<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11969
MEHL/BIOPHILE INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2408186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4127 N.W. 27th Lane
Gainesville, Florida 32606
(Address or principal executive offices)
Registrant's telephone number, including area code: (352) 373-2565
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
The number of shares outstanding of the Registrant's class of common stock, as
of November 30, 1997 is 43,993,301 shares of common stock, $.01 par value.
<PAGE> 2
MEHL/BIOPHILE INTERNATIONAL CORPORATION
Index
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Condensed consolidated balance sheet as
of November 30, 1997 3
Condensed consolidated statements of
operations for the six and three months ended
November 30, 1997 and 1996 4-5
Condensed consolidated statements of
cash flows for the six months ended
November 30, 1997 6-7
Notes to condensed consolidated financial
Statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 10
PART II. OTHER INFORMATION:
Item 3. Exhibits and Reports on Form 8-K 15
Item 5. Other Information 15
Signature 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS: $
Cash and equivalents 520,997
Accounts Receivable, net of allowance for doubtful accounts of $271,535 975,712
Inventories 5,827,892
Current portion of note receivable 74,926
Other current assets 1,175,517
-----------
Total Current Assets 8,575,044
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,007,651 5,446,864
PATENTS AND PATENT RIGHTS, net of accumulated amortization of $2,140,705 4,467,527
NOTES AND LOANS RECEIVABLE, net of current portion 400,000
OTHER ASSETS 13,790
DEFERRED LOAN COSTS net of accumulated amortization of $271,754 123,127
-----------
Total Assets 19,026,352
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Loan 7,000,000
Accounts Payable 4,889,487
Accrued Expenses 1,661,774
Other Current Liabilities 57,165
-----------
Total Current Liabilities 13,608,426
-----------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value, $1,000 stated value, authorized -
200,000 shares:
Series E, 5% cumulative convertible; issued and outstanding -
12,231 shares 12,231,000
Common stock, $.01 par value, 60,000,000 shares
Authorized - 46,468,260 shares issued 464,683
Additional paid-in-capital 26,749,304
Accumulated deficit (33,067,828)
Foreign currency translation adjustment (3,634)
-----------
6,373,525
Treasury stock, at cost, 2,474,959 common shares (955,599)
-----------
Total Stockholders' Equity 5,417,926
-----------
Total Liabilities and Stockholders' Equity 19,026,352
-----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30
1997 1996
---- ----
(as restated)
<S> <C> <C>
$ $
REVENUES 1,829,813 1,837,198
COST OF REVENUES 1,389,235 940,542
------------------------------
GROSS MARGIN 440,578 896,656
------------------------------
OPERATING EXPENSES:
Selling, general and administrative 8,562,930 3,392,130
Research and development 656,543 693,779
------------------------------
TOTAL OPERATING EXPENSES 9,219,473 4,085,909
------------------------------
OPERATING LOSS (8,778,895) (3,189,253)
------------------------------
OTHER INCOME (EXPENSES)
Investment income 71,088 (297,873)
Interest Expense (226,830) (18,702)
NET LOSS (8,934,637) (3,505,828)
------------------------------
NET LOSS PER COMMON SHARE (0.24) (0.09)
LOSS APPLICABLE TO COMMON STOCK (10,427,624) (3,741,653)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30
1997 1996
---- ----
(as restated)
<S> <C> <C>
$ $
REVENUES 977,095 331,507
COST OF REVENUES 697,498 141,956
------------------------------
GROSS MARGIN 279,597 189,551
------------------------------
OPERATING EXPENSES:
Selling, general and administrative 4,013,586 1,869,247
Research and development 373,506 385,976
------------------------------
TOTAL OPERATING EXPENSES 4,387,092 2,255,223
------------------------------
OPERATING LOSS 4,107,495 2,065,672
------------------------------
OTHER INCOME (EXPENSES)
Investment income 39,500 (471,586)
Interest Expense (179,443) (4,425)
NET LOSS (4,247,438) (2,541,683)
------------------------------
NET LOSS PER COMMON SHARE (0.12) (0.06)
LOSS APPLICABLE TO COMMON STOCK (5,131,418) (2,652,508)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30
1997 1996
---- ----
(As restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ $
Net loss (8,934,637) (3,505,828)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Provision for bad debts (400,173)
Provision for obsolete inventory (139,833)
