranche is
exercisable in whole or in part at $3.00 per share. The aggregate number of
shares of our common stock that may be purchased in tranche two is equal to (a)
fifty percent (50%) of our common stock then outstanding on a fully diluted
basis, minus (b) that number of shares of our common stock that GSP is or was
entitled to acquire (or has theretofore acquired) upon (i) exercise of the
conversion of the Debenture, and (ii) the Tranche One Exercise, plus (c) the
Prepayment Shares. Tranche two may only be exercised after the full number of
shares exercisable pursuant to tranche one have been purchased. GSP
has the right to exercise the Warrant, in whole or in part, by tendering shares
of our common stock to us in payment of the exercise price, in which event we
would receive shares of our common stock instead of cash upon GSP’s exercise of
the Warrant in that fashion.
The
Debenture and the Warrant were issued pursuant to the exemption to the
registration requirements of the Securities Act of 1933, as amended, available
under Section 4(2) of that Act. GSP represented to the Company in the
Agreement that it is an “accredited investor” pursuant to the rules of the
Securities and Exchange Commission.
See the
Financing 8-K for additional information regarding the above
Financing.
Issuance
of Warrants
On
November 17, 2004, we entered into a general financial and advisory services
agreement with Maxim Group LLC pursuant to which Maxim Group LLC was granted, on
April, 1, 2005, a three-year warrant to purchase 100,000 shares of our common
stock at an exercise price of $3.20 per share. These warrants were
issued pursuant to the exemption to the registration requirements of the
Securities Act of 1933, as amended, available under Section 4(2) of that
Act. Maxim Group LLC was an “accredited investor” pursuant to the
rules of the Securities and Exchange Commission. We filed a registration
statement on Form SB-2, which was declared effective on June 5, 2006, for
purposes of registering the shares of common stock underlying the warrants.
Maxim Group LLC has waived its rights to receive, based upon the date that the
registration statement on Form SB-2 was declared effective, an additional
warrant to purchase shares of our common stock. The warrants could
have been exercised in whole or in part at any time on or prior to April 1,
2008. No warrants were exercised at any time on or prior to April 1,
2008. In addition, the warrants provided for certain adjustments to
the exercise price upon the issuance by us of certain securities at a price
below $3.20.
-12-
Dividends
We have
never paid any cash dividends on our common stock and presently anticipate that
no dividends on our common stock will be declared in the foreseeable
future. Our current policy is to retain all of our earnings to
finance future growth. Under the terms of the Agreement, we may not
pay any dividends without first obtaining the written consent of
GSP.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
equity compensation plan information in the table below is as of December 31,
2008. See also Note 11 to the Consolidated Financial
Statements.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved
by
stockholders
|
1,284,682 | $ | 1.37 | 836,000 | ||||||||
|
Equity
compensation plans not
approved
by stockholders
|
213,992 | $ | 3.20 | - | ||||||||
|
Total
|
1,498,674 | $ | 1.63 | 836,000 | ||||||||
Performance
Graph
|
Cumulative
Total Return as of December 31,
|
||||||||||||||||||||||||
| 12/03 | 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | |||||||||||||||||||
|
Microfluidics
International Corporation
|
100.00 | 173.33 | 60.00 | 68.44 | 51.56 | 16.00 | ||||||||||||||||||
|
AMEX
Composite
|
100.00 | 124.13 | 155.00 | 184.30 | 217.52 | 132.72 | ||||||||||||||||||
|
Peer
Group
|
100.00 | 156.07 | 182.05 | 163.19 | 135.83 | 20.57 | ||||||||||||||||||
-13-
Our
competitors are either larger integrated companies or privately-held
companies. We have chosen a peer group consisting of companies with a
market capitalization from $7 million to $24 million in the information
technology sector of the American Stock Exchange. The peer group
consists of the following issuers:
|
· Advance
Photonic Inc.
|
· Softbrands
Inc.
|
|
|
· Elecsys
Corporation
|
· Telkonet
Inc.
|
|
|
· Elixir
Gaming Technologies Inc.
|
· Tucows
Inc.
|
|
|
· Globalscape
Inc.
|
· Widepoint
Corporation
|
|
|
· Orsus
Xelent Technologies Inc.
|
· Wireless
Telecom Group Inc.
|
|
|
· Relm
Wireless Corporation
|
Item
6. Selected
Financial Data
The
selected financial information presented below is derived from our audited
consolidated financial statements for each of the five years in the period ended
December 31, 2008. The information set forth below should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and related
Notes included elsewhere in this Form 10-K. All fiscal years noted
below have been restated to reflect discontinued operations.
|
For
The Years Ended December 31,
|
||||||||||||||||||||
|
(in
thousands, except share and per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||
|
Total
revenues
|
$ | 14,871 | $ | 12,992 | $ | 15,654 | $ | 11,645 | $ | 12,159 | ||||||||||
|
Total
costs and expenses
|
18,753 | 14,174 | 14,450 | 12,416 | 11,462 | |||||||||||||||
|
(Loss)
income from continuing operations before income
taxes
|
(3,882 | ) | (1,182 | ) | 1,204 | (771 | ) | 697 | ||||||||||||
|
Interest
expense
|
(154 | ) | (20 | ) | (35 | ) | (59 | ) | (69 | ) | ||||||||||
|
Interest
income
|
25 | 64 | 50 | 26 | 27 | |||||||||||||||
|
Net
(loss) income from continuing operations before
income
taxes
|
(4,011 | ) | (1,138 | ) | 1,219 | (804 | ) | 655 | ||||||||||||
|
Income
tax provision (benefit)
|
- | 369 | (58 | ) | 185 | (450 | ) | |||||||||||||
|
Net
(loss) income from continuing operations before
discontinued
operations
|
(4,011 | ) | (1,507 | ) | 1,277 | (989 | ) | 1,105 | ||||||||||||
|
Loss
from discontinued operations
|
- | - | - | - | (231 | ) | ||||||||||||||
|
Net
(loss) income
|
$ | (4,011 | ) | $ | (1,507 | ) | $ | 1,277 | $ | (989 | ) | $ | 874 | |||||||
|
Basic
amounts per common share:
|
||||||||||||||||||||
|
Basic
net (loss) income per share from
continuing
operations
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.13 | $ | (0.10 | ) | $ | 0.11 | |||||||
|
Basic
net (loss) income per share from
discontinued
operations
|
- | - | - | - | (0.02 | ) | ||||||||||||||
|
Basic
net (loss) income per share
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.13 | $ | (0.10 | ) | $ | 0.09 | |||||||
|
Diluted
amounts per common share:
|
||||||||||||||||||||
|
Diluted
net (loss) income per share from
continuing
operations
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.12 | $ | (0.10 | ) | $ | 0.10 | |||||||
|
Diluted
net (loss) income per share from
discontinued
operations
|
- | - | - | - | (0.02 | ) | ||||||||||||||
|
Diluted
net (loss) income per share
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.12 | $ | (0.10 | ) | $ | 0.08 | |||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||
|
Shares
used in computing net (loss) income per common
share,
basic
|
10,296,296 | 10,183,376 | 10,012,685 | 9,756,221 | 9,345,560 | |||||||||||||||
|
Shares
used in computing net (loss) income per common
share,
diluted
|
10,296,296 | 10,183,376 | 10,611,635 | 9,756,221 | 10,329,313 | |||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Cash
and cash equivalents
|
$ | 1,895 | $ | 756 | $ | 1,860 | $ | 1,452 | $ | 2,028 | ||||||||||
|
Current
assets
|
7,119 | 5,972 | 7,856 | 5,734 | 6,821 | |||||||||||||||
|
Working
capital
|
4,464 | 4,382 | 5,643 | 4,273 | 5,180 | |||||||||||||||
|
Total
assets
|
8,720 | 6,357 | 8,225 | 6,212 | 7,292 | |||||||||||||||
|
Long-term
debt (including current portion)
|
4,625 | 65 | 312 | 563 | 813 | |||||||||||||||
|
Total
stockholders' equity
|
1,440 | 4,767 | 5,947 | 4,426 | 5,089 | |||||||||||||||
-14-
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Future
Operating Results
This
report may contain forward-looking statements that are subject to certain risks
and uncertainties including statements relating to our plan to achieve,
maintain, and/or increase revenue growth, and/or operating
profitability, and to achieve, maintain, and/or increase net operating
profitability. Such statements are based on our current expectations
and are subject to a number of factors and uncertainties that could cause actual
results achieved by us to differ materially from those described in the
forward-looking statements. We caution investors that there can be no
assurance that the actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including but not limited to, the following
risks and uncertainties: (i) whether the performance advantages of our
Microfluidizer materials processing equipment will be realized commercially or
that a commercial market for the equipment will continue to develop, (ii)
whether the timing of orders will significantly affect quarter to quarter
revenues and resulting net income results for a particular quarter, which may
cause increased volatility in our stock price, (iii) whether we will have access
to sufficient working capital through continued and improving cash flow from
sales and ongoing borrowing availability, the latter being subject to our
ability to maintain compliance with the covenants and terms of our loan
agreement in place at that time, if any, (iv) whether our technology will be
adopted by customers as a means of producing MRT innovative materials in large
quantities, (v) whether we are able to deploy prototype MRT placements and then
manufacture and introduce commercial production MRT equipment, (vi) whether we
will achieve a greater proportion of our sales in the future through the sale of
advanced processor production systems, and (vii) as well as those risks set
forth in Item 1A, “Risk Factors.” We assume no responsibility to
update any forward-looking statements as a result of new information, future
events, or otherwise.
Overview
We have,
for over 20 years, specialized in manufacturing and marketing a broad line of
high shear fluid processing systems used in numerous applications in the
chemical, pharmaceutical, biotech, food and cosmetics industries.
Our line
of high shear fluid processor equipment, marketed under our Microfluidizer
trademark and trade name, process premixed formulations to produce small uniform
structures, usually of the submicron and nanoscale size (commonly defined as
particles having dimensions less than 100 nanometers) including nanostructures,
microemulsions and nanosuspensions. The equipment produces commercial
quantities of such materials important to producers of pharmaceuticals, coatings
and other products. Further, we guarantee scaleup of formulations and
results on our processor equipment from 10 milliliters per minute on our
laboratory and bench top models to more than 15 gallons per minute on our pilot
and production models.
The
technology embodied within our Microfluidizer high shear fluid processor is used
for formulation of products that are normally very difficult to mix and
stabilize. Microfluidizer processors through process intensification
allow manufacturers in the chemical, pharmaceutical, cosmetic, and food
processing industries to produce higher quality products with better
characteristics on a more consistent basis than with other blending, mixing or
homogenizing techniques. Additionally, the equipment is used for cell disruption
to harvest the cultivated contents of bacterial, yeast, mammalian and/or plant
cells and for liposomal encapsulation of materials for the cosmetics and
biotech/biopharma industries.
We have
begun to take steps toward commercializing our proprietary equipment, processes
and technology for the continuous production of precipitated submicron or
nanoscale particles by interaction of discrete streams of reacting materials,
through a novel adaptation of our Microfluidizer processor equipment that
permits the mixing of, and reactions between, streams of different solutions at
high pressures. We refer to this technology as a Multiple Stream High
Pressure Mixer/Reactor (MMR). In August 1997, we filed a patent
application for the device and its processes with the United States Patent and
Trademark Office (USPTO), and filed a Patent Cooperation Treaty (PCT)
application on May 5, 1998. In July and November 2000, we were issued
by the USPTO notices of allowances of utility patent claims regarding the MMR
and the use thereof.
On
September 18, 2002, the European Patent Office advised us it would grant its MMR
patent substantially as applied for, including its device and process
claims. We have gained national entry of the patent in France,
Germany, Italy, The Netherlands, and the United Kingdom. We are still pursuing
the allowance of the patent in Canada. Our management believes that
future commercialization and growth of nanotechnology may be, in large part,
enabled by the manufacturing capability of our materials processor and MMR
equipment.
We intend
to pursue patent protection in the United States and select foreign
jurisdictions with respect to proprietary aspects of our Microfluidics Reaction
Technology. U.S. Patent filing commenced in March 2008 and Patent
Convention Treaty (PCT) filing will commence in March 2009 with national patents
to follow in approximately 12-18 months.
Results
of Operations
Year Ended December 31, 2008
vs. December 31, 2007
Revenues
Total
revenues for the year ended December 31, 2008 were approximately $14,871,000, as
compared to revenues of $12,992,000 for the comparable prior year, an increase
of approximately $1,879,000, or 14.5%.
North
American sales for the year ended December 31, 2008 decreased to approximately
$7,423,000, a 5.4% decrease, as compared to sales of approximately $7,848,000
for the year ended December 31, 2007. The decrease in North American
sales was principally due to a decrease in sales of spare parts of approximately
$515,000, offset by an increase of sale of machines of approximately
$89,000. Sales outside of North America were approximately $7,448,000
for the year ended December 31, 2008, compared to $5,144,000 for the year ended
December 31, 2007, an increase of $2,304,000, or 44.8%. The increase in sales
outsides of North America was primarily due to an increase in sales of machines
of approximately $2,135,000, and an increase in the sale of spare parts of
approximately $170,000.
Cost
of Goods Sold
Cost of
goods sold for the year ended December 31, 2008 was approximately $7,298,000, or
49.1% of revenue, compared to $5,646,000, or 43.5% of revenue, for the
comparable prior year. The increase in cost of goods sold, in
absolute dollars, for the year ended December 31, 2008 reflects the overall
increase in sales.
