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, 1998
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.
11,454,370 shares of $0.001 par value common stock
outstanding as of July 31, 1998.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND
DECEMBER 31, 1997 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND 1997 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 7
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 11
SIGNATURES. 12
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
------------- ----------------
(Unaudited) *
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 7,029,675 $ 3,756,956
Accounts receivable, net 5,774,122 5,382,125
Inventories 4,230,351 3,411,213
Prepaid expenses and other current assets 1,422,885 1,060,506
------------ ------------
TOTAL CURRENT ASSETS 18,457,033 13,610,800
------------ ------------
PROPERTY AND EQUIPMENT, NET 9,522,899 8,145,543
OTHER ASSETS
Patent and distribution rights, net 927,891 977,903
Goodwill 3,125,687 3,247,229
Other intangibles, net 200,221 218,480
------------ ------------
TOTAL OTHER ASSETS 4,253,799 4,443,612
------------ ------------
TOTAL ASSETS $ 32,233,731 $ 26,199,955
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 5,848,930 $ 4,738,369
Accrued expenses 1,286,709 1,147,597
Other liabilities 581,075 815,280
Current portion of long-term debt 490,613 396,070
------------ ------------
TOTAL CURRENT LIABILITIES 8,207,327 7,097,316
LONG TERM DEBT 1,805,375 1,791,903
DEFERRED INCOME TAXES 78,558 77,964
------------ ------------
TOTAL LIABILITIES 10,091,260 8,967,183
------------ ------------
Convertible Series D Preferred Stock 12,676,922 10,617,346
SHAREHOLDERS' EQUITY
Convertible Series A Preferred Stock 90,000 2,073,000
Convertible Series C Preferred Stock 0 144
Common Stock 11,438 9,048
Additional paid-in capital 38,230,020 28,697,761
Accumulated deficit (28,913,951) (24,206,954)
Foreign currency translation adjustment 48,042 42,427
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 9,465,549 6,615,426
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,233,731 $ 26,199,955
============ ============
* 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,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Sales $16,370,772 $ 8,899,804 $ 9,135,752 $ 5,111,080
Cost of sales 13,439,173 8,031,660 7,363,746 4,643,530
----------- ----------- ----------- -----------
Gross profit 2,931,599 868,144 1,772,006 467,550
Selling, general and administrative expenses 3,764,260 2,704,035 1,881,292 1,499,619
Research and development costs 789,788 585,003 369,337 265,839
Depreciation and amortization 804,974 602,465 414,664 318,230
----------- ----------- ----------- -----------
Net loss from operations (2,427,423) (3,023,359) (893,287) (1,616,138)
Interest expense, net 14,573 48,541 (7,223) 27,101
Minority interest 0 (76,610) 0 (39,021)
----------- ----------- ----------- -----------
Net loss $(2,441,996) $(2,995,290) $ (886,064) $(1,604,218)
Deduct:
Accretion, discount and dividends on 2,353,654 318,909 1,002,682 194,559
preferred stock ----------- ----------- ----------- -----------
Net loss for common shareholders $(4,795,650) $(3,314,199) $(1,888,746) $(1,798,777)
=========== =========== =========== ===========
Loss per common share $ (0.49) $ (0.42) $ (0.18) $ (0.22)
=========== =========== =========== ===========
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,
1998 1997
------------ --------------
OPERATING ACTIVITIES:
Net loss $(2,441,996) $(2,995,290)
Adjustments to reconcile net loss to net cash
Used in operating activities: 799,182 592,824
(Loss) on foreign currency translation (44,413) (10,470)
Minority interest 0 (76,610)
Changes in assets and liabilities (757,034) 841,389
----------- -----------
Net cash (used) in operating activities (2,444,261) (1,648,157)
----------- -----------
INVESTING ACTIVITIES:
Purchase of fixed assets (1,958,225) (639,242)
Proceeds from sale of fixed assets 15,370 15,658
----------- -----------
Net cash (used) in investing activities (1,942,855) (623,584)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 852,018 578,084
Proceeds from issuance of preferred and common stock, net 6,726,190 1,960,000
Proceeds from note payable/net borrowings 0 131,675
Proceeds from long term debt 290,130 0
Repayment of long term debt (208,503) (84,531)
----------- -----------
Net cash provided from financing activities 7,659,835 2,585,228
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,272,719 313,487
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,756,956 1,639,567
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,029,675 $ 1,953,054
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES:
Accretion of warrants, discount, increased value and
issuance costs related to preferred stock $ 2,265,000 $ 72,222
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,
1998 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/A for
the fiscal year ended December 31, 1997.
