1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended SEPTEMBER 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.
17,961,632 shares of $0.001 par value common stock
outstanding as of October 31, 1997.
2
EPL TECHNOLOGIES, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997
AND DECEMBER 31, 1996 1
B. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996 2
C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 3
D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURES. 13
3
EPL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -------------
(Unaudited) (As Restated,
(As Restated, See Note 10)
See Note 10)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,165,749 $ 1,639,567
Accounts receivable, net 2,973,065 2,911,660
Due from related parties 30,585 34,101
Inventories 2,195,201 1,938,819
Prepaid expenses and other current assets 1,279,702 623,792
------------ ------------
TOTAL CURRENT ASSETS 7,644,302 7,147,939
------------ ------------
PROPERTY AND EQUIPMENT, NET 4,120,961 4,005,711
------------ ------------
OTHER ASSETS
Patent and distribution rights, net 1,056,089 1,303,121
Goodwill 2,324,556 2,503,655
Other intangibles, net 227,608 254,996
------------ ------------
TOTAL OTHER ASSETS 3,608,253 4,061,772
------------ ------------
TOTAL ASSETS $ 15,373,516 $ 15,215,422
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,362,175 $ 3,005,577
Accrued expenses 712,996 1,213,964
Other liabilities 661,114 396,418
Line of credit - related party 337,500 0
Current portion of long-term debt 222,345 262,779
------------ ------------
TOTAL CURRENT LIABILITIES 6,296,130 4,878,738
LONG TERM DEBT 2,107,032 1,554,161
DEFERRED INCOME TAXES 151,836 161,926
MINORITY INTEREST (10,552) 202,120
------------ ------------
TOTAL LIABILITIES 8,544,446 6,796,945
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock 2,143,000 2,490,000
Series B Convertible Preferred Stock 0 5,319
Series C Convertible Preferred Stock 144 0
Common Stock 17,676 15,531
Additional paid-in capital 25,626,362 21,939,678
Accumulated deficit (21,022,441) (16,283,464)
Foreign currency translation adjustment 64,329 251,413
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,829,070 8,418,477
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,373,516 $ 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)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(As Restated, (As Restated, (As Restated,
See Note 10) See Note 10) See Note 10)
Sales $ 14,047,404 $ 7,063,578 $ 5,147,600 $ 3,520,474
Cost of Sales 12,604,440 5,828,264 4,572,780 2,853,835
------------ ------------ ------------ ------------
Gross Profit 1,442,964 1,235,314 574,820 666,639
Selling, general and administrative expenses 4,437,477 3,172,052 1,733,442 1,271,651
Research and development costs 869,067 682,597 284,064 268,496
Depreciation and amortization 931,359 689,428 328,894 275,621
------------ ------------ ------------ ------------
Net loss from operations (4,794,939) (3,308,763) (1,771,580) (1,149,129)
Interest expense, net 84,488 12,227 35,947 (4,765)
Minority Interest (212,672) (7,773) (136,062) (7,773)
------------ ------------ ------------ ------------
Net loss $ (4,666,755) $ (3,313,217) $ (1,671,465) $ (1,136,591)
Deduct:
Accretion, discount and dividends on
preferred stock 411,139 873,357 92,230 736,250
------------ ------------ ------------ ------------
Net loss for common stockholders $ (5,077,894) $ (4,186,574) $ (1,763,695) $ (1,872,841)
============ ============ ============ ============
Loss per common share $ (0.31) $ (0.28) $ (0.10) $ (0.12)
============ ============ ============ ============
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)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -----------
OPERATING ACTIVITIES:
Net loss $(4,666,755) $(3,313,217)
Adjustments to reconcile net loss to net cash
Used in operating activities: 918,481 689,428
Gain on foreign currency translation 27,788 23,647
Minority interest (212,672) (7,773)
Changes in assets and liabilities 75,886 (638,106)
----------- -----------
Net cash (used) in operating activities (3,857,272) (3,246,021)
----------- -----------
INVESTING ACTIVITIES:
Purchase of intangible assets 0 (59,488)
Purchase of fixed assets (776,919) (2,207,402)
Proceeds from sale of fixed assets 15,658 0
----------- -----------
Net cash (used) in investing activities (761,261) (2,266,890)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the exercise of options/warrants 1,388,454 3,584,213
Proceeds from issuance of preferred and common stock, net 1,875,978 2,500,000
Proceeds from note payable/net borrowings/line of credit 1,086,495 939,000
Repayment of long term debt (206,212) (643,012)
----------- -----------
Net cash provided from financing activities 4,144,715 6,380,201
----------- -----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (473,818) 867,290
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,639,567 1,522,075
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,165,749 $ 2,389,365
=========== ===========
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 nine months and three months ended September 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 to be 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, of which
there can be no assurance. 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 products and related
protocols in their production and then, for competitive reasons, protect the
supply relationship with confidentiality agreements. This results in an extended
sales process, which the Company supports by absorbing the costs of testing work
undertaken and by retaining in a proprietary context the data generated. This
level of support adds to the cost of market development. 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.