Our major
product lines have different profit margins, as well as multiple profit margins
within each product line. Our product margins on production machines
are greater than that of our lab machines, which results in variations in our
overall margins due to product mix. During the year ended December
31, 2008, our sales of production machines of $4,478,000 decreased by $616,000,
or 12.1%, from $5,094,000 for the period ending December 31, 2007, while our
sales of lab machines increased by $2,519,000, or 71.8%, to $6,027,000 for the
year ended December 31, 2008, compared to $3,508,000 for the period ending
December 31, 2007, resulting in decreased margins overall. Also
contributing to lower product margins for the year ended December 31, 2008
compared to the same period in 2007 is the development of our new M110P product,
which suffered lower margins early in the development stage but which have
improved over the year resulting from an improved design and efficiencies in the
manufacturing process.
Research
and Development Expenses
Research
and development expenses for the year ended December 31, 2008 were approximately
$2,116,000, compared to $1,863,000 for the comparable prior year, an increase of
approximately $253,000, or 13.6%. The increase in research and
development expenses was primarily due to the hiring of additional personnel to
support our expansion of our technology laboratory in our Newton facility
resulting in salary and related cost increases of $256,000. During the year
ended December 31, 2008, increases in travel related costs of approximately
$23,000, and consultant fees of approximately $42,000, were partially offset by
a decrease in development costs and other related expenses of approximately
$68,000 compared to the comparable period of 2007.
-15-
Selling
Expenses
Selling
expenses for the year ended December 31, 2008 were approximately $4,844,000,
compared to $3,584,000 for the comparable prior year, an increase of $1,260,000,
or 35.2%. The increase is primarily attributable to an increase in
payroll and related expenses of approximately $815,000 resulting from the
addition of several sales and marketing personnel including senior sales
executives. During the year ended December 31, 2008 we created three
sales regions in the United States and expanded our senior sales organization
globally with increased presence in Europe and Asia. As a result of
the additions to the sales organization we incurred additional costs for travel
and related expenses of $191,000 during the year ended December 31, 2008
compared to the year ending December 31, 2007. We also realized an
increase in consulting fees of $41,000, and other net increases of approximately
$213,000 for occupancy and other operating expenses during the year ended
December 31, 2008 compared to the year ended December 31, 2007.
General
and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2008 were
approximately $4,495,000, compared to $3,081,000 for the comparable prior year,
an increase of $1,414,000, or 45.9%. The increase in general and
administrative expenses is in part due to increases in salary and related
charges of approximately $595,000. During the year ended December 31,
2008 we realized a full year of increased expenses resulting from a change in
senior management at the end of the prior year and other personnel additions
during the year ended December 31, 2008, including severance charges, recruiting
fees and other one time charges relating to personnel changes. We
realized an increase in consultant and professional fees of approximately
$331,000 for the development of the corporate strategy and operating plans and
an increase of approximately $169,000 in bank fees and financing charges
previously capitalized as part of the financing arrangements with Silicon Valley
Bank during the year ended December 31, 2008 compared to the same period of 2007
as described in Note 7 of the Consolidated Financial Statements. For
the year ended December 31, 2008, we incurred travel and related expenses in
excess of the comparable prior year of approximately $93,000. As a
result of additional head count in senior leadership team, expenses related to
the granting of stock options under FAS 123R increased during the period ended
December 31, 2008 by approximately $78,000 as compared to the comparable period
of 2007. We also incurred additional occupancy and operating expenses during the
year ended December 31, 2008 compared to the comparable period of 2007 due to a
renovation of our corporate headquarters in Newton, Massachusetts.
Interest
Income and Expense
Interest
expense for the year ended December 31, 2008 was approximately $154,000 compared
to $20,000 for the comparable prior year, an increase of approximately $134,000,
or 670%. The increase is due to borrowings under our line of credit
with Silicon Valley Bank and interest on our convertible debenture as further
described in Note 7 of the Consolidated Financial Statements.
Interest
income for the year ended December 31, 2008 was approximately $25,000 compared
to $64,000 for the comparable prior year, a decrease of $39,000, or
61.0%. The decrease is due to the decrease in cash available for
investing and lower interest rates.
Income
Tax Provision
The Company has incurred a
three year cumulative year loss of $4,241,000 from continuing operations for the
period ended December 31, 2008, and in accordance with SFAS 109, a three
year cumulative loss represents significant negative evidence to consider the
basis to determine whether a deferred tax asset is realizable. This fact
generally precludes relying on projections of future taxable income to support
the recovery of deferred tax assets. Consequently, the Company decided to
apply the full
valuation allowance against deferred taxes due to uncertainty regarding the
realization of the deferred taxes in the near future.
For the
year ended December 31, 2008 the Company did not record a provision for income
tax. For the year ended December 31, 2007, the Company recognized a
tax provision of approximately $369,000, reflecting the application of the full
valuation allowance provided against deferred assets generated the prior
years.
Results
of Operations
Year Ended December 31, 2007
vs. December 31, 2006
Revenues
Total
revenues for the year ended December 31, 2007 were approximately $12,992,000, as
compared to revenues of $15,654,000 for the comparable prior year, a decrease of
approximately $2,662,000, or 17.0%.
North
American sales for the year ended December 31, 2007 decreased to approximately
$7,848,000, a 9.10% decrease, as compared to sales of approximately $8,636,000
for the year ended December 31, 2006. The decrease in North American
sales was principally due to a decrease in the sale of machines of approximately
$161,000, and a decrease in the sale of spare parts of approximately
$627,000. The overall decrease in sales of spare parts was largely
attributable to a rescheduling of the shipment schedule for spare parts under an
existing supply order from a customer (“the Customer”). During the
three months ended June 2007, the Customer notified us that it was rescheduling
the spare parts delivery under an existing order and lengthening the shipping
schedule from its original conclusion date in December, 2007 to a new conclusion
date in June, 2008. As a result, there has been a reduction in spare
parts purchases from the customer of approximately $1,139,000 for the year ended
December 31, 2007.
Foreign
sales were approximately $5,144,000 for the year ended December 31, 2007,
compared to $7,018,000 for the year ended December 31, 2006, a decrease of
$1,874,000, or 26.7%. The decrease in foreign sales was principally due to a
decrease in the sale of machines of approximately $1,668,000, both to customers
in Europe and in Asia, and a decrease in the sale of spare parts of
approximately $206,000.
Cost
of Goods Sold
Cost of
goods sold for the year ended December 31, 2007 was approximately $5,646,000, or
43.46% of revenue, compared to $7,001,000, or 44.72% of revenue, for the
comparable prior year. The decrease in cost of goods sold in absolute
dollars for the year ended December 31, 2007 reflects the overall decrease in
sales. Our major product lines have different profit margins, as well
as multiple profit margins within each product line. The decrease in cost of
goods sold as a percentage of sales is attributable to both a decrease in sales
by our distributors in Canada and Japan, who purchase machines and spare parts
at a discount, and an increase in the average sales price per unit compared to
the previous year.
-16-
Research and Development
Expenses
Research
and development expenses for the year ended December 31, 2007 were approximately
$1,863,000, compared to $1,763,000 for the comparable prior year, an increase of
approximately $100,000, or 5.67%. The increase in research and
development expenses was primarily due to a planned increase in payroll and
related costs of $40,000, an increase in development costs related to product
enhancement costs of approximately $37,000, and an increase in consultant’s
costs of approximately $40,000, partially offset by a decrease in test supply
costs of approximately $15,000.
Selling
Expenses
Selling
expenses for the year ended December 31, 2007 were approximately $3,584,000,
compared to $2,985,000 for the comparable prior year, an increase of $599,000,
or 20.1%. The increase is primarily attributable to an increase in
outside commissions of approximately $272,000, a planned increase in payroll and
related costs of approximately $86,000, an increase in advertising expenses of
approximately $65,000, an increase in travel & entertainment expenses of
approximately $50,000 and an increase in occupancy costs of approximately
$36,000.
The
significant increase in commission expense results from an increase in the sale
of machines and spare parts by commissioned direct sales personnel and indirect
sales representatives, with a decrease in non-commissionable sales, primarily to
a major customer and distributors in Canada and Japan. Commissionable sales were
75.1% of total sales for the year ended December 31, 2007, versus 48.9% for the
comparable period in 2006.
General
and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2007, were
approximately $3,081,000, compared to $2,701,000 for the comparable prior year,
an increase of $380,000, or 14.1%. The increase in general and
administrative expenses is principally due to an increase in recruitment costs
of approximately $144,000, primarily in connection with the hiring of a new
Chief Executive Officer, an increase in consulting costs of approximately
$140,000, principally due to the utilization of outside professionals to assist
in our compliance with Sarbanes – Oxley regulations, an increase in public
relations costs of approximately $65,000, an increase in corporate expenses of
approximately $41,000, and an increase in occupancy costs of approximately
$40,000. The total increase was partially offset by a decrease in accounting and
legal of approximately $39,000. The increase in corporate expenses was
principally due to our adoption of SFAS 123R as of January
1, 2006, and recognizing compensation expense in conjunction with share based
payments to employees and directors for a total annual amount of $155,000,
versus $130,000 for the year ended December 31, 2006.
Interest
Income and Expense
Interest
expense for the year ended December 31, 2007 was approximately $20,000 compared
to $35,000 for the comparable prior year, a decrease of approximately $15,000,
or 42.9%. The decrease is due to the net pay down of the line of
credit and a reduction of the term loan with our lender.
Interest
income for the year ended December 31, 2007 was approximately $64,000 compared
to $50,000 for the comparable prior year, an increase of $14,000, or
28.0%. The increase is due to the increase in cash available for
investing.
Income
Tax Provision
The Company has incurred a
three year cumulative year loss of $1,219,000 from continuing operations for the
period ended December 31, 2007, and in accordance with SFAS 109, a three
year cumulative loss represents significant negative evidence to consider the
basis to determine whether a deferred tax asset is realizable. This fact
generally precludes relying on projections of future taxable income to support
the recovery of deferred tax assets. Consequently, the Company decided to
apply the full
valuation allowance against deferred taxes due to uncertainty regarding the
realization of the deferred taxes in the near future.
For the
year ended December 31, 2007, the Company recognized a tax provision of
approximately $369,000, reflecting the application of the full valuation
allowance provided against deferred assets generated the prior
years.
The tax
benefit or provision recognized for the year ended December 31, 2006 has been
based upon changes in the valuation reserve for deferred taxes. For
the year ended December 31, 2006, we recognized a tax benefit of approximately
$58,000.
-17-
Liquidity
and Capital Resources
Currently,
we require cash to fund our working capital needs. We fund our cash requirements
primarily through operations and customer deposits. We expect to fund our
liquidity requirements, including interest on our convertible debt and capital
expenditures, primarily through revenue and bookings for which we receive
deposits in advance of shipment.
On
November 14, 2008 we entered into the Agreement with, and sold the Debenture to,
GSP. The Debenture accrues interest at nine percent (9.0%) payable
quarterly. The Debenture is due and payable on the earlier to occur of (i)
November 14, 2015 or (ii) the acceleration of the maturity of the Debenture upon
the occurrence of an Event of Default. GSP may, at its option, on any of the maturity
date, the date that any interest payment is due, or the date on which a change
of control occurs, convert all or any portion of the outstanding
principal amount of the Debenture into shares of our common stock at a
$1.25 per share.
On
November 14, 2008 we also issued the Warrant to GSP, giving it the right to
purchase up to fifty percent (50%) of our outstanding common stock. The Warrant
can be exercised by GSP in two (2) tranches at any time prior to the
earlier to occur of: (i) the seventh anniversary of the date of the
Agreement, (ii) the Third Anniversary or (iii) such time as GSP has
acquired fifty percent (50%) of the total number of shares of our common
stock then outstanding on a fully diluted basis. The first
tranche is exercisable at $2.00 per share up to forty percent (40%) of our
common stock then outstanding on a fully diluted basis and the second tranche is
exercisable at $3.00 per share up to fifty percent (50%) of our common stock
then outstanding on a fully diluted basis.
In
connection with the Financing, we repaid the entire amount due under the Amended
and Restated Loan and Security Agreement, dated as of October 20, 2008, with
Silicon Valley Bank and the Amended and Restated Export-Import Bank Loan and
Security Agreement, dated as of October 20, 2008, with Silicon Valley Bank. The
Payoff amount was approximately $1,050,000.
On June
30, 2008, we entered into a Loan and Security Agreement (the “Domestic Loan
Agreement”) with a new lender, Silicon Valley Bank (“SVB”). On July 2,
2008, we entered into an Export-Import Bank Loan and Security Agreement (the
“Export-Import Loan Agreement”) with SVB and together with the Domestic Loan
Agreement, created the “SVB Loan Agreement”. The SVB Loan Agreement provided us
with a revolving line of credit (the “Revolving Line of Credit”).
The
Revolving Line of Credit had a two-year term and allowed for a maximum
outstanding balance of $2,500,000. The principal amount outstanding under the
SVB Loan Agreement accrued interest at a per annum rate equal to: (a) the
greater of (i) five percent (5.00%) or (ii) SVB’s most recently
announced “prime rate,” even if it was not SVB’s lowest rate, plus (b) one
percent (1.00%). SVB’s prime rate as of July 7, 2008 was 5.00%. Interest was
payable on the last business day of each month. We were also required to
maintain two financial covenants, and additional affirmative
covenants.
Also on
June 30, 2008 and in connection with the SVB Loan Agreement, we repaid the
entire amount due under our Loan and Security Agreement, dated March 3,
2004, with T.D. Banknorth, formerly known as Banknorth, N.A., as modified
pursuant to a Loan Modification Agreement dated November 20, 2006. The
Payoff Amount was comprised of $1,000,000 in principal, and approximately
$12,000 in interest and legal fees.
As
of December 31, 2008, we did not have a credit line or bank facility in
place.
As of
December 31, 2008, we had approximately $1,895,000 in cash and cash equivalents,
compared to $756,000 as of December 31, 2007. For the year ended
December 31, 2008, we used cash from operations of approximately $2,559,000 and
an increase in account payables and accrued expenses to fund our net loss, our
investment in inventories, and increase in prepaid expenses, primarily due to
the Financing costs, which was offset by a decrease in trade account
receivables.