NOTE 2 - OPERATIONS
EPL Technologies, Inc. develops, manufactures and markets proprietary
technologies designed to maintain the quality and integrity of fresh-cut
produce. The Company's primary products are processing aids and packaging
materials, together with a range of scientific and technical services that the
Company believes 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, of which there can be no assurance. The process by which the Company
develops and sells its integrated systems solutions for certain kinds and
varieties of fresh-cut produce is both expensive and time-consuming. After
preliminary discussions with a potential customer, the Company performs a
comprehensive review of the potential customer's methods and facilities and
initiates a series of tests in an effort to tailor the application of the
Company's proprietary and other technologies to the kind or variety of produce
to be processed. The Company also works closely with the potential customer to
develop a detailed protocol to be followed in processing such produce. Once
the development of this integrated systems solution is substantially complete,
the Company conducts increasingly sophisticated tests in an effort to refine
the prescribed solution before the customer makes any purchase decision.
Although the Company believes it has improved its sales efforts significantly,
the Company's product development and sales process continues to be lengthy and
resource-intensive and could limit the Company's growth. Additionally, limited
awareness of the Company and its products in the marketplace and the highly
fragmented nature of the fresh-cut produce industry may extend the Company's
product development and sales process. The Company does not believe that this
process is likely to shorten significantly. Management believes that success
in this sales process with large processors 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, although there can be no
assurance such will be the case. The nature of the packaging materials
business is such 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.
On April 21, 1998, the Company announced that NewCorn Co. LLC, an entity
in which the Company has a 51% ownership interest ("Newcorn"), had entered into
a trademark sublicense agreement with The Sholl Group II, Inc. ("Sholl"), the
exclusive licensee of the The Pillsbury Company's Green Giant Fresh (R) brand
name. The agreement grants Newcorn the right to use the Green Giant Fresh (R)
brand name on the Company's fresh-cut corn products on an exclusive basis in
North America. Under this agreement, Freshcorn LLC, a newly-formed joint
venture owned equally by Newcorn and Sholl ("Freshcorn") will provide marketing
support for the Company's fresh-cut corn products. The Company believes that
the Green Giant Fresh (R) brand will enhance consumer awareness and acceptance
of Newcorn's fresh-cut corn products and facilitate the development of a market
for branded fresh-cut corn available on a year-round basis. Newcorn's license
expires on December 31, 2020, subject to automatic renewal
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or earlier termination in certain events, including termination of Sholl's
license from the Pillsbury Company. Newcorn will pay a royalty to Sholl based
on the number of cases of licensed corn products sold by Newcorn.
Additionally, Newcorn will pay to Freshcorn a fee based on the profitability of
Newcorn's sales of fresh-cut corn products (the "Fee"), against which the
royalty payments to Sholl will be credited. As members of Freshcorn, Newcorn
and Sholl have agreed that, generally, 25% of the Fee in each year will be used
to reimburse expenses incurred by Newcorn for the advertising, marketing and
promotion of the Company's fresh-cut corn products.
The Company's management believes that cash flows from consolidated
operations and existing resources, together with the net proceeds received from
the offering described in Note 6 below, will be sufficient to meet the
Company's operating needs for the next 12 months. The Company may, however, be
required to seek additional debt or equity financing to implement its growth
strategy. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
June 30, 1998 December 31, 1997
------------- -----------------
Raw Materials and Supplies $ 1,853,783 $ 2,285,588
Finished Goods 2,376,568 1,125,625
------------- ----------
Total Inventories $ 4,230,351 $ 3,411,213
============= =========
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 $927,891 as of June 30, 1998. Amortization expense related to
patents totaled $50,011 for the six months ended June 30, 1998. 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 $221,087 for the six months ended June 30,
1998.
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
shares, 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 $1.50 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 ($1.50 per share) at the Company's option. The dividends in arrears at
June 30, 1998 total $1,411,424.
During the three months ended June 30, 1998, shareholders holding
1,983,000 shares of Series A Stock elected to exercise their right of
conversion, leaving 90,000 shares of Series A Stock outstanding at June 30,
1998. Of the 1,983,000 shares converted, 1,933,000 were converted by one
shareholder in connection with the public offering, described in Note 6 below.
In addition, 20% of the common stock into which the Series A Stock may be
converted carries detachable warrants at an exercise price of $2.00 per
warrant. During the three months ended June 30, 1998, 13,334 of these warrants
were exercised, leaving 8,000 of these warrants unexercised at June 30, 1998.