In September 1997, IPS Produce, Inc., ("IPSP"), one of the U.S.
subsidiaries of the Company, executed a ten-year exclusive trademark license
agreement and strategic alliance with Potandon Produce LLC ("Potandon"), a
"Green Giant Fresh(TM)" brand licensee of the Pillsbury Company. Under this
agreement, which is subject to extension beyond August 2007, and is subject to
the terms of Potandon's license of the "Green Giant Fresh(TM)" brand from the
Pillsbury Company, certain minimum royalties and other customary provisions,
EPL will sell fresh-cut potato products, such as french fries, to the wholesale
foodservice industry under the "Green Giant Fresh(TM)" brand name, utilizing
EPL's "Potato Fresh(TM) System" processing aid technologies and related
protocols. The sales process and documentary negotiations involved in securing
this alliance took two years. The fresh-cut potato products will be sold to the
foodservice industry through IPSP using raw materials from Potandon, in
conjunction with one or more co-packers expected to be operating at several
sites around the US. There can, however, be no assurance as to the pace of
development or degree of success of the expansion of this part of the Company's
business.
Subsequent to the end of the quarter, the Company also announced a
license agreement for its "Apple System(TM)" processing aid (see note 9 below -
Subsequent Events).
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 obtainable
acceptable terms, will provide the Company adequate financing for the next year,
assuming minimal sales budgets are met. For example, the Company, after the end
of the period reported, successfully raised $12.5 million in new equity in a
private transaction. See Note 6, Note 9 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
-4-
7
NOTE 3 - INVENTORIES
Inventories consisted of the following:
September 30, 1997 December 31, 1996
------------------ -----------------
Raw Materials and Supplies $1,198,962 $ 938,050
Finished Goods 996,239 1,000,769
---------- ----------
Total Inventories $2,195,201 $1,938,819
========== ==========
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 $998,689 as of September 30, 1997. Distribution rights are
amortized over the ten-year life of the relevant agreement. The net book value
of previously acquired distribution rights totaled $57,400 as of September 30,
1997. Amortization expense related to patent and distribution rights totaled
$247,032 for the nine months ended September 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 $247,844 for the nine months ended September 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 September 30, 1997 totaled $1,279,986).
During the three months ended September 30, 1997, shareholders
holding 210,000 shares of Series A Stock elected to exercise their right of
conversion, leaving 2,143,000 shares of Series A Stock outstanding at September
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 September 30, 1997, 91,733 of these
warrants were exercised, leaving 135,464 of these warrants unexercised at
September 30, 1997.
At the Annual Shareholders Meeting of the Company held on July 21,
1996, the shareholders 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 Series
B Convertible Preferred Stock - at an aggregate consideration of $2,500,000 to
two existing institutional investors in the Company (the "Series B Stock"). Such
issuance was made under Regulation D under the Securities Act of 1933, as
amended, as a transaction 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 below) and the common stock,
based on the underlying number of shares of common stock after conversion.
During the three months ended September 30, 1997, shareholders holding 531,915
shares of Series B stock elected to fully exercise their right of conversion
into common stock and thus there were no shares of Series B Stock outstanding at
September 30, 1997. The Series B Stock carried a dividend rate of 10% per annum,
-5-
8
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 September 30, 1997 totaled
$270,092.) The Series B Stock, when issued, was convertible into shares of
common stock at a fixed conversion price of $4.70 per share. The extent of the
beneficial conversion feature, representing the difference between the $4.70
conversion price and the prevailing market price of the Common Stock at the date
of issuance, a total of $625,000, was accreted immediately from accumulated
deficit to additional paid-in-capital.
