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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2010
[ ] 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 000-17741
EPOLIN, INC.
(Exact name of Registrant as Specified in its Charter)
New Jersey 22-2547226
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
358-364 Adams Street
Newark, New Jersey 07105
(Address of principal (Zip Code)
executive offices)
(973) 465-9495
(Registrant's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the Issuer's classes of common
stock, as of the latest practicable date: no par value per share: 12,266,355
outstanding as of January 12, 2011.
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EPOLIN, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial Condition 3
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 9
Item 4T. Controls and Procedures. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 10
Item 3. Default upon Senior Securities. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information. 10
Item 6. Exhibits. 10
SIGNATURES 11
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See the Consolidated Financial Statements annexed to this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto appearing elsewhere in
this report and is qualified in its entirety by the foregoing.
Forward-Looking Statements
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs and assumptions made by
the Company's management as well as information currently available to the
management. When used in this document, the words "anticipate", "believe",
"estimate", and "expect" and similar expressions, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. Certain of these risks and uncertainties are
discussed in Part I, Item 1A "Risk Factors" of the Company's Form 10-K for the
year ended February 28, 2010. The Company does not intend to update these
forward-looking statements.
Executive Overview
Epolin, Inc. (the "Company", "we", "us" and "our") which was incorporated
in the State of New Jersey in May 1984, is a specialized chemical company
primarily engaged in the manufacturing, marketing, research and development of
dyes and dye formulations. Our business is heavily weighted towards the
development, manufacture and sale of near infrared dyes. Applications for these
dyes cover several markets that include laser protection, welding, sunglasses,
optical filters, glazing and imaging and security inks and tagants. Paralleling
the growth of the dye business, we maintain a level of production and sales of
specialty products made on a custom basis. These include additives for plastics,
thermochromic materials for use in paints as well as other specialty chemicals
made in low volume to sell at prices that reflect the value of the product.
However, unlike the dye business, we do not expect our specialty chemical
business to grow.
We sell our products to manufacturers of plastics/resins, credit cards,
electronics, glass and other basic materials. Our customers are located in all
regions of the world, although a material portion of our business is dependent
on certain domestic customers, the loss of which could have a material effect on
operations. During the nine months ended November 30, 2010, approximately 27.9%
of sales were to three customers. During the nine months ended November 30,
2009, approximately 38.0% of sales were to three customers. The loss of one or
more key customers could have a material adverse effect on the Company.
Results of Operations
The following tables set forth operations data for the three and nine
months ended November 30, 2010 and 2009.
3
Three Months Ended November 30,
-------------------------------
2010 2009 % change
---------- ---------- ---------
Sales $ 802,397 $ 805,913 -0.4%
Gross profit 372,262 460,974 -19.2%
Gross profit percentage 46.4% 57.2% -10.8%
Selling, general & administrative 432,792 262,402 64.9%
---------- ----------
Operating income (60,530) 198,572 -130.5%
Other Income 2,283 5,893 -61.3%
---------- ----------
Income (loss) before taxes (58,247) 204,465 -128.5%
Income taxes (19,130) 77,457 -124.7%
---------- ----------
Net income (loss) (after taxes) $ (39,117) $ 127,008 -130.8%
========== ==========
Nine Months Ended November 30,
------------------------------
2010 2009 % change
---------- ---------- ---------
Sales $2,283,900 $2,240,660 1.9%
Gross profit 1,106,583 1,289,528 -14.2%
Gross profit percentage 48.5% 57.6% -9.1%
Selling, general & administrative 1,056,547 814,658 29.7%
---------- ----------
Operating income 50,036 474,870 -89.5%
Other Income 7,977 25,017 -68.1%
---------- ----------
Income before taxes 58,013 499,887 -88.4%
Income taxes 18,041 185,533 -90.3%
---------- ----------
Net income (after taxes) $ 39,972 $ 314,354 -87.3%
========== ==========
Sales
For the three months ended November 30, 2010, sales were $802,000 as
compared to $806,000 for the three months ended November 30, 2009, a decrease of
$4,000 or 0.4%. Sales increased to $2,284,000 for the nine months ended November
30, 2010 from $2,241,000 for the nine months ended November 30, 2009, an
increase of $43,000 or 1.9%.
While there was no significant change in total sales in the three months
ended November 30, 2010 compared to the three months ended November 30, 2009,
sales in the eye protection market and the ink and coating market did decrease
offset by an increase in sales in the light management market. The modest
increase in sales for the nine months ended November 30, 2010 compared to the
nine months ended November 30, 2009 was primarily due to an increase in sales in
the light management market with sales in the eye protection remaining
relatively constant, partially offset by a continuing decrease in sales in the
ink and coating market.
4
Categorized by geographic area, sales in the United States decreased for
the nine months ended November 30, 2010 while sales increased in Asia and Europe
compared to the prior year period. For the nine months ended November 30, 2010
compared to the prior year period, sales decreased in the United States to
$1,600,000 from $1,869,000, while in Asia sales increased to $334,000 from
$161,000, and in Europe sales increased to $346,000 from $206,000.
Gross Profit
Gross profit, defined as sales less cost of sales, was $372,000 or 46.4%
of sales for the three months ended November 30, 2010 compared to $461,000 or
57.2% of sales for the three months ended November 30, 2009. For the nine months
ended November 30, 2010, gross profit was $1,107,000 or 48.5% of sales compared
to $1,290,000 or 57.6% of sales for the nine months ended November 30, 2009. In
terms of absolute dollars, gross profit decreased $89,000 for the three months
ended November 30, 2010 compared to the prior year period, and decreased
$183,000 for the nine months ended November 30, 20010 compared to the nine
months ended November 30, 2009.
Cost of sales was $430,000 for the three months ended November 30, 2010
which represented 53.6% of sales compared to $345,000 for the three months ended
November 30, 2009 which represented 42.8% of sales. For the nine months ended
November 30, 2010, cost of sales was $1,177,000 which represented 51.5% of sales
compared to $951,000 which represented 42.4% of sales for the nine months ended
November 30, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $433,000 for the
three months ended November 30, 2010 compared to $262,000 for the three months
ended November 30, 2009, an increase of $171,000, while selling, general and
administrative expenses increased to $1,057,000 for the nine months ended
November 30, 2010 from $815,000 for the nine months ended November 30, 2009, an
increase of $242,000. For the three and nine months ended November 30, 2010
compared to the prior year periods, in terms of absolute dollars, the increase
was primarily due to a substantial increase in professional fees, primarily due
to services not regularly incurred in connection with the strategic
alternatives being pursued by the Company as previously disclosed and
described below. As a percentage of sales, selling, general and administrative
expenses were 54.0% of sales for the three months ended November 30, 2010
compared to 32.5% of sales for the three months ended
November 30, 2009, while for the nine months ended November 30, 2010, selling,
general and administrative expenses were 46.3% of sales compared to 36.4% of
sales for the nine months ended November 30, 2009.
