<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________to________________
Commission file number 0-11969
MEHL/BIOPHILE INTERNATIONAL CORPORATION
______________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware 22-2408186
______________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) identification No.)
4127 N.W. 27th Lane, Gainesville, Florida 32606
______________________________________________________________________________
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number (352) 373-2565
_________________
4020 Newberry Road, Gainesville, Florida 32607
______________________________________________________________________________
Former address
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of November 30, 1996
41,670,143 shares of common stock, $.01 par value
______________________________________________________________________________
Page 1 of 16 pages
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
Index
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Condensed consolidated balance sheet as
of November 30, 1996 3
Condensed consolidated statements of
operations for the six and three months
ended November 30, 1996 and 1995 4-5
Condensed consolidated statements of
cash flows for the six months ended
November 30, 1996 and 1995 6-7
Notes to condensed consolidated financial
statements 8-10
Item 2. Management's discussion and analysis of
financial condition and results of operations 11-14
PART II. OTHER INFORMATION 15
Signature 16
Exhibit 11 Statement Re: Computation of net income
per common share 17-18
* * * *
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
NOVEMBER 30, 1996
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 6,043,567
Accounts receivable, net of allowance for doubtful
accounts of $383,000 626,321
Inventories 2,102,075
Note receivable, current portion 50,000
Other current assets 288,859
Total current assets 9,110,822
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $1,054,576 828,245
PATENTS AND PATENT RIGHTS, net of accumulated amortization
of $1,246,908 4,839,944
LOANS AND ADVANCES 716,296
NOTE RECEIVABLE - RELATED PARTY, net of current portion 100,000
OTHER ASSETS
Investment in non-marketable securities 250,000
Other 605,455
$16,450,762
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,831,043
Accrued expenses 550,086
Other current liabilities 316,991
Total current liabilities 2,698,120
MINORITY INTEREST IN SLS BIOPHILE LTD 420,957
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value,
authorized-200,000 shares:
Series C, 5% cumulative convertible;
$1,000 stated value, 8,271 shares
issued and outstanding 8,271,000
Common stock, $.01 par value,
authorized-60,000,000 shares:
Issued-44,145,102 shares 441,451
Additional paid-in capital 15,002,684
Accumulated deficit (9,469,618)
Foreign currency translation adjustment 41,767
14,287,284
Treasury stock, at cost, 2,474,959 common shares (955,599)
Total stockholders' equity 13,331,685
$16,450,762
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
NOVEMBER 30,
1996 1995
OPERATING REVENUES $ 1,837,198 $ 1,066,102
COST OF REVENUES 940,542 625,629
GROSS MARGIN 896,656 440,473
OPERATING EXPENSES:
Selling, general and administrative 3,392,130 512,066
Research an development 693,779 0
Interest 18,702 0
4,104,611 512,066
(3,207,955) (71,593)
NET INVESTMENT INCOME (LOSS) (297,873) 32,345
MINORITY INTERST IN LOSS OF SUBSIDIARY 202,515 0
NET LOSS $(3,303,313) $ (39,248)
NET LOSS PER COMMON SHARE $ (.09) $ .00
LOSS APPLICABLE TO COMMON STOCK $(3,539,138) $ (66,248)
WEIGHTED AVERAGED NUMBER OF COMMON SHARES AND
DILUTIVE COMMON EQUIVALENT SHARES OUTSTANDING
DURING PERIOD 40,658,752 13,849,510
WEIGHTED AVERAGED NUMBER OF COMMON SHARES ASSUMING
FULL DILUTION DURING PERIOD 40,658,752 14,569,510
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
NOVEMBER 30,
1996 1995
OPERATING REVENUES $ 331,507 $ 314,868
COST OF REVENUES 141,956 213,241
GROSS MARGIN 189,551 101,627
OPERATING EXPENSES:
Selling, general and administrative 1,869,247 314,585
Research and development 385,976 0
Interest 4,425 0
2,259,648 314,585
(2,070,097) (212,958)
INVESTMENT INCOME (LOSS) (471,586) 14,514