As of
December 31, 2007, we had approximately $756,000 in cash and cash equivalents,
compared to $1,860,000 as of December 31, 2006. For the year ended December 31,
2007, we used cash from operations of approximately $1,040,000 to fund our net
loss, our decrease in current liabilities, and an increase in inventories,
partially offset by a decrease in trade receivables and prepaid
expenses.
For the
year ended December 31, 2008, we provided cash from financing activities of
approximately $4,728,000 primarily as a result of proceeds received upon
issuance of $5,000,000 of convertible debt. Borrowings under our bank lines in
place during the year were paid off upon termination of the bank lines. For the
year ended December 31, 2007, we provided cash from financing activities of
approximately $112,000 primarily as a result of draws on the revolver loan, the
issuance of common stock for options exercised, and proceeds from stock issued
from the employee stock purchase plan partially offset by repayments of our term
loan. For the year ended December 31, 2006, we used cash from financing
activities of approximately $184,000 primarily as a result of repayments on our
term loan, partially offset by the issuance of common stock for options
exercised and from proceeds from stock issued from the employee stock purchase
plan.
As of
December 31, 2007, we maintained a revolving credit facility with Banknorth,
N.A. (the “Lender”) that provided us with a $1,000,000, revolving credit line
that was subject to repayment on demand by the Lender. As of December 31, 2007,
our balance due was $262,000 under our revolving credit line. We also had a
$1,000,000 four-year term loan, that had a balance of $62,000 at December 31,
2007, which we paid in full as of March 4, 2008.
Under the
terms of the loan agreement with Banknorth , two covenants had to be met on an
annual basis. As of December 31, 2007, we were not in compliance with
the debt service coverage ratio covenant of our credit facility with the Lender.
On March 5, 2008, we obtained a waiver from the Lender for this
covenant. The second covenant required us to have a senior debt no
more than four times its capital base; this covenant was met for year end
2007.
-18-
Our
contractual obligations as of December 31, 2008 are as follows:
|
Total
|
Payment
due by period
|
|||||||||
|
Contractual
Obligation
|
Less
than 1 year
|
1
- 3 years
|
3
- 5 years
|
More
than 5 years
|
||||||
|
Convertible
debt (1)
|
$
7,716
|
$
450
|
$
900
|
$
900
|
$
5,466
|
|||||
|
Operating
leases
|
1,385
|
489
|
872
|
24
|
-
|
|||||
|
Purchase
obligations (2)
|
52
|
52
|
|
-
|
-
|
-
|
||||
|
$
9,153
|
$
991
|
|
$
1,772
|
$
924
|
$
5,466
|
|||||
|
(1)
|
Includes
principal and interest payments, principal is due only at maturity unless
called upon an event of default under the convertible debenture
agreement.
|
|
(2)
|
Purchase
obligations consist of commitments for production materials and
supplies.
|
Based on our
current operating model we must achieve substantial future revenue and
successfully implement substantial cost reductions, which we began in the first
quarter of 2009, in order to meet our cash needs. Our revenues,
together with our existing cash balance and the $1,000,000 of senior bank
financing we hope to obtain, should be sufficient to meet our working capital
requirements for the next twelve months if our cost cutting is
successful. However, if we do not achieve the revenues we need, or we
are not able to properly implement required expense changes, or we do not
receive the senior bank financing described, it is likely that we will face very
substantial liquidity pressures that we may not be able to
sustain. This concern is greatly increased by the fact that today’s
credit markets, coupled with our history of losses, make it possible that
we would not be able to borrow additional funds beyond our senior bank line or
obtain an alternative credit facility if we are unable to meet our
plan.
Off-Balance
Sheet Arrangements
We are
not a party to any off-balance sheet arrangements.
Critical
Accounting Policies
Our
significant accounting policies are summarized in Note 1 to our consolidated
financial statements. However, certain of our accounting policies
require the application of significant judgment by our management, and such
judgments are reflected in the amounts reported in our consolidated financial
statements. In applying these policies, our management uses their
judgment to determine the appropriate assumptions to be used in the
determination of estimates. Those estimates are based on our
historical experience, terms of existing contracts, our observance of market
trends, information provided by our strategic partners and information available
from other outside sources, as appropriate. Actual results may differ
significantly from the estimates contained in our consolidated financial
statements. Our critical accounting policies are as
follows:
|
·
|
Revenue
Recognition. We recognize revenue in accordance with Staff Accounting
Bulletin (“SAB” No. 104, “Revenue Recognition in Financial Statements”).
Revenue is recognized when all of the following criteria are met: i)
persuasive evidence of an arrangement exists, ii) delivery has occurred,
iii) the price to the customer is fixed and determinable, and iv)
collectibility is reasonably assured. In revenue transactions where
support services are requested, revenue is recognized on shipment since
the support service obligation is not essential to the functionality of
the delivered products. Revenue transactions involving
non-essential support services obligations are those which can generally
be completed in a short period of time at insignificant cost and the
skills required to complete these support services are not unique to us
and in many cases can be provided by third parties or the customers. The
customer’s purchase obligations are not contingent upon performance of
support services, if any, by us. Proceeds received in advance of product
shipment are recorded as customer advances in the consolidated balance
sheets. Returns and customer credits are infrequent and recorded as a
reduction to sales. Rights of returns are not included in sales
arrangements. Discounts from list prices are recorded as a reduction to
sales. On occasion, we provide machines for rent by
customers. Income for the rental of equipment is recognized on
a straight-line basis over the rental term. Rental income and product
sales are classified in revenues in the consolidated statement of
operations.
|
|
·
|
Accounts Receivable
Valuation. We perform various analyses to evaluate
accounts receivable balances and record an allowance for bad debts based
on the estimated collectability of the accounts such that the amounts
reflect estimated net realizable value. If actual uncollectible
amounts significantly exceed the estimated allowance, our operating
results would be significantly and adversely
affected.
|
|
·
|
Inventory
Valuation. We value our inventory at the lower of our
actual cost or the current estimated market value. We regularly
review inventory quantities on hand and inventory commitments with
suppliers and record a provision for excess and obsolete inventory based
primarily on our historical usage for the prior twenty-four month
period. Although we make every effort to ensure the accuracy of
our forecasts of future product demand, any significant unanticipated
change in demand or technological developments could have a significant
impact on the value of our inventory and our reported operating
results.
|
|
·
|
Product
Warranties. Our products are generally sold with a
twelve month warranty provision that requires us to remedy deficiencies in
quality or performance of our products at no cost to our customers only
after it has been determined that the cause of the deficiency is not due
to the actions of the machine operator or product used in the
machine. We have established a policy for replacing parts that
wear out or break prematurely. The policy called for replacing
the parts or repairing a machine within one year of the
sale. Commencing in May of 2006, we amended our warranty by
limiting to a period of 90 days our warranty coverage on certain critical
wear items. We are now selling more advanced processor
production systems than past years that may require more costly
parts.
|
-19-
Recent
Accounting Pronouncements
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This new standard identifies the
sources of accounting principles and framework for selecting the principles to
be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles
(“GAAP”) in the United States (“the GAAP hierarchy”).
The FASB
believes the GAAP hierarchy should be directed to entities because it is the
entity (not its auditor) that is responsible for selecting accounting principles
for financial statements that are presented in conformity with
GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should
reside in the accounting literature established by the FASB and is issuing this
statement to achieve that result. The new standard is effective 60
days following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”, and
it is not expected that this Statement will result in a change in our current
practice.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements.” This new standard provides
guidance for using fair value to measure assets and liabilities. The FASB
believes SFAS No. 157 also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
but does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS No. 159 establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities and to more easily understand the effect of the company’s choice to
use fair value on its earnings. SFAS No. 159 also requires entities to
display the fair value of the selected assets and liabilities on the face of the
balance sheet. SFAS No. 159 does not eliminate disclosure requirements of
other accounting standards, including fair value measurement disclosures in SFAS
No. 157. This Statement is effective as of the beginning of an entity’s
first fiscal year beginning after November 15, 2007.
On
January 1, 2008, we adopted both SFAS No. 157 and SFAS No. 159,
neither of which had any material impact on our results of operations or
financial position.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 clarifies that
a non-controlling or minority interest in a subsidiary is considered an
ownership interest and accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated financial statements.
SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We
expect to adopt SFAS No. 160 on January 1, 2009, and we do not expect it to have
a material effect on operations.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Our
financial instruments are generally not subject to changes in market value as a
result of changes in interest rates due to the short maturities of the
instruments. Our fixed rate debt is not exposed to cash flow or
interest rate changes but is exposed to fair market value changes in the event
of refinancing this fixed rate debt. We do not have significant
exposure to fluctuations in foreign exchange rates.
For
additional information about our financial instruments, see Note 7 to the
Consolidated Financial Statements.
Item
8. Financial Statements and Supplementary Data
-20-
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of Microfluidics International
Corporation:
We have
audited the accompanying consolidated balance sheets of Microfluidics
International Corporation, and subsidiaries (formerly MFIC
Corporation) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years ended December 31, 2008. These financial statements are
the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstance, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Microfluidics
International Corporation and subsidiaries (formerly MFIC Corporation) at
December 31, 2008 and 2007 and the consolidated results of their operations and
their cash flows for the three years ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.
/S/ UHY
LLP
Boston,
Massachusetts
March 30,
2009
-21-
|
MICROFLUIDICS
INTERNATIONAL CORPORATION
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
(in
thousands, except share and per share amounts)
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,895 | $ | 756 | ||||
|
Accounts
receivable, net of allowance of $44 and $41 as of
December
31, 2008 and 2007, respectively
|
2,181 | 2,582 | ||||||
|
Inventories
|
2,723 | 2,353 | ||||||
|
Prepaid
and other current assets
|
320 | 281 | ||||||
|
Total
current assets
|
7,119 | 5,972 | ||||||
|
Property
and equipment, net
|
1,121 | 325 | ||||||
|
Other
non-current assets
|
480 | 60 | ||||||
|
Total
assets
|
$ | 8,720 | $ | 6,357 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | - | $ | 327 | ||||
|
Accounts
payable
|
986 | 129 | ||||||
|
Accrued
expenses
|
1,233 | 725 | ||||||
|
Customer
advances
|
436 | 409 | ||||||
|
Total
current liabilities
|
2,655 | 1,590 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Convertible
debt
|
4,625 | - | ||||||
|
Total
liabilities
|
7,280 | 1,590 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock; $.01 par value; 20,000,000 shares authorized;
10,592,228
and 10,517,178 shares issued; 10,356,782 and 10,256,732
shares
outstanding
as of December 31, 2008 and 2007, respectively
|
106 | 105 | ||||||
|
Additional
paid-in capital
|
18,042 | 17,378 | ||||||
|
Accumulated
deficit
|
(16,039 | ) | (12,028 | ) | ||||
|
Treasury
stock, 235,446 and 260,446 shares, at cost, as of December 31, 2008 and
2007, respectively.