Operating Income (Loss)
The Company suffered an operating loss of $61,000 for the three months
ended November 30, 2010 compared to operating income of $199,000 for the three
months ended November 30, 2010, a decrease of $260,000. Operating income was
$50,000 for the nine months ended November 30, 2010 compared to $475,000 for the
nine months ended November 30, 2009, a decrease of $425,000. While there was not
a significant change in total sales from period to period, cost of sales and
selling, general and administrative expenses increased in both the three and
nine months ended November 30, 2010 compared to the prior year periods. As a
percentage of sales, operating income was 2.2% of sales for the nine months
ended November 30, 2010 compared to 21.2% of sales for the nine months ended
November 30, 2009.
Other Income
Total other income was $2,000 and $8,000 for the three and nine months
ended November 30, 2010 compared to $6,000 and $25,000 for the three and nine
months ended November 30, 2009. We had no rental income for the three and nine
months ended November 30, 2010 compared to $0 and $4,000 for the three and nine
months ended November 30, 2009. In May 2009, our subtenant abandoned the
premises which it had been subleasing since September 2005. Our interest income
was $2,000 and $8,000 for the three and nine months ended November 30, 2010
compared to $6,000 and $21,000 for the prior year periods.
5
Net Income
During the three months ended November 30, 2010, we reported a loss before
taxes of $58,000 as compared to income before taxes of $204,000 for the three
months ended November 30, 2009, a decrease of $262,000. During the nine months
ended November 30, 2010, we reported income before taxes of $58,000 as compared
to income before taxes of $500,000 for the nine months ended November 30, 2009,
a decrease of $442,000. Income taxes were $(19,130) and $18,000 for the three
and nine months ended November 30, 2010 while income taxes were $77,000 and
$186,000 for the comparable periods of 2009. We had a net loss after taxes of
$39,000 or $0.00 per share for the three months ended November 30, 2010 as
compared to net income after taxes of $127,000 or $0.01 per share for the three
months ended November 30, 2009. For the nine months ended November 30, 2010, net
income after taxes was $40,000 or $0.00 per share as compared to net income
after taxes of $314,000 or $0.03 per share for the nine months ended November
30, 2009. As a percentage of sales, net income after taxes was 1.8% of sales for
the nine months ended November 30, 2010 compared to 14.0% of sales for the nine
months ended November 30, 2009.
Net income in the future will be dependent upon our ability to maintain
revenues in excess of our cost of sales and other expenses. Prior to fiscal
2007, sales had grown for a number of consecutive years. However, we have now
had four consecutive years of decreased sales compared to sales in the immediate
prior year. One positive sign, however, is that net income did improve by
$142,000 in fiscal 2010 compared to the prior year. This favorably compares to
net income in fiscal 2009 compared to fiscal 2008 in which net income decreased
by $396,000. However, in the first nine months of fiscal 2011, while total sales
have remained relatively constant increasing by $43,000 compared to the prior
year period, net income decreased by $274,000 in the first nine months of fiscal
2011 compared to the first nine months of fiscal 2010.
Operations Outlook
Following a period of readjustment in our business priorities, we were
able to achieved $3,701,000 in sales for fiscal 2006 which was $821,000 or 28.5%
greater than the prior fiscal year. Nevertheless, we have not since then been
able to achieve comparable sales levels as achieved in fiscal 2006. Beginning in
fiscal 2007, sales have decreased from year to year with fiscal 2009 being the
year with the most dramatic change in sales compared to the immediate prior
year. While sales continued to decrease in fiscal 2010 compared to fiscal 2009,
such decrease was not nearly as dramatic as the change between fiscal 2008 and
2009. During fiscal 2010 sales were $2,945,000 compared to sales of $3,092,000
for fiscal 2009, a decrease of $147,000. For the first nine months of fiscal
2011, sales have increased, although modestly, to $2,284,000 from $2,241, 000
for the first nine months of fiscal 2010. During these periods of reduced sales,
we had a major decline in sales of security inks for the credit card market
which had been a key area of our growth from 2005 to 2007. While this market
remains a source of business for us, we will likely not be able to achieve the
same level of sales in the future which we achieved from 2005 to 2007 in the
security inks market. Nevertheless, we are confident that with our core group of
products, we will be able to maintain sales in our principal markets, such as
the eye protection market and the light management market, while always seeking
new areas for the use of our dyes.
As previously disclosed, Millburn Capital Group was retained in February
2009 as the Company's financial advisor in connection with the Board's decision
to explore strategic alternatives for the Company, including the potential sale
of the Company. The Company continues to pursue such strategic alternatives.
There can be no assurance that any such transaction can or will be completed.
The Company does not currently intend to publicly disclose additional
information about the status of this process but will publicly report all
required information on a timely basis.
In order to facilitate the environmental approvals which will be necessary
in conjunction with any potential sale or similar transaction involving the
Company, the Company has engaged a licensed site remediation professional and
special environmental counsel in the State of New Jersey. Certain environmental
testing has been done to date and other testing and other related actions will
continue. Such efforts are expected to be costly and may require funds to be
placed in escrow or alternative arrangements to be made in order to satisfy
State of New Jersey requirements.
The Company maintained a Simplified Employee Pension Plan which was
adopted in 1994 for its employees as a retirement and income tax reduction
facility. We have recently tested all years of the Plan to insure compliance
with Internal Revenue Service regulations and, during the quarter ended August
31, 2010, we received the test results for all years it was in effect. In
accordance with the results, we have accrued a contribution to the Plan in the
amount of $284,955 which is reflected in the financial statements included with
this report. In August 2010, the Company adopted a 401(k) Plan to
replace the Simplified Employee Pension Plan.
6
Liquidity and Capital Resources
Our primary source of funds is cash flow from operations in the normal
course of selling products. On November 30, 2010, we had working capital of
$2,908,000, a debt to equity ratio of 0.12 to 1, and stockholders' equity of
$3,813,000 compared to working capital of $3,099,000, a debt to equity ratio of
0.06 to 1, and stockholders' equity of $4,038,000 on February 28, 2010. On
November 30, 2010, we had $2,030,000 in cash and cash equivalents, total assets
of $4,257,000 and total liabilities of $444,000, compared to $1,909,000 in cash
and cash equivalents, total assets of $4,299,000 and total liabilities of
$261,000 on February 28, 2010.
Net cash used by operating activities for the nine months ended
November 30, 2010 was $44,000 which was primarily the result of net income of
$40,000, plus decreases in inventories of $18,000, increases in accounts payable
of $23,000 and accrued expenses of $354,000, offset by an increase in accounts
receivable of $49,000 and prepaid taxes of $35,000 and a prior period adjustment
for pension contribution of $263,000 and an adjustment of $195,000 due to
obligations under deferred compensation agreements. The adjustment of $263,000
represents the liability we have incurred to correct the Simplified Employee
Pension Plan as described above. The adjustment of $195,000 represents the
aggregate of the amount paid to the Company's President for the remaining
balance due to him under a deferred compensation agreement and an amount paid to
the Company's Chairman for a deferred compensation accrual remaining due to him,
each of which was paid in the second quarter of fiscal 2011. Net cash provided
by operating activities for the nine months ended November 30, 2009 was $259,000
which was primarily the result of net income of $314,000, plus a decrease in
prepaid taxes of $227,000, and an increase in taxes payable of $63,000, offset
by increases in accounts receivable of $176,000 and inventories of $32,000, and
a decrease in accrued expenses of $237,000.
