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 June 30, 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.
16,645,434 shares of $0.001 par value
common stock outstanding as of July 31, 1997.
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EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997
AND 1996 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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
JUNE 30, DECEMBER 31,
1997 1996
------------ -----------
(Unaudited) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,953,054 $ 1,639,567
Accounts receivable, net 3,431,343 2,911,660
Due from related parties 30,557 34,101
Inventories 2,309,063 1,938,819
Prepaid expenses and other current assets 1,013,948 623,792
------------ -----------
TOTAL CURRENT ASSETS 8,737,965 7,147,939
------------ -----------
PROPERTY AND EQUIPMENT, NET 4,278,615 4,005,711
------------ -----------
OTHER ASSETS
Patent and distribution rights, net 1,138,433 1,303,121
Goodwill 2,358,589 2,503,655
Other intangibles, net 236,737 254,996
------------ -----------
TOTAL OTHER ASSETS 3,733,759 4,061,772
------------ -----------
TOTAL ASSETS $ 16,750,339 $15,215,422
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,997,203 $ 3,005,577
Accrued expenses 935,134 1,213,964
Other liabilities 841,447 396,418
Current portion of long-term debt 251,370 262,779
------------ -----------
TOTAL CURRENT LIABILITIES 7,025,154 4,878,738
LONG TERM DEBT 1,573,055 1,554,161
DEFERRED INCOME TAXES 157,387 161,926
MINORITY INTEREST 125,510 202,120
------------ -----------
TOTAL LIABILITIES 8,881,106 6,796,945
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock 2,353,000 2,490,000
Series B Convertible Preferred Stock 5,319 5,319
Series C Convertible Preferred Stock 144 --
Common Stock 16,487 15,531
Additional paid-in capital 23,988,662 21,314,678
Accumulated deficit (18,653,754) (15,658,464)
Foreign currency translation adjustment 159,375 251,413
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 7,869,233 8,418,477
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,750,339 $15,215,422
============ ===========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $ 8,899,804 $ 3,543,104 $ 5,111,080 $ 1,845,576
Cost of Sales 8,031,660 2,974,429 4,643,530 1,567,234
----------- ----------- ----------- -----------
Gross Profit 868,144 568,675 467,550 278,342
Selling, general and administrative expenses 2,704,035 1,900,401 1,499,619 1,100,198
Research and development costs 585,003 414,101 265,839 219,185
Depreciation and amortization 602,465 413,807 318,230 200,811
----------- ----------- ----------- -----------
Net loss from operations (3,023,359) (2,159,634) (1,616,138) (1,241,852)
Interest expense, net 48,541 16,992 27,101 221
Minority Interest (76,610) (39,021)
----------- ----------- ----------- -----------
Net loss $(2,995,290) $(2,176,626) $(1,604,218) $(1,242,073)
Deduct:
Effect of 10% cumulative preferred dividend 246,687 137,107 122,337 65,813
----------- ----------- ----------- -----------
Net loss for common stockholders $(3,241,977) $(2,313,733) $(1,726,555) $(1,307,886)
=========== =========== =========== ===========
Loss per common share $ (0.20) $ (0.16) $ (0.11) $ (0.09)
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
----------- -----------
OPERATING ACTIVITIES:
Net loss $(2,995,290) $(2,176,626)
Adjustments to reconcile net loss to net cash
Used in operating activities: 592,824 413,807
(Loss) on foreign currency translation (10,470) (617)
Minority interest (76,610)
Changes in assets and liabilities 841,389 (411,180)
----------- -----------
Net cash (used) in operating activities (1,648,157) (2,174,616)
----------- -----------
INVESTING ACTIVITIES:
Purchase of intangible assets (59,488)
Purchase of fixed assets (639,242) (176,280)
Proceeds from sale of fixed assets 15,658
----------- -----------
Net cash (used) in investing activities (623,584) (235,768)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 578,084 3,686,150
Proceeds from issuance of preferred and common stock, net 1,960,000 2,500,000
Proceeds from note payable/net borrowings 131,675 931,200
Repayment of long term debt (84,531) (760,895)
----------- -----------
Net cash provided from financing activities 2,585,228 6,356,455
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 313,487 3,946,071
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,639,567 1,522,075
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,953,054 $ 5,468,146
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
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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 six months and three months ended June 30, 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, together with 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 by retaining 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, would 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 there is still an approval process to be completed with new customers
prior to sale.