Provision for notes and loans receivable 248,963
Realized loss on marketable and non marketable security investments 1,611,438 542,127
Depreciation and amortization 75 506,615
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (200,957) 437,108
Inventories (5,029,744) (1,492,464)
Other operating assets (293,764) (745,105)
Accounts payable 1,076,224 1,115,072
Accrued expenses (10,198) 189,236
Other operating liabilities 91,159
-------------------------------
Net cash provided (used) by operating activities (11,981,447) (2,953,239)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes and loans receivable (118,662) (716,296)
Property and equipment acquisitions 1,178,077 (645,408)
Proceeds from sale of marketable securities 477,690
-------------------------------
Net cash used by investing activities 1,059,415 (884,014)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock, net of issuance costs 204,172
Loans received 7,000,000
Note repayments (138,248)
Preferred stock dividends paid (155,285) (153,521)
-------------------------------
Net cash from financing activities 6,844,715 (87,597)
EFFECT OF EXCHANGE RATE ON CASH (90,993) 129,419
-------------------------------
DECREASE IN CASH FOR THE PERIOD (4,168,310) (3,795,431)
CASH AND EQUIVALENTS, beginning of period 4,689,307 9,838,998
-------------------------------
CASH AND EQUIVALENTS, end of period 520,997 6,043,567
-------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SUPPLEMENTAL SCHEDULES OF NON-CASH, INVESTING AND NOVEMBER 30
FINANCING ACTIVITIES
1997 1996
(As restated)
<S> <C> <C>
$ $
EXISTING BUSINESS ACQUISITION COSTS:
Issuance of common stock 543,292
Loans and advances applied toward 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
-----------
NOTES, LOANS AND ADVANCES USED TO RETIRE DEBT OF ACQUIRED BUSINESS $ 1,253,620
-----------
ISSUANCE OF COMMON STOCK:
Conversion of debt, net of unamortized issue costs $714,978
-----------
Payment of accrued interest $16,436
-----------
Conversion of preferred stock $ 1,729,000
-----------
PREFERRED STOCK DIVIDEND EQUAL TO INTRINSIC VALUE OF BENEFICIAL
CONVERSION FEATURES 1,187,211
----------
VALUATION OF DEFERRED LOAN COSTS ARISING IN CONJUNCTION WITH DEBT 394,881
----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE> 8
MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
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 three months and six months ended
November 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending May 31, 1998. 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, 1997.
The accounting policies followed by the Company are set forth in Note
1 to the Company's financial statements in the 1997 MEHL/Biophile
International Corporation and Subsidiaries Annual Report on form
10-KSB for the year ended May 31, 1997.
2. CAPITAL TRANSACTIONS
On August 5, 1997, the Company completed a loan agreement with
Clearwater Fund IV, LLC ("Clearwater") whereby the Company has
borrowed $7 million to be used in connection with the manufacture and
delivery of laser hair removal systems and for general working capital
purposes. The loan bears interest at 15% per annum payable in arrears
on a monthly basis and was due on January 15, 1998 (Note 3 below
describes an agreement to extend the period of the loan). The loan is
secured by all of the Company's assets and approval must be obtained
from Clearwater for all expenditures made with the loan proceeds. As
additional consideration for the loan, the Company agreed to issue
common stock purchase warrants according to the following schedule:
<TABLE>
<CAPTION>
Date Shares Price Expiration
---- ------ ----- ----------
<S> <C> <C> <C>
08/05/97 750,000 $2.50 08/05/02
Date of second borrowing 750,000 $2.50 5 years from date of
second borrowing
10/02/97 1,000,000 $2.50 07/15/02
12/02/97 500,000 $2.50 07/15/02
</TABLE>
The cost of these warrants, as valued using the Black Scholes model,
is included as a deferred loan cost and is amortized over the period
of the loan. The deferred cost and amortization applied in the six
month period covered by these financial statements are $394,881 and
$123,127.
Included as part of the loan agreement, the Company agreed to exchange
all 2,231 shares of $1,000 stated value Series C, 5% cumulative
preferred stock and all 10,000 shares of $1,000 stated value Series D,
5% cumulative convertible preferred stock for 12,231 shares of $1,000
stated value Series E, 5% cumulative convertible preferred stock
("Series E").