|
(669 | ) | (688 | ) | ||||
|
Total
stockholders' equity
|
1,440 | 4,767 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 8,720 | $ | 6,357 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-22-
|
MICROFLUIDICS
INTERNATIONAL CORPORATION
|
||||||||||||
|
Consolidated
Statements of Operations
|
||||||||||||
|
(in
thousands, except share and per share amounts)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues
|
$ | 14,871 | $ | 12,992 | $ | 15,654 | ||||||
|
Cost
of sales
|
7,298 | 5,646 | 7,001 | |||||||||
|
Gross
profit
|
7,573 | 7,346 | 8,653 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
2,116 | 1,863 | 1,763 | |||||||||
|
Selling
|
4,844 | 3,584 | 2,985 | |||||||||
|
General
and administrative
|
4,495 | 3,081 | 2,701 | |||||||||
| Total operating expenses | 11,455 | 8,528 | 7,449 | |||||||||
|
(Loss)
income from operations
|
(3,882 | ) | (1,182 | ) | 1,204 | |||||||
|
Interest
expense
|
(154 | ) | (20 | ) | (35 | ) | ||||||
|
Interest
income
|
25 | 64 | 50 | |||||||||
|
(Loss)
income before income tax provision
|
(4,011 | ) | (1,138 | ) | 1,219 | |||||||
|
Income
tax provision (benefit)
|
- | 369 | (58 | ) | ||||||||
|
Net
(loss) income
|
$ | (4,011 | ) | $ | (1,507 | ) | $ | 1,277 | ||||
|
Net
(loss) income per common share:
|
||||||||||||
|
Basic
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.13 | ||||
|
Diluted
|
$ | (0.39 | ) | $ | (0.15 | ) | $ | 0.12 | ||||
|
Weighted
average number of common and common
equivalent
shares outstanding:
|
||||||||||||
|
Basic
|
10,296,296 | 10,183,376 | 10,012,685 | |||||||||
|
Diluted
|
10,296,296 | 10,183,376 | 10,611,635 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-23-
|
MICROFLUIDICS
INTERNATIONAL CORPORATION
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
(loss) income
|
$ | (4,011 | ) | $ | (1,507 | ) | $ | 1,277 | ||||
|
Adjustments
to reconcile net (loss) income to net cash
flows:
|
||||||||||||
|
Income
tax provision (benefit)
|
- | 369 | (68 | ) | ||||||||
|
Depreciation
and amortization
|
403 | 170 | 174 | |||||||||
|
Allowance
for doubtful accounts
|
3 | 3 | (5 | ) | ||||||||
|
Provision
for obsolete inventory
|
(12 | ) | 8 | 9 | ||||||||
|
Share-based
compensation
|
252 | 218 | 141 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
398 | 668 | (1,383 | ) | ||||||||
|
Other
current assets
|
- | - | (116 | ) | ||||||||
|
Inventories
|
(358 | ) | (335 | ) | (185 | ) | ||||||
|
Prepaid
expenses
|
(626 | ) | 56 | 61 | ||||||||
|
Accounts
payable
|
857 | (118 | ) | 131 | ||||||||
|
Accrued
expenses
|
508 | (128 | ) | 376 | ||||||||
|
Customer
advances
|
27 | (444 | ) | 237 | ||||||||
|
Net
cash flows (used in ) provided by operating
activities
|
(2,559 | ) | (1,040 | ) | 649 | |||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of property, plant and equipment
|
(1,030 | ) | (176 | ) | (57 | ) | ||||||
|
Net
cash flows used in investing activities
|
(1,030 | ) | (176 | ) | (57 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Borrowings
on bank loan
|
1,999 | 262 | - | |||||||||
|
Principal
repayments on long-term debt and obligations under
capital
leases
|
(65 | ) | (259 | ) | (288 | ) | ||||||
|
Payments
on bank loan
|
(2,261 | ) | - | - | ||||||||
|
Proceeds
from issuance of convertible debt
|
5,000 | - | - | |||||||||
|
Net
proceeds from issuance of common stock
|
55 | 109 | 104 | |||||||||
|
Net
cash flows provided by (used in ) financing activities
|
4,728 | 112 | (184 | ) | ||||||||
|
Net
change in cash and cash equivalents
|
1,139 | (1,104 | ) | 408 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
756 | 1,860 | 1,452 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 1,895 | $ | 756 | $ | 1,860 | ||||||
|
Supplemental
Disclosure of Cash Flow Information:
|
||||||||||||
|
Interest
received
|
$ | 25 | $ | 63 | $ | 50 | ||||||
|
Interest
paid
|
95 | 20 | 34 | |||||||||
|
Taxes
paid, net of refund
|
89 | - | 10 | |||||||||
| Non-cash item | ||||||||||||
| Issuance of warrants | $ | 382 | $ | - | $ | - | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-24-
|
Microfluidics
International Corporation
|
||||||||||||||||||||||||||||
|
Consolidated
Statements of Changes in Stockholders' Equity
|
||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
Paid-in Capital
|
Accumulated
Deficit
|
Treasury
Stock
|
Total
Stockholders' Equity
|
||||||||||||||||||||||||
|
(in
thousands)
|
Number
of Shares
|
Amount
|
Number
of Shares
|
Amount
|
||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
10,166 | $ | 102 | $ | 16,809 | $ | (11,798 | ) | 260 | $ | (688 | ) | $ | 4,425 | ||||||||||||||
|
Issuance
of common stock in connection
with
exercise of stock options
|
144 | 2 | 69 | 71 | ||||||||||||||||||||||||
|
Issuance
of common stock under employee
stock
purchase plan
|
29 | 33 | 33 | |||||||||||||||||||||||||
|
Compensation
expense related to stock
options
|
130 | 130 | ||||||||||||||||||||||||||
|
Compensation
expense related to director
stock
options
|
11 | 5 | 5 | |||||||||||||||||||||||||
|
Compensation
expense related to employee
purchase
plan
|
6 | 6 | ||||||||||||||||||||||||||
|
Net
income
|
1,277 | 1,277 | ||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
10,350 | 104 | 17,052 | (10,521 | ) | 260 | (688 | ) | 5,947 | |||||||||||||||||||
|
Issuance
of common stock in connection
with
exercise of stock options
|
103 | 1 | 74 | 75 | ||||||||||||||||||||||||
|
Issuance
of common stock under employee
stock
purchase plan
|
28 | 34 | 34 | |||||||||||||||||||||||||
|
Compensation
expense related to stock
options
|
154 | 154 | ||||||||||||||||||||||||||
|
Non-
cash share based compensation expense - former
officer
|
36 | 61 | 61 | |||||||||||||||||||||||||
|
Compensation
expense related to employee
purchase
plan
|
3 | 3 | ||||||||||||||||||||||||||
|
Net
loss
|
(1,507 | ) | (1,507 | ) | ||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
10,517 | 105 | 17,378 | (12,028 | ) | 260 | (688 | ) | 4,767 | |||||||||||||||||||
|
Issuance
of common stock in connection
with
exercise of stock options
|
55 | 1 | 27 | 28 | ||||||||||||||||||||||||
|
Issuance
of common stock under employee
stock
purchase plan
|
20 | 22 | 22 | |||||||||||||||||||||||||
|
Issuance
of treasury stock
|
(25 | ) | 19 | 19 | ||||||||||||||||||||||||
|
Compensation
expense related to stock
options
|
233 | 233 | ||||||||||||||||||||||||||
|
Warrants
issued with debt
|
382 | 382 | ||||||||||||||||||||||||||
|
Net
loss
|
(4,011 | ) | (4,011 | ) | ||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
10,592 | $ | 106 | $ | 18,042 | $ | (16,039 | ) | 235 | $ | (669 | ) | $ | 1,440 | ||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-25-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
1.
|
Organization
and Summary of Significant Accounting
Policies
|
Organization
Microfluidics
International Corporation (the “Company”), through its wholly-owned subsidiary,
Microfluidics Corporation (“Microfluidics”), its operating division, operates in
one segment, specializing in producing and marketing a broad line of proprietary
fluid materials processing systems used for a variety of fluid grinding, mixing,
milling, and blending applications across a variety of industries and for use in
numerous applications within those industries. Microfluidizer
materials processor systems are produced at Microfluidics.
Management's
Plans
For the year ended December 31, 2008, the Company incurred net
losses of $4.0 million and generated negative cash flow from operations of $2.6
million. The Company has historically funded its operations with
cash flows from operations and the issuance of various debt and equity
instruments. The Company has approximately $1.9 million of cash and cash
equivalents and $5 million of long-term debt as of December 31, 2008. As a
result of the financial performance of the Company in the fourth quarter of 2008
and the global economic crisis, in the first quarter of 2009 the Company made
significant cost reductions. These consist primarily of reductions in
headcount as well as a reduction of discretionary expenses such as travel,
consulting and marketing programs. The Company is prepared to make further
cost reductions if needed. We expect to continue to fund our operations
from existing cash resources, operating cash flow and, when required, the
issuance of various debt and equity instruments. That notwithstanding, we
believe that our current financial resources are adequate to fund our ongoing
operations and pursue our strategic initiatives for the next twelve
months. Management anticipates the Company will become cash flow positive
and improve its liquidity through continued growth and the increase
in cash as a result of the cost reduction measures that have
already been implemented. To the extent our revenue growth does not meet
our anticipated target, we will continue to adjust our cost structure as deemed
appropriate. However no assurance can be given that management's actions
will result in profitable operations or positive cash flow.
Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (“Generally
Accepted Accounting Principles”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassification
Certain
prior years account balances have been reclassified to be consistent with the
current year’s presentation.
Revenue
Recognition
The
company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”
No. 104, “Revenue Recognition in Financial Statements”). Revenue is recognized
when all of the following criteria are met: i) persuasive evidence of an
arrangement exists, ii) delivery has occurred, iii) the price to the customer is
fixed and determinable, and iv) collectability is reasonably assured. In revenue
transactions where support services are requested, revenue is recognized on
shipment since this supportive service obligation is not essential to the
functionality of the delivered products. Revenue transactions
involving non-essential support services obligations are those which can
generally be completed in a short period of time at insignificant cost and the
skills required to complete these installations are not unique to the Company
and in many cases can be provided by third parties or the customers. The
customer’s purchase obligations are not contingent upon performance of support
services, if any, by the Company. Proceeds received in advance of product
shipment are recorded as customer advances in the consolidated balance sheets.
Returns and customer credits are infrequent and recorded as a reduction to
sales. Rights of returns are not included in sales arrangements.
Discounts from list prices are recorded as a reduction to sales. On occasion,
the Company provides machines for rent by customers. Income for the
rental of equipment is recognized on a straight-line basis over the rental
term. Rental income and product sales are classified in revenues in
the consolidated statement of operations.
Cash
and Cash Equivalents
The
Company considers the following highly liquid securities to be cash equivalents:
(i) securities with initial maturity of 90 days or less, at the time of
acquisition and (ii) securities with initial maturities greater than 90 days
whose terms include a demand feature allowing the Company to liquidate the
investment prior to maturity.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for estimated losses resulting from the inability
of its customers to make required payments. An estimate of
uncollectible amounts is made by management based upon historical bad debts,
current customer receivable balances, age of customer receivable balances,
customer’s financial condition and current economic trends. If the
actual uncollected amounts significantly exceed the estimated allowance, the
Company’s operating results would be significantly adversely
affected.
Inventories
Inventories
consist of material, labor and manufacturing overhead and are stated at the
lower of cost or market. Cost is determined on a first-in, first-out basis
(FIFO).
The
Company periodically reviews quantities of inventory on hand and compares these
amounts to expected usage of each particular product line. Reserves
are established to record provisions for slow moving inventories in the period
in which it becomes reasonably evident that the item is not useable, salable or
the market value is less than cost.
Property
and Equipment
The
Company’s property and equipment is recorded at cost. Depreciation is computed
using the straight-line method, based upon estimated useful lives of 3 to 7
years. Leasehold improvements are amortized using the straight-line
method based upon the shorter of the estimated useful lives or remaining life of
the lease. Expenditures for maintenance and repairs are expensed as
incurred. Upon retirement or sale of property and equipment, the cost
of the disposed asset and the related accumulated depreciation are removed from
the accounts and any resulting gain, or loss is credited or charged to
operations.
-26-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
Long-Lived
Assets
In
accordance with Statements of Financial Accounting Standards (“SFAS”) No.144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets,” the Company reviews
long-lived assets and all amortizing intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of such assets
may not be recoverable. Recoverability of these assets is determined
by comparing the forecasted undiscounted net cash flows of the operation to
which the assets relate, to the carrying amount. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets.
Other
Non-Current Assets
Other
long term assets include financing costs associated with the issuance of our
convertible debenture and patents, patent applications, and patent rights which
are stated at acquisition cost. Financing cost associated with the
issuance of our convertible debenture are amortized using the straight-line
method over the seven year life of the debenture, See Note 7 to the Consolidated
Financial Statements. Amortization of patents is recorded using the
straight-line method over the shorter of the legal lives or useful life of the
patents. Patents are being amortized over a period of three to
seventeen years.
Financial
Instruments
The
proceeds received upon the issuance of a convertible debenture with detachable
warrants are allocated into liability and equity components on a relative fair
value basis at the time of issuance, in accordance with APB Opinion No. 14,
Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrant (“APB
14”). Management reviews the terms of a compound instrument to
determine whether there are embedded derivatives that may be required to be
bifurcated and accounted for separately as a derivative financial
instrument. In connection with the Company’s issuance of a
convertible debenture during the year ended December 31, 2008 (the “Debenture”),
management determined that the conversion feature of the Debenture qualified as
an embedded derivative to the host contract, and had to be considered for
bifurcation. The Company concluded that the feature meets the
exemption criteria in SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (as amended) and therefore the
conversion feature will not be bifurcated. The accounting for the
convertible debenture with detachable warrants is discussed in the footnote
entitled Convertible Debenture
with Common Stock Warrants.
Reserve
for Warranty Expenses
Our
products are generally sold with a twelve month warranty provision that requires
us to remedy deficiencies in quality or performance of our products at no cost
to our customers only after it has been determined that the cause of the
deficiency is not due to the actions of the machine operator or product used in
the machine. The Company has established a policy for replacing parts
that wear out or break prematurely. The policy called for replacing
the parts or repairing a machine within one year of the
sale. Commencing in May of 2006, the Company amended its warranty by
limiting to a period of 90 days its warranty coverage on certain critical wear
items. We believe the reserve balances in the amount of $71,000 and
$54,000 as of December 31, 2008 and December 31, 2007, respectively, to be
adequate.
Research
and Development Expenses
The
Company charges research and development expenses to operations as
incurred.
Earnings
(Loss) per Share
Basic and
diluted net loss per common share was determined by dividing net income or loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the period. Options to purchase 1,284,682,
1,585,427, and 1,561,086 shares of common stock were outstanding for the years
ended December 31, 2008, 2007, and 2006, respectively. Basic and
diluted net loss per share is $.39 and $.15, for the years ended December 31,
2008 and 2007, respectively. Basic and diluted net income per share
is $.13 and $.12 respectively for the year ended December 31, 2006.
Fair
Value of Financial Instruments
The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates fair value due to the short term
nature of these accounts. The Company’s bank debt, because it carries
a variable interest rate, is stated at its approximate fair market
value.
Income
Taxes
Deferred
tax assets or liabilities are computed based on the differences between the
financial statement and income tax bases of assets and liabilities using the
effective tax rates. Deferred income tax expense or credits are based on changes
in the asset or liability from period to period. These differences are temporary
and are expected to reverse in the following periods. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in the results of
operations in the period that includes the enactment date under the law. The
Company records a valuation allowance to reduce the carrying amounts of deferred
assets if it is “more likely than not” that such assets will be
realized.
During
the first quarter of 2007, the Company adopted FAS Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS
No. 109, by defining the confidence level that a tax position must meet in order
to be recognized in the financial statements. FIN 48 requires that the tax
effect(s) of a position be recognized only if it is “more likely than not” to be
sustained based solely in its technical merits as of a reporting
date.
The “more
likely than not” threshold represents a positive assertion by management that
the Company is entitled to the economic benefits of a tax
position. If a tax position is not considered “more likely than not”
to be sustained based solely on its technical merits, no benefits of tax
position are to be recognized. The “more likely than not” threshold must
continue to be met in each reporting period to support continued recognition of
a benefit. With the adoption of FIN 48, the Company is required to adjust their
financial statements to reflect only those tax positions that are “more likely
than not” to be sustained.
