MFIC Corporation Can Talk the Talk, But Can They Walk the Walk?

I mentioned last week that MFIC Corporation (MFIC.OB) had pre-announced revenues, and that these revenues constituted a significant break from the past by showing strong growth. Specifically, they announced fourth-quarter revenues of $5 million, a 69% increase over 2005, and $15 million for FY2006, which represents a 35% increase.

At the time, I was interested in knowing if this announcement was a "watershed" event for the company, and whether this news made MFIC an attractive investment. Well, I finished reviewing the MFIC filings, so I will provide a brief profile and then share my thoughts.

Profile (from Yahoo Finance):

"MFIC Corporation, through its wholly owned subsidiary, Microfluidics Corporation, engages in the production and marketing of proprietary fluid materials processing systems. Its systems are used for various grinding, mixing, milling, and blending applications in various industries, including chemical, pharmaceutical, biotechnology, food, and cosmetics industries. The company's Microfluidizer processor equipment is used to mix and formulate stable emulsions, dispersions, and liposomes, and for cell disruption. It also offers Microfluidizer Mixer-Reactor that produces uniform nanoparticles with phase purity. MFIC sells its equipment through a network of independent manufacturers representative firms, distributors, and a network of independent regional sales agents in the United States, Canada, Europe, and Asia and the Pacific Rim."

My thoughts

  • The company offers some compelling products for the pharma, biotech, and food processing industries. Their M series high shear fluid processing systems seem to provide interesting niche applications, but I'm not sure how big the market for these technologies. Additionally, the patents have expired, and the company is now relying on trade secrets regarding modifications to their systems in order to hold off competition. A subsidiary of Teva (NYSE:TEVA) pharmaceuticals is one of the their biggest customers, but the lack of other large U.S. customers means that I'm not sure how big the demand for these high shear processing systems going forward, and MFIC states that it will face increasing competition in this area.
  • The company seems to be very high on its new MMR (Microfluidizer Mixer/Reactor), which it states "may become a standard device for conducting chemical reactions" because of its ability to produce uniform nanoparticles. Having read the filings, I got the sense that this was where the real growth opportunity would come from. The MMR is in the process of patenting, and should receive patents both in Europe and the U.S. relatively soon.
  • The company notes that it faces competition in the market for the MMR. In particular, it notes Five Star Technologies Inc. as a company which claims it has found a way to use "hydrodynamic cavitation" to produce nanoparticles. More importantly, Five Star claims that its process is inherently scalable. The company "believes that its MMR system is superior in design and function," but to me, the potential competition in MFIC's presumed area of growth is a warning sign.
  • The company has also had a history of lumpy revenues. For instance, the company noted that its 2005 performance was affected by the production of a custom unit for the Korean Institute of Technology, which had lower margins than the company's typical products. The fact that just one order can have an impact on entire year's performance makes me skeptical here, because its completely possible that one big order in the fourth quarter of 2006 could skew performance to the upside.
  • In the recent press release regarding revenues for the fourth quarter and fiscal year for 2006, the company noted that order backlog at December 31, 2006 was approximately $3.1 Million as compared to a backlog at December 31, 2005 of approximately $2.8 Million. Order backlog at September 30, 2006, was $4.9 Million. The decline in revenues from September indicates to me that the demand for the company's products is not overwhelming, or they would have been able to replace the realized revenues in the backlog. This makes me believe that the company just managed to recognize more revenue in the fourth quarter, and that the revenue increase does not signal a marked increase in demand for the company's products.

  • Conclusions

    As a result of what I've read in the filings and recent press releases, I have to hold back on this company at the moment. We still don't have the actual fourth quarter and year end results, so it is difficult to tell what is driving the revenue increase. However, based on the backlog information, it appears that the demand for the company's products has not materially changed from other quarters, and therefore, the increase in revenue may simply represent a one-time event of increased revenue recognition for the quarter.

    Additionally, the potential for competition is a bit worrying, and I fully recognize that I'm qualified enough in laboratory technology to evaluate which company is the most likely to succeed here. Therefore, I don't find MFIC to be an attractive investment on the heels of its recent announcement regarding revenues. I will keep an eye out for the Annual Report, which may yield some data to change my opinion, but at the present time, there are still too many question marks to warrant investing here.

    MFIC 1-yr chart

    Full disclosure: No position in MFIC.OB