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 institutional shareholder in connection with a private
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 Convertible Preferred Stock
(the "Series C Stock"). Such issuance was made under Regulation D under the
Securities Act of 1933, as amended, as a transaction 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 September 30, 1997 totaled $20,583. The Series
C Stock, when issued, was convertible into shares of common stock at a fixed
conversion price of $4.50 per share. The extent of the beneficial conversion
feature, representing the difference between the $4.50 conversion price and the
prevailing market price of the common stock at the date of issuance, a total of
$72,222, was accreted immediately from accumulated deficit to additional
paid-in-capital.
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. See also Note 9 below.
NOTE 6 - ISSUANCE OF COMMON STOCK AND EXERCISE OF WARRANTS
In addition to the 280,000 shares of common stock issued upon the
conversion of 210,000 shares of Series A Stock, the 531,915 shares of common
stock issued upon conversion of an equal number of shares of Series B Stock and
91,733 shares of common stock issued upon the exercise of warrants underlying
the Series A Stock, all as described in Note 5 above, 175,000 shares of common
stock were issued due to the exercise of stock options covered by the Company's
registration statements on Form S-8 during the three month period ended
September 30, 1997. This exercise of options resulted in gross proceeds to the
Company of $510,656. Furthermore, 110,450 previously privately-issued warrants
were exercised, which resulted in additional gross proceeds to the Company of
$220,900.
At the Annual Meeting of the Company held on July 21, 1997, the
shareholders also approved an amendment to the Company's 1994 Stock Incentive
Plan (the "Plan") which increased the number of shares of common stock reserved
for issuance under the Plan from 3,000,000 to 4,500,000.
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 September 30, 1997 and
1996 and were therefore excluded from the per share calculations.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") 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 year 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," This statement, which establishes standards for reporting
and disclosing comprehensive income, is effective for interim and annual periods
beginning after December 15, 1997, although earlier adoption is permitted.
Reclassification of financial information for earlier periods presented for
comparative periods is required under SFAS No. 130. As this statement only
requires additional disclosures in the Company's consolidated financial
statements, its adoption will not have any impact on the Company's consolidated
financial position or results of operations. The Company expects to adopt SFAS
No. 130 effective January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," This statement, which
establishes standards for the reporting of information about operating segments
and requires the reporting of selected information about operating segments in
interim financial statements, is effective for
-6-
9
fiscal years beginning after December 15, 1997, although earlier application is
permitted. Reclassification of segment information for earlier periods presented
for comparative periods is required under SFAS No. 131. The Company does not
expect adoption of this statement to result in changes to its presentation of
financial information. The Company expects to adopt SFAS No. 131 effective
January 1, 1998.
NOTE 9 - SUBSEQUENT EVENTS
On October 3, 1997, Integrated Produce Systems, Inc. a subsidiary
of the Company, announced a three-year license agreement with Farmington Fresh
("FF"), which the Company believes is the largest grower and shipper of Fuji
apples in California. Under this agreement, which may be extended beyond its
initial term, FF will produce fresh-cut apple slices, utilizing the Company's
"Apple System(TM)" processing aid technologies and related protocols, as well as
the Company's scientific support and packaging technologies. The new sliced
apple product will be processed at FF's newlybuilt processing plant in
California. The agreement grants FF production exclusivity in FF's local
geographic market. The Company announced this arrangement in a report on a Form
8-K filed October 3, 1997.
Effective October 21, 1997, the Company completed a revolving line
of credit agreement with Trilon Dominion Partners LLC, the Company's largest
shareholder (the"Trilon Line"). Under the Trilon Line, which makes available to
the Company $2.1 million for working capital purposes, any amounts drawn are
secured by, amongst other things, a blanket lien on the assets of the Company's
wholly-owned US subsidiaries and on the assets of the Company itself. Any
accounts drawn under this line of credit are repayable on September 30, 1998,
unless repaid earlier or the repayment date is renegotiated. Interest at the
"prime rate" (as published in the Wall Street Journal) plus 3% or 4% is payable
quarterly in arrears. $337,500 was drawn at September 30, 1997 . The Company
reported this arrangement in a report on Form 8-K filed October 24, 1997.