Each share of Series E stock is convertible into common stock of the
Company at 80% of the average market price on the five trading days
prior to conversion with no minimum price, but in no event shall the
conversion price be greater than $3.125. The Company has filed a
registration statement covering the public sale of the shares of
common stock receivable upon conversion of the
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Series E stock and the holders agreed not to sell or transfer any such
shares on or before February 28, 1998. The conversion price of the
Series E stock is subject to an adjustment whereby for each complete
month after the end of August 1997 that the common stock receivable
upon conversion have not been registered, the conversion discount will
increase by 2%. At the end of November 1997, the conversion discount
applying to these shares was 26%. Dividends of 5% per annum are to be
paid quarterly ($152,888 per quarter) beginning August 31, 1997. The
implied dividend from the discount attributable to the conversion
rights contained within the Series E stock and represented in these
financial statements as a loss to common stock holders for the period
is $1,187,211.
In connection with the Loan Agreement dated as of August 5, 1997
between the Company and Clearwater, Thomas L. Mehl, Sr., the Company's
Chairman, guaranteed the repayment to Clearwater of all amounts
borrowed by the Company and pledged all of the shares of Common Stock
of the Company owned by him, amounting to 8,425,000 shares, as
security for repayment of such borrowed amounts.
3 RECENT EVENTS
The Clearwater loan dated August 5 and referred to in Note 2 above,
was due for repayment on January 15, 1998. An amendment to this
agreement ("the Amendment"), dated January 16, 1998, was reached
between the Company and Clearwater whereby:
1) Clearwater agreed to extend the due date of their $7 million
loan by 90 days and provide additional extensions of 30 days
on the remaining outstanding principal balance for each
$1million of principal paid. All other terms of the loan
agreement remain in force.
2) The Company agreed to:
a) Continue to pay interest on the loan when due;
b) Make ongoing repayments of the loan amounting to:
* 10% of the gross sales proceeds from the sale of any hair
removal lasers;
* 10% of the gross proceeds from the financing of lasers
(e.g. from Medcap, as described below);
* 100% of the outstanding balance due upon receipt of any
capital injection (debt or equity) in excess of $10 million;
* 25% of the proceeds from any capital injection of less
than $10 million
In connection with the Amendment, Thomas L. Mehl Sr. and Nardo Zaias
each agreed to contribute four million shares of the Common Stock to
the treasury of the Company. The contribution of capital by Dr. Zaias
is to be effective immediately and the contribution by Mr. Mehl is to
be effective upon the release of the pledge of his stock in the
Company to secure the repayment of the $7 million loan from
Clearwater. In consideration to the capital contribution, Dr. Zaias
received an option from the Company to purchase 4 million shares of
Common Stock at $5 per share. This option is exercisable on or after
January 16, 2000 and expires on January 16, 2003. Mr. Mehl will
receive an option with the same terms upon the effectiveness of his
capital contribution to the Company.
Pursuant to the Amended and Restated Agreement and Plan of Merger
dated as of June 4, 1996 between the Company, Classy Lady by Mehl of
Puerto Rico ("Classy Lady") and Selvac Acquisition Corp. ("Merger
Agreement"), individuals designated by a majority of the stockholders
of Classy Lady had the right to share in certain proceeds derived from
the sale of laser hair removal joint ventures entered into by the
Company or its subsidiaries. The Company has disclosed that the
recipients to share in such proceeds were Thomas L. Mehl Sr. and Nardo
Zaias. In connection with the Amendment to the Clearwater Loan
Agreement, the Company, Mehl Technologies, Inc.
9
<PAGE> 10
(the successor to Classy Lady), Mr. Mehl and Dr. Zaias entered into a
Termination Agreement, dated January 16, 1998, which eliminated the
revenue sharing provisions set forth in the Merger Agreement.
In connection with the contribution by Nardo Zaias of Common Stock to
the Treasury of the Company and the waiver by Dr Zaias to receive any
proceeds from the sale of laser hair removal joint ventures, Mehl
Technologies, Inc. ("MTI") agreed that if MTI enters into a third
sublicense arrangement under the exclusive sublicense held by MTI for
the method of hair removal patented by Dr. Zaias:
1) MTI will pay to Dr. Zaias 25% of the revenues derived by MTI
from the third sub license; and
2) If all or substantially all the assets or stock of MTI are
sold, Dr. Zaias will have the right to receive 25% of
the fair market value of the third sublicense at the time of
such sale payable in the form of consideration paid in the
sale transaction.
