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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 May 31, 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: 12,166,355
outstanding as of July 1, 2010.
EPOLIN, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial 3
Condition 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 three months ended May 31, 2010, approximately 32.9% of
sales were to three customers. During the three months ended May 31, 2009,
approximately 48.1% 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 months ended
May 31, 2010 and 2009.
3
Three Months Ended May 31,
--------------------------
2010 2009 % change
---- ---- --------
Sales $811,014 $726,169 11.7%
Gross profit 412,697 470,514 -12.3%
Gross profit percentage 50.9% 64.8% -13.9%
Selling, general & administrative 363,901 259,065 40.5%
-------- --------
Operating income 48,796 211,449 -76.9%
Other Income 3,351 12,367 -72.9%
-------- --------
Income before taxes 52,147 223,816 -76.7%
Income taxes 20,767 83,950 -75.3%
Net income (after taxes) $ 31,380 $139,866 -77.6%
======== ========
Sales
For the three months ended May 31, 2010, sales were $811,000 as compared
to $726,000 for the three months ended May 31, 2009, an increase of $85,000 or
11.7%.
Such increase in sales for the three months ended May 31, 2010 is
primarily due to increased sales in the light management market which sales
increased by $168,000 compared to the prior year period, offset by reduced sales
in the eye protection market which sales decreased by $14,000 and the ink and
coating market which sales decreased by $79,000 compared to the prior year
period. In both the three months ended May 31, 2010 and May 31, 2009, the eye
protection market represented our largest market with sales in the eye
protection representing 51.5% and 59.5% of sales in the three months ended May
31, 2010 and 2009, respectively. Sales in the eye protection market were
$418,000 for the three months ended May 31, 2010 compared to $432,000 for the
three months ended May 31, 2009. For the light management market, sales were
$297,000 and $130,000 for the three months ended May 31, 2010 and 2009. With
regard to the ink and coating market, sales were $54,000 for the three months
ended May 31, 2010 compared to $132,000 for the three months ended May 31, 2009.
For the three months ended May 31, 2010, sales in the custom market were $40,000
compared to $30,000 for the three months ended May 31, 2009.
Categorized by geographic area, sales in the United States decreased for
the three months ended May 31, 2010 while sales increased in Asia and Europe
compared to the prior year period. For the three months ended May 31, 2010
compared to the prior year period, sales decreased in the United States to
$569,000 from $665,000, while in Asia sales increased to $107,000 from $21,000,
and in Europe sales increased to $132,000 from $39,000.
Gross Profit
Gross profit, defined as sales less cost of sales, was $413,000 or 50.9%
of sales for the three months ended May 31, 2010 compared to $471,000 or 64.8%
of sales for the three months ended May 31, 2009, a decrease of 13.9%. In terms
of absolute dollars, gross profit decreased $58,000 in the three months ended
May 31, 2010 compared to the prior year period.
Cost of sales was $398,000 for the three months ended May 31, 2010 which
represented 49.1% of sales compared to $256,000 for the three months ended May
31, 2009 which represented 35.3% of sales. In terms of absolute dollars, cost of
sales increased $142,000 for the three months ended May 31, 2010 compared to the
prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $364,000 or
44.9% of sales for the three months ended May 31, 2010 compared to $259,000 or
35.7% of sales for the three months ended May 31, 2009, an increase of $105,000.
Such increase in absolute dollars was primarily due to a substantial increase in
4
professional fees for services not regularly incurred principally due to actions
taken in connection with the potential sale of the Company and a much lesser
increase in officers' salaries and administrative salaries which increase
principally resulted from the timing of the payment of bonuses in the current
fiscal year, and increases in commissions resulting from an increase in
commission sales in Europe.
Operating Income
Operating income, in terms of absolute dollars, decreased to $49,000 for
the three months ended May 31, 2010 from $211,000 for the three months ended May
31, 2009, a decrease of $162,000. While sales increased by $85,000 in the three
months ended May 31, 2010 compared to the prior year period, such increase was
offset by a greater increase in cost of sales and in selling, general and
administrative expenses compared to the prior year period. As mentioned above,
cost of sales increased $142,000 for the three months ended May 31, 2010
compared to the prior year period and selling, general and administrative
expenses increased $105,000 for the three months ended May 31, 2010 compared to
the prior year period principally due to the reasons discussed above.