Effective October 31, 1997, the Company announced the acquisition
of 100% of the issued shares of California Microbiological Consulting, Inc.
("CMC"), based in Walnut Creek, CA. CMC specializes in food safety, forensic
testing and microbiological consulting. The acquisition provides the Company
with a West Coast food safety laboratory and microbiological testing facility to
complement the Company's East Coast capabilities at the facilities of its Pure
Produce, Inc. subsidiary. The two companies together afford the Company
increased food safety management capability, together with production
monitoring, contract research and HACCP (Hazard Analysis Critical Control
Points) and TQM (Total Quality Management) program services. The consideration
was settled almost exclusively through the issuance of shares of common stock in
the Company. The total consideration was not material.
Effective November 10, 1997, the Company issued 12,500 further
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"). Such issuance was made under Regulation D under the Securities Act of
1933, as amended, in a transaction not involving a public offering. The Series D
Stock carries the option to convert into shares of common stock at a variable
rate, based on a formula linked to the prevailing market price at the time of
conversion, and subject to certain limitations. The conversion rate may be up to
a 50% premium to the closing market price at the consummation of the transaction
(i.e. a 50% premium to the November 7, 1997 closing price of $7.75). In
addition, the Company issued 403,228 warrants exercisable at 130% of the closing
price (i.e. $10.08) exercisable at any time over the next 5 years. Part of the
proceeds of this offering were used to repay the Trilon Line on November 12,
1997, whereupon the Company instructed Trilon to cancel the Trilon Line and to
file appropriate releases of all collateral securing the Trilon Line. The Trilon
Line therefore is no longer available for drawings.
NOTE 10 - RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 1996, in conjunction with the SEC's
review of a Registration Statement on Form S-3 filed by the Company in December
1997, the SEC, pursuant to the Financial Accounting Standards Board's Emerging
Issues Task Force - Topic D 60 ["Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable Conversion Feature"]
issued March 13, 1997, which formally announces the SEC staff's position that
any discounts resulting from an allocation of proceeds to the beneficial
conversion feature is analogous to a dividend and should be recognized as a
return to the preferred shareholders over the minimum conversion period,
requested that the Company retroactively apply the accounting suggested to the
Company's Series B Stock issued in July 1996 and Series C Stock issued in June
1997. Accordingly, the Company's management determined that the consolidated
financial statements and footnotes for the Company's year ended December 31,
1996 and quarters ended March 31, 1997, June 30, 1997 and September 30, 1997
should be restated.
Under this accounting treatment, the value of the discounts
($625,000 for Series B Stock and $72,222 for Series C Stock) have been reflected
in the restated consolidated financial statements as additional preferred
dividends and have been accreted through the first possible conversion dates.
This restatement had no effect on previously reported total stockholders equity
as of September 30, 1997 or on previously reported net income (prior to
preferred stock accretion, discount and dividends) or cash flows for the quarter
ended September 30, 1997.