The Company has incurred a
three year cumulative year loss for the period ended December 31, 2008, and
in accordance with SFAS 109, a three year cumulative loss represents
significant negative evidence to consider the basis to determine whether a
deferred tax asset is realizable. This fact generally precludes relying on
projections of future taxable income to support the recovery of deferred tax
assets. Consequently, the Company decided to apply the full valuation
allowance against deferred taxes due to uncertainty regarding the realization of
the deferred taxes in the near future.
For the
year ended December 31, 2008, the Company has not recorded a tax provision or
benefit. For the year ended December 31, 2007, the Company recognized
a tax provision of approximately $369,000, reflecting the application of the
full valuation allowance provided against deferred assets generated in prior
years. For the year ended December 31, 2006, we recognized a tax
benefit of approximately $58,000, based upon changes in the valuation reserve
for deferred tax asset accounts.
Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R. For the years ended December 31, 2008, and 2007, the
Company recognized stock-based employee compensation expense of approximately
$233,000 and $215,000 respectively, which is included in General and
Administrative expense of the Consolidated Statement of Operations. For the year
ended 2007, the total expense balance includes $61,000 of compensation expense
attributed to the exercise of stock options by the Company’s former Chairman and
Chief Executive Officer (see Note 11). The Company did not capitalize
any stock-based compensation.
-27-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
The
Company has a valuation allowance for net deferred tax assets; accordingly, no
significant tax benefit on the stock-based compensation was recorded during the
year ended December 31, 2008.
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company’s employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The fair
value of each option granted during the years ended December 31, 2008, 2007 and
2006 is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
yield
|
None
|
None
|
None
|
|||||||||
|
Expected
volatility
|
230 | % | 104 | % | 116 | % | ||||||
|
Risk-free
interest rate
|
1.55 | % | 3.62 | % | 4.85 | % | ||||||
|
Expected
life
|
5
years
|
5
years
|
5
years
|
|||||||||
|
Fair
value of options granted
|
$ | 0.84 | $ | 1.16 | $ | 1.25 | ||||||
Dividend yield - The
Company has never declared or paid any cash dividends on any of its capital
stock and does not expect to do so in the foreseeable
future. Accordingly, the Company uses an expected dividend yield of
zero to calculate the grant-date fair value of a stock option.
Expected volatility -
The expected volatility is a measure of the amount by which the Company’s stock
price is expected to fluctuate during the expected term of options
granted. The Company determines the expected volatility solely based
upon the historical volatility of the Company’s Common Stock over a period
commensurate with the option’s expected term. The Company does not
believe that the future volatility of its Common Stock over an option’s expected
term is likely to differ significantly from the past.
Risk-free interest
rate - The risk-free interest rate is the implied yield available on U.S.
Treasury zero-coupon issues with a remaining term equal to the option’s expected
term on the grant date.
Expected life - The
expected life of options granted represents the period of time for which the
options are expected to be outstanding and is derived from the Company’s
historical stock option exercise experience and option expiration
data.
Other
reasonable assumptions about these factors could provide different estimates of
fair value. Future changes in stock price volatility, life of
options, interest rates, forfeitures and dividend practices, if any, may require
changes in our assumptions, which could materially affect the calculation of
fair value.
We
estimate forfeitures related to options grants at an annual rate
of 9% to 16% per year.
Total
unrecognized stock-based compensation expense related to unvested stock options,
expected to be recognized over a weighted average period of 5 years, amounted to
approximately $680,800 at December 31, 2008.
Recent
Accounting Pronouncements
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This new standard identifies the
sources of accounting principles and framework for selecting the principles to
be used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles
(“GAAP”) in the United States (“the GAAP hierarchy”).
The
Financial Accounting Standards Board (“FASB”) believes the GAAP hierarchy should
be directed to entities because it is the entity (not the auditor) that is
responsible for selecting accounting principles for financial statement that are
presented in conformity with GAAP. Accordingly, the FASB concluded
that the GAAP hierarchy should reside in the accounting literature established
by the FASB and is issuing this statement to achieve that result. The
new standard is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in conformity With
Generally Accepted Accounting Principles”, and it is not expected that this
Statement will result in a change in our current practice.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements.” This new standard provides
guidance for using fair value to measure assets and liabilities. The
FASB believes SFAS No. 157 also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
but does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS No. 159 establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities and to more easily understand the effect of the company’s choice to
use fair value on its earnings. SFAS No. 159 also requires entities to
display the fair value of the selected assets and liabilities on the face of the
balance sheet. SFAS No. 159 does not eliminate disclosure requirements of
other accounting standards, including fair value measurement disclosures in SFAS
No. 157. This Statement is effective as of the beginning of an entity’s
first fiscal year beginning after November 15, 2007.
On
January 1, 2008, we adopted both SFAS No. 157 and SFAS No. 159,
neither of which had any material impact on our results of operations or
financial position.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 clarifies that
a non-controlling or minority interest in a subsidiary is considered an
ownership interest and accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated financial statements.
SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We
expect to adopt SFAS No. 160 on January 1, 2009, and we do not expect it to have
a material effect on operations.
-28-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
2.
|
Industry
Segment, Geographic and Enterprise-Wide
Reporting
|
SFAS No.
131, “Disclosures about
Segments of an Enterprise and Related Information,” requires companies to
report selected information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas and major
customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company’s chief decision-maker, as defined under
SFAS No. 131, is the chief executive officer. The Company has
determined that it conducts its operations in one business segment: the
development, manufacture, marketing and sale of process and formulation
equipment. The Company’s sales are primarily to companies with
processing needs in the chemical, pharmaceutical, food, cosmetic, and
biotechnology industries. The Company has less than 1% of total
assets in foreign countries. As a result, the financial information
disclosed herein represents all of the material financial information related to
the Company’s principal operating segment.
Approximate
sales to customers by geographic markets, are as follows:
|
Years
Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
North
America
|
$ | 7,423 | $ | 7,848 | $ | 8,636 | ||||||
|
Asia
|
2,478 | 2,800 | 3,525 | |||||||||
|
Europe
|
4,970 | 2,344 | 3,493 | |||||||||
| $ | 14,871 | $ | 12,992 | $ | 15,654 | |||||||
The users
of the Company’s systems are in various industries, including the chemical,
pharmaceuticals, food, cosmetic and biotechnology industries.
In 2008,
sales to one of Company’s customers and its world-wide subsidiaries were
approximately $3,005,000, which accounted for approximately 20.2% of the
Company’s net revenues. In 2007, sales to the Company’s top two
customers were approximately $1,129,000 and $925,000, which accounted for 8.7%
and 7.2% of the Company’s net revenues. In 2006, sales to the same
two customers were $1,494,000 and $2,345,000, which accounted for 9.6% and 15.2%
of the Company’s net revenues. With regard to sale to the Company’s
distributors, no individual end-user represents 10% or more of the Company’s net
revenues in fiscal years ended December 31 2008, 2007 and 2006. A
reduction or delay in orders from any of the Company’s significant customers
could have a material adverse effect on the Company’s results of
operations.
The
Company sells its products in various countries. The Company’s sales
in North America, including the United States, Canada and Mexico, accounted for
approximately 49.9% of our revenues in 2008; 60.4% of our revenues in 2007; and
55.2% of our revenues in 2006 with almost all of those sales coming from the
United States and Canada. Sales to the rest of the world accounted
for approximately 50.1% of our revenues in 2008; 39.6% of our revenues in 2007;
and 44.8% of our revenues in 2006.
|
3.
|
Inventories
|
Inventories
consist of the following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Raw
materials
|
$ | 2,485 | $ | 2,140 | ||||
|
Work-in
progress
|
63 | 63 | ||||||
|
Finished
goods
|
371 | 358 | ||||||
| 2,919 | 2,561 | |||||||
|
Less:
provision for excess inventory
|
(196 | ) | (208 | ) | ||||
|
Inventories,
net
|
$ | 2,723 | $ | 2,353 | ||||
|
4.
|
Property
and Equipment
|
Property
and equipment consist of the following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Furniture,
fixtures and office equipment
|
$ | 893 | $ | 686 | ||||
|
Machinery,
equipment and tooling
|
505 | 455 | ||||||
|
Leasehold
improvements
|
869 | 96 | ||||||
| 2,267 | 1,237 | |||||||
|
Less: accumulated
depreciation and amortization
|
(1,146 | ) | (912 | ) | ||||
|
Property
and equipment, net
|
$ | 1,121 | $ | 325 | ||||
Depreciation
expense for property and equipment for the years ended December 31, 2008, 2007
and 2006 was approximately $174,000, $154,000, and $160,000,
respectively.
-29-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
5.
|
Other
Non-Current Assets
|
Costs
incurred in connection with the financing of the convertible debenture and
issuance of common stock warrants on November 14, 2008, totaling $428,000, are
being amortized over the life of the debenture, which is seven
years. Previously capitalized costs of $37,000 associated with the
Banknorth debt refinancing that occurred in March 2004 was expensed as a result
of the termination of that agreement in June 2008 (See Note 7). The
amortization expense associated with the Banknorth financing was approximately
$2,000, $10,000 and $8,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
In the
last quarter of 2001, the Company capitalized approximately $65,000 of costs
related to the Multiple-Stream Mixer High Pressure Reactor patent, with an
additional $29,000 of costs related to this patent capitalized in
2004. These costs are being amortized over a 17-year period, which we
estimate to be the useful life for this asset. Amortization of these costs for
the years ended December 31, 2008, 2007 and 2006 was approximately $6,000 each
year.
|
6.
|
Accrued
Expenses
|
Accrued
expenses consist of the following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Accrued
expenses
|
$ | 549 | $ | 273 | ||||
|
Accrued
wages and vacation pay
|
360 | 164 | ||||||
|
Accrued
commissions
|
253 | 234 | ||||||
|
Accrued
warranty
|
71 | 54 | ||||||
| $ | 1,233 | $ | 725 | |||||
|
7.
|
Long-term
Debt and Obligations Under Capital
Lease
|
Long-term debt and obligations under
capital lease consist of the following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Convertible
debt, (net of discount of $375,156)
|
$ | 4,625 | $ | - | ||||
|
Term
loan
|
- | 62 | ||||||
|
Obligations
under capital lease
|
- | 3 | ||||||
| 4,625 | 65 | |||||||
|
Less: current
portion
|
- | (65 | ) | |||||
|
Long-term
debt, net of current portion
|
$ | 4,625 | $ | - | ||||
On
November 14, 2008, the Company issued the Debenture to GSP, which will be
convertible into the Company’s common stock, par value $0.01 per
share. The principal of the Debenture will mature and be payable on
November 14, 2015. Interest on the Debenture is payable
quarterly. Upon occurrence of certain events of default, as defined
in the Debenture, all amounts will be immediately due and
payable. The Debenture is secured by all assets, property rights and
interests of the Company. It shall be senior to all other
indebtedness of the Company, except for certain bank guarantees as defined in
the Debenture.
On March
1, 2004, the Company and its Microfluidics Corporation subsidiary, as
co-borrowers, entered into a revolving credit and term loan agreement with
Banknorth N.A. (the “Lender”), providing the Company with a $2,000,000 demand
revolving credit and four year term loan facility (the “Credit
Facility”). The Credit Facility was comprised of (i) a $1,000,000
demand revolving line of credit (the “Revolving Credit Line”), and (ii) a
$1,000,000 four year term promissory note (the “Term Loan”).
At
December 31, 2007, the Company was not in compliance with the debt coverage
ratio, and required a waiver from the Lender, which was granted on March 5,
2008.
Due to
the subjective acceleration clause and the lock-box arrangement with the Lender,
the Revolving Credit Line is classified as a current liability, as of December
31, 2007, in the consolidated balance sheet.
On June
30, 2008, the Company repaid the entire amount due under its Loan and Security
Agreement, dated March 3, 2004, with T.D. Banknorth, formerly known as
Banknorth, N.A., as modified pursuant to a Loan Modification Agreement dated
November 20, 2006. The payoff amount was comprised of $1,000,000 in
principal, and approximately $12,000 in interest and legal fees.
On June
30, 2008, the Company entered into a Loan and Security Agreement with a new
lender, Silicon Valley Bank (“SVB”). On July 2, 2008, the Company and SVB
entered into an Export-Import Bank Loan and Security Agreement and together with
the Domestic Loan Agreement, created the “SVB Loan Agreement”. The SVB Loan
Agreement provided the Company with a revolving line of credit.
In
connection with the Convertible Debenture Financing, we repaid the
entire amount due under the Amended and Restated Loan and
Security Agreement, dated as of October 20, 2008, with Silicon Valley
Bank and the Amended and Restated Export-Import Bank Loan and
Security Agreement, dated as of October 20, 2008, with Silicon Valley
Bank. The payoff amount was approximately $1,050,000.
|
8.
|
Employee
Benefit Plans
|
The
Company offers a 401(k) profit-sharing plan (the 401K Plan) to its
employees. All Company and related entity employees who are eighteen
(18) years of age and have completed one hour of service are eligible to
participate in the 401K Plan. Employees may contribute from 1% to 20%
of their compensation. The Company’s contribution is
discretionary. Commencing in July of 2008, the Company matches
employee contribution at a rate of 25 cents on each dollar of the first six
percent of participants’ contributions, to a maximum of three percent of
eligible compensations. The Company’s contributions to the 401(k)
plan were approximately $21,000 for the year ended December 31,
2008. The Company made no matching contributions during the years
ended December 31, 2007 and 2006. The Company also instituted a
cafeteria plan in 1992, giving the employees certain pre-tax advantages on
specific payroll deductions.