Under the joint venture presently in effect with Laser Industries
Limited ("LIL"), MTI is not permitted to enter into a third
sublicense. This sublicense will only be entered into if the joint
venture with LIL is terminated or if MTI otherwise reaches an
agreement or settlement with LIL to permit such sublicense.
On December 9 and 11, 1997, the Company entered into a two
subscription agreements whereby J. Barrie Farrington and Pacific
Advisors Ltd purchased an aggregate of 1,500, Convertible Preferred
Stock, Series F for an aggregate consideration of $1,500,000. The
shares do not pay a dividend but are entitled to receive a dividend
along with the holders on Common Stock on an as-if-converted basis.
The shares are convertible into Common Stock of the Company, par value
$0.01 per share (Common Stock), at any time 40 days after the issuance
of the shares. The shares are convertible at 75% of the average
closing bid price for the five trading days immediately prior to the
conversion. The conversion price is subject to adjustment so that if,
at the end of any month after the date which is 40 days after the
original issuance date of the shares, the average closing bid price of
the Common Stock on the five consecutive days prior to the end of such
month is less than $1.50, then, in each case the percentage discount
from the market price shall be increased by 2%. The shares were sold in
reliance on Regulation S promulgated under the Securities Act 1993.
The Company used the proceeds of this offering for working capital
purposes.
The intended acquisition of Converting Laboratories, Inc. ("CLI"),
reported previously, has not been completed. CLI is the manufacturer
of one the Company's new consumer products, the hair removal patch.
The Company is continuing to evaluate the final terms of the
transaction with a view to making a decision during 1998. The Company
has advanced a total of $969,065 to CLI, of which $156,065 has been
paid in the six months to November 30, 1997. The whole amount has
been reserved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company has continued to accumulate losses and utilize its cash
resources while developing its laser hair removal and consumer
products businesses. The loss for the three months and six months to
November 30, 1997 was $4,247,438 and $8,934,637 respectively. The
Company's revenues for the six months to November 30, 1997 have fallen
marginally to $1,829,813 compared to $1,837,198 for the same period in
1996. However the losses have increased from $3,505,828 to
$8,934,637. The Company's overall gross margin percentage has fallen
in relation to the comparative period from 48.8% to 24%. This results
from lower margins arising in the Consumer Products Division and the
high initial direct costs associated with installation of lasers and
training customers under the Laser Services Agreement. However, the
principal contributory factor to the increase in losses is the rise in
operating expenses from $4,085,909 to $9,219,473.
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<PAGE> 11
The increase in losses has resulted from the relatively high selling,
general, administration costs, including legal costs associated to
defend the Company's intellectual property rights, as the Company
continues to its develop both its laser hair removal business and
Consumer Products Division. The main components of operating expenses
for the period were Payroll ($2,146,004), Depreciation and
Amortization ($1,611,438) Marketing & Selling ($927,990), Legal &
Professional ($922,320) and Travel ($748,366). The Company has
identified savings in operating overheads, including significant
payroll reductions, which will be implemented immediately. Further
the Company anticipates Legal & Professional and Travel costs to be
similarly reduced. Marketing & Selling costs are likely to increase
as a result of the planned continued development of the business.
The Company has continued its litigation actions against Laser
Industries, Palomar and Spectron and this has been the principal
reason for the Company incurring high legal costs.
Research and Development costs have continued at a rate similar to the
previous period especially as they relate to the continuing
development of the Company hair removal laser products and the
research into the hair removal treatment methods. The Company
anticipates similar continuing research and development costs into
existing and new products areas.
Laser Hair Removal
Although the Company's total revenue is similar to the previous
period, the mix of revenues has changed significantly reflecting the
overall changing nature of the Company's operations. The Company's
laser hair removal division has generated 60% of the Company's
revenue. The decision to sell lasers has had an immediate effect on
revenue as these laser sales of $591,391 represented 32.3% of
revenue. Revenue arising from the Company's share of laser hair removal
services offered by the Company's licensed customers was $334,183 or
18.3% of total revenue.