A summary of the significant effects of the restatement is as
follows:
As Previously
Reported Restated
------------- --------
Quarter ended September 30, 1997
Additional paid-in-capital 24,929,140 25,626,362
Accumulated deficit (20,325,219) (21,022,441)
For the nine months ended September 30, 1997:
Accretion, discount and dividends on
preferred stock 338,917 411,139
Quarter ended September 30, 1996:
For the nine months ended September 30, 1996:
Accretion, discount and dividends on
Preferred Stock 248,357 873,357
Net loss for common Shareholders 3,561,574 4,186,574
Loss per common share 0.24 0.28
For the three months ended September 30, 1996:
Accretion, discount and dividends on
Preferred Stock 111,250 736,250
Net loss for common Shareholders 1,247,841 1,872,841
Loss per common share 0.08 0.12
-7-
10
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 products and
services 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, packaging
materials and services 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, which have
continued to progress satisfactorily. 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. It currently believes
that the acquisition will be completed by the end of 1997 or the first quarter
of 1998. 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 other processors and companies in connection with the use of the
Company's processing aid technology and related protocols in various fruit and
vegetable categories, as well as the use of its variety-specific produce
packaging technologies, with regard to potential strategic alliances, joint
ventures, licenses and other contracts. In this regard, as mentioned above in
Note 2 (Operations), effective September 22, 1997 the Company, through its
subsidiary IPS Produce, Inc., executed a ten-year exclusive trademark license
agreement and strategic alliance with Potandon Produce LLC, a "Green Giant
Fresh(TM)" brand licensee of the Pillsbury Company. Under this agreement, which
is subject to extension beyond August 2007, and is subject to the terms of
Potandon's license of the "Green Giant Fresh(TM)" brand from the Pillsbury
Company, certain minimum royalties and other customary provisions, EPL will sell
fresh-cut potato products, such as french fries, to the wholesale foodservice
industry under the "Green Giant Fresh(TM)" brand name, utilizing EPL's "Potato
Fresh(TM) System" processing aid technologies and related protocols. The
fresh-cut potato products will be sold to the foodservice industry through IPSP
using raw materials from Potandon, in conjunction with one or more co-packers
expected to be operating at several sites around the US. Furthermore, as
mentioned in Note 9 (Subsequent Events) of the financial statements, the Company
announced, subsequent to the end of the quarter, a three-year license agreement
for its "Apple System(TM)" processing aid with Farmington Fresh ("FF"),which the
Company believes is the largest grower and shipper of Fuji apples in California.
In addition to the "Apple System(TM)" being used in the production of fresh-cut
apple slices, the company also supplies FF with its scientific support and
packaging technologies. The agreement grants FF production exclusivity in their
local geographic market. There can, however, be no assurance as to the pace of
development or degree of success of the expansion of this part of the Company's
business. Other discussions in relation to further potential transactions are
continuing. However, there can be no assurance that any such discussions will
result in any further transaction being consummated.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Sales for the nine months ended September 30, 1997 were
$14,047,404, an increase of 99% on the total revenue of $7,063,578 achieved
during the nine months ended September 30, 1996. Sales for the first nine months
of
-8-
11
1997 was comprised of $2,098,421 of processing aids and related activities,
$2,047,745 of US packaging materials and $9,901,238 of UK and other European
packaging materials.
Sales of processing aids and related activities increased by
$1,377,970 (191%) compared to the nine months ended September 30, 1996. This
increase was mainly from the inclusion of the revenue from the Company's corn
activities through its majority owned company NewCorn Co LLC, which joint
venture was completed on July 22, 1996. The focus of processing aid activity
continues to be towards new product introduction to larger processors. The
supply of product for testing continues, and in some cases has been expanded
and/or accelerated, and as detailed below, significant costs have been incurred
which are yet to yield material revenue increases. The main market development
work has been, and continues to be, on potatoes, corn and apples. Some of the
initial results of this work are evidenced in the agreements with Potandon
Produce LLC and Farmington Fresh detailed above. The potato and apple markets
are potentially the two largest produce categories and the Company believes that
both of these agreements have the potential to yield significant future revenue
streams to the Company, although no material income is expected in 1997. 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. In each case, there can be no
assurance that any such development activity will succeed in generating profits
for the Company.
Sales of US packaging materials increased by $963,479 (89%) over
the same period in 1996, much of which was due to the inclusion in operations of
results from Crystal Specialty Films, Inc. (Crystal) which the Company acquired
in July 1996. The balance of the increase came from growth in the business of
the Company's Respire Films subsidiary, together with an initial contribution
from the contract with DuPont for gas-flame film perforation services. Revenue
from this source, which is serviced from the Crystal factory, is expected to
increase during 1998.
Sales of UK and other European packaging materials increased by
$4,642,377 (88%) in the nine months ended September 30, 1997 compared to the
same period in 1996. This reflected both an increase in the underlying business
of the company formerly known as Bakery Packaging Services Limited (BPS) as well
as the contribution from EPL Flexible Packaging Limited (EPL Flexible) and its
main customer Pepsico. BPS and EPL Flexible now trade under the one name, EPL
Flexible. 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, together with an increase in production capacity from the combined
printing equipment of the EPL Flexible site, were commenced. Costs incurred to
date in connection with this reorganization have had a negative impact on the
gross margin in the first nine months of 1997.