Other Income
Total other income was $3,000 for the three months ended May 31, 2010
compared to $12,000 for the three months ended May 31, 2009. We had no rental
income for the three months ended May 31, 2010 compared to rental income of
$4,500 for the three months ended May 31, 2009. In May 2009, our subtenant
abandoned the premises which it had been subleasing since September 2005. Our
interest income was $3,000 for the three months ended May 31, 2010 compared to
$8,000 for the prior year period.
Net Income
During the three months ended May 31, 2010, we reported income before
taxes of $52,000 as compared to income before taxes of $224,000 for the three
months ended May 31, 2009, a decrease of $172,000. Income taxes were $21,000 for
the three months ended May 31, 2010 compared to income taxes of $84,000 for the
three months ended May 31, 2009. The changes in income taxes were generally
attributed to changes from period to period in sales and expenses. Net income
after taxes was $31,000 or $- per share for the three months ended May 31, 2010
as compared to net income after taxes of $140,000 or $0.01 per share for the
three months ended May 31, 2009. As a percentage of sales, net income after
taxes was 3.8% of sales for the three months ended May 31, 2010 compared to
19.3% of sales for the three months ended May 31, 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. In fiscal 2007,
however, sales decreased by $91,000 compared to fiscal 2006 and, in fiscal 2008,
sales decreased by $17,000 compared to fiscal 2007. The largest reduction in
sales in recent years occurred in fiscal 2009 with sales decreasing by $501,000
compared to fiscal 2008. While sales continued to decrease in fiscal 2010
compared to fiscal 2009, such decrease was not nearly as dramatic as the prior
year with sales decreasing by $147,000 in fiscal 2010 compared to fiscal 2009.
Nevertheless, we have had four consecutive years of sales having decreased
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 three
months of fiscal 2011, while sales increased by $85,000 compared to the prior
year period, net income decreased by $109,000 in the first three months of
fiscal 2011 compared to the first three 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. In fiscal 2007, however, sales decreased to
$3,610,000, a decrease of 2.5% from the prior year, and in fiscal 2008, sales
decreased to $3,593,000, a decrease of 0.5% from fiscal 2007. This continued
into fiscal 2009 in which sales decreased at a much greater rate to $3,092,000
or 14.0% compared to fiscal 2008. 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.
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
5
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 a result of expressions of interest received, management began in
fiscal 2009 to explore strategic alternatives for the Company. In February 2009,
the Company retained Millburn Capital Group as its financial advisor in
connection with the Board's decision to explore strategic alternatives for the
Company, including the potential sale of the Company. In May 2009, the Company
announced that it had entered into a non-binding letter of intent whereby all of
the outstanding capital stock of the Company would be acquired by a strategic
purchaser. Pursuant to an amendment entered into in September 2009, the Company
had agreed to negotiate exclusively with such strategic purchaser until December
15, 2009. In November 2009, such proposed purchaser terminated the non-binding
letter of intent as a result of which the Company's obligation to negotiate
exclusively with such purchaser was terminated as well. Such proposed purchaser
has recently resumed its interest in acquiring the Company and as of June 23,
2010, the Company entered into an exclusivity letter whereby it has agreed to
negotiate exclusively with such proposed purchaser for a period of 90 days.
There can be no assurance that such exclusivity period will result in a
definitive agreement being executed by the parties, or, if executed, that any
proposed transaction will be approved by the shareholders of the Company or that
any such transaction 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 maintains a Simplified Employee Pension Plan which was adopted
in 1994 for its employees as a retirement and income tax reduction facility. We
are currently investigating whether the Plan has met the requirements of the
Internal Revenue Service regarding contribution limits and employee deferral
amounts. We have taken the steps to have all years of the Plan tested to insure
our compliance and will take any appropriate corrective measures.
Liquidity and Capital Resources
Our primary source of funds is cash flow from operations in the normal
course of selling products. On May 31, 2010, we had working capital of
$3,178,000, a debt to equity ratio of $0.09 to 1, and stockholders' equity of
$4,069,00 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 May
31, 2010, we had $2,048,000 in cash and cash equivalents, total assets of
$4,419,000 and total liabilities of $349,000, 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 provided by operating activities for the three months ended May
31, 2010 was $124,000 which was primarily the result of net income of $31,000,
plus decreases in inventories of $57,000, prepaid expenses of $21,000 and
prepaid taxes of $12,000, and an increase in accounts payable of $82,000, offset
by an increase in accounts receivable of $115,000. Net cash provided by
operating activities for the three months ended May 31, 2009 was $3,000 which
was primarily the result of net income of $140,000, plus decreases in prepaid
expenses of $20,000 and prepaid taxes of $87,000, offset by a decrease in
accrued expenses of $228,000 and increases in accounts receivable of $17,000 and
inventories of $21,000.