Revenue generated by laser hair removal is below the Company's
expectation. As at January 16, 1998, the Company has placed 130
lasers, which includes 69 in North America. Recognizing that the
Company has yet to realize the full potential of these contracts, the
Company has adopted a revised marketing support program devised to
enhance the ability of the licensed customer to generate a continuing
income stream from laser hair removal services. The Company
anticipates that this program, which uses initial training and ongoing
support to enhance the marketing activities of the customer, will lead
to enhanced revenue generation. The development of this marketing
program in the short term, and therefore the increase in revenues, is
dependent upon the Company being able to raise additional working
capital to fund the program.
Consumer Products
Revenues from Consumer products were $731,880, at a gross margin of
36%. The division made a loss $140,682 compared to a profit of
$294,936 for the comparative period in 1996. The division's revenue
and gross margin suffered from the phasing out of its Finally Free(tm)
Ultra from its principal market, Japan, ahead of the launch of its
replacement product the Finally Free(tm) Ultra Plus in November 1997.
The division's future prospects were improved in October 1997 when the
Company received FDA clearance to market the Finally Free Ultra in the
United States. The Company is actively marketing its products in the
United States and anticipates significant revenue growth during 1998.
A new product, the hair removal patch was launched in early January
1998. This accessory to the Finally Free product is expected to result
in increased sales of the Company's products throughout 1998 and
initial levels of interest from the Company's overseas customers have
been very encouraging.
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<PAGE> 12
FINANCIAL CONDITION
The Company has continued to absorb cash resources as it builds its
hair removal and consumer products divisions. During the six month
period to November 30, 1997 cash consumed by operating and investing
activities of $10,922,032 was partly offset by the Clearwater loan of
$7,000,000. Otherwise the Company has utilized the majority of its
available cash resources. Cash at the end of the period was $520,997.
Over the six month period to November 30, 1997, the Company has been
consuming cash at an average rate of nearly $2 million per month,
however as a result of the reductions in operating overhead costs
mentioned above, the Company expects this consumption to significantly
reduced with immediate effect. The Company has suffered a severe cash
shortage in the period to November 30, 1997. The cash shortage has
had a material effect on the way the business has been operated.
During this period and in the intervening period the Company has not
been able to meet all of its creditor payments as they have fallen
due. Although the Company has negotiated extended credit terms with
some of its vendors, the cash shortage has had led to a shortage of
some component parts for the manufacture, service and maintenance of
its laser systems. This shortage in turn has led to a loss of income
from customer's lasers being out of operation for a period. The
Company needs to locate additional sources of working capital in order
to pay its current outstanding creditors.
Under the terms of the agreement reached on January 16, 1998 the
Clearwater loan repayment has been extended 90 days beyond its
original repayment date of 15th January 1998. The loan will be
further extended by periods of 30 days, should the Company be able to
make a payment of $1 million before the end of the 90 day extension.
Subsequent payments of $1 million will give the Company further 30 day
extension periods. The Company is neither currently generating
sufficient income, nor has the cash available to make this repayment.
The Company will default on the repayment unless additional working
capital financing can be located. Management believes it has
identified potential sources of capital sufficient to meet these
obligations. The Company is not able, however, to make any assurances
that the financing will be available before the revised repayment
date.
In December 1997, the Company sold 1,500 Series F Preferred Shares for
$1,500,000. The proceeds of this sale have been used for operating
purposes and payment of outstanding trade payables. All cash
generated from operations since the period end has been used to fund
continuing operations.
In December 1997, the Company entered into a financing arrangement
with the Medcap Financial Corporation Inc. ("Medcap"). Under this
agreement the Company will receive approximately $100,000 for each of
its Chromos 694 ruby laser hair removal systems placed, under the
terms of a new Laser Services Agreement, with customers in the United
States. The new Laser Services Agreement requires the Company's
customers to commit to a minimum monthly payment over the term of a
three year contract. The lasers will become the property of Medcap
for the term of the agreement and the Company has assigned its rights
to the minimum monthly guaranteed amount to Medcap. There is no
recourse by Medcap to the Company in the event of a customer
defaulting the minimum monthly payment. The Company has the right to
repurchase the laser at the end of the term of the agreement for $10.
The Company has received approval for financing of new Laser Services
Agreements but has not yet completed any.
