1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 0-28444
-------------------------------
EPL TECHNOLOGIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0990658
-------- ----------
(State of incorporation) (I.R.S. Employer Identification Number)
2 INTERNATIONAL PLAZA, SUITE 245
PHILADELPHIA, PA 19113-1507
--------------------------- ----------
(Address of principal executive offices) Zip Code
(610) 521-4400
--------------
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
15,747,701 shares of $0.001 par value common stock
outstanding as of April 30, 1997.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 10
SIGNATURES. 11
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,626,435 $ 1,639,567
Accounts receivable, net 2,388,971 2,911,660
Due from related parties 54,124 34,101
Inventories 2,303,929 1,938,819
Prepaid expenses and other current assets 998,651 623,792
------------ ------------
Total Current Assets 7,372,110 7,147,939
------------ ------------
PROPERTY AND EQUIPMENT, Net 4,231,992 4,005,711
------------ ------------
OTHER ASSETS
Patent and distribution rights, net 1,220,777 1,303,121
Goodwill 2,431,126 2,503,655
Other intangibles, net 245,866 254,996
------------ ------------
Total Other Assets 3,897,769 4,061,772
------------ ------------
TOTAL ASSETS $ 15,501,871 $ 15,215,422
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,110,416 $ 3,005,577
Accrued expenses 979,685 1,213,964
Other liabilities 503,948 396,418
Current portion of long-term debt 205,114 262,779
------------ ------------
Total Current Liabilities 5,799,163 4,878,738
LONG TERM DEBT 1,453,077 1,554,161
DEFERRED INCOME TAXES 155,261 161,926
MINORITY INTEREST 164,530 202,120
------------ ------------
Total Liabilities 7,572,031 6,796,945
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock 2,430,000 2,490,000
Series B Convertible Preferred Stock 5,319 5,319
Common Stock 15,626 15,531
Additional paid-in capital 22,400,833 21,314,678
Accumulated deficit (17,049,536) (15,658,464)
Foreign currency translation adjustment 127,598 251,413
------------ ------------
Total Shareholders' Equity 7,929,840 8,418,477
------------ ------------
TOTAL LIABILITY AND SHAREHOLDERS' EQUITY $ 15,501,871 $ 15,215,422
============ ============
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
-1-
4
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
----------- -----------
Sales $ 3,788,724 $ 1,697,528
Cost of sales 3,388,130 1,407,195
----------- -----------
Gross profit 400,594 290,333
Selling, general and administrative expenses 1,204,416 800,203
Research and development costs 319,164 194,916
Depreciation and amortization 284,235 212,996
----------- -----------
Net loss from operations (1,407,221) (917,782)
Interest expense (net) 21,440 16,771
Minority Interest (37,589)
----------- -----------
Net Loss $(1,391,072) $ (934,553)
Deduct:
Effect of 10% cumulative
preferred dividend 124,350 71,294
----------- -----------
Net loss for common shareholders $(1,515,422) $(1,005,847)
=========== ===========
Loss Per Common Share $ (0.10) $ (0.08)
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
-2-
5
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,391,072) $ (934,553)
Adjustments to reconcile net loss to net cash
used in operating activities 275,080 212,996
Gain/(Loss) on foreign currency translation 8,461 (23,540)
Minority interest (37,589)
Changes in assets and liabilities 678,914 (143,500)
----------- -----------
Net cash used by operations (466,206) (888,597)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (478,795) (23,276)
Proceeds from sale of fixed assets 6,703
----------- -----------
Net cash used for investments (472,092) (23,276)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options/warrants 26,250 10,500
Committed proceeds from expected stock issuance 1,000,000
Repayment of long term debt (101,084) (37,486)
----------- -----------
Net cash provided/(used) in financing activities 925,166 (26,986)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (13,132) (938,859)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,639,567 1,522,075
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,626,435 $ 583,216
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
-3-
6
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information of EPL Technologies, Inc. and Subsidiaries
(the "Company") included herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of results for the
interim period.
The financial information has been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly it does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Moreover, the results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year. At this stage of the
Company's development, month to month and quarter to quarter anomalies in
operating results are expected. This information must also be read in connection
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
NOTE 2 - OPERATIONS
EPL Technologies, Inc. develops, manufactures and markets complementary
proprietary technologies designed to maintain the quality and integrity of fresh
produce. The Company's primary products are processing aids and packaging
materials. In addition, the Company offers a range of scientific and technical
services that support and complement its product offerings. The Company's
continued ability to operate is dependent upon its ability to maintain adequate
financing and to achieve levels of revenues necessary to support its cost
structure. The nature of the processing aid business is such that fresh-cut
produce processors and other third party users supplying retail markets require
extensive and confidential on-site, and, in certain cases, independent testing
prior to utilizing the Company's product in their production. This results in an
extended sales process, which the Company supports by absorbing the costs of
work undertaken and retains data in a proprietary context. This adds to the cost
of market development. Management believes that success in this process with
large processors, despite the fact that such success is usually protected by
confidentiality agreements for competitive reasons, is the primary basis for
developing sustainable growth in revenues, which will enable the Company to
achieve profitable operations in this area of the business. The nature of the
packaging materials business is that the sales process is shorter than that for
processing aids, but with new customers there is still an approval process to be
completed prior to sale.