MINORITY INTEREST IN SUBSIDIARY 108,752 0
NET LOSS $(2,432,931) $ (198,444)
NET LOSS PER COMMON SHARE $ (.06) $ (.02)
LOSS APPLICABLE TO COMMON STOCK $(2,543,756) $ (211,944)
WEIGHTED AVERAGED NUMBER OF COMMON SHARES AND
DILUTIVE COMMON EQUIVALENT SHARES OUTSTANDING
DURING PERIOD 41,243,888 13,844,944
WEIGHTED AVERAGED NUMBER OF COMMON SHARES ASSUMING
FULL DILUTION DURING PERIOD 41,243,888 14,564,944
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
NOVEMBER 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,303,313) $ (39,248)
Adjustments to reconcile net loss to net
cash used by operating activities:
Minority interest in net loss of subsidiary (202,515) 0
Depreciation and amortization 506,615 108,126
Realized loss on marketable and non-
marketable security investments 542,127 0
Changes in operating assets and liabilities:
Accounts receivable 437,108 103,294
Inventories (1,492,464) (182,074)
Other operating assets (745,105) (82,539)
Accounts payable 1,115,072 (27,060)
Accrued expenses and other operating
liabilities 189,236 (15,653)
Net cash used by operating activities (2,953,239) (135,154)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in loans and advances (716,296) 112,500
Property and equipment acquisitions (645,408) 0
Proceeds from sale of marketable securities 477,690 0
Net cash provided (used) by investing
activities (884,014) 112,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (138,248) 0
Preferred stock dividends (153,521) (26,700)
Proceeds from issuance of common stock 204,172 30,750
Treasury stock acquisitions 0 (2,301)
Net cash provided (used) by financing
activities (87,597) 1,749
EFFECT OF EXCHANGE RATE ON CASH 129,419 0
DECREASE IN CASH FOR THE PERIOD (3,795,431) (20,905)
CASH, beginning of period 9,838,998 633,509
CASH, end of period $ 6,043,567 $ 612,604
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NON-CASH ACTIVITIES:
SIX MONTHS ENDED
NOVEMBER 30,
1996 1995
Existing business acquisition costs:
Issuance of common stock $ 543,292
Loans and advances applied
towards purchase price 1,946,380
$2,489,672
Components of acquired businesses, in
aggregate, are as follows:
Accounts receivable $ 534,448
Inventories 204,748
Property and equipment 222,952
Patents and patent rights 5,183,180
Other assets 4,188
Accounts payable and accrued expenses (1,028,515)
Current portion of notes and loans (1,119,838)
Long-term debt (804,885)
Other liabilities (83,134)
3,113,144
Less minority interest (623,472)
$2,489,672
Notes, loans and advances used to
retired debt of acquired business $1,253,620
Issuance of common stock:
Conversion of debt, net of unamortized
issue costs of $35,022 $ 714,978
Payment of accrued interest $ 16,439
Conversion of preferred stock $1,729,000 $ 35,000
Receipt of non-marketable securities
as payment of note receivable $ 750,000
Receipt of stock into treasury
in payment of note receivable $ 37,500
See notes to condensed consolidated financial statements.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S.B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended November 30, 1996
are not necessarily indicative of the results that may be expected for the
year ending May 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended May 31, 1996.
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the 1996 Mehl/Biophile International
Corporation and Subsidiaries Annual Report on form 10-KSB for the year ended
May 31, 1996.
2. BUSINESS ACQUISITIONS:
On June 4, 1996, the Registrant completed the purchase of capital stock
representing in the aggregate of 81% interest in SLS (Wales) Limited, a
privately held Welsh company ("SLS") engaged in developing, manufacturing and
selling lasers primarily in the field of hair removal. The consideration for
the acquisition of the SLS shares consisted of a cash payment of 1,255,000
pounds sterling (approximately $1.9 million) and the issuance of 25,044 shares
of the Company's Common Stock. SLS holds patents pending in the field of
laser depilation. In accordance with the terms of the agreement, funds of
approximately $1,300,000, advanced by the Company to SLS, were used to retire
existing SLS debt.