Medcap has also agreed to provide approximately $100,000 for existing
lasers providing the customers agree to switch to the new format
contract. The new Laser Services Agreement allows the share of
revenues due to the Company to reduce if certain gross income targets
are reached.
As at November 30, 1997, the Company had outstanding accounts payables
and accrued expenses of $6,551,261. A large proportion of this is
overdue. If Company does not receive additional working capital, the
ability of the company to continue operating will be severely
diminished, as revenues are not currently sufficient to generate
enough cash to settle outstanding accounts
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<PAGE> 13
payable. While the Company has identified additional potential
sources to settle outstanding accounts payable, it can not make
assurances that such funding will be achieved.
The Company's cash flow statement for the six months to November 30,
1997 shows disposal of plant & equipment of $1,178,077. This has not
generated cash inflow, but reflects an accounting change in the
classification of assets between inventory and plant & equipment. The
reduction in plant & equipment is matched by a corresponding increase
in inventory. This arises due to an amendment in the Company's policy
to build laser systems and accessories for its own use only. The
Company has made two changes in policy leading to the change in
accounting treatment. Firstly, a finance deal with Medcap, discussed
above, will result in the Company selling the lasers to Medcap.
Secondly, the Company has decided to sell lasers outright to customers
in certain geographic territories of the world where a revenue sharing
license arrangement is not financially attractive. Had this change
not taken place the Company's plant & equipment would have increased
by $4,069,901. The Company's increase in inventory of $5,029,744 is
likewise affected and had this change not taken place the Company's
inventory would have decreased by $218,234.
Together with the introduction of the Medcap financing arrangement the
Company has undertaken other measures designed to reduce the cash
usage of the business. Firstly, the Company is concentrating on
cutting its cash outflows by reducing its fixed operating overhead.
The Company does not anticipate its operations will be materially
affected by these reductions. Secondly, the Company has identified
opportunities to increase its cash inflows from revenues generated.
As mentioned above, the Company has decided to sell laser systems
outright in addition to boosting its revenue sharing program by
introducing an enhanced marketing support program. This program has
included the reallocation of the Company's resources to train and
assist licensed customers develop their hair removal businesses
through planned advertising and media campaigns.
A temporary cessation in the contracting of the Company's Chromos 694
ruby laser hair removal system while a source of laser financing (e.g.
Medcap) was secured has resulted in the Company holding inventory of
finished goods, work in progress and raw materials at the end November
30, 1997 of $5,286,544 relating to its laser products. The Company
expects that the development of third party sales of laser systems and
accessories will not only boost revenues but will result in
inventories being held at lower levels.
The Company has identified it needs to locate additional working
capital of between $5 million and $10 million, to finance outstanding
payables, repay the Clearwater loan and fund ongoing operations until
the Company generates a positive cash flow. The amount of financing
required will depend on the volume of laser sales and the revenue
growth from Laser Service Agreements. It is also dependent upon the
amount of cash raised from laser financing (Medcap) resulting from new
laser placements and the conversion of existing contracts to the new
Laser Services Agreement.
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 21B
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:
1) Raise additional working capital;
2) Place lasers under the new Laser Service Agreement and thus
release working capital from Medcap;
3) Persuade its targeted number of existing customers to adopt the new
Laser Services Agreement and thus release working capital from
Medcap;
13
<PAGE> 14
4) Fund the full implementation of its new marketing program and
to achieve the expected levels of revenue share income growth;
and
5) Make sufficient operating overhead cuts to reduce the cash
outflow from the Company.
No assurance can be given that the Company will succeed in any or
all of the above.
The ability of the Company to generate revenues from Laser Services
Agreements 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. It
will also be dependent upon the strength of the Company's competitors
and the ability of those competitors to sell lasers into the same
target markets as those of the Company. 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.
Further, the Company's future results may depend upon the Company's
ability to successfully defend its intellectual property rights and in
particular on the outcome of the current litigation against Palomar
which alleges infringement of the Zaias patent. While Management
believes the Company's patents are valid, no assurances can be given
that the Company will able to successfully defend its intellectual
property.