At the Annual Meeting of the Company's shareholders held on July 22,
1996, the shareholders of the Company authorized 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 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"). During 1997, the holders of all of the shares of the
Series B Stock elected to convert such shares into an aggregate of 265,957
shares of common stock and thus there were no shares of Series B Stock
outstanding at June 30, 1998. The Series B Stock carried a dividend rate of
10% per annum, payable in cash and/or shares of common
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stock (at a rate of $9.40 per share) at the Company's option. The dividend in
arrears on the Series B Stock at June 30, 1998 totaled $270,092.
During 1997, the Company received gross proceeds of $1.0 million
from an existing institutional shareholder in connection with a private
offering of common and Board Designated Preferred Stock. This resulted in the
issuance of 43,750 shares of common stock, together with 144,444 shares of
Board Designated Preferred Stock - designated Series C Convertible Preferred
Stock (the "Series C Stock"). The Series C Stock carried a dividend rate of
10% per annum, payable in cash and/or shares at the Company's option. During
the three months ended March 31, 1998, the holder of all of the Series C Stock
converted such shares into 72,222 shares of common stock and thus there were no
shares of Series C Stock outstanding at June 30, 1998. Dividends in arrears on
the Series C Stock at June 30, 1998 totaled $49,239. In connection with the
issuance of the Series C Stock, the Company issued warrants to purchase 30,993
shares of the Company's common stock at an exercise price of $10.00 per share.
The value of these warrants will be accreted over the estimated lives of these
warrants (5 years).
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. During 1997, the Company issued a further 12,500 shares of Board
Designated Preferred Stock - designated Series D Convertible Preferred Stock -
at an aggregate consideration, before associated costs and expenses, of
$12,500,000 to three new institutional investors (the "Series D Stock"). The
Series D Stock certificate of designation contains provisions which, in certain
circumstances outside of the Company's control, could provide the holders of
Series D Stock with the ability to redeem their shares. The amount to be paid
by the Company in the event of a redemption would be calculated as the greater
of (a) 115% of the stated value of the Series D stock plus 4% per annum
appreciation provision accrued from the issuance date to the redemption date or
(b) the "parity value" of the shares to be redeemed, which is calculated as the
number of shares issuable upon conversion multiplied by the closing price of a
share of common stock on the redemption date.
The Series D Stock carries the option to convert into shares of
common stock at a variable rate, based on the stated value for each share of
Series D Stock ($1,000) divided by 94% of the prevailing market price at the
time of conversion, as calculated based on the lowest five-day average closing
bid price per share of Common Stock during a specified period of time, and
subject to certain limitations. The extent of the beneficial ownership
feature, representing the 6% discount from the market price at the conversion
date, a total of $800,000, will be accreted over the earliest period after
which all such shares are convertible, or nine months (the "Conversion Period")
and was thus largely complete as of June 30, 1998. In addition the Series D
Stock agreement contains a provision whereby the stated value of the Series D
Stock is to increase by 4% per annum, accruing from the date of issuance until
conversion. In connection with the issuance of the Series D Stock, the Company
issued 201,614 warrants to purchase the Company's common stock at an exercise
price of 130% of the closing price on the issuance date (i.e. $20.16 per
share). The fair value of these warrants ($1,200,000) will be accreted over
the Conversion Period. Holders of the Series D Stock have limited voting
rights and are not entitled to any dividends.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
On May 15, 1998 the Company completed the public offering of
2,400,000 shares of its common stock (the "Offering"), of which 809,097 shares
were sold by the Company and 1,590,903 were sold by Trilon Dominion Partners
LLC ("Trilon"). As mentioned above, in connection with the Offering, Trilon
converted 1,933,000 shares of the Company's Series A Stock into 1,288,667
shares of common stock - see Note 5 "Convertible Preferred Stock". The
offering price was $10.00 per share of common stock - see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
In addition to the 2,097,764 shares of common stock issued in
connection with the Offering (809,097 issued by the Company and 1,288,667
issued to Trilon upon conversion of its Series A Stock), a total of 202,167
additional shares of common stock were issued during the three months ended
June 30, 1998: 33,333 shares upon the conversion of 50,000 shares of Series A
Stock, 155,500 shares upon the exercise of previously issued stock options and
13,334 shares upon the exercise of previously issued warrants. The exercise of
options and warrants resulted in gross proceeds to the Company of $821,355.
On May 12, 1998 the shares of common stock of the Company were
accepted for quotation on the Nasdaq Stock Market's National market under the
symbol "EPTG". Prior to the Offering, the shares of common stock of the
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Company were included on the Nasdaq Stock Market's SmallCap Market under the
symbol "EPTG".