Net cash provided by investing activities for the nine months ended
November 30, 2010 was $165,000 due to a decrease in cash value of a life
insurance policy of $189,000 (resulting from the surrender of a life insurance
policy for its net surrender value maintained in connection with the deferred
compensation agreement with the Company's President) offset by payments of
plant, property and equipment of $23,000. Net cash provided by investing
activities for the nine months ended November 30, 2009 was $7,000 due a decrease
in cash value of a life insurance policy of $35,000 offset by payments for
property and equipment of $28,000,
For the nine months ended November 30, 2010 and 2009, there was no net
cash from or used by financing activities.
We anticipate, based on currently proposed plans and assumptions relating
to our operations, that our current cash and cash equivalents together with
projected cash flows from operations and projected revenues will be sufficient
to satisfy its contemplated cash requirements for more than the next 12 months.
Our contemplated cash requirements for the balance of fiscal 2011 and beyond
will depend primarily upon level of sales of our products, inventory levels,
product development, sales and marketing expenditures and capital expenditures.
Inflation has not significantly impacted our operations.
Significant Accounting Policies
Our discussion and analysis of the Company's financial condition and
results of operations are based upon our consolidated financial statements which
have been prepared in conformity with U.S. generally accepted accounting
principles. Our significant accounting policies are described in Note B to the
consolidated financial statements included elsewhere herein. The application of
our critical accounting policies is particularly important to the portrayal of
our financial position and results of operations. These critical accounting
policies require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We believe the following critical accounting
policies reflect the more significant judgments and estimates used in the
preparation of the consolidated financial statements.
Accounts Receivable - Accounts receivable are stated at the amount
management expects to collect from outstanding balances. Management provides for
probable uncollectible amounts though a charge to earnings and a credit to a
valuation allowance based on its assessment of the status of individual
accounts. This allowance is an amount estimated by management to be adequate to
absorb possible losses. Balances that are still outstanding after management has
used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable.
Inventories - Our inventories consist of raw materials, work in process,
finished goods and supplies which we value at the lower of cost or market under
the first-in, first-out method.
7
Plant, Property and Equipment - Our plant, property and equipment are
stated at cost. We compute provisions for depreciation on the straight-line
methods, based upon the estimated useful lives of the various assets. We also
capitalize the costs of major renewals and betterments. Repairs and maintenance
are charged to operations as incurred. Upon disposition, the cost and related
accumulated depreciation are removed and any related gain or loss is reflected
in earnings.
Income taxes - We account for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", in which the asset
and liability method is used in accounting for income taxes. We recognize
deferred taxes for temporary differences between the basis of assets and
liabilities for financial statement and for income tax purposes. Temporary
differences relate primarily to different accounting methods used for
depreciation and amortization of property and equipment and deferred
compensation.
Revenue Recognition - We recognize revenue consistent with the provisions
of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition", which sets
forth guidelines in the timing of revenue recognition based upon factors such as
passage of title, payments and customer acceptance. Any amounts received prior
to satisfying our revenue recognition criteria will be recorded as deferred
revenue in the accompanying balance sheet. We recognize revenue from product
sales when there is persuasive evidence that an arrangement exists, when title
has passed, the price is fixed or determinable, and we are reasonably assured of
collecting the resulting receivable. Our policy is to replace certain products
that do not conform to customer specifications, however replacements are made at
our discretion subject to in house product lab analysis. There are no terms or
conditions set forth within our sales contracts that provide for product
replacements. We expense replacement costs as incurred.
Stock-based Compensation - Effective March 1, 2006, we have adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment". SFAS 123R requires companies to measure and recognize in operations
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value. In accordance with the
provisions of the Securities and Exchange Commission Staff Accounting Bulletin
No. 107, we have adapted the modified-prospective transition method. Prior
periods were not restated to reflect the impact of adopting the new standard. We
determine the fair value of stock-based compensation using the Black-Scholes
option-pricing model, which requires us to make assumptions regarding future
dividends, expected volatility of our stock, and the expected lives of the
options. Under SFAS 123R we also make assumptions regarding the number of
options and the number of shares of restricted stock and performance shares that
will ultimately vest. As a result of the adoption of FAS 123R, stock-based
compensation expense recognized includes compensation expense for all
share-based payments granted on or prior to, but not yet vested as of March 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of FAS 123, and compensation cost for all share-based
payments granted on or subsequent to March 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of FAS 123R.
Recently Adopted Accounting Standards
On March 1, 2008, we adopted Statement of Financial Accounting Standard
("SFAS") No. 157, "Fair Value Measurements" ("FAS 157") for financial assets and
liabilities, which clarifies the meaning of fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined under FAS 157 as the exchange price that would be received
for an asset or paid to transfer a liability in the principal or most
advantageous market for the assets or liabilities in an orderly transaction
between market participants on the measurement date. Subsequent changes in fair
value of these financial assets and liabilities are recognized in earnings or
other comprehensive income when they occur. The effective date of the provisions
of FAS 157 for non-financial assets and liabilities, except for items recognized
at fair value on a recurring basis, was deferred by Financial Accounting
Standards Board ("FASB") Staff Position FAS 157-2 ("FSP FAS 157-2") and are
effective for the fiscal year beginning March 1, 2009. The adoption of FAS 157
for financial assets and liabilities did not have an impact on our consolidated
financial position or results of operations.
Also, effective March 1, 2008, we adopted SFAS No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities" ("FAS 159") which allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. As of February 28, 2010, we have not elected the
fair value option for any additional financial assets and liabilities beyond
those already prescribed by accounting principles generally accepted in the
United States.
8
In October 2008, the FASB issued Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset in a Market That Is Not Active
("FSP FAS 157-3")." FSP FAS 157-3 clarifies the application of FAS 157 in a
market that is not active and defines additional key criteria in determining the
fair value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
FAS 157. FSP FAS 157-3 was effective upon issuance and the application of FSP
FAS 157-3 did not have a material impact on our consolidated financial
statements.
Other Information
Subsequent to the end of fiscal 2006, the Board of Directors approved the
adoption of a dividend policy under which we will issue a regular annual cash
dividend on shares of our Common Stock. The amount of the dividend, record date
and payment date will be subject to approval every year by the Board of
Directors. In accordance with the new dividend policy, a regular annual cash
dividend of $0.02 per share was paid in each of May 2006, May 2007 and May 2008.
In addition, since of the adoption of the dividend policy in fiscal 2007, a
special cash dividend of $0.02 per share was paid in each of January 2007 and
January 2008, and a supplemental special cash dividend of $0.04 per share was
paid in August 2008. No further dividends have been paid since August 2008
primarily due to the Company's decision to seek strategic alternatives. The
Board determined to postpone any action regarding the declaration of the regular
annual cash dividend for 2009 and beyond pending the outcome of this process.