Additionally, on June 4, 1996, Classy Lady by Mehl of Puerto Rico, Inc. a
privately-held Puerto Rico company ("Classy Lady"), merged with and into a
wholly-owned subsidiary of the Company (the "Merger"). As consideration for
the Merger, the Company issued an aggregate of 25,000,000 shares of Common
Stock, $.01 par value per share, to the shareholders of Classy Lady.
In exchange for the issuance of the shares of the Company issued pursuant to
the Merger, the Company obtained all of the stock of Classy Lady, which owns
the exclusive licensing rights granted to Classy Lady by Thomas L. Mehl, Sr.,
for a multiple hair removal technology and by Dr. Nardo Zaias for a laser hair
removal technology.
3. INCOME TAXES:
For the six and three months ended November 30, 1996 the Company's deferred
tax asset valuation allowance increased by approximately $900,000 and
$170,000, respectively, as a result of current period losses. The Company
recognized respective increases in its deferred tax asset valuation allowance
of approximately $17,000 and $85,000 for the six and three months ended
November 30, 1995 which were attributable to additional losses for the
periods.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INVENTORIES:
At November 30, 1996, inventories are comprised primarily of finished goods.
5. COMMON STOCK ISSUANCES:
In addition to the common shares issued related to the business acquisitions
(see Note 2), during the six months ended November 30, 1996, the Company
issued 261,583 Common shares upon retirement of $750,000 convertible debenture
and related accrued interest of $16,383 and 562,621 shares upon conversion of
1,729 shares of Series C, 5% cumulative convertible preferred stock.
Unamortized debt issue costs of $35,022 were charged to paid in capital.
Additionally, 163,338 Common shares were issued during the period at $1.25 per
share ($204,172 in aggregate) upon the exercise of outstanding stock purchase
warrants. At November 30, 1996 warrants to purchase 208,308 shares of Common
stock at $1.25 were outstanding. The expiration date of these warrants is
December 7, 1996.
6. RECENT EVENTS:
On June 7, 1996 the Company entered into a Letter of Intent with Converting
Laboratories, Inc. (CLI), a Wisconsin corporation, located in Fond du Lac,
Wisconsin. CLI will be the primary manufacturer of the Company's consumer
multiple hair removal patch and is presently manufacturing, on an OEM basis,
consumer product and devices primarily related to the medical field, which it
will continue to do. Subject to entering a definitive agreement, the intent
of the parties is for the Company to purchase eighty-one percent (81%) of the
stock of CLI in exchange for one hundred five thousand (105,000) of the common
shares of the Company. An additional two hundred thousand shares (200,000)
will be issued to the owners of CLI according to certain performance
milestones to be included in the definitive agreement. To date, the Company
has advanced in the form of 6% interest bearing notes a total of $527,000 to
enable CLI to expand its facilities and acquire the necessary equipment to
ramp up and expand its manufacturing capabilities. The Company anticipates
its total cash investment in CLI, as revised, will be approximately $700,000.
The Company anticipates that CLI's continued reliance for additional capital
support will begin to diminish as CLI begins to manufacture and distribute the
Company's new consumer hair removal patch which is scheduled for market release
sometime during the 4th quarter of fiscal 1997. At that time it is felt that
CLI will be generating a sufficient flow of cash to sustain its ongoing
operation and begin to retain profits.
On July 12, 1996 the Company entered into a Letter of Intent with Anton H.
Clemens ("Clemens"), a director of the Company, and Victor M. Haughton, M.D.