The Company's management believes that cash flows from consolidated
operations and the availability of financing from other sources, such as
additional 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 Note 6 and Item 2 below.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
June 30, 1997 December 31, 1996
------------- -----------------
Raw Materials and Supplies $ 1,408,768 $938,050
Finished Goods 900,295 1,000,769
----------- ----------
Total Inventories $ 2,309,063 $1,938,819
========== ==========
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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 $1,023,634 as of June 30, 1997. Distribution rights are
amortized over the ten year life of the agreement. The net book value of
previously acquired distribution rights totaled $114,799 as of June 30, 1997.
Amortization expense related to patent and distribution rights totaled $164,688
for the six months ended June 30, 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
$163,325 for the six months ended June 30, 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 more than three years ago 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 $1,222,403).
During the three months ended June 30, 1997, shareholders holding
77,000 shares of Series A Stock elected to exercise their right of conversion,
leaving 2,353,000 shares of Series A Stock outstanding at June 30, 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 June 30, 1997, 11,334 of these warrants were exercised,
leaving 227,198 of these warrants unexercised at June 30, 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 (see also Note 9 below). On July 23, 1996, the Company issued 531,915 of
these shares - designated Series B 10% Convertible Preferred Stock - at an
aggregate consideration of $2,500,000 to two existing investors in the Company
(the "Series B Stock"). Such issuance was made under Regulation D under the
Securities Act of 1933, as amended, as not involving a public offering. 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, the Series C Stock (as defined above) 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 June 30, 1997 totaled $235,445.
During the three months ended June 30, 1997, the Company accepted
the subscription of $1.0 million, received in the three months ended March 31,
1997, from an existing shareholder in connection with an offering of common and
Board Designated Preferred Stock. This resulted in the issuance of 87,500 shares
of common stock, together with 144,444 shares of Board Designated Preferred
Stock - designated Series C 10% Convertible Preferred Stock (the "Series C
Stock"). Such issuance was made under Regulation D under the Securities Act of
1933, as amended, as not involving a public offering. The Series C Stock carries
the option to convert into shares of common stock at the rate of $4.50 per share
and votes as a class, except as otherwise provided by law, with the Series A
Stock, the Series B Stock and the common stock, based on the underlying number
of shares of common stock after conversion. The Series C Stock carries a
dividend rate of 10% per annum, payable in cash and/or shares ($4.50 per share)
at the Company's option. The dividend in arrears on the Series C Stock at June
30, 1997 were not material.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
In addition to the 102,667 shares of common stock issued upon the
conversion of 77,000 shares of Series A Stock and 11,334 shares of common stock
issued upon the exercise of warrants underlying the Series A Stock, both as
described in Note 5 above, 389,000 shares of common stock were issued due to the
exercise of stock options covered by
- 5 -
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the Company's registration statement in Form S-8 during the three month period
ended June 30, 1997. This exercise of options resulted in gross proceeds to the
Company of $500,500. Furthermore, 20,000 warrants were exercised, which resulted
in additional gross proceeds to the Company of $40,000.
In addition to the 87,500 shares of common stock issued further to
the offering mentioned in Note 5 above, in May 1997, the Company issued a
further 250,000 shares of common stock in connection with the same offering of
common and Board Designated Preferred Stock, to an additional existing
shareholder. Such issuance was made under Regulation D under the Securities Act
of 1933, as amended, as not involving a public offering. This resulted in gross
proceeds to the Company of $1.0 million.
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, Series B Stock and Series C Stock and stock warrants
were determined to be antidilutive for the periods ended June 30, 1997 and 1996
and were therefore excluded from the per share calculations.
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.
NOTE 9 - SUBSEQUENT EVENTS
At the Annual Meeting of the Company held on July 21, 1997, the
shareholders of the Company approved an increase in the number of shares of
Board Designated Preferred Stock reserved for issuance from 2,000,000 to
4,000,000.
Also at the Annual Meeting of the Company, the shareholders of the
Company approved an amendment to the Company's 1994 Stock Incentive Plan (the
"Plan") which increases the number of shares of common stock reserved for
issuance under the Plan from 3,000,000 to 4,500,000.
- 6 -
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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, 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 (the Company's processing aid products use ingredients that
are included in the Food and Drug Administration list as generally recognized as
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, although there can be no assurance in this regard.