Net cash provided by investing activities for the three months ended May
31, 2010 was $15,000 due a decrease in cash value of a life insurance policy of
$20,000 offset by payments for property and equipment of $5,000, compared to net
cash provided by investing activities of $10,000 for the three months ended May
31, 2009 due a decrease in cash value of a life insurance policy of $38,000
offset by payments for property and equipment of $28,000.
For the three months ended May 31, 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
6
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.
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
7
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.
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. The
Company indicated that the timing of the buyback of the Company's shares will be
dictated by overall financial and market conditions and other corporate
considerations. The repurchase program may be suspended without further notice.
There were no repurchases made by the Company of shares of its Common Stock
during the fiscal years ended February 29, 2008, February 28, 2009 and February
28, 2010, and during the first three months of fiscal 2011. In prior years,
since the adoption of the program in August 2001, a total of 331,500 shares were
repurchased at a cumulative cost of $195,766.
8
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 May
31, 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.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
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: July 20, 2010 By: /s/ Murray S. Cohen
---------------------------
Murray S. Cohen,
Chairman of the Board
Dated: July 20, 2010 By: /s/ James Ivchenko
---------------------------
James Ivchenko,
President
(Principal Financial Officer)
11
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED
MAY 31, 2010 AND 2009
CONTENTS
PAGE
----
Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited) 2 - 3
Consolidated Statements of Income (Unaudited) 4
Consolidated Statements of Stockholders' Equity (Unaudited) 5
Consolidated Statements of Cash Flows (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 22
1
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31,
2010 FEBRUARY 28,
(UNAUDITED) 2010
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,048,287 1,908,752
Accounts receivable 583,735 469,035
Inventories 626,824 683,995
Prepaid expenses 34,569 55,094
Prepaid taxes 21,604 33,870
Deferred tax assets-current portion 14,433 14,698
----------- ------------
Total current assets 3,329,452 3,165,444
----------- ------------
PLANT, PROPERTY AND EQUIPMENT - AT COST:
Land 81,000 81,000
Building and improvements 774,550 770,537
Laboratory equipment 210,555 210,555
Furniture and office equipment 273,863 273,863
Leasehold improvements 532,773 532,131
----------- ------------
Total 1,872,741 1,868,086
----------- ------------
Less: Accumulated depreciation and amortization 1,029,513 1,008,372
----------- ------------
Net plant, property and equipment 843,228 859,714
----------- ------------
OTHER ASSETS:
Deferred tax assets-non current portion 77,349 85,460
Cash value - life insurance policy 168,832 188,641
----------- ------------
Total other assets 246,181 274,101
----------- ------------
Total $ 4,418,861 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
MAY 31,
2010 FEBRUARY 28,
(UNAUDITED) 2010
----------- ------------
CURRENT LIABILITIES:
Accounts payable $ 98,850 16,777
Accrued expenses 50,304 47,145
Taxes payable:
Payroll 2,208 2,208
----------- ------------
Total current liabilities 151,362 66,130
OTHER LIABILITIES - Deferred compensation 198,072 195,082
----------- ------------
Total liabilities 349,434 261,212
----------- ------------
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;
13,115,000 shares issued, and 12,166,355 shares
shares outstanding at May 31, 2010 and February
2010, repectively 2,364,693 2,364,693
Additional paid-in capital 124,820 124,820
Retained earnings 1,930,996 1,899,616
----------- ------------
Total 4,420,509 4,389,129
Less: Treasury stock - at cost 351,082 351,082
----------- ------------
Total stockholders' equity 4,069,427 4,038,047
----------- ------------
Total $ 4,418,861 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)
THREE MONTHS ENDED MAY 31, 2010 AND 2009
2010 2009
------------ ------------
SALES $ 811,014 726,169
------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales 398,317 255,655
Selling, general and administrative 363,901 259,065
------------ ------------
Total 762,218 514,720
------------ ------------
OPERATING INCOME 48,796 211,449
------------ ------------
OTHER INCOME:
Rental income -- 4,500
Interest 3,351 7,867