Gross margin for the nine months ended September 30, 1997, was
10.3% as compared to 17.5% 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, which continued to some degree in the third
quarter; 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 and increase in EPL Flexible production
capacity, 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.
While action to address these is being taken, the benefits of this action, to
the extent they materialize, are not expected to begin to affect the Company
until late in 1997 and into 1998.
Selling, general and administrative expenses rose from $3,172,052
for the nine months ended September 30, 1996 to $4,437,477 for the same period
in 1997, an increase of $1,265,425 (40%). 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, corn and
apples, where market development activity is continuing. The Company expects
that this level of additional expenditure will continue at least in the
short-term and may even increase. In addition, the Company continues to spend
significant amounts on patent preparation and filing. Today, the Company has two
US patents and two overseas patents. In addition, however, it has three patents
pending in the US, 26 patent applications pending overseas, as well as two
patents being prepared for application. The Company believes that this patent
expense, which it expects will continue in at least the short term, will help
protect the Company's future anticipated revenues, although in this regard there
can be
-9-
12
no assurance that this will in fact be the case.
Research and development costs increased from $682,597 for the
first nine months of 1996 to $869,067 for the same period of 1997, an increase
of $186,470 (27%). 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 54.6% in the nine months ended September 30, 1996 to 37.8% for the
nine months ended September 30, 1997. Depreciation and amortization expense
increased by $241,931 (35%), from $689,428 in the first nine months of 1996 to
$931,359 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 SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Sales for the three months ended September 30, 1997 increased to
$5,147,600 compared with $3,520,474 recorded during the three months ended
September 30, 1996, an increase of $1,627,126 (46%). Of the sales in the third
quarter, processing aids and related activities accounted for $1,090,087, US
packaging materials $692,293 and UK and other European packaging materials
$3,365,220.
Sales of processing aids and related activities rose by $564,396
(107%) compared to the three months ended September 30, 1996. This increase was
mainly due to the inclusion of revenue from the Company's Newcorn Co corn and
other activities as noted above. The focus of processing aid activity continues
to be towards new product introduction to larger processors. The supply of
product for testing continues, and in some cases has been expanded and/or
accelerated, and as detailed below, costs have been incurred which are yet to
yield significant revenue increases. The main market development work has been,
and continues to be, on potatoes, corn and apples. Some of the initial results
of this work are evidenced by the conclusion of the agreements with Potandon
Produce LLC and Farmington Fresh detailed above. The Company believes that both
of these agreements have the potential to yield significant future revenue
streams to the Company, although no material income is expected in 1997. 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 approximately 8% or
$51,500 from the same period in 1996. 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, although there can be no assurance of success.
Sales of UK and other European packaging materials increased by
$1,011,219 (43%) in the three months ended September 30, 1997 compared to the
same period in 1996. This was due to a full quarter of the business from
Pepsico, which only began during the same period in 1996, plus growth in the
underlying business.
Gross margin for the third quarter of 1997 was 11.2% as compared
to 18.9% for the third quarter of 1996. This reduction was 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, as mentioned above, it also reflects the effect of the
disproportionate level of fixed costs in packaging manufacturing operations,
reorganization costs and the costs of operational inefficiencies at the EPL
Flexible site arising from this and significantly increased volumes. As
mentioned above, while action to address these is being taken, the benefits of
this action, to the extent they materialize, are not expected to begin to affect
the Company until late in 1997 and into 1998.
Selling, general and administrative expenses rose to $1,733,442 in
the 1997 quarter from $1,271,651, an increase of $461,791 (36%). 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 products (the Company expects that this
level of additional expenditure will continue at least in the short term). In
addition, as mentioned above, the Company continues to spend significant amounts
on patent preparation and filing. Research and development costs increased from
$268,496 to $284,064, an increase of $15,568. 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 43.7% in the three months ended September 30, 1996 to
39.2% in the same period in 1997. Depreciation and amortization expense
increased by $53,273 from $275,621 in 1996
-10-
13
to $328,894 in 1997. The majority of this increase was due to increased
depreciation as a result of capital expenditure.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had $1,165,749 in cash and short
term investments, compared with $1,639,567 at December 31, 1996, a decrease of
$473,818. During the nine months ended September 30, 1997, cash has been used to
fund operating activities of $3,857,272 and to finance the purchase of fixed
tangible and intangible assets of $776,919. The increase in net cash used in
operations of $611,251 in the nine months ended September 30, 1997, as compared
to the nine months ended September 30, 1996 reflects the increased loss in 1997
offset by lower amounts used in inventory and a smaller increase in accounts
receivable balances. Total financing activities were $4,144,715 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.