("Haughton"). The intent of the parties, subject to a definitive agreement,
is to have the Company form a new subsidiary, of which Clemens will be
president, having the exclusive worldwide license rights for the development,
manufacturing and marketing of a new and novel retractable needle and catheter
technology for the medical field protected by issued United States and
International Patents and by patents pending. As consideration for the
Company's entering into the Letter of Intent, the Company agreed to 1) pay the
sum of sixty-three thousand nine hundred dollars ($63,900) to cover related
patent fees for the intellectual property, 2) have the subsidiary pay Clemens
and Haughton additional compensation in the form of license fees or other
moneys to be set forth in the definitive agreement and 3) invest such
additional funds necessary for the development, manufacture and marketing of
the intellectual property as set forth in the definitive agreement.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENT EVENTS: (continued)
On July 25, 1996 the Company entered into a Letter of Intent with G.K.S.
Technologies, Inc. (GKS), a Puerto Rico corporation together with Gunner K.
Svanberg ("Svanberg"), a Director of GKS. Svanberg holds several patents and
patents pending worldwide for a new dental curret and curret sharpening
machine. The intent of the parties, subject to a definitive agreement, is to
develop, manufacture and market Svanberg's new curret devices within the
worldwide dental market. As consideration for the Company entering into this
Letter of Intent with Svanberg and GKS, the Company agreed to (1) subscribe to
One Hundred Thousand Shares (100,000) of GKS common stock at $.50 per share
for the sum of Fifth Thousand Dollars ($50,000) upon the execution of the
Letter of Intent; and (2) invest such additional funds necessary for the
development, manufacture and marketing of the Patent Applications according to
the terms set forth in the definitive agreement. Through November 30, 1996,
the Company had advanced $69,000, including $50,000 to be applied towards the
purchase of GKS common stock under the terms outlined above. Thomas L.
Mehl, Sr., President and Chairman of the Company, personally owns twelve and
one-half percent (12.5%) of GKS as a result of his working with Svanberg on
patent applications over the past two years without any prior compensation.
M.C.M. Group, Inc., a Florida corporation owned by Thomas L. Mehl, Sr., also
owns twelve and one-half percent of GKS as a result of providing management
and consulting services to GKS and Svanberg over the past two years without
prior compensation.
On July 25, 1996 the company entered into a Letter of Intent with Applied
Genetics, Inc. (AGI), a New York Corporation. AGI has a patented liposome
delivery system for skin and hair. The intent of the parties is to enter into
definitive agreement for the express purpose of (1) the Company retaining the
services of AGI to prove the efficacy of those certain delivery systems
developed by Thomas L. Mehl, Sr. and Nardo Zaias, M.D. and (2) MEHL's future
strategic alliance with AGI for the purpose of obtaining additional funding
for AGI through private placement, initial offering or other mezzanine
funding. As of November 30, 1996, the Company had advanced to AGI the sum of
$100,000 for the provision of services pertaining to the efficacy of those
certain delivery systems discussed above.
Advances to CLI and GKS of $596,000, in aggregate at November 30, 1996 are
included in loans and advances. The payment to AGI of $100,000 has been
charged to operations and is included in research and development costs.
Payments related to the pending arrangement with Clemens and Haughton were
charged to operations.
7. INVESTMENT INCOME LOSS:
In November 1996 Roadrunner Video Group, Inc. (Roadrunner) filed for
protection under Chapter 11 of the US Bankruptcy Code. The Company realized
investment losses of $539,000, in aggregate, during the six and three months
ended November 30, 1996 related to the write down of its investment in
preferred and common stock of Roadrunner. At November 30, 1996, the Company's
investment in Roadrunner is carried on the balance sheet at $250,000 as a non-
marketable security.
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ACQUISITIONS:
On June 4, 1996, Classy Lady by Mehl of Puerto Rico, Inc., a privately-held
Puerto Rico Company ("Classy Lady"), merged with and into a wholly-owned
subsidiary of the Company (the "Merger"). In consideration for the Merger, the
Company issued an aggregate of 25,000,000 shares of Common Stock, $.01 par
value per share, to the shareholders of Classy Lady. As a result of the
Merger, the former Classy Lady shareholders received, in the aggregate a
majority of the outstanding Common Stock of the Company, thereby resulting in a
change of control of the Company, Classy Lady owns the exclusive rights which
were granted by Dr. Nardo Zaias for laser hair removal technology and Thomas L.