-30-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
9.
|
Income
Taxes
|
The
provision (benefit) for income taxes consists of the following:
|
Years
Ended December 31,
|
||||||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
||||||||||||
|
Current:
|
||||||||||||||||
|
Federal
|
$ | - | $ | - | $ | 21 | $ | - | ||||||||
|
State
|
- | - | 10 | - | ||||||||||||
|
Foreign
|
- | - | 15 | - | ||||||||||||
| $ | - | $ | - | $ | 46 | $ | - | |||||||||
|
Deferred:
|
||||||||||||||||
|
Federal
|
$ | - | $ | 312 | $ | (88 | ) | $ | (345 | ) | ||||||
|
State
|
- | 57 | (16 | ) | (105 | ) | ||||||||||
|
Foreign
|
- | - | - | - | ||||||||||||
| $ | - | $ | 369 | $ | (104 | ) | $ | (450 | ) | |||||||
The deferred
provision for the year ended December 31, 2007, is the result of an increase in
the valuation allowance reserve that was recorded against the Company’s deferred
tax asset. The amount reported as an income tax benefit for the year
ended December 31, 2006 is the result of a decrease to the valuation allowance
reserve that was recorded against the Company’s deferred tax
assets.
The total
income tax provision (benefit) differs from the income tax at the statutory
federal income tax rate due to the following:
|
Years
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
income tax at statutory rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
State
income taxes, net of federal benefits
|
5.8 | % | 5.3 | % | 6.3 | % | ||||||
|
Foreign
|
-2.4 | % | -2.0 | % | 0.0 | % | ||||||
|
Permanent
adjustments
|
-2.4 | % | -5.4 | % | 4.2 | % | ||||||
|
Net
research and development and other tax credits
|
-0.4 | % | -5.0 | % | 0.0 | % | ||||||
|
Valuation
allowance
|
-34.8 | % | -58.7 | % | -50.9 | % | ||||||
|
Other
|
0.2 | % | -0.6 | % | 1.6 | % | ||||||
|
Effective
tax rate
|
0.0 | % | -32.4 | % | -4.8 | % | ||||||
The
following is a summary of the significant components of the Company’s deferred
tax assets and liabilities:
|
December
31,
|
||||||||
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carry forwards
|
$ | 4,388 | $ | 3,384 | ||||
|
Research
and development and other credits
|
50 | 66 | ||||||
|
Accruals
and allowances not currently deductible
for
tax purposes
|
211 | 168 | ||||||
|
Depreciation
and other
|
111 | 103 | ||||||
|
Valuation
allowance
|
(4,760 | ) | (3,721 | ) | ||||
|
Total
deferred tax assets
|
$ | - | $ | - | ||||
As of
December 31, 2008, the Company has available federal net operating loss carry
forwards for income tax purposes of approximately $10,772,000 and state net
operating loss carry forwards of approximately $4,025,000, which expire at
various dates through 2028, federal research and development credit carry
forwards of approximately $50,000 expiring in varying amounts during the period
through 2021. Ownership changes, as defined in the Internal Revenue Code, may
limit the amount of operating loss carry forwards that can be utilized annually
to offset future taxable income. Subsequent ownership changes could
further affect the limitation in future years.
-31-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
The
Company recognizes deferred tax assets and liabilities based on the differences
between the financial statement carrying values and the tax basis on assets and
liabilities. The Company regularly evaluates for recoverability its deferred tax
assets and establishes a valuation allowance based on historical taxable income,
projected future taxable income, the expected timing of the reversals of
existing temporary differences and implementation of tax-planning
strategies.
A
valuation allowance is established if it is “more likely than not” that all or a
portion of the deferred tax asset will not be realized. The Company has incurred
a three year cumulative loss for the period ended December 31, 2008. In
accordance with SFAS 109, a three year cumulative loss represents significant
negative evidence to consider the basis to determine whether a deferred tax
asset is realizable, and this fact generally precludes relying on projections of
future taxable income to support the recovery of deferred tax
assets. As a result, the Company maintains a full valuation allowance
for the amount of the deferred tax assets as of December 31, 2008.
|
10.
|
Stockholders’
Equity
|
Warrants
On
November 14, 2008, pursuant to the Agreement, the Company issued the Debenture
to GSP, which will be convertible into the Company’s common stock, par value
$0.01 per share. The principal of the Debenture will mature and be
payable on November 14, 2015. Interest on the Debenture is payable
quarterly. Upon occurrence of certain events of default, as defined
in the Debenture, all amounts will be immediately due and
payable. The Debenture is secured by all assets, property rights and
interests of the Company. It shall be senior to all other
indebtedness of the Company, except for certain bank guarantees as defined in
the Debenture.
GSP has
the right to convert all or part of the outstanding principal and interest
amount of the Debenture into shares of the Company’s common stock on any of the
maturity date, the date that any interest payment is due, or the date on which a
change of control occurs. The conversion price will be $1.25 per
share as adjusted with certain anti-dilution adjustments. Upon
conversion of the Debenture, the related accrued and unpaid interest, if any,
shall become immediately due and payable.
In
addition, the Company granted to GSP the Warrant, giving GSP the right to
purchase shares of the Company’s common stock constituting up to 50% of the
Company’s outstanding common stock on a fully diluted basis at exercise prices
ranging from $2.00 - $3.00. The Warrant has a term of the earlier to occur of:
(i) the seventh anniversary of the date of the Agreement, (ii) the
Third Anniversary or (iii) such time as GSP has acquired fifty percent
(50%) of the total number of shares of the Company’s common stock then
outstanding on a fully diluted basis.
In
accordance with APB 14, the Company allocated the proceeds of the Debenture to
the Debenture and the detachable warrants based on the relative fair values of
the two securities at the time of issuance. The fair value of each warrant is
estimated on the date of grant using the Black-Scholes option pricing
model. The Company recorded the warrants as a debt discount and
additional paid-in-capital for their relative fair value of
$382,339. The aggregate discount will be amortized to interest
expense over the seven year term of the Debenture using the straight-line
method. The carrying value of the Notes, net of corresponding
unamortized of discount is as follows:
|
Face
amount of Notes
|
$ | 5,000,000 | ||
|
Less
unamortized discount
|
375,156 | |||
|
|
||||
|
Carrying
value at December 31, 2008
|
$ | 4,624,844 |
Cost
incurred with the issuance of the Debenture is approximately $428,000 and is
being amortized over the seven year life of the Debenture.
On
November 17, 2004, the Company entered into a general financial and advisory
services agreement with Maxim Group LLC pursuant to which Maxim Group LLC was
granted, on April, 1, 2005, a three-year warrant to purchase 100,000 shares of
the Company’s common stock at an exercise price of $3.20 per
share. These warrants were issued pursuant to the exemption to the
registration requirements of the Securities Act of 1933, as amended, available
under Section 4(2) of that Act. Maxim Group LLC was an “accredited
investor” pursuant to the rules of the Securities and Exchange Commission. The
Company filed a registration statement on Form SB-2, which was declared
effective on June 5, 2006, for purposes of registering the shares of common
stock underlying the warrants. Maxim Group LLC has waived its rights to receive,
based upon the date that the registration statement on Form SB-2 was declared
effective, an additional warrant to purchase shares of the Company’s common
stock. The warrants could have been exercised in whole or in part at
any time on or prior to April 1, 2008. No warrants were exercised at any time on
or prior to April 1, 2008. In addition, the warrants provided for
certain adjustments to the exercise price upon the issuance by the Company of
certain securities at a price below $3.20. The estimated value
of these warrants, included in general and administrative expense, was amortized
to expense pursuant to the terms of the agreement.
Private
Placement
On March
30, 2004, the Company completed a private placement of investment units (each
unit consisting of one share of common stock and a 3-year warrant to purchase an
additional ½ share of common stock). A total of 1,426,616 units were
sold, yielding gross proceeds of approximately $3,567,000. The units
were priced at $2.50 each and the associated warrants to purchase 713,308 shares
of common stock were exercisable at $3.05. Additionally, the
placement agent for the offering received five-year warrants to purchase 213,992
shares of common stock at an exercise price of $3.20 per share. The
investment units and warrants were issued pursuant to the exemption to the
registration requirements of the Securities Act of 1933, as amended, available
under Section 4(2) of that Act. The purchasers of the units (the
“Purchasers”) and the placement agent were “accredited investors” pursuant to
the rules of the Securities and Exchange Commission. The Company
filed a registration statement on Form SB-2, which was declared effective on May
13, 2004, for purposes of registering the shares of common stock underlying the
units and warrants. The warrants associated with the purchases of
these units expired on March 30, 2007. The warrants issued to the placement
agent may be exercised in whole or in part at any time on or prior to their
termination date in March, 2009. In addition, the warrants issued to
the placement agent provide for certain adjustments to the exercise price upon
the issuance by the Company of certain securities at a price below $3.20. The value of the warrants granted to the
placement agent was approximately $351,000, and was accounted for as a non-cash
financing activity.
Employee
Stock Purchase Plan
The
Company has an employee stock purchase plan (the “Purchase
Plan”). Under the Purchase Plan, participants are granted options to
purchase the Company’s common stock twice a year at the lower of 85% of market
value at the beginning or end of each period. Calculation of the
number of options granted, and subsequent purchase of these shares, is based
upon voluntary payroll deductions during each six-month period. The
number of options granted to each employee under this plan is limited to a
maximum amount of 1,000 shares for each six-month period. The number
of shares issued pursuant to this plan totaled 20,409, 27,864, and 29,183 in
2008, 2007 and 2006, respectively.
-32-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
11.
|
Supplemental
Disclosures for Stock-Based
Compensation
|
Stock
Options
The
Company has three (3) shareholder approved stock option plans as
follows: (i) the 1988 Stock Plan, which authorized the grant of stock
rights for up to 3,500,000 shares of common stock (the “1988 Plan”); (ii) the
1989 Non-Employee Director Stock Option Plan (the “1989 Plan”), which authorized
the grant of nonqualified stock options for up to 500,000 shares of common
stock; and (iii) the 2006 Stock Plan (the “2006 Plan”) which authorizes the
grant of stock rights for up to 4,000,000 shares of common stock, increased by
the number of shares of common stock underlying unexercised options issued under
either the 1988 Plan or the 1989 Plan (together, the “Prior Plans”) that expired
after June 20, 2006, and decreased by the number of shares of common stock
issued and issuable pursuant to options outstanding under the Prior
Plans. The 2006 Plan was approved by our shareholders at the Annual
Meeting of Shareholders held on June 20, 2006. Upon adoption of the
2006 Plan by our shareholders, we ceased granting new options under the Prior
Plans. The Prior Plans permitted, and the 2006 Plan permits, the
granting of stock awards to employees, officers, and non-employee members of the
Board of Directors. Options granted under the Prior Plans and the
2006 Plan permit vesting over a 3-to-5 year period and expire 5-to-10 years from
the date of grant. At December 31, 2008, approximately
836,000 shares were available for future grants under the 2006 Plan
and no shares were available for future grants under the Prior
Plans.
During
the year ended December 31, 2008, the Company issued approximately 433,000 stock
options at exercise prices equal to or greater than the fair market value of the
Company’s common stock on the date of grant under the 2006 Plan. Approximately
679,000 shares were forfeited and approximately 56,000 shares were vested during
the year ended December 31, 2008.
Although
the Stock Option Plans do not provide for cashless exercise, the administrator
of the Stock Option Plan allowed the former Chairman and Chief Executive Officer
during the three months ended June 30, 2007 and a former director
during the nine months ended September 30, 2006, to transact a cashless exercise
of stock options granted. The cashless exercise allows the former
employee/director to not tender any cash or shares in an option exercise.
Rather, the employer withholds the number of shares with a fair value
equal to the option exercise price from the shares that would otherwise be
issued upon exercise.
During
the year ended December 31, 2007, the Company issued 36,577 shares
of common stock pursuant to the cashless exercise of options granted
for the exercise of 50,000 shares of the Company’s common stock. Also, during
the year ended December 31, 2006, the Company issued 10,548 shares of common
stock pursuant to cashless exercise of options granted of 15,000 shares on the
Company’s common stock. Since the stock Option Plans do not provide
for a cashless exercise, these transactions were considered a modification of
the respective stock option agreements entered into with the former Chairman and
Chief Executive Officer and a former director. Accordingly, for the years ended
December 31, 2007, and 2006, the Company recorded compensation expenses of
approximately $61,000, and $5,000, respectively. These amounts were charged to
General and Administrative expenses in the consolidated statements of
operations.