In August 2001, the Board of Directors of the Company authorized a 500,000
share stock repurchase program. Pursuant to the repurchase program, the Company
may purchase up to 500,000 shares of its common stock in the open market or in
privately negotiated transactions from time to time, based on market prices.
There have been no repurchases made by the Company under the repurchase program
since the fiscal year ended February 28, 2007. Since the adoption of the program
and through the fiscal year ended February 28, 2007, a total of 331,500 shares
were repurchased at a cumulative cost of $195,766.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
and results of operations, liquidity or capital expenditures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and are not required to provide the information
under this item.
Item 4T. Controls and Procedures.
Under the supervision and with the participation of our management,
including the Principal Executive Officer and Principal Financial Officer, we
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end
of the period covered by this report. Based on that evaluation, the Principal
Executive Officer and Principal Financial Officer have concluded that, as of
November 30, 2010, these disclosure controls and procedures were effective to
ensure that all information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is: (i) recorded, processed, summarized
and reported, within the time periods specified in the Commission's rule and
forms; and (ii) accumulated and communicated to our management, including our
Principal Executive Officer and Principal Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
There have been no material changes in internal control over financial
reporting that occurred during the fiscal quarter covered by this report that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which we are a party or
to which any of our property is subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Pursuant to the Epolin, Inc. 2008 Stock Incentive Plan, each director
shall receive a stock award annually of 25,000 shares of Common Stock. On
October 5, 2010, a total of 100,000 shares of Common Stock were granted to the
Company's four directors. All of such securities were issued in reliance upon
the exemption from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended, for "transactions by the issuer not involving any public
offering".
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved.]
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350)
10
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.
EPOLIN, INC.
(Registrant)
Dated: January 13, 2011 By: /s/ Murray S. Cohen
---------------- -------------------
Murray S. Cohen,
Chairman of the Board
Dated: January 13, 2011 By: /s/ James Ivchenko
---------------- ------------------
James Ivchenko,
President
(Principal Financial Officer)
11
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED
NOVEMBER 30, 2010 AND 2009
CONTENTS
Page
----
Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited) 2 - 3
Consolidated Statements of Income Nine Months Ended
(Unaudited) 4
Consolidated Statements of Income Three Months Ended
(Unaudited) 5
Consolidated Statements of Stockholders' Equity (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8 - 23
1
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30,
2010 February 28,
(Unaudited) 2010
------------ ------------
Current assets:
Cash and cash equivalents $ 2,030,078 1,908,752
Accounts receivable 518,296 469,035
Inventories 665,584 683,995
Prepaid expenses 52,222 55,094
Prepaid taxes 68,810 33,870
Deferred tax assets-current portion 16,398 14,698
------------ ------------
Total current assets 3,351,388 3,165,444
------------ ------------
Plant, property and equipment - at cost:
Land 81,000 81,000
Building and improvements 791,242 770,537
Laboratory equipment 213,242 210,555
Furniture and office equipment 273,863 273,863
Leasehold improvements 532,129 532,131
------------ ------------
Total 1,891,476 1,868,086
Less: Accumulated depreciation and amortization 1,058,264 1,008,372
------------ ------------
Net plant, property and equipment 833,212 859,714
------------ ------------
Other assets:
Deferred tax assets-non current portion 72,260 85,460
Cash value - life insurance policy -- 188,641
------------ ------------
Total other assets 72,260 274,101
------------ ------------
Total $ 4,256,860 4,299,259
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,
2010 February 28,
(Unaudited) 2010
------------ ------------
Current liabilities:
Accounts payable $ 39,796 16,777
Accrued expenses 401,599 47,145
Taxes payable:
Payroll 2,208 2,208
------------ ------------
Total current liabilities 443,603 66,130
Other liabilities - Deferred compensation -- 195,082
------------ ------------
Total liabilities 443,603 261,212
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $2.50 par value; 940,000 shares authorized; none issued
Preferred stock, series A convertible non-cumulative, $2.50 par value;
redemption price and liquidation preference; 60,000 shares
authorized; 5,478 shares issued and redeemed
Common stock, no par value; 20,000,000 shares authorized; 13,215,000
and 13,115,000 shares issued, and 12,266,355 and 12,166,355 shares
outstanding at November 30, 2010 and February 28, 2010, repectively 2,364,693 2,364,693
Additional paid-in capital 123,125 124,820
Retained earnings 1,676,521 1,899,616
------------ ------------
Total 4,164,339 4,389,129
Less: Treasury stock - at cost 351,082 351,082
------------ ------------
Total stockholders' equity 3,813,257 4,038,047
------------ ------------
Total $ 4,256,860 4,299,259
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
2010 2009
------------ -----------
Sales $ 2,283,900 2,240,660
------------ -----------
Cost of sales and expenses:
Cost of sales 1,177,317 951,132
Selling, general and administrative 1,056,547 814,658
------------ -----------
Total 2,233,864 1,765,790
------------ -----------
Operating income 50,036 474,870
------------ -----------
Other income:
Rental income -- 4,500
Interest 7,977 20,517
------------ -----------
Total 7,977 25,017
------------ -----------
Income before taxes 58,013 499,887
Income taxes 18,041 185,533
------------ -----------
Net income $ 39,972 314,354
============ ===========
Per share data:
Basic earnings per common share $ -- 0.03
============ ===========
Fully diluted earnings per common share $ -- 0.03
============ ===========
Weighted average number of common shares outstanding 12,185,992 12,080,847
============ ===========
Fully diluted number of common shares outstanding 12,203,092 12,083,747
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
2010 2009
------------ -----------
Sales $ 802,397 805,913
------------ -----------
Cost of sales and expenses:
Cost of sales 430,135 344,939
Selling, general and administrative 432,792 262,402
------------ -----------
Total 862,927 607,341
------------ -----------
Operating income (loss) (60,530) 198,572
------------ -----------
Other income:
Interest 2,283 5,893
------------ -----------
Total 2,283 5,893
------------ -----------
Income (loss) before taxes (58,247) 204,465
Income taxes (19,130) 77,457
------------ -----------
Net income (loss) $ (39,117) 127,008
============ ===========
Per share data:
Basic earnings per common share $ -- 0.01
============ ===========
Fully diluted earnings per common share $ -- 0.01
============ ===========
Weighted average number of common shares outstanding 12,239,589 12,109,834
============ ===========
Fully diluted number of common shares outstanding 12,239,589 12,112,734
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
Additional
Number of Common Paid-in- Retained Treasury Treasury Stockholders'
Shares Issued Stock Capital Earnings Shares Stock Equity
------------- ----------- ---------- --------- -------- -------- -------------
Balance - March 1, 2009 13,015,000 $ 2,364,693 104,820 1,430,546 948,645 (351,082) 3,548,977
Stock-based compensation 100,000 -- 20,000 -- -- -- 20,000
Net income -- -- -- 314,354 -- -- 314,354
------------- ----------- ---------- --------- -------- -------- -------------
Balance - November 30, 2009 13,115,000 $ 2,364,693 124,820 1,744,900 948,645 (351,082) 3,883,331
============= =========== ========== ========= ======== ======== =============
Balance - March 1, 2010 13,115,000 $ 2,364,693 124,820 1,899,616 948,645 (351,082) 4,038,047
Prior period adjustment -
pension contribution -- -- -- (263,067) -- -- (263,067)
Stock-based compensation 100,000 -- (1,695) -- -- -- (1,695)
Net income -- -- -- 39,972 -- -- 39,972
------------- ----------- ---------- --------- -------- -------- -------------
Balance - November 30, 2010 13,215,000 $ 2,364,693 123,125 1,676,521 948,645 (351,082) 3,813,257
============= =========== ========== ========= ======== ======== =============
The accompanying notes are an integral part of these consolidated
financial statements.