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. Since that time the Company has continued its due
diligence and negotiations. The Company believes that this acquisition would
complement its existing European operations and advance its strategic plan of
the range 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. In
addition, the Company continues to be in discussions with a number of processors
in connection with various fruit and vegetable categories regarding strategic
alliances, joint ventures, licenses and other contracts. There can, however, be
no assurance that any such discussions will result in any transaction being
consummated.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales for the six months ended June 30, 1997 were $8,899,804, an
increase of 151% on the total revenue of $3,543,104 achieved during the six
months ended June 30, 1996. Sales for the first six months of 1997 was comprised
of $1,008,334 of processing aids and related activities, $1,355,452 of US
packaging materials and $6,536,018 of UK and other European packaging materials.
Sales of processing aids and related activities increased by
$813,574 (418%) compared to the six months ended June 30, 1996. This increase
was mainly from the inclusion of the revenue from the Company's corn activities
through of its majority owned company NewCorn Co, completed on July 22, 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,
significant costs have been incurred which are yet to show in material revenue
increases. The current market development includes work on potatoes and apples,
where the Company continues to be in volume market test in retail and food
service outlets. Market development activity is also ongoing in carrots, celery
and onions while product development continues on broccoli and mushrooms. As
mentioned above, the Company continues to evaluate the most appropriate
strategic options with regard to the development of each fruit or vegetable
category.
Sales of US packaging materials increased by $911,968 (206%) over
the same period in 1996, of which $719,429 in 1997 was due to the inclusion of
Crystal Specialty Films, Inc. (Crystal) which the Company acquired in July 1996.
The balance of the increase of $192,539 came from growth in the business of its
Respire subsidiary (up 25%), 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.
Sales of UK and other European packaging materials increased by
$3,631,158 (125%) in the six months ended June 30, 1997 compared to the same
period in 1996. This reflected both an increase in the underlying business of
what was formerly Bakery Packaging Services Limited (BPS) as well as the
contribution from EPL Flexible Packaging Limited
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(EPL Flexible) and its main customer Pepsico. BPS and EPL Flexible now trade
under the one name, EPL Flexible. As already announced, at the end of 1996/early
1997, the Company relocated all of the film printing activities previously
located at the BPS site to the EPL Flexible site. In addition, following this
relocation, a plant reorganization to facilitate an increase in higher margin
film perforation and conversion capacity at the BPS site was commenced. Costs
incurred to date in connection with this reorganization have had an impact on
the gross margin in the first six months of 1997.
Gross margin for the six months ended June 30, 1997, was 9.8% as
compared to 16.0% for the same period in 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 seasonably lower fiscal
first half 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. With
the relocation of the printing presses mentioned above, combined with the
significant increase in volumes, the EPL Flexible site incurred operational
inefficiencies in meeting this demand. These have been identified and remedial
action has already commenced. The benefits of this action are expected to begin
to affect the Company later in 1997.
Selling, general and administrative expenses rose from $1,900,401
for the six months ended June 30, 1996 to $2,704,035 for the same period in
1997, an increase of $803,634 (42%). This increase was due not only to the
inclusion on consolidation of incremental expenses from the inclusion of EPL
Flexible, Crystal, and NewCorn Co, but also due to the continuing and
accelerating 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 $414,101 for the first six months of 1996 to
$585,003 for the same period of 1997, an increase of $170,902 (41%). 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. Despite these increases, overheads as a percentage of sales revenue
fell from 65.3% in the six months ended June 30, 1996 to 37.0% for the six
months ended June 30, 1997.Depreciation and amortization expense increased by
$188,658 (46%), from $413,807 in the first six months of 1996 to $602,465 for
the same period of 1997. This reflects 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 second half of 1996.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Sales for the three months ended June 30, 1997 increased to
$5,111,080 compared with $1,845,576 recorded during the three months ended June
30, 1996, an increase of $3,265,504 (177%). Of the sales in the second quarter,
processing aids and related activities accounted for $887,438, US packaging
materials $604,092 and UK and other European packaging materials $3,619,550.