Mehl, Sr. for radio frequency and direct current multiple hair removal
technology.
On June 4, 1996, the Company completed the purchase of capital stock
representing in the aggregate, an 81% interest in SLS (Wales) Limited, a
privately held Welsh company which has been renamed SLS Biophile Ltd. ("SLS"),
engaged in developing, manufacturing and selling lasers for dermatological use,
including hair removal. SLS is presently the exclusive manufacturer of all
laser technology for the Company, including the CHROMOS 694 Ruby Laser used for
professional hair removal and the Chromos 585 laser.
LIQUIDITY AND CAPITAL RESOURCES:
At November 30, 1996, the Company had available funds of $6,043,567
representing a decrease of $3,795,431 and $3,156,433 from May 31, 1996 and
August 31, 1996, respectively.
Cash required to fund the Company's operating loss were primarily attributable
to losses resulting from the start up and realignment of operations at the
Florida administrative facilities and for manufacturing and ramp-up at SLS's
Welsh production facilities. Cash reserves and proceeds from the issuance of
common stock resulting from exercise of outstanding stock purchase warrants
were used to offset, in part, cash requirements for the quarter including the
aforementioned operating loss, preferred stock dividend payments, the purchase
of property, equipment, and inventory, (primarily for use in SLS production)
research and development and for loans and advances to prospective
acquisition candidates (see Note 6 to the financial statements). Finally
Free inventories decreased minimally over the same period last year while
inventories for SLS increased 311% to $1,547,099 as SLS expands its production
of ruby lasers.
Management anticipates increased production of the SLS laser products and a
corresponding increase in their stock inventory. Production facilities at
SLS in Wales are considered adequate to meet the next years anticipated
increased production. The Company will continue to utilize its resources to
finance the expected increased SLS production for labor costs and inventory
and will also be looking to finance this growth through more traditional means
such as bank lines of credit for the inventory and receivable build-up that
will continue.
The Company anticipates that it will continue to apply significant portions of
its cash reserves in order to carry out its planned Research and Development
activity, to manufacture and market its technologies and products primarily in
the laser (professional) and consumer hair removal fields and provide the
necessary working cash to its subsidiaries. SLS and Converting Laboratories
are expected to generate sufficient funds during the later part of fiscal 1997
from their existing and anticipated sales activity to sustain themselves out
of their own retention of profits.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES: (continued)
The Company believes that its present level of cash reserves and working
capital will be sufficient to enable it to carry out its near and mid range
plans but does anticipate that it will require additional funds to complete
its long range business plan. It is also believed that additional funds will
be necessary in order to maintain maximum production levels at SLS of the
Company's ruby laser for professional hair removal and for the ramp up and
deployment of the consumer hair removal technology expected to occur during
the last quarter in fiscal 1997. With this understanding the Company is
presently developing professional affiliations with funding sources within
the capital marketplace in order to adequately meet its long term objectives.
The Company plans to achieve its financing objectives through either private
or public offerings of equity and debt.
During the six month period ending November 30, 1996, 1,729 shares of the
Company's 5% cumulative convertible, Series C preferred shares were converted
into 562,621 of common shares. At November 30, 1996, warrants to purchase
208,308 shares of common stock at $1.25 were outstanding. Between November 30,
1996 and December 27, 1996, warrants to purchase 73,158 shares of common stock
were exercised, resulting in gross proceeds to the Company of $91,447. The
remaining warrants expired on December 27, 1996 and no further exercise of
warrants may occur after such date. While management anticipates additional
preferred stock conversions, there can be no assurance in this regard.