6
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
2010 2009
----------- ----------
Cash flows from operating activities:
Net income $ 39,972 314,354
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 49,892 75,900
Prior period adjustment - pension contribution (263,067) --
Stock based compensation (1,695) 20,000
Deferred tax expense 11,500 (7,967)
Obligation under deferred compensation agreement (195,082) 4,271
(Increase) decrease in:
Accounts receivable (49,261) (175,995)
Inventories 18,411 (31,798)
Prepaid expenses 2,872 (2,331)
Prepaid taxes (34,940) 227,246
Increase (decrease) in:
Accounts payable 23,019 9,331
Taxes payable -- 62,900
Accrued expenses 354,454 (237,256)
----------- ----------
Net cash provided (used) by operating activities (43,925) 258,655
----------- ----------
Cash flows from investing activities:
(Increase) decrease in cash value - life insurance policy 188,641 35,009
Payments for plant, property and equipment (23,390) (27,575)
----------- ----------
Net cash provided in investing activities 165,251 7,434
----------- ----------
Increase (decrease) in cash 121,326 266,089
Cash and cash equivalents:
Beginning 1,908,752 1,544,966
----------- ----------
Ending $ 2,030,078 1,811,055
=========== ==========
Supplemental disclosures of cash flows:
Income taxes paid $ 70,500 129,700
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
7
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A - Organization:
------
We are engaged in the development, production and sale of near infrared
dyes to the optical industry for laser protection and welding applications, and
other dyes and specialty chemical products that serve as intermediates and
additives used in the adhesive, plastic, aerospace, credit card security and
protective documents industries to customers located in the United States and
throughout the world.
Our wholly owned Subsidiary, Epolin Holding Corporation, was incorporated
in New Jersey as a real estate holding company whose assets consist of land and
a building. On January 29, 1998, we acquired 100% of the stock in Epolin Holding
Corporation. Prior to acquisition, two officers/stockholders controlled it.
NOTE B - Summary of Significant Accounting Policies:
------
Basis of Presentation - The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in our Annual Report on Form 10-K for the fiscal
year ended February 28, 2010. Such interim Consolidated Financial Statements
reflect all normal and recurring adjustments that, in the opinion of management,
are necessary for a fair presentation of our financial position, results of
operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated.
The results of operations for the nine-month interim period ended November
30, 2010 and 2009 are not necessarily indicative of the results of operations
for the fiscal year ending February 28, 2011.
Cash and Cash Equivalents - Includes cash in bank and money market accounts for
purposes of preparing the Statement of Cash Flows.
Concentrations of Credit Risks - We have at various times of the year had cash
deposits in financial institutions and a brokerage house in excess of the amount
insured by the agencies of the federal government. In evaluating this credit
risk, we periodically evaluate the stability of the financial institution and
brokerage house.
Financial instruments, which potentially subject us to concentrations of
credit risk, consist principally of accounts receivable. Generally, we do not
require collateral or other securities to support its accounts receivable. Three
customers represented 33.9% of our trade receivables at November 30, 2010.
Source of Raw Materials - We purchase chemicals from several large chemical
manufacturers, further processing them into its saleable products. Although we
limit ourselves to a relatively small number of suppliers, it is not restricted
to such suppliers, and availability of such raw materials is widespread.
8
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - Summary of Significant Accounting Policies (continued):
------
Principles of Consolidation - The accompanying Consolidated Financial Statements
include the accounts of the Company and Subsidiary. Inter-company transactions
and balances have been eliminated in consolidation. Condensed Consolidating
Financial Statements as of November 30, 2010 and for the nine months then ended
are:
CONDENSED CONSOLIDATING BALANCE SHEET
Epolin Epolin
Inc. Holding, Corp. Eliminations Consolidated
----------- -------------- ------------ ------------
Current assets $ 2,850,443 500,945 -- 3,351,388
Non-current assets 1,406,417 642,816 (1,143,761) 905,472
----------- -------------- ------------ ------------
Total $ 4,256,860 1,143,761 (1,143,761) 4,256,860
=========== ============== ============ ============
Total liabilities $ 443,603 24,435 (24,435) 443,603
----------- -------------- ------------ ------------
Stockholders' equity:
Common stock 2,364,693 -- -- 2,364,693
Additional paid-in capital 123,125 -- -- 123,125
Retained earnings 1,676,521 1,119,326 (1,119,326) 1,676,521
Treasury stock (351,082) -- -- (351,082)
----------- -------------- ------------ ------------
Total stockholders' equity 3,813,257 1,119,326 (1,119,326) 3,813,257
----------- -------------- ------------ ------------
Total $ 4,256,860 1,143,761 (1,143,761) 4,256,860
=========== ============== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Epolin Epolin
Inc. Holding, Corp. Eliminations Consolidated
----------- -------------- ------------ ------------
Sales $ 2,283,900 -- -- 2,283,900
Rental income -- 73,305 (73,305) --
----------- -------------- ------------ ------------
Total 2,283,900 73,305 (73,305) 2,283,900
----------- -------------- ------------ ------------
Cost of sales 1,177,317 -- -- 1,177,317
Selling, general and administrative 1,106,175 23,677 (73,305) 1,056,547
----------- -------------- ------------ ------------
Total 2,283,492 23,677 (73,305) 2,233,864
----------- -------------- ------------ ------------
Operating income 408 49,628 -- 50,036
Other income - interest 6,415 1,562 -- 7,977
----------- -------------- ------------ ------------
Income before taxes 6,823 51,190 -- 58,013
Income taxes 13,559 4,482 -- 18,041
----------- -------------- ------------ ------------
Net income $ (6,736) 46,708 -- 39,972
=========== ============== ============ ============
9
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE B - Summary of Significant Accounting Policies (continued):
------
Accounts Receivable - Accounts receivable are stated at the amount management
expects to collect from outstanding balances. Management provides for probable
uncollectible amounts though a charge to earnings and a credit to a valuation
allowance based on its assessment of the status of individual accounts. This
allowance is an amount estimated by management to be adequate to absorb possible
losses. Balances that are still outstanding after management has used reasonable
collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Plant, Property and Equipment - Stated at cost. Provisions for depreciation are
computed on the straight-line methods, based upon the estimated useful lives of
the various assets.