Although Management believes the use of lasers is currently the most
effective for long term hair removal, the Company can not make any
assurances that a technological innovation by a competitor will not
render its products obsolete.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule
99.2 Consolidated Statements of Changes in Stockholders Equity
Reports on Form 8-K:
The company filed the following Current Report on Form 8-K during the
second quarter of 1998:
Current Report on Form 8-K/A dated September 26, 1997
ITEM 5. OTHER INFORMATION
Antonius H. Clemens resigned from the office of Director in September
1997. At a meeting of the Board of Directors on January 12, 1998 Paul
W. Hartloff Jr. resigned from the office of Director of the Company and
AnnMarie Mehl resigned from offices of Director and Secretary of the
Company. At the same meeting David E. Fowler was appointed as
Secretary of the Company. On January 15, 1998, Dr. Pitchit
Suvanprakorn resigned from the office of Director of the Company.
The Clearwater loan dated August 5, 1997 was due for repayment on
January 15, 1998. An amendment to the loan agreement ("the
Amendment") was reached between the Company and Clearwater on January
16, 1998, whereby:
1) Clearwater agreed to extend the due date of their $7 million
loan by 90 days and provide additional extensions of 30 days
on the remaining outstanding principal balance for each
$1million of principal paid. All other terms of the loan
agreement remain in force.
2) The Company agreed to:
a) Continue to pay interest on the loan when due;
b) Make ongoing repayments of the loan amounting to:
* 10% of the gross sales proceeds from the sale of any
hair removal lasers;
* 10% of the gross proceeds from the financing of lasers
(e.g. from Medcap, as described below);
* 100% of the outstanding balance due upon receipt of
any capital injection (debt or equity) in excess of
$10 million;
* 25% of the from any capital injection of less than $10
million
In connection with the Amendment, Thomas L. Mehl Sr. and Nardo Zaias
each agreed to contribute four million shares of the Common Stock to
the treasury of the Company. The contribution of capital by Dr. Zaias
is to be effective immediately and the contribution by Mr. Mehl is to
be effective upon the release of the pledge of his stock in the
Company to secure the repayment of the $7 million loan from
Clearwater. In consideration to the capital contribution, Dr. Zaias
received an option from the Company to purchase 4 million shares of
Common Stock at $5 per share. This option is exercisable on or after
January 16, 2000 and expires on January 16, 2003. Mr. Mehl will
receive an option with the same terms upon the effectiveness of his
capital contribution to the Company.
Pursuant to the Amended and Restated Agreement and Plan of Merger
dated as of June 4, 1996 between the Company, Classy Lady by Mehl of
Puerto Rico ("Classy Lady") and Selvac Acquisition Corp. ("Merger
Agreement"), individuals designated by a majority of the stockholders
of Classy Lady had the right to share in certain proceeds derived from
the sale of laser hair removal joint ventures entered into by the
Company or its subsidiaries. The Company has disclosed that the
15
<PAGE> 16
recipients to share in such proceeds were Thomas L. Mehl Sr. and Nardo
Zaias. In connection with the Amendment to the Clearwater Loan
Agreement, the Company, Mehl Technologies, Inc. (the successor to
Classy Lady), Mr. Mehl and Dr. Zaias entered into a Termination
Agreement, dated January 16, 1998, which eliminated the revenue
sharing provisions set forth in the Merger Agreement.
In connection with the contribution by Nardo Zaias of Common Stock to
the Treasury of the Company and the waiver by Dr Zaias to receive any
proceeds from the sale of laser hair removal joint ventures, Mehl
Technologies, Inc. ("MTI") agreed that if MTI enters into a third
sublicense arrangement under the exclusive sublicense held by MTI for
the method of hair removal patented by Dr. Zaias:
1) MTI will pay to Dr. Zaias 25% of the revenues derived by MTI from
the third sub license; and
2) If all or substantially all the assets or stock
of MTI are sold, Dr. Zaias will have the right to receive 25% of
the fair market value of the third sublicense at the time of
such sale payable in the form of consideration paid in the
sale transaction.
Under the joint venture presently in effect with Laser Industries
Limited ("LIL"), MTI is not permitted to enter into a third
sublicense. This sublicense will only be entered into if the joint
venture with LIL is terminated or if MTI otherwise reaches an
agreement or settlement with LIL to permit such sublicense.