The Company's management believes that cash flows from consolidated
operations and the availability of financing from other sources, such as
borrowing under its available line of credit, or other private or public
issuances of equity which the Company believes may be obtained on acceptable
terms, will provide the Company adequate financing for the next year, assuming
minimal sales budgets are met. See also Notes 6 and Item 2 below.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw Materials and Supplies $ 967,520 $ 938,050
Finished Goods 1,336,409 1,000,769
---------- ----------
Total Inventories $2,303,929 $1,938,819
========== ==========
- 4 -
7
NOTE 4 - INTANGIBLE ASSETS - PATENT AND DISTRIBUTION RIGHTS AND GOODWILL
Patents are amortized over the shorter of their estimated useful
lives or the life of the patent. The net book value of acquired and developed
patents totaled $1,048,578 as of March 31, 1997. Distribution rights are
amortized over the ten year life of the agreement. The net book value of
previously acquired distribution rights totaled $172,199 as of March 31, 1997.
Amortization expense related to patent and distribution rights totaled $82,344
for the three months ended March 31, 1997. Goodwill related to the acquisition
of certain subsidiaries is being amortized on a straight line basis over ten
years. Amortization expense related to goodwill and other intangible assets
totaled $81,659 for the three months ended March 31, 1997.
NOTE 5 - CONVERTIBLE PREFERRED STOCK
The Company's 10% Series A Convertible Preferred Stock (the "Series
A Stock"), which has been issued up to its authorized limit of 3,250,000, was
issued at a price of $1.00 per share, with each share of Series A Stock carrying
the option to convert into common shares at a rate of $0.75 per share. The
Series A Stock carries equal voting rights to the common shares, based on the
underlying number of common shares after conversion. The Series A Stock carries
a dividend rate of 10% per annum, payable in cash and/or common shares ($0.75
per share) at the Company's option (dividends in arrears at March 31, 1997 total
$1,162,566).
During the three months ended March 31, 1997, shareholders holding
60,000 shares of Series A Stock elected to exercise their right of conversion,
leaving 2,430,000 shares of Series A Stock outstanding at March 31, 1997. In
addition, 20% of the common stock into which the Series A Stock may be converted
carries detachable warrants at an exercise price of $1.00 per warrant. During
the three months ended March 31, 1997, none of these warrants were exercised,
leaving 238,532 of these warrants unexercised at March 31, 1997.
At the Annual Meeting of the Company's shareholders held on July 22,
1996, the shareholders of the Company approved an amendment to the Company's
Articles of Incorporation to permit the issuance of up to 2,000,000 shares of
preferred stock ("the Board Designated Preferred Stock") with such designations
and preferences as the Company's Board of Directors may determine from time to
time. On July 23, 1996, the Company issued 531,915 of these shares - designated
10% Series B Convertible Preferred Stock - at an aggregate consideration of
$2,500,000 to two existing investors in the Company (the "Series B Stock"). The
Series B Stock carries the option to convert into shares of common stock at the
rate of $4.70 per share and votes as a class, except as otherwise provided by
law, with the Series A Stock and the common stock, based on the underlying
number of shares of common stock after conversion. The Series B Stock carries a
dividend rate of 10% per annum, payable in cash and/or shares ($4.70 per share)
at the Company's option. The dividend in arrears on the Series B Stock at March
31, 1997 totaled $172,945.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
In addition to the 80,000 shares of common stock issued upon the
conversion of 60,000 shares of Series A Stock as described in Note 5 above,
15,000 shares of common stock were issued due to the exercise of stock options
during the three month period ended March 31, 1997. This exercise of options
resulted in gross proceeds to the Company of $26,250.
In March 1997, the Company received subscriptions, from an existing
shareholder, of $1.0 million in connection with an offering of common and Board
Designated Preferred Stock. Further subscriptions for this limited private
placement are expected shortly from other existing offeree shareholders,
although there can be no assurance that any further subscriptions will in fact
be received.
NOTE 7 - NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the loss
applicable to common shareholders by the weighted average number of common
shares and common share equivalents during the period. Outstanding options,
convertible Series A Stock and Series B Stock and stock warrants were determined
to be antidilutive for the periods ended March 31, 1997 and 1996 and were
therefore excluded from the per share calculations.