A summary of the major categories of our plant, property and equipment are as
follows:
Estimated Years
---------------
Building and improvements Straight Line 39
Laboratory equipment Straight Line 5 - 7
Furniture and office equipment Straight Line 5 - 7
Leasehold Improvements Straight Line 10 - 39
The costs of major renewals and betterments are capitalized. Repairs and
maintenance are charged to operations as incurred. Upon disposition, the cost
and related accumulated depreciation are removed and any related gain or loss is
reflected in earnings.
Depreciation and amortization expense totaled $49,892 and $75,900 for the
nine months ended November 30, 2010 and 2009, respectively.
Income Taxes - We account for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", wherein the asset
and liability method is used in accounting for income taxes. Deferred taxes are
recognized for temporary differences between the basis of assets and liabilities
for financial statement and for income tax purposes. Temporary differences
relate primarily to different accounting methods used for depreciation and
amortization of property and equipment and deferred compensation.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109 (FIN 48), clarifies the accounting
for uncertainty in income tax positions, as defined. FIN 48 requires, among
other matters, that we recognize in our financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. We became subject to the
provisions of FIN 48 as of March 1, 2007, the beginning of fiscal year ended
2008, and analyzed the filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The adoption of FIN 48 had no impact on
our financial statements for fiscal year ended 2010. As of November 30, 2010 and
2009, we did not record any unrecognized tax benefits. Our policy, if it had
unrecognized benefits, is to recognize accrued interest and penalties related to
unrecognized tax benefits as interest expense and other expense, respectively.
10
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE B - Summary of Significant Accounting Policies (continued):
------
Use of Estimates - The preparation of our financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition - We recognize revenue consistent with the provisions of SEC
Staff Accounting Bulletin No. 104, "Revenue Recognition", which sets forth
guidelines in the timing of revenue recognition based upon factors such as
passage of title, payments, and customer acceptance. Any amounts received prior
to satisfying our revenue recognition criteria will be recorded as deferred
revenue in the accompanying balance sheet. We recognize revenue from product
sales when there is persuasive evidence that an arrangement exists, when title
has passed, the price is fixed or determinable, and we are reasonably assured of
collecting the resulting receivable. Our policy is to replace certain products
that are in nonconformity with customer specifications; however, replacements
are made at our discretion subject to in house product lab analysis. There are
no terms or conditions set forth within our sales contracts that provide for
product replacements. Replacement costs are expensed as incurred.
Regulations - We have expended approximately $57,412 and $33,669 through
November 30, 2010 and 2009, respectively, to maintain compliance with certain
Federal, State and City government regulations relative to the production of
near infrared dyes and specialty chemicals.
Net Income Per Share - Basic net income per share is calculated on the basis of
the weighted average number of shares outstanding during the period, excluding
dilution. Diluted net income per share is computed on the basis of the weighted
average number of shares plus potentially dilutive common shares arising from
the assumed exercise of stock options.
Inventories - Consists of raw materials, work in process, finished goods and
supplies valued at the lower of cost or market under the first-in, first-out
method.
Advertising Costs - Advertising costs, included in operating expenses, are
expensed as incurred. Advertising expenses amounted to $22,180 and $13,096 for
the nine months ended November 30, 2010 and 2009, respectively.
11
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE B - Summary of Significant Accounting Policies (continued):
------
Stock-Based Compensation - Effective March 1, 2006, we have adopted Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment". SFAS
123R requires companies to measure and recognize in operations the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value. In accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin No. 107, we have
adapted the modified-prospective transition method. Prior periods were not
restated to reflect the impact of adopting the new standard. We determine the
fair value of stock-based compensation using the Black-Scholes option-pricing
model, which requires us to make assumptions regarding future dividends,
expected volatility of its stock, and the expected lives of the options. Under
SFAS 123R we also make assumptions regarding the number of options and the
number of shares of restricted stock and performance shares that will ultimately
vest. As a result of the adoption of FAS 123R, stock-based compensation expense
recognized includes compensation expense for all share-based payments granted on
or prior to, but not yet vested as of March 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of FAS 123, and
compensation cost for all share-based payments granted on or subsequent to March
1, 2006, based on the grant date fair value estimated in accordance with the
provisions of FAS 123R.
Prior to the adoption of FAS 123R and for the year ended February 28,
2007, no tax benefits from the exercise of stock options have been recognized.
Any future excess tax benefits derived from the exercise of stock options will
be recorded prospectively and reported as cash flows from financing activities
in accordance with FAS 123R.
Deferred charges for options granted to non-employees are determined in
accordance with FAS No. 123 and EITF 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" as the fair value of the consideration or the fair
value of the equity instruments issued, whichever is more reliably measured.
The weighted average Black-Scholes value of options granted under the
stock plans during the nine months ended November 30, 2010 and 2009 was $.32 and
$.49, respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants:
November 30,
------------
2010 2009
---- ----
Weighted average expected life in years 3 2
Volatility 7.0% 7.0%
Risk-free interest rate 3.2% 2.8%
12
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE B - Summary of Significant Accounting Policies (continued):
------
Recently Adopted Accounting Standards - On March 1, 2008, we adopted Statement
of Financial Accounting Standard ("SFAS") No. 157, "Fair Value Measurements"
("FAS 157") for financial assets and liabilities, which clarifies the meaning of
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Fair value is defined under FAS 157
as the exchange price that would be received for an asset or paid to transfer a
liability in the principal or most advantageous market for the assets or
liabilities in an orderly transaction between market participants on the
measurement date. Subsequent changes in fair value of these financial assets and
liabilities are recognized in earnings or other comprehensive income when they
occur. The effective date of the provisions of FAS 157 for non-financial assets
and liabilities, except for items recognized at fair value on a recurring basis,
was deferred by Financial Accounting Standards Board ("FASB") Staff Position FAS
157-2 ("FSP FAS 157-2") and are effective for the fiscal year beginning March 1,
2009. The adoption of FAS 157 for financial assets and liabilities did not have
an impact on our consolidated financial position or results of operations. For
additional information on the fair value of financial assets and liabilities,
see Note N - Fair Value Measurements.
Also, effective March 1, 2008, we adopted SFAS No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities" ("FAS 159") which allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. As of November 30, 2010, we have not elected the
fair value option for any additional financial assets and liabilities beyond
those already prescribed by accounting principles generally accepted in the
United States.
In October 2008, the FASB issued Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset in a Market That Is Not Active
("FSP FAS 157-3")." FSP FAS 157-3 clarifies the application of FAS 157 in a
market that is not active and defines additional key criteria in determining the
fair value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
FAS 157. FSP FAS 157-3 was effective upon issuance and the application of FSP
FAS 157-3 did not have a material impact on our consolidated financial
statements.