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 shares outstanding during the period.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share", which was adopted by the Company effective for the year ended December
31, 1997, as required by the statement. For the periods ended June 30, 1998
and 1997, the potential common shares have an antidilutive effect on the net
loss per common share for common shareholders. Accordingly, diluted net loss
per common share for common shareholders has not been presented. All loss per
common share and share figures have been adjusted to reflect the 1-for-2
reverse stock split approved by shareholders on March 13, 1998.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which was adopted by the Company effective January 1, 1998, as required
by the statement. The total comprehensive loss for the three months ended June
30, 1998 and 1997 was $788,055 and $1,572, 441 respectively, and for the six
months ended June 30, 1998 and 1997 was $2,436,440 and $3,087,328 respectively.
The adjustment to arrive at the total comprehensive loss for each period
consists of foreign currency translation.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which was adopted by the
Company effective for the year beginning January 1, 1998, as required by the
statement. This statement does not require adoption in interim financial
statements in the initial year of adoption.
NOTE 9 - SUBSEQUENT EVENTS
In July 1998, the Company, through its Spanish subsidiary Fabbri,
finalized with Bank Santander an unsecured line of credit of Spanish PTS
275,000,000 ($1,800,000 at an exchange rate of PTS153:$1). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
As had been indicated in the Company's prospectus issued in
connection with the Offering, the Company is in the process of finalizing the
details of its future UK banking facilities. It expects to complete this
during the third quarter of 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company is a leading developer and marketer of integrated
produce systems solutions specifically designed to address the needs of the
rapidly growing market for fresh-cut produce. In this regard, the Company
develops, manufactures and markets proprietary produce processing aids,
packaging technologies, and scientific and technical services, which are
specifically designed to maintain the quality and integrity of fresh-cut
produce. The foundation of the Company's integrated systems solutions is its
proprietary produce processing aid technology, which inhibits the natural
enzymatic degradation of fruits and vegetables after they have been processed.
Fresh-cut fruits and vegetables that are treated with the Company's proprietary
processing aids better maintain their natural characteristics such as color,
texture, taste and smell. The use of the Company's processing aids allows for
increased availability of certain fresh-cut produce products, such as sliced
apples, potatoes and corn. The Company has concluded that the use of the
Company's processing aids, in accordance with the Company's recommended
protocols, is "generally recognized as safe" ("GRAS") under FDA regulations.
The Company also uses a variety of film technologies to create packaging
specifically designed to complement and enhance the effectiveness of the
Company's processing aids by allowing fruits and vegetables to "breathe" after
they have been cut and packaged. The Company markets these packaging products
to produce growers and processors. In addition, the Company's scientific and
technical services, which include food safety and microbiological testing,
provide fresh produce processors with expertise in food safety, post-harvest
horticulture and processing techniques, and support the cross-marketing efforts
for the Company's other products. The Company believes its processing aids are
safe and environmentally "friendly" and, together with its packaging and
scientific and technical services, add significant value to the businesses of
its customers. In addition to its integrated systems solutions for fresh-cut
produce, the Company also markets flexible packaging for uses in the snack
food, bakery and confectionery industries and for other uses.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales. Sales increased from $8,900,000 in the six months ended June
30, 1997 to $16,371,000 in the six months ended June 30, 1998, an increase of
$7,471,000 or 84%. Sales of processing aids and related activities in the US
and Europe increased from $1,008,000 in the six months ended June 30, 1997 to
$3,829,000 in the six months ended June 30, 1998, an increase of $2,821,000 or
280%. Sales of US packaging materials increased from $1,356,000 in the six
months ended June 30, 1997 to $1,823,000 in the six months ended June 30, 1998,
an increase of $467,000 or 34.4%. Sales of UK and European packaging materials
grew from $6,536,000 in the six months ended June 30, 1997 to $10,719,000 in
the six months ended June 30, 1998, an increase of $4,183,000 or 64%.
The increase in sales of processing aids and related activities was
mainly due to growth in revenues at the Company's Newcorn joint venture. This
is the first year in which Newcorn had sales of its fresh-cut corn products in
the winter season. Increased sales activities resulted in Newcorn gaining a
number of national accounts. The Company currently expects that Newcorn's
fresh-cut corn products will begin to be marketed under the Green Giant
Fresh(R) brand during the third quarter, although there can be no assurance that
such in fact will occur. The Company also expects that Newcorn will relocate
into new facilities on the west coast, which the Company believes will
significantly increase capacity and improve operational efficiencies. The
Company is continuing to focus on the sale and development of its processing
aid technologies, particularly with respect to corn, potatoes and apples.