- 5 -
8
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings Per Share," which will result in changes to the computation and
presentation of earnings per share. The Company will be required to adopt this
standard during its quarter ended December 31, 1997 with earlier adoption not
permitted. At this time, the Company has not determined the impact this standard
will have on the Company's earnings per share.
- 6 -
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
EPL Technologies, Inc. develops, manufactures and markets
complementary proprietary technologies designed to maintain the quality and
integrity of fresh produce. The Company's primary products are processing aids
and packaging materials, together with a range of scientific and technical
services that support and complement its product offerings. These enable the
Company to offer a full systems approach to maintaining fresh produce quality
and integrity, and together with their proprietary nature, in management's
view, position the Company in a unique place in the market. These products and
services, which are designed for and marketed to processors of fresh fruits and
vegetables, to be integrated into a customer's fresh produce production system.
The Company believes its products are safe, environmentally friendly and,
together with the Company's services, add significant value to the business of
its customers. The Company also believes that its processing aids and packaging
materials are complementary technologies and markets them as such. The
Company's goal is to become a world class provider of products and scientific
and technical services designed to maintain the quality and integrity of fresh
produce. As consumer awareness continues to grow, including reaction to reports
regarding the potential health concerns surrounding the use of sulfite-based
preservatives and untreated produce or produce derived food products,
management believes interest in the Company's products will increase.
Management is continually searching for new ways to market its products and
services and expand operations, both internally and, where appropriate, through
strategic and opportunistic acquisitions. In this regard, in March 1997 the
Company executed a letter of intent containing its conditional offer to acquire
a European based specialty packaging business, with sales revenue of
approximately $7,500,000. The Company believes that this would complement its
existing European operations and advance its strategic plan of products and
services it desires to offer. There can, however, be no assurance that this or
any other acquisition will in fact be consummated.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Sales for the three months ended March 31, 1997 were $3,788,724, an
increase of 123% on the total revenue of $1,697,528 achieved during the three
months ended March 31, 1996. Sales for the first quarter of 1997 was comprised
of $120,896 of processing aids and related activities, $751,360 of US packaging
materials and $2,916,468 of UK and other European packaging materials.
Sales of processing aids and related activities rose $16,242 (16%)
compared to the three months ended March 31,1996. The focus of processing aid
activity continues to be towards new product introduction to larger processors.
Testing at numerous locations continues, and in some cases has been expanded
and/or accelerated, and as detailed below, costs have been incurred which are
yet to show in significant revenue increases. The current market development
includes work on potatoes and apples, where the Company continues to be in
volume market test in retail, food and food service outlets. Market development
activity is also ongoing in carrots, celery and onions while product development
continues on broccoli and mushrooms.
Sales of US packaging materials increased by $548,704 (271%) over
the same period in 1996, of which $382,404 in 1997 was due to the inclusion of
Crystal Specialty Films, Inc. which the Company acquired in July 1996. The
balance of the increase came from growth in the business of its Respire
subsidiary (up 48%), together with an initial contribution from the contract
with DuPont for gas-flame film perforation. Revenue from this source, which is
serviced from the Crystal factory, is expected to increase during 1997.
UK/European packaging materials increased by $1,526,250 (110%) in 1997
over the prior year period, due primarily to a full period contribution from
EPL Flexible and its main customer Pepsico. EPL Flexible was formed in July,
1996 to acquire the fixed assets, assume the real estate lease and employ some
of the employees of Printpack (St. Helens) Ltd. New customers continue to be
sought to help maximize the available capacity of EPL Flexible and further
diversify the customer base. There can be no assurance, however, that the
Company will be successful in doing so. BPS continues to develop, and the
Company is beginning to exploit the synergies between EPL Flexible and BPS,
although these are not expected to show until later in 1997. At the end of 1996
/ early 1997 the Company relocated all of the film printing activites
previously located at BPS to the EPL Flexible site. The costs associated with
this were incurred in the first quarter, but are expected to yield economies of
scale from having all of the printing activities in one location. In addition,
following this relocation, a plant reorganization to facilitate an increase in
higher margin film perforation capacity at BPS was commenced. Costs have been
incurred to date in connection with this reorganization, have had an impact on
the gross margin in the first quarter and are expected to continue into the
next quarter.
- 7 -
10
Gross margin for the 1997 first quarter, historically the quietest
of the year in terms of sales revenue, was 10.6% as compared to 17.1% for the
first quarter of 1996. This reduction was principally due to: the inclusion in
consolidation of sales of UK and other European packaging materials, which
generate a lower average margin than processing aids and now represent a greater
proportion of total group sales; the effect of the disproportionate level of
fixed costs in packaging manufacturing operations exacting a disproportionate
impact on margins on the historically lower volume levels; the previously noted
costs incurred in the relocation of the film printing activities to the EPL
Flexible site; costs associated with the subsequent plant reorganization at BPS
which are expected to continue to some degree into the next quarter; and an
adverse sales mix in the period.