------------ ------------
Total 3,351 12,367
------------ ------------
INCOME BEFORE TAXES 52,147 223,816
INCOME TAXES 20,767 83,950
------------ ------------
NET INCOME $ 31,380 139,866
============ ============
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 12,138,095 12,066,355
============ ============
Fully diluted number of common shares outstanding 12,143,195 12,106,791
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MAY 3, 2010 AND 2009
NUMBER OF ADDITIONAL
SHARES COMMON PAID-IN- RETAINED TREASURY TREASURY STOCKHOLDERS'
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
NET INCOME -- -- -- 139,866 -- -- 139,866
---------- ---------- --------- --------- -------- -------- -----------
BALANCE - May 31, 2009 13,015,000 $2,364,693 104,820 1,570,412 948,645 (351,082) 3,688,843
========== ========== ========= ========= ======== ======== ===========
BALANCE - March 1, 2010 13,115,000 $2,364,693 124,820 1,899,616 948,645 (351,082) 4,038,047
NET INCOME -- -- -- 31,380 -- -- 31,380
---------- ---------- --------- --------- -------- -------- -----------
BALANCE - May 31, 2010 13,115,000 $2,364,693 124,820 1,930,996 948,645 (351,082) 4,069,427
========== ========== ========= ========= ======== ======== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MAY 31, 2010 AND 2009
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,380 139,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,141 25,300
Deferred tax expense 8,376 (2,680)
Obligation under deferred compensation agreement 2,990 1,423
(Increase) decrease in:
Accounts receivable (114,700) (17,148)
Inventories 57,171 (20,941)
Prepaid expenses 20,525 20,017
Prepaid taxes 12,266 86,530
Increase (decrease) in:
Accounts payable 82,073 (1,640)
Accrued expenses 3,159 (227,658)
------------ ------------
Net cash provided by operating activities 124,381 3,069
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in cash value - life insurance policy 19,809 37,909
Payments for plant, property and equipment (4,655) (27,575)
------------ ------------
Net cash provided (used) in investing activities 15,154 10,334
------------ ------------
INCREASE (DECREASE) IN CASH 139,535 13,403
CASH AND CASH EQUIVALENTS:
Beginning 1,908,752 1,544,966
------------ ------------
Ending $ 2,048,287 1,558,369
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Income taxes paid $ 33,794 127,818
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
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 three-month interim period ended May 31,
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 39.4% of our trade receivables at May 31, 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.
7
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 $21,141 and $25,300 for the
three months ended May 31, 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 May 31, 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.
8
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 $15,990 and $5,571 through May 31,
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 $10,116 and $6,480 for
the three months ended May 31, 2010 and 2009, respectively.
9
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 three months ended May 31, 2010 and 2009 was $.18,
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:
MAY 31,
-------------------------
2010 2009
----------- ---------
Weighted average expected life in years 2 2
Volatility 7.0% 7.0%
Risk-free interest rate 2.8% 4.0%
10
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 May 31, 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.
11
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C - INCOME TAXES:
1. Federal and State deferred tax assets include:
MAY 31,
------------------------
2010 2009
----------- ----------
Temporary differences:
Accelerated amortization $ 4,318 4,698
Deferred compensation 71,410 95,809
Stock-based compensation 16,054 16,054
----------- ----------
Total 91,782 116,561
Less: Current portion 14,433 11,794
----------- ----------
Non-current portion $ 77,349 104,767
=========== ==========
2. Income tax:
MAY 31,
------------------------
2010 2009
----------- ----------
Current:
Federal $ 8,783 67,200
State 3,608 19,430
----------- ----------
Total current 12,391 86,630
----------- ----------
Deferred:
Federal 6,055 2,883
State 2,321 203
----------- ----------
Total deferred 8,376 2,680
----------- ----------
Total $ 20,767 83,950
=========== ==========
12
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D - TREASURY STOCK:
Consists of 948,645 shares at a net cost of $351,082 as of May 31, 2010 and
February 28, 2010, respectively. There were no purchases of treasury shares made
during the three months ended May 31, 2010 and 2009, respectively.