Product testing continues, and in some cases has been expanded or accelerated,
and significant costs have been incurred to date which have yet to yield
material revenues. Some of the initial results of this work are evidenced by
agreements with Potandon Produce LLC and Farmington Fresh as well as the
recently announced agreement between Newcorn and Sholl for the creation of
Freshcorn LLC and the license of the Green Giant Fresh (R) brand on the
Company's fresh-cut corn products. The Company believes that these agreements
have the potential to result in increased sales in the future, although there
can be no assurance that this will be the case.
The growth in the U.S. packaging materials business was principally
attributable to internal growth of the Company's Respire (R) brand products,
together with sales of perforated film. The sales increase in the U.K. and
Europe of packaging materials was principally attributable to the inclusion of
results of operations of Fabbri Artes Graficas
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Valencia S.A., ("Fabbri"), which was acquired in December 1997.
Gross Profit. Gross profit increased from $868,000 in the six
months ended June 30, 1997 to $2,932,000 in the six months ended June 30, 1998,
an increase of $2,064,000 or, as a percentage of sales, from 9.8% to 17.9%.
This increase was principally due to (i) the inclusion of results of operations
of Fabbri which was acquired in December 1997, (ii) higher margins at the
Company's U.K. packaging operation following the completion in 1997 of the
reorganization of the Company's Runcorn and Gainsborough facilities, (iii)
higher margins on the sales of U.S. packaging materials and (iv) higher margins
at Newcorn. Gross profit from period to period may continue to be impacted by
variations in product mix. Management believes changes in prices of raw
materials for its products have not had a material effect on the Company's
results of operations; however, as the Company's business becomes more reliant
upon sales of its processing aids and related activities, results of operations
may be more susceptible to the effects of changing prices due to the pricing of
certain kinds of produce, as well as ingredients used in the Company's
processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,704,000 in the six months ended June
30, 1997 to $3,764,000 in the six months ended June 30, 1998, an increase of
$1,060,000 or 39%. This increase was due primarily (i) to incremental expenses
from the inclusion of Fabbri and California Microbiological Consulting, Inc.
("CMC"), both of which were acquired after the first quarter of 1997, (ii) the
continuing and accelerating development of the Company's sales and marketing
efforts, particularly in the area of sales of processing aids and related
activites for potatoes, corn and apples, and (iii) other costs, including the
appointment of additional personnel.
Research and Development Costs. Research and development costs
increased from $585,000 in the six months ended June 30, 1997, to $790,000 in
the six months ended June 30, 1998, an increase of $205,000 or 35%. This
reflects increased costs of scientific activities related to sales efforts for
large potential customers, principally related to carrots, broccoli, mushrooms
and perforated films. The Company expects that research and development costs
will continue at no less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $602,000 in the six months ended June 30, 1997, to $805,000 in
the six months ended June 30, 1998, an increase of $203,000 or 34%. This is a
result of six months of depreciation expense for Fabbri, as well as from capital
expenditures at Newcorn and EPL Flexible subsequent to the first six months of
1997. Amortization expense increased due to the acquisition of CMC and Twin
Gardens, which occurred subsequent to the first six months of 1997, offset in
part by the completion at December 31, 1997 of the amortization of distribution
rights.
Loss from Operations. Loss from operations decreased from $3,023,000
in the six months ended June 30, 1997 to $2,427,000 in the six months ended June
30, 1998, a decrease of $596,000 or 19.7%. The decrease was principally due to
the increase in the gross profit as a percentage of sales, together with an
increase in total sales. In addition, total operating expenses, excluding
depreciation and amortization, increased at a lower rate than the growth in
sales, as reflected in the decrease of operating expenses as a percentage of
sales, from 37% in 1997 to 28% in 1998. This reflects improved leveraging of
the Company's infrastructure through the expansion of the Company's business.
Accretion, Discount and Dividends on Preferred Stock. The accretion,
discount and dividends on preferred stock increased from $319,000 in the six
months ended June 30, 1997 to $2,354,000 in the six months ended June 30, 1998,
an increase of $2,035,000. The increase principally reflects the amortization
of the beneficial conversion features of the Series D Stock, accretion of the
fair value of warrants issued concurrently with the issuance of the Series D
Stock, and a provision representing a 4% per annum appreciation on the stated
value of the Series D Stock while the Series D Stock remains outstanding. The
amortization and accretion charges, which commenced in the fourth quarter of
1997, are now largely complete.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Sales. Sales increased from $5,111,000 in the three months ended
June 30, 1997 to $9,136,000 in the three months ended June 30, 1998, an
increase of $4,025,000 or 79%. Sales of processing aids and related activities
in the US and Europe increased from $887,000 in the three months ended June 30,
1997 to $2,848,000 in the three months ended June 30, 1998, an increase of
$1,961,000 or 221%. Sales of US packaging materials increased from $604,000 in
the three months ended June 30, 1997 to $999,000 in the three months ended June
30, 1998, an increase of $395,000 or 65%. Sales of UK and European packaging
materials grew from $3,620,000 in the three months ended June 30, 1997
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to $5,289,000 in the three months ended June 30, 1998, an increase of
$1,669,000 or 46%.