In August 1997, the Company, through its wholly-owned English
subsidiary EPL Technologies (Europe) Limited, completed an additional revolving
term loan with the Bank of Scotland. This totaled (pound)400,000 ($646,000 at an
exchange rate of $1.615) and was drawn in full by September 30, 1997. This term
loan matures and carries an interest rate of 2 1/2% over the Bank of Scotland
Base Rate, which base rate is currently 7%. The term loan, together with the
existing Bank of Scotland banking facilities, are collateralized on the assets
of EPL Technologies (Europe) Ltd. and its two main subsidiaries - Bakery
Packaging Services Limited and EPL Flexible Packaging Limited.
As detailed above in Note 9 (Subsequent Events), effective
November 10, 1997, the Company raised gross proceeds of $12,500,000 through the
issuance of the Series D Stock, in a transaction not involving a public
offering. Part of the proceeds of this offering were used to repay the Trilon
Line (as defined in Note 9) on November 12, 1997, whereupon the Company
instructed Trilon to cancel the Trilon Line and to file appropriate releases of
all collateral securing the Trilon Line.
The Company may seek additional financing through an equity
offering or increase in debt facilities such as those agreed with Trilon (see
Note 9 above - Subsequent Events), 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, of which
there can be no assurance. The nature of the processing aid 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 products and related protocols in their
production and then, for competitive reasons, protect the supply relationship
with confidentiality agreements. This results in an extended sales process. The
Company's management believes that this sales process, is the basis for
developing sustainable growth in revenues which will enable the Company to
achieve profitable operations, although there can be no assurance in this
regard. 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 September 30, 1997 the Company had 284,501 warrants (i.e.
excluding those issued in connection with the Series D Stock) 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
$807,000. In addition, at September 30, 1997 the Company had 2,855,000 options
outstanding to purchase shares of common stock at a weighted average price of
$3.45 per share, which if exercised would provide the Company with gross
proceeds of approximately $9,850,000. There can be no assurance, however, that
any such exercises will occur. At September 30, 1997, there were no material
commitments for capital expenditures.
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 debt or equity 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 that might adversely affect
marketing of the Company's products, d) the length of time to scale up
production in connection with the apple and potato contracts referred to above,
and e) difficulty with research and development activities regarding new
products, including extension of necessary time periods or increase in expense
for product introduction.
-11-
14
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 3.2 - Amended and Restated By-Laws of the Company,
as amended to date.
* Exhibit 4.4 - Series D Preferred Stock - Securities Purchase
Agreement
* Exhibit 4.5 - Series D Preferred Stock - Registration Rights
Agreement
* Exhibit 10.12 - Trademark License Agreement between IPS
Produce, Inc. and Potandon Produce LLC.**
Exhibit 11.0 - Computation of Loss per share
Exhibit 27 - Financial Data Schedule (submitted pursuant to
Item 601(c)(1)(iv) of Regulation S-K, but not
deemed filed for purposes of Section 11 of the
Securities Act or Section 18 of the Exchange Act)
b) Reports on Form 8-K
On September 25, 1997, the Company filed a report on Form
8-K under Item 5 thereof, in connection with the execution
by IPS Produce, Inc., a subsidiary of the Company, of a
trademark license agreement and strategic alliance with
Potandon Produce LLC.
* Previously filed
** Confidential treatment has been granted for certain
portions thereof. Such portions have been filed separately
with the Securities and Exchange Commission.
-12-
15
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: February 13, 1998 /s/ Paul L. Devine
--------------------
Paul L. Devine
Chairman and President
(Principal Executive Officer)
-13-