RESULTS OF OPERATIONS:
Operations for the six and three months ended November 30, 1996 resulted in
losses of $3,303,313, ($.09 per share), and $2,432,931, ($.06 per share),
respectively as compared to losses of $39,248 and $198,444 for the
corresponding periods of the previous year. The increases in losses were due
primarily to start up and transition costs related to the business acquisi
tions during the period and related increases in overhead, research and
development and depreciation and amortization attributable to the acquired
businesses and their rapid expansion. As revenues are realized from the
licensing agreements for laser hair removal and the concurrent sale of its
CHROMOS 694 ruby laser, the Company anticipates that losses will diminish and
that it will be profitable on a monthly basis by the end of fiscal 1997.
Sales for the six and three months ended November 30, 1996 increased $771,096
or 72% and $16,639 or 6% as compared to the corresponding periods of the
previous years. This gain is almost exclusively a result of the sales of
lasers by SLS. SLS has recently completed the manufacturing and delivery of 30
of its CHROMOS 694 Ruby Lasers which have been delivered to revenue sharing
partners of the Company outside of the United States. SLS is presently
projecting delivery of 30 units per month for the remainder of fiscal 1997.
Sales of lasers are expected to rise sharply during the third and fourth
quarters of fiscal 1997 as the Company begins to realize revenues from its
licensed partners outside of the United States and from continued sales of the
ruby laser. The Company should also continue to enjoy moderate increases in
the sales of its consumer hair removal products during the third quarter and
anticipates a sharp increase during the fourth quarter as it releases its
multiple hair removal patch for sale outside of the United States.
Gross margin as a percentage of sales increased by 7.5% and 24.9% respectively,
for the six and three months ended November 30, 1996. The increase was due to
both the inclusion of the sales of laser products from the Company's foreign
subsidiary and more favorable vendor pricing for the Company on its Finally
Free consumer hair removal product. The Company is anticipating further
improvement in gross margin as it begins to take advantage of the economics of
scale inherent with the continued ramp up of laser manufacturing and the
Company's manufacturing release of its consumer patch during the last quarter
of fiscal 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: (continued)
Selling, general and administrative expenses for the six and three months ended
November 30, 1996, increased by $2,880,064 and $1,554,662 respectively, as
compared to the corresponding periods or the previous year. Subsequent to the
merger on June 4, 1996 the Company went from being essentially a consumer
product company with declining sales to a multifaceted technology company
engaged in laser and consumer hair removal on a global basis. This combined
with the acquisition of SLS has necessitated an increased investment in
administrative employees, legal expenses, patent fees, research and
development, travel and increased depreciation and amortization which is not
directly comparable to the like periods of 1995.
For the six and three months ended November 30, 1996, the Company incurred net
losses of $298,000 and $472,000, respectively, resulting from investing
activities. This was attributable to the reduction of $539,000, in the
aggregate, to the carrying value of the Company's investment in preferred and
common stock of Roadrunner Video Enterprises, Inc. for the recognition of what
is considered to be a permanent decline in the realizable value of these
securities. Other investment income for the first six and three months of the
current fiscal year increased by $209,000 and $52,000, respectively, from the
corresponding periods of the previous fiscal year. These increases were a
result of the investment of funds raised during the later part of fiscal year
1996 from private debt and equity placements.
Research and Development expenses which were not significant in the previous
year, increased to $693,779 for the first six months of fiscal 1997. This is a
result of the Company's transformation into a technology based entity that will
continue to incur R & D expenses in order to insure that it maintains
technological superiority in the fields of laser and consumer hair removal.
The Company expects its future success will largely be dependent on its laser
hair removal licensing arrangements with prospective licensees, the sales of
its lasers and from the sales of its consumer multiple hair removal patch,
which management presently anticipates deploying by the end of 1997.
The Company's consumer hair removal division realized a profit of $294,936 for
the first six months of fiscal 1997 compared to a loss of $39,248 for the same
period for the previous year. This increase was primarily attributable to the
Company's new management being able to negotiate a new and lucrative purchase
agreement for the Finally Free product with its Japanese distributor and the
shifting of the Company's corporate office and related administrative overhead
costs to its Florida location. SLS continued to ramp up for the manufacturing
and deployment or the CHROMOS 694 Ruby Laser, and as a result generated a loss
for the six month period. The Company's interest in such loss was $1,026,606.