The increase in sales of processing aids and related activities was
mainly due to growth in revenues at the Company's Newcorn joint venture. This
is the first year in which Newcorn had sales of its fresh-cut corn products in
the winter season, which continued into the second quarter. Increased sales
activities resulted in Newcorn gaining a number of national accounts. The
Company currently expects that Newcorn's fresh-cut corn products will begin to
be marketed under the Green Giant Fresh (R) brand during the third quarter,
although there can be no assurance that such in fact will occur. The Company
also expects that Newcorn will relocate into new facilities on the west coast,
which the Company believes will significantly increase capacity and improve
operational efficiencies The Company is continuing to focus on the sale and
development of its processing aid technologies, particularly with respect to
corn, potatoes and apples. Product testing continues, and in some cases has
been expanded or accelerated, and significant costs have been incurred to date
which have yet to yield material revenues. Some of the initial results of this
work are evidenced by agreements with Potandon Produce LLC and Farmington Fresh
as well as the recently announced agreement between Newcorn and Sholl for the
creation of Freshcorn LLC and the license of the Green Giant Fresh(R) brand on
the Company's fresh-cut corn products. The Company believes that these
agreements have the potential to result in increased sales in the future,
although there can be no assurance that this will be the case.
The growth in the U.S. packaging materials business was principally
attributable to internal growth of the Company's Respire(R) brand products,
together with sales of perforated film. The sales increase in the U.K. and
Europe of packaging materials was principally attributable to the inclusion of
results of operations of Fabbri, which was acquired in December 1997.
Gross Profit. Gross profit increased from $468,000 in the three
months ended June 30, 1997 to $1,772,000 in the three months ended June 30,
1998, an increase of $1,304,000 or, as a percentage of sales, from 9.1% to
19.4%. This increase was principally due to (i) the inclusion of results of
operations of Fabbri, (ii) higher margins on the sales of U.S. packaging
materials, (iii) higher margins at Newcorn and (iv) higher margins at the
Company's U.K. packaging operation following the completion in 1997 of the
reorganization of the Company's Runcorn and Gainsborough facilities Gross
profit from period to period may continue to be impacted by variations in
product mix. Management believes changes in prices of raw materials for its
products have not had a material effect on the Company's results of operations;
however, as the Company's business becomes more reliant upon sales of its
processing aids, results of operations may be more susceptible to the effects
of changing prices due to the pricing of certain kinds of produce, as well as
ingredients used in the Company's processing aids.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,500,000 in the three months ended
June 30, 1997 to $1,881,000 in the three months ended June 30, 1998, an
increase of $381,000 or 25%. This increase was due primarily to (i)
incremental expenses from the inclusion of Fabbri and CMC, both of which were
acquired after the second quarter of 1997, (ii) the continuing and accelerating
development of the Company's sales and marketing efforts, particularly in the
area of sales of processing aids and related activites for potatoes, corn and
apples, and (iii) other costs, including the appointment of additional
personnel.
Research and Development Costs. Research and development costs
increased from $266,000 in the three months ended June 30, 1997, to $369,000 in
the three months ended June 30, 1998, an increase of $103,000 or 39%. This
reflects increased costs of scientific activities related to sales efforts for
large potential customers, principally related to carrots, broccoli, mushrooms
and perforated films. The Company expects that research and development costs
will continue at not less than recent levels and may increase.
Depreciation and Amortization. Depreciation and amortization
increased from $318,000 in the three months ended June 30, 1997, to $415,000 in
the three months ended June 30, 1998, an increase of $97,000 or 31%. This is a
result of a full quarter of depreciation expense for Fabbri, as well as from
the previous capital expenditures at Newcorn and EPL Flexible subsequent to
the second quarter of 1997. Amortization expense increased due to the
acquisition of CMC and Twin Gardens, which occurred subsequent to the second
quarter of 1997, offset in part by the completion at December 31, 1997 of
amortization of distribution rights.
Loss from Operations. Loss from operations decreased from
$1,616,000 in the three months ended June 30, 1997 to $893,000 in the three
months ended June 30, 1998, a decrease of $723,000 or 45%. The decrease was
principally due to the increase in sales and gross profit, together with the
increase in the gross profit percentage. In addition, total operating
expenses, excluding depreciation and amortization, increased at a lower rate
than the growth in sales, as reflected in the decrease of operating expenses as
a percentage of sales, from 35% in 1997 to 25% in 1998. This reflects the
leveraging of the Company's infrastructure through the expansion of the
Company's business.