Selling, general and administrative expenses rose from $800,203 for
the three months ended March 31, 1996 to $1,204,416 for the same period in 1997,
an increase of $404,213 (50%). A significant part of this increase over the
first quarter of 1996 was due to the inclusion on consolidation of incremental
expenses from the inclusion of EPL Flexible, Crystal, and Newcorn Co. The
remainder was due to the continuing development of the sales and marketing
effort as well as projects to support prospective large customers. As discussed
above, this effort is focused on a number of vegetable categories, including
potatoes and apples, where market test activity is continuing. The Company
expects that this level of additional expenditure will continue at least in the
short-term. Research and development costs increased from $194,916 for the first
quarter of 1996 to $319,164 during the first three months of 1997, an increase
of $124,248 (64%). This reflects increased costs of the scientific activities
related to projects supporting the sales effort for prospective large customers,
which, as previously noted, the Company absorbs. Again, the Company expects that
these higher expenses will continue in the short-term, although it believes the
results of these expenditures will be seen in incremental revenues later in 1997
and beyond. Depreciation and amortization expense increased by $71,239, from
$212,996 in the first quarter of 1996 to $284,235 in the first quarter of 1997.
This reflected increased depreciation and amortization as a result of capital
expenditure and the assets acquired in the EPL Flexible, Crystal and Newcorn
Co. acquisitions in the the second half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had $1,626,435 in cash and short term
investments, compared with $1,639,567 at December 31, 1996, a decrease of
$13,132. During the three months ended March 31, 1997, cash has been used to
fund operating activities of $466,206 and to finance the purchase of fixed
tangible and intangible assets of $478,795. The decrease in net cash used in
operations in 1997 is due primarily to an increase in current payables and a
decrease in accounts receivable offset by an increase in inventories. Total
financing activities were $925,166 during this period, including $1,000,000 from
the subscription for common and Board Designated Preferred Stock as mentioned in
Note 6 above.
The Company may seek additional financing through an equity offering or
increase in debt facility if the Company fails to meet its sales objectives
over the short term, although there can be no assurance that such capital would
be available or if available, obtainable on acceptable terms in such
circumstances. The Company's continued ability to operate is dependent upon its
ability to maintain adequate financing and to achieve levels of revenue
necessary to support its cost structure. The nature of the business is such
that fresh-cut produce processors and other third-party users supplying retail
markets require extensive and confidential on-site, and, in certain cases,
independent testing prior to utilizing the Company's product in their
production. This results in an extended sales process. The Company's management
believes that this process, despite the fact that success in this process is
usually protected by confidentiality agreements for competitive reasons, is the
basis for developing sustainable growth in revenues which will enable the
Company to achieve profitable operations. The Company's management also
believes that cash flows from consolidated operations and the availability of
financing from other sources such as borrowing under its available line of
credit, or other private or public issuances of equity which the Company
believes may be obtained on acceptable terms, will allow the Company to
maintain adequate financing for the next year, assuming minimal sales budgets
are met. At March 31, 1997 the Company had 393,532 warrants outstanding to
purchase shares of Common Stock at between $1.00 and $2.00 per share, which if
exercised would provide the Company with gross proceeds of approximately
$548,000. In addition, at March 31, 1997 the Company had 3,280,000 options
outstanding to purchase shares of Common Stock at a weighted average price of
$3.01 per share, which if exercised would provide the Company with gross
proceeds of approximately $9,870,000. There can be no assurance, however, that
any such exercise will occur. At March 31, 1997, there were no material
commitments for capital expenditures.
- 8 -
11
FORWARD LOOKING STATEMENTS
The discussion above includes certain forward looking statements
regarding the Company's expectations on gross margin, expenses, market
penetration, success in obtaining large new customers, possible acquisitions,
access to capital and new product introduction. Consequently, actual results may
vary materially from such expectations. Meaningful factors that might affect
such results include: a) the length and effectiveness of the sales process for
processing aids and packaging, b) raw material availability and pricing, c)
changes in regulatory environment and d) difficulty with research and
development activities regarding new products, including extension of necessary
time periods or increase in expense for product introduction.
- 9 -
12
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 11.0 Computation of Loss per share
b) Reports on Form 8-K
None
- 10 -
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: May 15, 1997 /s/ Paul L. Devine
--------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: May 15, 1997 /s/ Timothy B. Owen
----------------------
Timothy B. Owen
Principal Financial Officer and
Principal Accounting Officer
- 11 -