13
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE C - Income Taxes:
------
1. Federal and State deferred tax assets include:
November 30,
-------------------
2010 2009
-------- --------
Temporary differences:
Accelerated amortization $ 11,173 8,761
Deferred compensation 61,431 97,033
Stock-based compensation 16,054 16,054
-------- --------
Total 88,658 121,848
Less: Current portion 16,398 11,804
-------- --------
Non-current portion $ 72,260 110,044
======== ========
2. Income tax: November 30,
-------------------
2010 2009
-------- --------
Current:
Federal $ 0 150,200
State 6,541 43,300
-------- --------
Total current 6,541 193,500
-------- --------
Deferred:
Federal 8,900 (8,590)
State 2,600 623
-------- --------
Total deferred 11,500 (7,967)
-------- --------
Total $ 18,041 185,533
======== ========
NOTE D - Treasury Stock:
------
Consists of 948,645 shares at a net cost of $351,082 as of November 30,
2010 and February 28, 2010, respectively. There were no purchases of treasury
shares made during the nine months ended November 30, 2010 and 2009,
respectively.
14
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE E - Economic Dependency:
------
A material portion of our business is dependent on certain domestic
customers, the loss of which could have a material effect on operations. During
the nine months ended November 30, 2010, approximately 27.9% of sales were to
three customers. During the nine months ended November 30, 2009, approximately
38.0% of sales were to three customers.
NOTE F - Rental Income Under Sublease:
------
We entered into an agreement with a non-related party effective September
1, 2005 for a term ending October 31, 2007, and continuing on a month-to-month
basis thereafter through May 31, 2009. Under the terms of the agreement, the
tenant is to pay a base rent of $18,000 per year. On May 31, 2009, the tenant
abandoned the property.
NOTE G - Research and Development:
------
We have developed substantial research and development capability. Our
efforts are devoted to (i) developing new products to satisfy defined market
needs, (ii) providing quality technical services to assure the continued success
of its products for its customers' applications, (iii) providing technology for
improvements to its products, processes and applications, and (iv) providing
support to its manufacturing plant for cost reduction, productivity and quality
improvement programs. Expenditures for our sponsored product research and
product development of $289,785 and $293,030 were included in cost of sales for
the nine months ended November 30, 2010 and 2009, respectively. Expenditures for
the fiscal year ended 2011 are projected to remain at approximately the same
level as in fiscal 2010.
NOTE H - Employee Benefits:
------
Simplified Employee Pension Plan - Effective June 1, 1994, we provide a SAR/SEP
plan to our employees as a retirement and income tax reduction facility. Full
time employees are eligible to participate immediately. Employees may make
pre-tax and after-tax contributions subject to Internal Revenue Service
limitations. We make contributions ranging from three to five percent. Employer
contributions totaled $53,573 and $34,586 for the nine months ended November 30,
2010 and 2009, respectively. The plan has not met the requirements of Section
416 and Section 408(k) (6) regarding contribution limits and employee deferral
amounts. We have tested all years of the plan to insure our compliance with
Internal Revenue Service regulations. In accordance with the results, we have
accrued a contribution to the plan in the amount of $284,955. See Note P - Prior
Period Adjustment.
401K Plan - Effective August 20, 2010, we provide a 401K plan to our employees
as a retirement and income tax reduction facility. Full time employees are
eligible to participate after completing one year of eligibility service.
Employees may make pre-tax and after-tax contributions subject to Internal
Revenue Service limitations. We make contributions ranging from three to five
percent. Employer contributions totaled $7,314 for the nine months ended
November 30, 2010.
15
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE H - Employee Benefits (continued):
------
Stock Option Plan - We adopted the 1998 Stock Option Plan on December 1, 1998.
Under the terms of the plan, we have reserved 750,000 shares of common stock for
issuance pursuant to the exercise of options to be granted under the Plan, which
do not meet the requirements of Section 422 of the Code. On September 15, 2001,
the Board of Directors increased the reserve to 1,500,000. Options granted
expire five or ten years after the date granted and are subject to various
vesting periods as follows: (1) none exercisable prior to the first anniversary
of the date of grant, and (2) certain options become exercisable as to 50% of
the shares underlying the option on each of the first and second anniversaries
of the date granted (3) certain options become exercisable as to 50% of the
shares underlying the option on each of the second and fourth anniversaries of
the date granted. From inception through November 30, 2010, options granted
totaled 1,242,000, options exercised totaled 686,000; options cancelled or
expired for all years totaled 461,000.
A summary of the status of our 1998 stock option plan as of November 30,
2010, and the changes during the nine months ended November 30, 2010 and 2009 is
presented below:
Weighted-Average
Fixed Options: Shares Exercise Price
-------------- ------- ----------------
Balance - February 28, 2010 245,000 $.49
=======
Options cancelled 150,000
-------
Balance - November 30, 2010 95,000 $.32
=======
Exercisable at November 30, 2010 95,000 $.32
=======
Stock Option Plans - The following table summarizes information about fixed
stock options outstanding at November 30, 2010:
Outstanding Options Exercisable Options
----------------------------------------------- -----------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Exercisable Weighted-Average
Exercise Price at 11/30/10 Contractual Life at 11/30/10 Exercise Price
-------------- ----------- ---------------- ----------- ---------------
$.41 95,000 3.2 95,000 .32
16
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE H - Employee Benefits (continued):
------
Stock Option and Stock-Based Compensation Plan - On June 18, 2008, our Board of
Directors approved and adopted the Epolin, Inc. 2008 Stock Incentive Plan (the
"2008 Plan"), and authorized us to issue up to 1,500,000 shares of our Common
Stock under the 2008 Plan (subject to adjustment to take account of stock
dividends, stock splits, recapitalizations and similar corporate events). Under
the 2008 Plan, we will have the right to issue stock options, stock appreciation
rights, restricted stock, Common Stock or convertible securities that may or may
not be subject to restrictions or forfeiture, restricted stock units,
performance shares and performance units. With the adoption of the new 2008
Plan, the 1998 Plan terminated, and we will no longer be able to grant options
under it. However, options that have already been granted under the 1998 Plan
will continue to be outstanding. As of November 30, 2010, 300,000 shares of
Common Stock have been granted and 1,200,000 shares remain to be granted.
The purpose of the Plan is to provide officers, other employees and
directors of, and consultants to us, an incentive to (a) enter into and remain
in our service or to provide services to us, (b) enhance the our long-term
performance, (c) acquire a proprietary interest in us.
The Compensation Committee or another committee of our Board of Directors
(or if there is no committee, the Board of Directors itself) will administer the
Plan. It will determine the persons to whom awards will be made, the types of
awards that will be made to particular persons, the numbers of shares to which
awards will relate, the dates when awards will vest in whole or in part and the
other terms of awards, including the payments, if any, that participants will
have to make to benefit from awards.
The 2008 Plan provides that each year, commencing September 1, 2008, each
person who serves as a Director during the current year shall automatically
receive a stock award of 25,000 shares of Common Stock. The dollar value of the
shares of Common Stock granted each year is calculated based upon the fair
market value of our Common Stock at the date of grant. Stock-based compensation
in the amount of $20,000 was charged to selling, general and administrative
expenses for the nine months ended November 30, 2010 and 2009 respectively.