Operations of the subsidiary which included the former Classy Lady activities
and the newly aligned corporate offices generated a loss of $1,982,466 for the
same period. This was largely attributable to costs associated with creating
the infrastructure necessary for the worldwide launch of its laser technology
as well as continued significant research and development, costs related to
relocation of the corporate offices and those related to the recent merger.
As a result of the merger between Selvac Corporation and Classy Lady on June 4,
1996 and the acquisition by the Company of SLS, the Company has substantially
changed the focus of its operations. The Company went from being a single
consumer product company dependent upon Mr. Mehl's earlier consumer hair
removal product (which was experiencing a declining sales trend over the past
several years) to an international company established to develop, manufacture,
sell and license sophisticated laser technology and other products on a global
scale.
-13-
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: (continued)
Classy Lady had no prior operating history but held significant intellectual
property in the field or laser (professional) and consumer hair removal
technologies. Classy Lady had no prior history of financial performance to
form a meaningful financial comparison between like operating periods. SLS has
recently made the transformation from primarily a research and development
company to a manufacturer and distributor of lasers.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS:
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include those discussed below.
The Company's future results of operations initially depend to a substantial
degree on the ability of the Company to license parties outside the United
States to utilize the Chromos 694 ruby laser manufactured by SLS and for such
licensees to successfully sell hair removal services utilizing this product.
The ability of such licensees to market such services will in part depend on
the public's acceptance of the use of lasers to remove hair, as to which there
can be no assurance, and the strength of the Company's competitors. The
Company's existing or potential competitors have or may have substantially
greater research and development capabilities, clinical, manufacturing,
regulatory and marketing experience and financial and managerial resources than
the Company. The Company may be required to find alternative means for
marketing and selling its laser hair removal services, and thereby experience
substantial delays and costs. No assurance can be given that the Company would
be able to find an acceptable alternative means of marketing and selling its
laser hair removal system, or if such an alternative means was found, that it
would be successful.
The Company's manufacturing and marketing operations are subject to extensive
regulation by numerous governmental authorities in the United States and other
countries. Manufacturing and marketing of the Company's laser hair removal and
consumer patch products are subject to the 510(k) pre-market approval process
of the FDA and corresponding foreign regulatory authorities. The regulatory
process may take longer than presently anticipated and require the expenditure
of substantial financial and other resources. Delays in obtaining such
approvals could adversely affect the marketing of products developed by the
Company and the Company's ability to generate commercial product revenues.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 5, 1996, the Company's wholly-owned subsidiary, Selvac Acquisition
Corp. ("SAC"), commenced an arbitration with the American Arbitration
Association in New York, New York to terminate a joint venture with Laser
Industries Limited ("Laser"). The joint venture was formed in December 1995
when Laser and Classy Lady by Mehl of Puerto Rico, Inc. ("Classy Lady"), which
merged with and into SAC and is now 100% owned by the Company, entered into an
agreement to exploit patented laser hair removal technology exclusively
licensed to Classy Lady. The joint venture, Sharplan 2000, Inc. ("Sharplan
2000"), is 50% owned by SAC and 50% by Laser and is managed exclusively by
Laser.
SAC commenced the arbitration to terminate the license granted to Sharplan
2000 and unwind the joint venture. SAC is basing this action on a dispute
concerning the nature of technological and financial contributions to be made
to the joint venture by Laser and an additional dispute concerning whether
Laser utilized technology within the joint venture which was in fact developed
by a third party, SLS Wales Ltd., a Welsh laser company. In June 1996, MEHL
acquired an 81% interest in SLS, which has since been renamed SLS (Biophile)
Limited.
On December 23, 1996, Laser asserted two counterclaims in the arbitration
proceedings, claiming that the Company has breached an alleged fiduciary duty
owed to Laser and Sharplan 2000 and seeking a declaration that SAC may not
grant a sublicense of certain patent rights to SLS. The Company has filed a
response to these counterclaims requesting dismissal on the grounds that
neither claim is arbitrable.