Activity
under the Plans is as follows:
|
Years
Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Number
of Options
|
Weighted
Average Exercise Price
|
Number
of Options
|
Weighted
Average Exercise Price
|
Number
of Options
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Outstanding
at beginning of period
|
1,585,427 | $ | 1.35 | 1,561,086 | $ | 1.45 | 1,718,925 | $ | 1.37 | |||||||||||||||
|
Granted
|
432,577 | 1.06 | 376,982 | 1.16 | 58,412 | 1.24 | ||||||||||||||||||
|
Cancelled
|
(678,681 | ) | 1.21 | (213,139 | ) | 2.18 | (62,052 | ) | 2.03 | |||||||||||||||
|
Exercised
|
(54,641 | ) | 0.42 | (139,502 | ) | 0.66 | (154,199 | ) | 0.49 | |||||||||||||||
|
Outstanding
at end of period
|
1,284,682 | $ | 1.37 | 1,585,427 | $ | 1.35 | 1,561,086 | $ | 1.45 | |||||||||||||||
|
Exercisable
at end of period
|
550,646 |
$
|
1.59 | 1,134,678 | $ | 1.35 | 1,321,735 | $ | 1.32 | |||||||||||||||
Summarized
information about stock options outstanding as of December 31, 2008 is as
follows:
|
Range of exercise prices
|
Number of options outstanding |
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
Exercisable
number of options
|
Weighted average exercise price | |||||||||||||||||
| $ | 0.30 - $0.95 | 195,555 | 4.1 | $ | 0.96 | 182,825 | $ | 0.46 | ||||||||||||||
| 1.00 - $1.95 | 910,865 | 8 | 1.74 | 192,271 | 1.81 | |||||||||||||||||
| 2.06 - $4.25 | 178,262 | 4.7 | 4.63 | 175,550 | 2.51 | |||||||||||||||||
| 0.30 - $4.25 | 1,284,682 | 5.6 | 1.37 | 550,646 | 1.59 | |||||||||||||||||
-33-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
12.
|
Commitments
|
The
Company leases its facilities under non-cancelable operating leases expiring
through December 2012. Future minimum rental payments under the
operating leases at December 31, 2008 are:
|
Years
Ended December 31
|
(in
thousands)
|
|||
|
2009
|
$ | 489 | ||
|
2010
|
473 | |||
|
2011
|
400 | |||
|
2012
|
24 | |||
|
2013
|
- | |||
|
Thereafter
|
- | |||
|
Total lease payments
|
$ | 1,386 | ||
Rent
expense for the years ended December 31, 2008, 2007, and 2006, was approximately
$509,000, $498,000 and $415,000, respectively. A portion of the
Newton, Massachusetts rented facility was sublet to a non-affiliated company
under a tenant-at-will arrangement until June 30, 2007 for an approximate total
of $15,000.
|
13.
|
Related
Party Transactions
|
On
December 20, 1999 the Company signed an agreement in principle (the
"Agreement") with the former owners (the "Sellers"); including entities
controlled by the Sellers, of the Epworth Mill and Morehouse-COWLES businesses
(the "Sellers"). The Agreement set forth the understandings among the parties
concerning a restructuring of the Company's subordinated debt and resolution of
various disputes at that time. On January 17, 2000, a definitive settlement
agreement incorporating these subject matters was executed between the parties
(the "Settlement Agreement"). In connection with the Settlement Agreement, a
$300,000 subordinated note was replaced with a new $300,000 subordinated
promissory note dated February 28, 2000 (the "2000 Subordinated Note"). The
2000 Subordinated Note had a maturity date of February 28, 2005, bearing
interest at a rate of ten percent (10%) per annum. The final principal payment
on the 2000 Subordinated Note was made on January 25, 2005 in the
approximate amount of $6,000, including accrued interest.
|
14.
|
Condensed
Consolidated Quarterly Financial Data
(unaudited)
|
The
following consolidated interim financial information is
unaudited. Such information reflects all adjustments, consisting
solely of normal recurring adjustments, which are in the opinion of management
necessary for a fair presentation of the quarterly financial data.
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
(in
thousands, except share and per share data)
|
Qtr.
1
|
Qtr.
2
|
Qtr.
3
|
Qtr.
4
|
||||||||||||
|
Revenues
|
$ | 3,522 | $ | 4,374 | $ | 3,511 | $ | 3,464 | ||||||||
|
Gross
profit
|
1,913 | 2,149 | 1,803 | 1,708 | ||||||||||||
|
Loss
before income tax provision
|
(445 | ) | (790 | ) | (1,061 | ) | (1,715 | ) | ||||||||
|
Income
tax provision
|
- | - | - | - | ||||||||||||
|
Net
loss
|
(445 | ) | (790 | ) | (1,061 | ) | (1,715 | ) | ||||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
loss per share
|
$ | (0.04 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.17 | ) | ||||
|
Diluted
loss per share
|
$ | (0.04 | ) | $ | (0.08 | ) | $ | (0.10 | ) | $ | (0.17 | ) | ||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
Qtr.
1
|
Qtr.
2
|
Qtr.
3
|
Qtr.
4
|
|||||||||||||
|
Revenues
|
$ | 2,801 | $ | 3,557 | $ | 2,311 | $ | 4,323 | ||||||||
|
Gross
profit
|
1,608 | 2,104 | 1,193 | 2,441 | ||||||||||||
|
(Loss)
income before income tax provision
|
(417 | ) | (107 | ) | (859 | ) | 245 | |||||||||
|
Income
tax provision
|
- | - | - | 369 | ||||||||||||
|
Net
loss
|
(417 | ) | (107 | ) | (859 | ) | (124 | ) | ||||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
loss per share
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.02 | ) | ||||
|
Diluted
loss per share
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.02 | ) | ||||
-34-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
15.
|
Valuation
and Qualifying Accounts:
|
|
(in
thousands)
|
Balance
at Beginning of Period
|
Additions
Charged to Costs and Expenses
|
Deductions
and Adjustments
|
Balance
at End of Period
|
||||||||||||
|
Allowance
for Doubtful Accounts:
|
||||||||||||||||
|
For
the year ended December 31, 2008
|
$ | 41 | $ | 3 | $ | - | $ | 44 | ||||||||
|
For
the year ended December 31, 2007
|
38 | 6 | (3 | ) | 41 | |||||||||||
|
For
the year ended December 31, 2006
|
43 | 9 | (14 | ) | 38 | |||||||||||
|
Inventory
Reserve:
|
||||||||||||||||
|
For
the year ended December 31, 2008
|
$ | 208 | $ | - | $ | (12 | ) | $ | 196 | |||||||
|
For
the year ended December 31, 2007
|
200 | 8 | - | 208 | ||||||||||||
|
For
the year ended December 31, 2006
|
185 | 15 | - | 200 | ||||||||||||
|
Warranty
Reserve:
|
||||||||||||||||
|
For
the year ended December 31, 2008
|
$ | 54 | $ | 17 | $ | - | $ | 71 | ||||||||
|
For
the year ended December 31, 2007
|
74 | 14 | (34 | ) | 54 | |||||||||||
|
For
the year ended December 31, 2006
|
58 | 16 | - | 74 | ||||||||||||
-35-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
Item
9. Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
|
None.
|
Item
9A(T). Controls and Procedures
The
certificates of the Company’s chief executive officer and chief financial
officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K
include, in paragraph 4 of such certifications, information concerning the
Company’s disclosure controls and procedures, and internal control over
financial reporting. Such certifications should be read in
conjunction with the information contained in this Item 9A(T) for a more
complete understanding of the matters covered by such
certifications.
Disclosure
Controls and Procedures
The
Company’s management, with the participation of the Company’s chief executive
officer, chief financial officer and controller, evaluated the effectiveness of
the Company’s disclosure controls and procedures as of December 31,
2008. The term “disclosure controls and procedures”, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), means controls and other procedures of
a company that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its chief executive officer, chief financial
officer and controller, as appropriate, to allow timely decisions to be made
regarding required disclosure. It should be noted that any system of
controls and procedures, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are
met and that management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based
on the evaluation of the Company’s disclosure controls and procedures as of
December 31, 2008, the Company’s chief executive officer, chief financial
officer, and controller concluded that, as of such date, the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the interim or annual consolidated financial
statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The
Company’s management, with the participation of its chief executive officer,
chief financial officer and controller, conducted an evaluation of the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities Exchange Commission that permit the Company to provide only
Management’s report in this Annual Report. Based on this assessment,
the Company’s management concluded that, as of December 31, 2008, the Company’s
internal control over financial reporting was effective based on those
criteria.
Changes
in Internal Control Over Financial Reporting
There
were no changes to the Company’s internal control over financial reporting
during the fourth quarter ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Item
9B. Other Information
None.
-36-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item 10 will be incorporated by reference from our
definitive proxy statement or will be filed as an amendment to our Form 10-K
within 120 days of our fiscal year end.
Item
11. Executive Compensation
|
The
information required by this Item 11 will be incorporated by reference
from our definitive proxy statement or will be filed as an amendment to
our Form 10-K within 120 days of our fiscal year
end.
|
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item 12 will be incorporated by reference from our
definitive proxy statement or will be filed as an amendment to our Form 10-K
within 120 days of our fiscal year end.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information required by this Item 13 will be incorporated by reference from our
definitive proxy statement or will be filed as an amendment to our Form 10-K
within 120 days of our fiscal year end.
|
Item
14.
|
Principal
Accounting Fees and
Services
|
Audit
Fees
During
the years ended December 31, 2008 and 2007, UHY LLP (“UHY”), was paid
approximately $110,000 and $101,000, respectively for services rendered for the
audit of our annual financial statements and review of financial statements
included in our reports on Form 10-Q or services that are normally provided by
UHY in connection with statutory and regulatory filings or engagements for those
fiscal years. All services were approved by the Audit
Committee.
Audit
Related Fees
During
the years ended December 31, 2008 and 2007, UHY Advisors was paid approximately
$24,000 and $26,000, respectively, for assurance and related services that are
reasonably related to the performance of audit or review of our financial
statements and are not reported under Item 9(e)(1) of our definitive proxy
statement. All
services were approved by the Audit Committee.
Tax
Fees
During
the years ended December 31, 2008 and 2007, UHY was paid approximately $ 26,000
and $11,000, respectively, for tax compliance, tax advice and tax planning
services. The tax fees were related to the preparation of the corporate tax
returns. All tax services were approved by the Audit
Committee.
All
Other Fees
During
the years ended December 31, 2008 and 2007, UHY received no payments for
non-audit services.
The Audit
Committee pre-approves audit and non-audit services provided to us by the
independent auditors (or subsequently approves non-audit services in those
circumstances where a subsequent approval is necessary and
permissible).
The Audit
Committee has considered whether the provision of non-core audit services to us
by our principal auditor is compatible with maintaining independence, and has
affirmed, in each instance, that the provision of such service was compatible
with the principal auditor’s independent role.
-37-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
PART
IV
Item
15. Exhibits, Financial Statement Schedules
|
(a)
|
Financial
Statements
|
The
following Consolidated Financial Statements are included in Item 8:
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
21 | |||
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
22 | |||
|
Consolidated
Statements of Operations for the Three Years Ended December 31,
2008
|
23 | |||
|
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2008
|
24 | |||
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Three Years Ended
December 31, 2008
|
25 | |||
|
Notes
to Consolidated Financial Statements
|
26-35 | |||
-38-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
|
(b)
|
Exhibit
Index
|
|
Exhibit
No.
|
Description
|
|
|
3(a)
|
Certificate
of Incorporation for the Company, as amended (filed as Exhibit 2A to
Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a) to
the Company’s Report on Form 10-Q for the quarterly period ended September
30, 1999 and incorporated herein by reference).
|
|
|
3(b)
|
Amended
and Restated By-Laws for the Company (filed as Exhibit 3.3(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).
|
|
|
4.1
|
Certificate
of Incorporation for the Company, as amended (filed as Exhibit 2A to
Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a)
to the Company’s Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by
reference).
|
|
|
4.2
|
Amended
and Restated By-Laws for the Company (filed as Exhibit 3.3(b) to the
Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).
|
|
|
10.2
|
1988
Stock Plan (filed as Exhibit 10(g) to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 1988 and incorporated herein
by reference).
|
|
|
10.3
|
1989
Non-Employee Directors Stock Option Plan (filed as Exhibit 10.1 to the
Company’s registration statement on Form S-8 filed October 22,
1996 and incorporated herein by reference).
|
|
|
10.18
|
1988
Stock Plan as amended (filed as Exhibit 10(a) to the Company’s Form 10-Q
for the quarterly period ended March 31, 1997 and incorporated herein by
reference).
|
|
|
10.19
|
Asset
Purchase Agreement, dated as of June 19, 1998, by and among the Company,
Epworth Manufacturing Company and Morehouse-COWLES, Inc. (filed as Exhibit
2.1 to Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated
herein by Reference).
|
|
|
10.20
|
Stockholders
Agreement, dated August 14, 1998, by and among the Company and J.B.
Jennings and Bret A. Lewis (filed as Exhibit 2.2 to Schedule 13D of Bret
A. Lewis, File No. 005-35850, and incorporated herein by
reference).
|
|
|
10.21
|
$500,000
Subordinated Promissory Note issued by the Company to Epworth
Manufacturing Company (filed as Exhibit 99.2 to the Company’s Form 8-K on
August 27, 1998, File No. 000-11625, and incorporated herein by
reference).
|
|
|
10.22
|
$300,000
Subordinated Promissory Note issued by the Company to Epworth
Manufacturing Company (filed as Exhibit 99.2 to the Company’s Form 8-K on
August 27, 1998, File No. 000-11625, and incorporated herein by
reference).
|
|
|
10.32
|
Subordinated
Promissory Note on the Company in favor of Lake Shore Industries, Inc. in
the amount of $300,000.00 dated February 28, 2000. (Filed as
Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, and incorporated herein by
reference.)
|
|
|
10.33
|
Settlement
Agreement, dated January 17, 2000 by and among the Company, Bret A. Lewis,
J. B. Jennings, Lake Shore Industries, Inc., and JLJ Properties, Inc.,
with $300,000 Subordinated Promissory Note dated February 28, 2000, issued
by the Company to Lake Shore Industries, Inc. (FKA Epworth Manufacturing
Company, Inc). (Filed as Exhibit 10.37 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, and
incorporated herein by reference.)
|
|
|
10.42
|
Lease
for 30 Ossipee Road, Newton, Massachusetts dated October 19, 2001, between
Microfluidics International Corporation and King Real Estate Corp.,
Trustee of 1238 Chestnut Street Trust under Declaration of Trust dated May
23, 1969, recorded with Middlesex South Registry of Deeds in Book 11682,
Page 384. (Filed as Exhibit 10.47 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 21, 2001, and
incorporated herein by reference.)
|
|
|
10.45
|
Second
Amendment to Revolving Credit and Term Loan Agreement between the Company
and PNC Bank, N.A. dated March 29, 2002. (Filed as Exhibit
10.50 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, and incorporated herein by
reference.)
|
|
|
10.46
|
1986
Employee Stock Purchase Plan as Amended (Filed as Exhibit 10.51 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2001, and incorporated herein by reference.)
|
|
|
10.47
|
1988
Stock Plan as Amended. (Filed as Exhibit 10.52 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
and incorporated herein by reference.)