Sales of processing aids and related activities rose by $797,332
(885%) compared to the six months ended June 30, 1996. This increase was mainly
due to the inclusion of revenue from the Company's corn activities as noted
above. 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 and food service
outlets. Market development activity is also ongoing in carrots, celery and
onions while product development continues on broccoli and mushrooms. As
mentioned above, the Company continues to evaluate the most appropriate
strategic options with regard to the development of each fruit or vegetable
category.
Sales of US packaging materials grew by some 151% or $363,264 from
the same period in 1996 primarily due to the inclusion of Crystal noted above.
The Company continues to target and to expand product development activities and
to exploit synergies that it believes exist with the processing aid business,
together with increasing business from the contract with DuPont.
Sales of UK and other European packaging materials increased by
$2,104,908 (139%) in the three months
- 8 -
11
ended June 30, 1997 compared to the same period in 1996. As mentioned above,
this was primarily due to the inclusion of EPL Flexible and the business of its
main customer Pepsico.
Gross margin for the second quarter of 1997 was 9.1% as compared to
15.1% for the second quarter of 1996. This reduction is also principally due to
the inclusion in consolidation of sales of UK and other European packaging
materials, which, as noted above, generate a lower average margin than
processing aids. However, also as mentioned above, it also reflects the effect
of the disproportionate level of fixed costs in packaging manufacturing
operations exacting a disproportionate impact on margins on the seasonably lower
fiscal second quarter volume levels, reorganization costs and the costs of
operational inefficiencies at the EPL Flexible site arising from this and
significantly increased volumes. As mentioned above, remedial action is already
in progress, the benefits of which are expected to come through later in 1997.
Selling, general and administrative expenses rose to $1,499,619 in
the 1997 quarter from $1,100,198, an increase of $399,421. This was due to the
inclusion in consolidation of expenses related to the inclusion of acquired
subsidiaries and the continuing development of the sales and marketing effort as
well as projects to support prospective, large customer particularly for field
tests of the Company's fresh potato product (the Company expects that this level
of additional expenditure will continue at least in the short term). Research
and development costs increased from $219,185 to $265,839, an increase of
$46,654. This reflects the costs to support the Company's scientific and
technical objectives in relation to the ongoing sales effort for large,
prospective customers particularly with reference to the field tests noted
above. Again, the Company expects that these expenses will continue to exceed
the expenses in 1996. However, overheads as a percentage of sales revenue fell
from 71.5% in the three months ended June 30, 1996 to 34.5% in the same period
in 1997. Depreciation and amortization expense increased by $117,419 from
$200,811 in 1996 to $318,230 in 1997. The majority of this increase was due to
and increased depreciation as a result of capital expenditure.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 the Company had $1,953,054 in cash and short term
investments, compared with $1,639,567 at December 31, 1996, an increase of
$313,487. During the six months ended June 30, 1997, cash has been used to fund
operating activities of $1,648,157 and to finance the purchase of fixed tangible
and intangible assets of $639,242. The decrease in net cash used in operations
in 1997 is due primarily to an increase in current payables offset by an
increase in accounts receivables, prepaid expenses and inventories. Total
financing activities were $2,585,228 in this period, principally through the
issuance of new stock and the exercise of options and warrants as mentioned in
Notes 5 and 6 above.
The Company may seek additional financing through an equity offering
or increase in debt facility if the Company believes results of its sales
objectives over the short term are unsatisfactory, 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 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 June 30,
1997 the Company had 486,684 warrants outstanding to purchase shares of common
stock at between $1.00 and $5.00 per share, which if exercised would provide the
Company with gross proceeds of approximately $1,120,000. In addition, at June
30, 1997 the Company had 3,029,500 outstanding to purchase shares of common
stock at a weighted average price of $3.42 per share, which if exercised would
provide the Company with gross proceeds of approximately $10,360,000. There can
be no assurance, however, that any such exercises will occur. At June 30, 1997,
there were no material commitments for capital expenditures.
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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.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit 3.1 - Amended and Restated Articles of Incorporation
of the Company, as amended to date.
Exhibit 10.11 - Employment agreement between EPL
Technologies, Inc. and P.L. Devine, Director, President and
Chief Executive Officer, as of January 1, 1997.
Exhibit 11.0 - Computation of Loss per share
b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPL TECHNOLOGIES, INC.
Date: August 14, 1997 /s/ Paul L. Devine
--------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: August 14, 1997 /s/ Timothy B. Owen
----------------------
Timothy B. Owen
Principal Financial Officer
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