Accretion, Discount and Dividends on Preferred Stock. The
accretion, discount and dividends on preferred stock increased from $195,000 in
the three months ended June 30, 1997 to $1,003,000 in the three months ended
June
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30, 1998, an increase of $808,000. The increase principally reflects the
amortization of the beneficial conversion features of the Series D Stock,
accretion of the fair value of warrants issued in connection with the issuance
of the Series D Stock, and a provision representing a 4% per annum appreciation
on the stated value of the Series D Stock while the Series D Stock remains
outstanding. The amortization and accretion charges, which commenced in the
fourth quarter of 1997, are now largely complete.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs
and operating systems in its internal operations, including applications used
in manufacturing, product development, financial business systems and various
administrative functions. To the extent that these software applications
contain source code that is unable to appropriately interpret the upcoming
calendar year "2000," some level of modification or even possibly replacement
of such source code or applications will be necessary. The Company is currently
in the process of completing its identification of software applications that
are not "Year 2000" compliant and expects to begin to make appropriate
responses to address any issue identified by the end of 1998. Given the
information known at this time about the Company's systems, coupled with the
Company's ongoing, normal course-of-business efforts to upgrade or replace
business critical systems as necessary, it is currently not anticipated that
these "Year 2000" costs will have any material adverse effect on the Company's
business, financial condition or results of operations. However, the Company is
still in the preliminary stages of analyzing its software applications and, to
the extent they are not fully "Year 2000" compliant, there can be no assurance
that the costs necessary to update software, or potential systems
interruptions, would not have a material adverse effect on the Company's
business, financial condition or results of operations. However, if the Company
and third parties upon which it relies are unable to address this issue in a
timely manner, it could result in a material financial risk to the Company. To
minimize the likelihood of such material financial risk, the Company expects to
be able to allocate sufficient resources to resolve any significant Year 2000
issues in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $7,030,000 in cash and short term
investments, compared with $3,757,000 at December 31, 1997, an increase of
$3,273,000. During the six months ended June 30, 1998, $2,444,000 was used in
operating activities. In addition, a net $1,943,000 was used in investing
activities to purchase fixed assets, mainly in support of the corn and potato
businesses, but also in connection with the UK and European packaging
businesses. The increase in cash used in operating activities of $811,000 in
the six months ended June 30, 1998 compared to the same period in 1997 reflects
increased working needs as the business has grown, offset by a lower net loss
and higher noncash expenditures.
Total financing activities during the six months ended June 30, 1998
provided $7,660,000, compared with $2,585,000 provided in the same period in
1997. In 1998 $6,726,000 was raised in net proceeds from the public offering
described below, together with $852,000 raised from the exercise of previously
issued stock options and warrants.
At June 30, 1998, the Company had warrants outstanding and
exercisable to purchase 284,132 shares of common stock at a weighted average
price of $16.72 per share, which, if exercised, would provide the Company with
gross proceeds of approximately $4,750,000. In addition, at June 30, 1998, the
Company had 1,734,875 options outstanding and exercisable to purchase shares of
common stock at a weighted average price of $9.48 per share, which, if
exercised, would provide the Company with gross proceeds of up to approximately
$16,447,000. There can be no assurance that any such warrants or options in
fact will be exercised. At June 30, 1998, commitments for capital expenditures
totalled $640,000, primarily in Newcorn.
On May 15, 1998 the Company completed the public offering of
2,400,000 shares of its common stock (the "Offering"), of which 809,097 shares
were sold by the Company and 1,590,903 were sold by Trilon Dominion Partners
LLC ("Trilon"). In connection with the Offering, Trilon converted 1,933,000
shares of the Company's Series A Stock into 1,288,667 shares of common stock,
leaving 90,000 shares of Series A Stock issued and outstanding as at June 30,
1998 - see Note 5 above. The Offering price was $10.00 per share of common
stock. As detailed below, the Company expects to use approximately $1,853,000
of the net proceeds of the Offering to repay outstanding borrowings under the
U.K. Credit Facility, and the remainder to make additional capital expenditures
in its corn, potato and packaging businesses and for working capital and
general corporate purposes, including the possibility that the Company may use
a portion of the net proceeds of the Offering for the acquisition of
businesses, products and technologies that are complementary to those of the
Company (for which additional equity or debt financing may be required).
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14
The Company, through its subsidiary EPL Technologies (Europe) Limited
("EPL Europe"), has a line of credit in the amount of 150,000 pound sterling
($250,695 at an exchange rate of 1 pound sterling:$1.67) with the Bank of
Scotland as part of its credit facility for its U.K. operations (the "U.K.