|
|
|
10.49
|
Third
Amendment to Revolving Credit and Term Loan Agreement between the Company
and PNC Bank N.A. dated February 19, 2003. (Filed as Exhibit 10.54 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2002, and incorporated herein by reference)
|
|
|
10.50
|
Fourth
Amendment and Waiver to Revolving Credit and Term Loan Agreement between
the Company and PNC Bank, N.A. dated February 6, 2004 (filed as Exhibit
10.54 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2003, and incorporated herein by
reference).
|
|
|
10.51
|
Asset
Purchase Agreement dated February 5, 2004, by and among MFIC Corporation
and Morehouse Cowles, Inc. (filed as Exhibit 2 to the Company’s Form 8K
dated February 13, 2004, and incorporated herein by
reference).
|
|
|
10.52
|
Revolving
Line of Credit Note in the amount of $1,000,000 in favor of Banknorth,
N.A. dated March 3, 2004 (Filed as Exhibit 10.56 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.54
|
Secured
Term Note in the amount of $1,000,000 in favor of Banknorth, N.A. dated
March 3, 2004 (Filed as Exhibit 10.58 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.55
|
Loan
and Security Agreement between Banknorth, N.A. and the Company dated March
3, 2004 (Filed as Exhibit 10.59 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.56
|
Trademark
Security Agreement of the Company in favor of Banknorth, N.A., dated March
3, 2004 (Filed as Exhibit 10.60 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.57
|
Patent
Security Agreement of the Company in favor of Banknorth, N.A., dated March
3, 2004 (Filed as Exhibit 10.61 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.58
|
Placement
Agency Agreement between the Company and Casimir Capital L.P. dated
February 13, 2004 (Filed as Exhibit 10.62 to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.59
|
First
Amendment to Placement Agency Agreement between the Company and Casimir
Capital L.P. dated March 12, 2004 (Filed as Exhibit 10.63 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December
31, 2003, and incorporated herein by reference).
|
|
|
10.60
|
Registration
Rights Agreement between the Company and Purchasers dated March 16, 2004
(Filed as Exhibit 10.64 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2003, and
incorporated herein by reference).
|
|
|
10.61
|
Lease
between ABB and MFIC Corporation dated April 1, 2004 for space at
Lampertheim, Germany (filed as Exhibit 10.65 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004
and incorporated herein by reference).
|
|
|
10.62
|
Letter
Agreement between Maxim Group LLC and MFIC Corporation dated November 17,
2004 to provide general financial advisory and investment banking services
to the Company (filed as Exhibit 10.66 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and
incorporated herein by reference).
|
|
|
10.63
|
Research
Collaboration Agreement between University of Massachusetts, Lowell and
MFIC Corporation, dated September 21, 2005 (filed as Exhibit 10.63 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2005, and incorporated herein by reference).
|
|
|
10.64
|
Warrant
issued to Maxim Group LLC dated April 1, 2005 (filed as Exhibit 10.64 to
the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, and incorporated herein by
reference).
|
|
|
10.65
|
Form
of Warrant issued to placement agent under the Placement Agency Agreement
(filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 and incorporated herein by
reference).
|
|
|
10.66
|
Form
of Warrant issued to investors in the private placement described in the
Placement Agency Agreement (filed as Exhibit 4.3 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference).
|
|
|
10.67
|
2006
Stock Plan (filed as Exhibit 10.1 to the Company’s Form 8-K on August 11,
2006 and incorporated herein by reference).
|
|
|
10.68
|
Letter Agreement
between MFIC Corporation and Maxim Group LLC dated February 24, 2006
concerning the warrant issued to Maxim Group LLC. (filed as Exhibit
10.68 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 and incorporated herein by
reference).
|
|
|
10.69
|
Lease
for 30 Ossipee Road, Newton, Massachusetts dated November 6, 2006, between
MFIC Corporation and King Real Estate Corp., Trustee of 1238 Chestnut
Street Trust under Declaration of Trust dated May 23, 1969, recorded with
Middlesex South Registry of Deeds in Book 11682, Page 384. (filed as Exhibit
10.69 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 and incorporated herein by
reference).
|
|
|
10.70
|
TD
Banknorth Loan Modification Agreement dated November 20, 2006. (filed as
Exhibit 10.70 to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 and incorporated herein by
reference).
|
|
|
10.71
|
Letter
Agreement between MFIC Corporation and Maxim Group LLC dated March 23,
2007 concerning the warrant issued to Maxim Group LLC. (filed as Exhibit
10.71 to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 and incorporated herein by
reference).
|
|
|
10.72
|
Executive
Employment Agreement by and between the Company and Irwin J. Gruverman
dated as of April 6, 2007 (filed as Exhibit 10.1 to the Company’s Form 8-K
on April 12, 2007 and incorporated herein by
reference).
|
|
|
10.73
|
Executive
Employment Agreement by and between the Company and Robert P. Bruno dated
as of April 26, 2007 (filed as Exhibit 10.1 to the Company’s Form 8-K on
May 2, 2007 and incorporated herein by reference
|
|
|
10.74
|
Executive
Employment Agreement by and between the Company and Dennis Riordan dated
as of April 26, 2007 (filed as Exhibit 10.2 to the Company’s Form 8-K on
May 2, 2007 and incorporated herein by reference).
|
|
|
10.75
|
Executive
Employment Agreement by and between the Company and Jack M. Swig dated as
of April 26, 2007 (filed as Exhibit 10.3 to the Company’s Form 8-K on May
2, 2007 and incorporated herein by reference).
|
|
|
10.76
|
Resignation
letter dated September 17, 2007 from Irwin J. Gruverman to the Company
(filed as Exhibit 10.1 to the Company’s Form 8-K on September 20, 2007 and
incorporated herein by reference).
|
|
|
10.77
|
Resignation
Agreement dated September 17, 2007 by and between Irwin J. Gruverman and
the Company (filed as Exhibit 10.2 to the Company’s Form 8-K on September
20, 2007 and incorporated herein by reference).
|
|
|
10.78
|
Affirmation
and Release Agreement dated September 17, 2007 by and between Irwin J.
Gruverman and the Company (filed as Exhibit 10.3 to the Company’s Form 8-K
on September 20, 2007 and incorporated herein by
reference).
|
|
|
10.79
|
Employment
Agreement dated as of November 14, 2007 by and between Michael C. Ferrara
and the Company (filed as Exhibit 10.1 to the Company’s Form 8-K on
November 19, 2007 and incorporated herein by
reference).
|
|
|
10.80
|
Lease
for 17755 Sky Park East, Suite 100, Irvine, CA, 92614 between MFIC
Corporation and The Knoll Company dated November 28, 2007 (filed as
Exhibit 10.80 to the Company’s Form 10-K on March 21, 2008 and
incorporated herein by reference).
|
|
|
10.81
|
Banknorth,
N.A. waiver letter dated March 5, 2008 (filed as exhibit 10.81 to the
Company's form 10-K on March 21, 2008 and incorporated herein by
reference)
|
|
|
10.82
|
Letter
dated May 19, 2008 from MFIC Corporation to Brian E. LeClair (filed as
Exhibit 10.1 to the Company’s Form 8-K on June 10, 2008 and incorporated
herein by reference).
|
|
|
10.83
|
Loan
and Security Agreement, dated as of June 30, 2008, between Silicon
Valley Bank, Microfluidics International Corporation and Microfluidics
Corporation (filed as Exhibit 10.1 to the Company’s Form 8-K on July 7,
2008 and incorporated herein by reference).
|
|
|
10.84
|
Intellectual
Property Security Agreement, dated as of June 30, 2008, by and
between Microfluidics International Corporation and Silicon Valley Bank
(filed as Exhibit 10.2 to the Company’s Form 8-K on July 7, 2008 and
incorporated herein by reference).
|
|
|
10.85
|
Letter
from Microfluidics International Corporation and Microfluidics Corporation
to Silicon Valley Bank, dated June 30, 2008 (filed as Exhibit 10.3 to
the Company’s Form 8-K on July 7, 2008 and incorporated herein by
reference).
|
|
|
10.86
|
Security
Agreement, dated June 30, 2008, executed by Microfluidics
International Corporation in favor of TD Bank, N.A. (filed as Exhibit 10.4
to the Company’s Form 8-K on July 7, 2008 and incorporated herein by
reference).
|
|
|
10.87
|
Export-Import
Bank Loan and Security Agreement, dated as of July 2, 2008, among
Silicon Valley Bank, Microfluidics International Corporation and
Microfluidics Corporation (filed as Exhibit 10.5 to the Company’s Form 8-K
on July 7, 2008 and incorporated herein by reference).
|
|
|
10.88
|
Export-Import
Bank Loan and Security Agreement, dated as of July 2, 2008, among
Silicon Valley Bank, Microfluidics International Corporation and
Microfluidics Corporation (filed as Exhibit 10.6 to the Company’s Form 8-K
on July 7, 2008 and incorporated herein by reference).
|
|
|
10.89
|
Promissory
Note (Export-Import), dated July 2, 2008, by and between
Microfluidics International Corporation and Microfluidics Corporation in
favor of Silicon Valley Bank (filed as Exhibit 10.7 to the Company’s Form
8-K on July 7, 2008 and incorporated herein by
reference).
|
|
|
10.90
|
First
Loan Modification Agreement, dated as of July 2, 2008, by and between
Silicon Valley Bank, Microfluidics International Corporation and
Microfluidics Corporation (filed as Exhibit 10.8 to the Company’s Form 8-K
on July 7, 2008 and incorporated herein by reference).
|
|
|
10.91
|
Amended
and Restated Loan and Security Agreement, dated as of October 20,
2008, among Silicon Valley Bank, Microfluidics International Corporation
and Microfluidics Corporation (filed as Exhibit
10.1 to the Company’s Form 8-K on October 24, 2008 and incorporated herein
by reference).
|
|
|
10.92
|
Amended
and Restated Export-Import Bank Loan and Security Agreement, dated as of
October 20, 2008, among Silicon Valley Bank, Microfluidics
International Corporation and Microfluidics Corporation (filed as Exhibit
10.2 to the Company’s Form 8-K on October 24, 2008 and incorporated herein
by reference).
|
|
|
10.93
|
Promissory
Note (Export-Import), dated October 20, 2008, made by Microfluidics
International Corporation in favor of Silicon Valley Bank (filed as Exhibit
10.3 to the Company’s Form 8-K on October 24, 2008 and incorporated herein
by reference).
|
|
|
10.94
|
Promissory
Note (Export-Import), dated October 20, 2008, made by Microfluidics
Corporation in favor of Silicon Valley Bank (filed as Exhibit
10.4 to the Company’s Form 8-K on October 24, 2008 and incorporated herein
by reference).
|
|
|
10.95
|
Debenture
and Warrant Purchase Agreement between Microfluidics International
Corporation and Global Strategic Partners, LLC, dated as of November 14,
2008 (filed as Exhibit
10.1 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
10.96
|
Amendment
No. 1 to Debenture and Warrant Purchase Agreement and Amendment No. 1 to
Convertible Debenture, between Microfluidics International Corporation and
Global Strategic Partners, LLC, dated as of November 17, 2008 (filed as Exhibit
10.2 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
10.97
|
Registration
Rights Agreement between Microfluidics International Corporation and
Global Strategic Partners, LLC, dated as of November 14, 2008 and amended
on December 3, 2008 (filed as Exhibit
10.3 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
10.98
|
Security
Agreement between Microfluidics International Corporation and Global
Strategic Partners, LLC, dated as of November 14, 2008 (filed as Exhibit
10.4 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
10.99
|
Convertible
Debenture issued by Microfluidics International Corporation to Global
Strategic Partners, LLC, dated as of November 14, 2008, as amended (filed as Exhibit
10.5 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
10.100
|
Common
Stock Purchase Warrant issued by Microfluidics International Corporation
to Global Strategic Partners, LLC, dated as of November 14,
2008 (filed as Exhibit
10.6 to Amendment No. 1 to the Company’s Form S-3 on January 19, 2009 and
incorporated herein by reference).
|
|
|
14
|
Code
of Ethics, as adopted by the Company (Filed as Exhibit 14 to the Company’s
Form 10-K dated December 31, 2006, and incorporated herein by
reference.)
|
|
|
21
|
Subsidiary
of the Company, Microfluidics Corporation, a Delaware
corporation
|
|
|
23(a)*
|
Consent
of UHY LLP
|
|
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2*
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
*
Filed herewith.
|
-39-
Microfluidics
International Corporation
Notes to
Consolidated Financial Statements
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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, in the city of Newton, Commonwealth
of Massachusetts, on the 30th day of
March, 2009.
MICROFLUIDICS
INTERNATIONAL CORPORATION
By: /s/
MICHAEL C. FERRARA
Michael C.
Ferrara
President and Chief
Executive Officer
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Michael C. Ferrara
|
||||
|
Michael
C. Ferrara
|
President,
Chief Executive Officer & Director
|
March
30, 2009
|
||
|
(principal
executive officer)
|
||||
|
|
||||
|
/s/
Brian E. LeClair
|
||||
|
Brian
E. LeClair
|
Executive
Vice-President and Chief Financial Officer
|
March
30, 2009
|
||
|
(principal
financial and accounting officer)
|
||||
|
|
||||
|
/s/
James N. Little
|
||||
|
James
N. Little
|
Director
|
March
30, 2009
|
||
|
Chairman
of the Board of Directors
|
||||
|
|
||||
|
/s/
Leo Pierre Roy
|
||||
|
Leo
Pierre Roy
|
Director
|
March
30, 2009
|
||
|
/s/
George Uveges
|
||||
|
George
Uveges
|
Director
|
March
30, 2009
|
||
|
/s/
Eric G. Walters
|
||||
|
Eric
G. Walters
|
Director
|
March
30, 2009
|
||
-40-