In connection with the Amendment the Company agreed to make certain
management and operational changes. Upon the closing of the Amendment
on January 16, 1998, the following became effective:
1) Thomas L. Mehl Sr. resigned as President and Chief Executive
Officer;
2) Hans Frederick Heye, Gerard P. Melia and Jack W. Forrest were
elected to serve as Directors, as designees of Clearwater;
3) Nardo Zaias resigned as a member of the Executive Committee of
the Board of Directors;
4) Hans Frederick Heye was appointed to serve with Thomas L. Mehl
Sr. and Robert Marc Clement on the Executive Committee of
the Board of Directors;
5) David E. Fowler was elected President and Chief Operating Officer
to report to and serve under the direction of the Executive
Committee;
6) The Company agreed to make substantial reductions to its
operating overhead costs in an amount not less than $2 million
annually;
On January 16, 1998 Thomas L. Mehl Sr. executed an Irrevocable Proxy
and Letter of Direction in favor of Clearwater to vote his 8,425,000
shares so long as any principal of their loan remains outstanding.
Under the same proxy, Clearwater agreed to vote their shares in the
Company and Mr. Mehl's shares subject to the proxy for a period of 18
months, in favor of Mr Mehl's election as a Director and not to
vote in favor of his removal.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEHL/BIOPHILE INTERNATIONAL CORPORATION
By: /s/ David E. Fowler
- -----------------------------------------
David E. Fowler
President and Chief Operating Officer DATE: January 20th, 1998
By: /s/ Timothy J. Chapple
- ------------------------------------------
Timothy J. Chapple
Principal Financial and Accounting Officer DATE: January 20th, 1998
17
<PAGE> 1
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding:
Primary 43,993,301 40,658,752 43,993,301 41,243,888
Fully diluted 43,993,301 40,658,752 43,993,301 41,243,888
Primary:
Net loss (8,934,637) (3,505,828) (4,247,438) (2,541,683)
Paid and cumulative undeclared preferred
stock dividends (305,775) (235,825) (152,887) (110,825)
Implied dividend equal to intrinsic value of
preferred stock conversion feature (1,187,211) (731,092)
Net loss applicable to common stock (10,427,624) (3,741,653) (5,131,418) (2,652,508)
Net loss per share (0.24) (0.09) (0.12) (0.06)
</TABLE>
For the above years, earnings per share, assuming full dilution, has not been
presented since the effect would be antidiluting.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 520,997
<SECURITIES> 0
<RECEIVABLES> 1,247,247
<ALLOWANCES> 271,535
<INVENTORY> 5,827,892
<CURRENT-ASSETS> 8,575,044
<PP&E> 7,454,515
<DEPRECIATION> 2,007,651
<TOTAL-ASSETS> 19,026,352
<CURRENT-LIABILITIES> 13,608,426
<BONDS> 0
0
12,231,000
<COMMON> 464,683
<OTHER-SE> (7,277,757)
<TOTAL-LIABILITY-AND-EQUITY> 19,026,352
<SALES> 1,495,630
<TOTAL-REVENUES> 1,829,813
<CGS> 932,444
<TOTAL-COSTS> 1,379,861
<OTHER-EXPENSES> 9,201,114
<LOSS-PROVISION> 186,911
<INTEREST-EXPENSE> 226,830
<INCOME-PRETAX> (8,934,637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,934,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,934,637)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
MEHL/Biophile International Corporation
Consolidated statements of changes in stockholders equity
<TABLE>
<CAPTION>
Prefered Stock
Series C Series D Series E
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance as at May 31, 1997 2,231 $ 2,231,000 10,000 $ 10,000,000
Conversion into Series E (2,231) $(2,231,000) (10,000) $(10,000,000) 12,231 $12,231,000
Balance as at August 31, 1997 0 0 0 0 12,231 $12,231,000
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Treasury
Paid Accumulated Treasury shares Translation
in Capital Deficit Shares at Cost adjustment
---------- ------- ------ ------- ----------
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as at May 31, 1997 46,468,260 $464,683 $25,167,212 $ (22,640,205) 2,474,959 $959,599 $(1,429)
Dividend on Preference shares
(paid and accrued) $ (305,775)
Cost of warrants issued $ 394,881
Implied Dividend equal to intrinsic
value of conversion feature $ 1,187,211 $ (1,187,211)
Net Loss $ (8,934,637)
Translation Adjustment $(2,205)
BALANCE AS AT NOVEMBER 30, 1997 46,468,260 $464,683 26,749,304 (33,067,828) 2,474,959 $959,599 $(3,634)
</TABLE>