Credit Facility"). There were no amounts outstanding under this facility at
June 30, 1998. The U.K. Credit Facility also contains a term loan and a
revolving facility, under which 710,000 pound sterling ($1,186,623 at an
exchange rate of 1 pound sterling:$1.67) and 400,000 pound sterling ($668,520
at an exchange rate of 1 pound sterling:$1.67), respectively, were outstanding
as of June 30, 1998. The U.K. Credit Facility is secured by the assets of the
Company's U.K. subsidiaries. The Company is in the process of negotiating new
credit facilities with the Bank of Scotland and has deposited with the Bank of
Scotland sufficient proceeds from the Offering to repay the outstanding amounts
under the term loans and the revolving facility. While the term loans will be
terminated upon formal repayment, the Company has requested that the revolving
facility, in the amount of 400,000 pound sterling ($668,520 at an exchange rate
of 1 pound sterling:$1.67), would remain available for future borrowings. In
addition, the line of credit would be increased by 100,000 pound sterling to
250,000 pound sterling ($417,500 at an exchange rate of 1 pound
sterling:$1.67). The Company expects to formally complete the new credit
facilities during the third quarter. The existing UK Credit Facility contains
certain covenants applicable to the results of operation of the businesses of
EPL Europe and its subsidiaries, which provide for maintenance of minimum
earnings before income taxes and cash flows to interest expense ratios. In
addition, in July 1998, the Company, through its Spanish subsidiary Fabbri,
finalized with Bank Santander an unsecured line of credit for Spanish PTS
275,000,000 ($1,800,000 at an exchange rate of PTS153:$1). This line of credit
will be used for working capital and other purposes.
Historically, the Company's revenues have not been sufficient to
fund the development of the Company's business, and thus it has had to finance
its operating losses externally principally through equity financing. The
Company's management believes that cash flows from consolidated operations and
existing resources, together with the net proceeds of the Offering, will be
sufficient to meet the Company's operating needs for the next twelve months.
The Company may, however, be required to seek additional debt or equity
financing to implement its growth strategy.
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FORWARD LOOKING STATEMENTS
The discussions above include certain forward looking statements
regarding the Company's expectations of gross margin, expenses, market
penetration, success in obtaining large new customers, possible acquisitions,
access to capital, new product introduction, trends affecting the Company's
financial condition or results of operations, the Company's financing plans,
the Company's business and growth strategies, and the use of the net proceeds
to the Company of the recently completed Offering. Actual results may vary
materially from such expectations. Meaningful factors that might affect such
results include: a) the Company's needs for capital, including for
acquisitions, which needs have been and are expected to continue to be
substantial, and its potential inability to obtain additional financing on
satisfactory terms, b) the Company's product development and sales process,
which is lengthy and resource intensive, c) the uncertainty of demand for, or
the market acceptance of, the Company's products and services, d) the Company's
limited resources and experience in marketing and selling its products and
services, e) financial and personnel resource requirements and potential
difficulties in cross-marketing and managing multiple product lines, f) the
Company's potential inability to identify and acquire acceptable acquisition
targets, to the extent necessary to fulfill its expansion plans, and its
potential inability to successfully integrate any such acquisitions into its
operations, g) potential product obsolescence and short product life cycles, h)
potential competition, particularly in the market for produce packaging, from
companies with greater financial, management and other resources, i) the
unpredictability and volatility of the market for agricultural products, j)
changes in U.S. and foreign regulation, k) difficulty with research and
development activities regarding new products, including extension of necessary
time periods or increase in expense for product introduction, l) potential
difficulties in obtaining or protecting intellectual property rights or the
infringement of proprietary or other rights of the Company by third parties, m)
raw material availability and pricing, n) loss of services of key employees of
the Company and o) delays in the Company's ability to relocate its Newcorn
processing facilities, as well as other information contained in the Company's
filings with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
On May 18, 1998 the Company filed a report on Form 8-K, under
Item 5 thereof, in connection with the execution by NewCorn Co.
LLC, an entity in which the Company has a 51% ownership
interest, of a trademark sublicense agreement with the Sholl
Group II, Inc. and the formation of Freshcorn LLC.
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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 7, 1998 /s/ PAUL L. DEVINE
---------------------------------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
Date: August 7, 1998 /s/ BRUCE M. CROWELL
---------------------------------------------
Bruce M. Crowell
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 7, 1998 /s/ TIMOTHY B. OWEN
--------------------------------------------
Timothy B. Owen
Secretary and Treasurer
(Principal Accounting Officer)
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