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 three months ended May 31, 2010, approximately 32.9% of sales were to three
customers. During the three months ended May 31, 2009, approximately 48.1% 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 $100,766 and $100,721 were included in cost of sales for
the three months ended May 31, 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
Simplified Employee Pension Plan to its 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 $11,212 and $11,085 for the
three months ended May 31, 2010 and 2009,respectively. We are currently
investigating whether the Plan has met the requirements of the Internal Revenue
Service regarding contribution limits and employee deferral amounts. We have
taken the steps to have all years of the Plan tested to insure compliance and
will take any appropriate corrective measures.
13
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 May 31, 2010, options granted totaled
1,242,000, options exercised totaled 686,000; options cancelled or expired for
all years totaled 311,000.
A summary of the status of our 1998 stock option plan as of May 31, 2010,
and the changes during the three months ended May 31, 2010 and 2009 is presented
below:
WEIGHTED-AVERAGE
FIXED OPTIONS: SHARES EXERCISE PRICE
-------------- -------- ----------------
Balance - February 28, 2010 245,000 $.49
========
Balance - May 31, 2010 245,000 $.49
========
Exercisable at May 31, 2010 245,000 $.49
========
STOCK OPTION PLANS - The following table summarizes information about fixed
stock options outstanding at May 31, 2010:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE AT 05/31/10 CONTRACTUAL LIFE AT 05/31/10 EXERCISE PRICE
-------------- ----------- ---------------- ----------- ----------------
$ .41 95,000 3.7 95,000 .32
.54 150,000 0.1 150,000 .68
14
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 May 31, 2010, 200,000 shares of Common
Stock have been granted and 1,300,000 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.
15
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:
THREE MONTHS ENDED
MAY 31,
----------------------------
2010 2009
--------- ---------
United States $ 569,235 664,920
Asia 107,270 20,674
Europe 131,914 38,530
Other nations 2,595 2,045
--------- ---------
Total $ 811,014 726,169
========= =========
Two customers, located in the United States, accounted for more than 10% of
revenues from continuing operations. These customers accounted for 23.8% of
sales of infrared dies.
Long-lived assets include net plant, property and equipment. We had
long-lived assets of $843,228 and $859,714 located in the United States at May
31, 2010 and February 28, 2010, respectively.
16
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J - ACCRUED EXPENSES:
Accrued expenses consisted of the following as of May 31, 2010 and 2009,
respectively:
MAY 31, FEBRUARY 28,
2010 2010
-------- ------------
Salaries and wages $ 22,465 --
Purchases 3,149 3,455
Insurance -- --
Commissions 10,545 10,545
Rent 8,145 8,145
Professional fees 6,000 25,000
-------- --------
Total accrued expenses $ 50,304 47,145
======== ========
NOTE K - INVENTORIES:
MAY 31, FEBRUARY 28,
2010 2010
-------- ------------
Raw materials and supplies $195,097 160,387
Work in process 112,402 92,421
Finished goods 319,325 431,187
-------- --------
Total $626,824 683,995
======== ========
17
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
MAY 31,
--------------------------
2010 2009
---------- ----------
BASIC EARNINGS PER COMMON SHARE:
Net income 31,380 139,866
========== ==========
Average common shares outstanding 12,138,095 12,066,355
========== ==========
Basic earnings per common share -- 0.01
========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Net income 31,380 139,866
========== ==========
Average common shares outstanding 12,138,095 12,066,355
Common shares issuable with respect
to options issued to employees
with a dilutive effect 5,100 40,436
---------- ----------
Total diluted common shares outstanding 12,143,195 12,106,791
========== ==========
Diluted earnings per common share -- 0.01
========== ==========
18
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.
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 (5)
years with three (3) five (5) 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
$24,435 for the three months ended May 31, 2010 and 2009, respectively.
Future minimum payments for the current option period:
FISCAL YEARS ENDING FEBRUARY:
-----------------------------
2011 $ 40,725
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 and pay the remaining
balance due in a lump sum payment during the current year.
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.
19
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:
MAY 31, 2010 FEBRUARY 28, 2010
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- --------- ---------
ASSETS:
Cash and cash equivalents $2,048,287 2,048,287 1,908,752 1,908,752
Other assets:
Cash value - life insurance 168,832 168,832 188,641 188,641
---------- --------- --------- ---------
Total assets at fair value $2,217,119 2,217,119 2,097,393 2,097,393
========== ========= ========= =========
LIABILITIES:
Deferred compensation $ 198,072 198,072 195,082 195,082
========== ========= ========= =========
20
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE N - 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 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.
2