In a separate action filed in England on October, 1996, SLS commenced an
action against Laser, a laser manufacturer, Spectron Laser Systems Ltd.
("Spectron") and related parties, for orders preventing Laser from using SLS's
technology and stopping Spectron from supplying SLS's technology to Laser.
Management believes that the actions commenced by its subsidiaries and
described above are well-founded, that the counterclaims filed by Laser in the
arbitration proceeding are without merit and that its subsidiaries will
prevail in both actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is included herein:
Exhibit 11: Statement re: computation of net income per common
share
(b) Reports on Form 8-K:
None
-15-
<PAGE> 16
SIGNATURE
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.
MEHL/BIOPHILE INTERNATIONAL CORPORATION
DATE: January 13, 1997 BY: (s) Thomas L. Mehl, Sr.
Thomas L. Mehl, Sr.
Chairman of the Board and
Chief Executive Officer
-16-
<PAGE> 17
MEHL/BIOPHILE INTERNATIONAL CORPORATION
(11) Statement re: Computation of New Income Per Common Share
(Unaudited)
Computation of average number of shares outstanding used in determining
primary and fully diluted earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average number of shares
outstanding 40,658,752 13,849,510 41,243,888 13,844,944
Assumed exercise of common stock
warrants and certain stock
options based on average market
value * * * *
Weighted average number of shares
used in primary per share
computations 40,658,752 13,849,510 41,243,888 13,844,944
FULLY DILUTED:
Weighted average number of shares
outstanding 40,658,752 13,849,510 41,243,888 13,844,944
Assumed conversion of cumulative
convertible stock:
Series A * 360,000 * 360,000
1985 Series * 360,000 * 360,000
Series C * *
Assumed exercise of common stock
warrants and certain options
based on higher of average or
closing market price 0 0 0 0
Weighted average number of shares
used in fully diluted per share
computations 40,658,752 14,569,510 41,243,888 14,564,944
*Not considered in the computation as their effect on earnings per share would be anti-
dilutive.
</TABLE>
-17-
<PAGE> 18
MEHL/BIOPHILE INTERNATIONAL CORPORATION
(11) Statement re: Computation of Net Income Per Common Share
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995 1996 1995
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Primary 40,658,752 13,849,510 41,243,888 13,844,944
Fully diluted 40,658,752 14,569,510 41,243,888 14,564,944
PRIMARY:
Net loss $(3,303,313) $ (39,248) $(2,432,931) $(198,444)
Paid and cumulative undeclared
preferred stock dividends (235,825) (27,000) (110,825) (13,500)
Net loss applicable
to common stock $(3,539,138) $ (66,248) $(2,543,756) $(211,944)
Net loss per share $ (.09) $ .00 $ (.06) $ (.02)
FULLY DILUTED:
Net loss per share $ * $ * $ * $ *
*Not calculated as the effect would be anti-dilutive.
-18-
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND INCOME STATEMENT INCLUDED IN PART I, ITEM 1 OF
THE REGISTRANT'S QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
NOVEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 6,043,567
<SECURITIES> 0
<RECEIVABLES> 1,009,321
<ALLOWANCES> 383,000
<INVENTORY> 2,102,075
<CURRENT-ASSETS> 9,110,822
<PP&E> 1,882,821
<DEPRECIATION> 1,054,576
<TOTAL-ASSETS> 16,450,762
<CURRENT-LIABILITIES> 2,698,120
<BONDS> 0
<COMMON> 441,451
0
8,271,000
<OTHER-SE> 4,619,234
<TOTAL-LIABILITY-AND-EQUITY> 16,450,762
<SALES> 1,837,198
<TOTAL-REVENUES> 1,837,198
<CGS> 940,542
<TOTAL-COSTS> 940,542
<OTHER-EXPENSES> 4,402,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,702
<INCOME-PRETAX> (3,303,313)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,303,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,303,313)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