17
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE I - Segment Reporting:
------
We currently operate in a single operating segment. In addition, financial
results are prepared and reviewed by management as a single operating segment.
We continually evaluate our operating activities and the method utilized by
management to evaluate such activities and will report on a segment basis if and
when appropriate to do so.
Sales by geographic area are as follows:
Nine Months Ended
November 30,
-----------------------
2010 2009
---------- ----------
United States $1,600,489 1,869,034
Asia 333,549 161,395
Europe 345,714 205,576
Other nations 4,148 4,655
---------- ----------
Total $2,283,900 2,240,660
========== ==========
Two customers, located in the United States, accounted for more than 10%
of revenues from continuing operations. These customers accounted for 21.9% of
sales of infrared dies.
Long-lived assets include net plant, property and equipment. We had
long-lived assets of $833,212 and $859,714 located in the United States at
November 30, 2010 and February 28, 2010, respectively.
18
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE J - Accrued Expenses:
------
Accrued expenses consisted of the following as of November 30, 2010 and
February 28, 2010, respectively:
November 30, February 28,
2010 2010
------------ ------------
Salaries and wages $ 26,368 --
Purchases 3,149 3,455
Pension contribution 292,270 --
Commissions 20,667 10,545
Rent 8,145 8,145
Professional fees 51,000 25,000
------------ ------------
Total accrued expenses $ 401,599 47,145
============ ============
NOTE K - Inventories:
------
November 30, February 28,
2010 2010
------------ ------------
Raw materials and supplies $ 169,570 160,387
Work in process 126,902 92,421
Finished goods 369,112 431,187
------------ ------------
Total $ 665,584 683,995
============ ============
19
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE L - Earnings Per Share:
------
Basic earnings per share are computed on the basis of the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options. The components of basic and diluted
earnings per share are as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
----------------------- -----------------------
2010 2009 2010 2009
---------- ---------- ---------- ----------
Basic Earnings Per Common Share:
Net income (loss) (39,117) 127,008 39,972 314,354
========== ========== ========== ==========
Average common shares
outstanding 12,239,589 12,109,834 12,185,992 12,080,847
========== ========== ========== ==========
Basic earnings per
common share -- 0.01 -- 0.03
========== ========== ========== ==========
Diluted Earnings Per Common Share:
Net income (39,117) 127,008 39,972 314,354
========== ========== ========== ==========
Average common shares
outstanding 12,239,589 12,109,834 12,185,992 12,080,847
Common shares issuable with respect
to options issued to employees
with a dilutive effect -- 2,900 17,100 2,900
---------- ---------- ---------- ----------
Total diluted common shares
outstanding 12,239,589 12,112,734 12,203,092 12,083,747
========== ========== ========== ==========
Diluted earnings per
common share -- 0.01 -- 0.03
========== ========== ========== ==========
20
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE M - Commitments and Contingencies:
------
Losses for contingencies such as litigation and environmental matters are
recognized in income when they are probable and can be reasonably estimated.
Gain contingencies are not recognized in income.
Simplified Employee Pension Plan - Our SAR/SEP plan has failed to meet certain
tests as required by Internal Revenue Service codes regarding contribution
limits and employee deferral amounts. We have tested all years of the plan to
insure our compliance with Internal Revenue Service regulations. In accordance
with the results, we have accrued a contribution to the plan in the amount of
$284,955. See Note P - Prior Period Adjustment.
Lease Obligations - We lease our real estate under an operating lease with a
related party. The lease effective November 1, 1996 was for a term of five years
with three five year options at annual rentals of $97,740. The Cost of Living
Index adjustment effective with the second year has been waived by the
subsidiary. Rent includes reimbursed insurance costs. Generally, management
expects that the lease will be renewed in the normal course of business.
Rental expense charged to operations, eliminated in consolidation, amounted to
$73,305 for the nine months ended November 30, 2010 and 2009, respectively.
Future minimum payments for the current option period:
Fiscal Years Ending February:
-----------------------------
2011 $24,435
2012 97,740
2013 97,740
2014 97,740
2015 97,740
Deferred Compensation - On December 29, 1995, we entered into a deferred
compensation agreement with James Ivchenko, President, whose additional annual
compensation of $19,645 plus interest is deferred until he reaches age 65 or is
terminated. The obligation is funded by the cash value in a life insurance
policy. Commencing on December 2005, annual payments will be made to the officer
in the amount of $32,000 for ten consecutive years. On May 14, 2010, the Board
of Directors agreed to surrender the life insurance policy. The remaining
balance of $128,000 was paid during the current quarter ended November 30, 2010.
On January 1, 1996, we entered into a deferred compensation agreement with
Dr. Murray S. Cohen, PhD, Chairman of the Board, wherein $25,000 per year was
accrued. This agreement, with unfunded accruals of $79,041, terminated on June
25, 1998. On May 14, 2010, the Board of Directors agreed to pay the balance due
during the current year. This balance was paid during the current quarter ended
November 30, 2010.
21
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE N - Fair Value Measurements:
------
Effective March 1, 2008, we adopted FAS 157, which defines fair value as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. FAS 157 establishes a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities. This includes certain pricing models, discounted cash
flow methodologies and similar techniques that use significant
unobservable inputs.
All financial assets that are measured at fair value on a recurring basis (at
least annually) have been segregated into the most appropriate level within the
fair value hierarchy based on the inputs used to determine the fair value at the
measurement date. These assets measured at fair value on a recurring basis are
summarized below:
November 30, 2010 February 28, 2010
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- --------- ---------
Assets:
-------
Cash and cash equivalents $2,030,078 2,030,078 1,908,752 1,908,752
Other assets:
Cash value - life insurance -- -- 188,641 188,641
---------- --------- --------- ---------
Total assets at fair value $2,030,078 2,030,078 2,097,393 2,097,393
========== ========= ========= =========
Liabilities:
------------
Deferred compensation $ -- -- 195,082 195,082
========== ========= ========= =========
22
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE O - Environmental Matters
------
Our past and present daily operations include activities, which are
subject to extensive federal, and state environmental and safety regulations.
Compliance with these regulations has not had, nor do we expect such compliance
to have, any material effect upon expected capital expenditures, net income,
financial condition, or competitive position. We have engaged a licensed site
remediation professional and special environmental counsel in order to
facilitate the environmental approvals which will be necessary in conjunction
with any potential sale or similar transaction of our company. We believe that
our current practices and procedures comply with applicable regulations. Our
policy is to accrue environmental and related costs of a non-capital nature when
it is both probable that a liability has been incurred and that the amount can
be reasonably estimated. No such amounts have been accrued in these statements.
NOTE P - Prior Period Adjustment
------
During the quarter ended August 31, 2010, we received the test results of
our Simplified Employee Pension Plan for all years it was in effect. The
liability we have incurred to correct the plan in the amount of $263,067 is
presented in the financial statements as an increase in accrued expenses and a
corresponding reduction to retained earnings.
2
