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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 FEBRUARY 28, 1998
[ ] 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 February 28, 1998 is 41,404,829 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 February 28, 1998 3
Condensed consolidated statements of
operations for the nine and three months ended
February 28, 1998 and 1997 4-5
Condensed consolidated statements of
cash flows for the nine months ended
February 28, 1998 6-7
Notes to condensed consolidated financial
Statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
MEHL/BIOPHILE INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS: $
Cash and equivalents 406,038
Accounts Receivable, net of allowance for doubtful accounts of $366,502 488,661
Inventories 5,294,580
Current portion of note receivable 300,000
Other current assets 1,147,866
-----------
Total Current Assets 7,637,145
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,206,159 5,112,555
PATENTS AND PATENT RIGHTS, net of accumulated amortization of $2,371,590 4,236,642
OTHER ASSETS 13,701
-----------
Total Assets $ 17,000,043
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short Term Loan $
Accounts Payable 4,386,364
Accrued Expenses 1,278,291
Deferred Income 164,312
Other Current Liabilities 664,652
-----------
Total Current Liabilities 6,493,619
-----------
LONG TERM DEBT 9,050,372
-----------
Total Liabilities 15,543,991
STOCKHOLDERS' EQUITY:
Serial preferred stock, $10 par value, $1,000 stated value, authorized -
200,000 shares:
Series F, Convertible 620 shares outstanding 620,000
Series G, 5% cumulative convertible; issued and outstanding -
12,231 shares 12,231,000
Common stock, $.01 par value, 60,000,000 shares
Authorized - 47,879,788 shares issued, 41,404,829 Shares outstanding 478,798
Additional paid-in-capital 30,312,094
Accumulated deficit (41,167,480)
Foreign currency translation adjustment (62,761)
-----------
2,411,651
Treasury stock, at cost, 6,474,959 common shares (955,599)
-----------
Total Stockholders' Equity 1,456,052
-----------
Total Liabilities and Stockholders' Equity $17,000,043
-----------
</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>
NINE MONTHS ENDED
FEBRUARY 28
1998 1997
---- ----
<S> <C> <C>
$ $
REVENUES 2,922,541 2,420,027
COST OF REVENUES 3,473,787 1,601,035
------------------------------
GROSS MARGIN (551,246) 818,992
------------------------------
OPERATING EXPENSES:
Selling, general and administrative 12,167,325 6,694,452
Research and development 905,023 1,484,013
------------------------------
TOTAL OPERATING EXPENSES 13,072,348 8,178,465
------------------------------
OPERATING LOSS (13,623,594) (7,359,473)
------------------------------
OTHER INCOME (EXPENSES)
Investment income/(expense) 82,598 (396,721)
Interest Expense 611,844 23,829
MINORITY INTEREST IN LOSS OF SUBSIDIARY -- 364,106
------------------------------
NET LOSS BEFORE TAX (14,152,840) (7,415,917)
INCOME TAXES 31,657 --
------------------------------
NET LOSS AFTER TAX (14,184,497) (7,415,917)
------------------------------
NET LOSS PER COMMON SHARE (0.42) (0.19)
LOSS APPLICABLE TO COMMON STOCK (18,527,786) (7,755,483)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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MEHL/BIOPHILE INTERNATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 28
1998 1997
---- ----
<S> <C> <C>
$ $
REVENUES 1,092,728 582,829
COST OF REVENUES 2,084,553 660,493
------------------------------
GROSS MARGIN (991,825) (77,664)
------------------------------
OPERATING EXPENSES:
Selling, general and administrative 3,622,755 3,302,322
Research and development 248,479 790,234
------------------------------
TOTAL OPERATING EXPENSES 3,871,234 4,092,556
------------------------------
OPERATING LOSS (4,863,059) (4,170,220)
------------------------------
OTHER INCOME (EXPENSES)
Investment income/(expense) 11,511 (98,848)
Interest Expense 385,014 5,127
MINORITY INTEREST IN LOSS OF SUBSIDIARY -- 161,591
------------------------------
NET LOSS BEFORE TAX (5,236,562) (4,112,604)
INCOME TAXES 13,298 --
------------------------------
NET LOSS AFTER TAX (5,249,860) (4,112,604)
------------------------------
NET LOSS PER COMMON SHARE (0.19) (0.10)
LOSS APPLICABLE TO COMMON STOCK (8,099,652) (4,216,345)
</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>
NINE MONTHS ENDED
FEBRUARY 28,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ $
Net loss (14,184,497) (7,415,916)
Adjustments to reconcile net loss to net cash used by operating
activities:
Provision for bad debts (304,842) 310,721
Minority interest in net loss of subsidiary (364,106)
Realized loss on marketable and non marketable security investments 74 792,127
Provision for obsolete inventory 685,236
Provision for notes and loans receivable 309,748
Depreciation and amortization 2,051,726 784,696
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 176,381 255,781
Inventories (5,450,995) (3,253,805)
Other operating assets (37,172) (1,390,010)
Accounts payable 646,119 1,800,562
Accrued expenses (539,041) 1,255,953
Other operating liabilities 863,631
-------------------------------
Net cash used by operating activities (15,783,632) (7,223,997)
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes and loans receivable (125,431) (523,077)
Property and equipment acquisitions 1,291,216 (1,495,566)
Proceeds from sale of marketable securities -- 477,690
Notes receivable repayments -- 50,000
-------------------------------
Net cash provided (used) by investing activities 1,165,785 (1,490,953)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of:
Common stock 295,620
Preferred Stock 1,500,000 10,000,000
Loans received 9,050,372 --
Note repayments (100,898)
Preferred stock dividends paid (155,285) (312,061)
-------------------------------
Net cash provided by financing activities 10,395,087 9,882,661
EFFECT OF EXCHANGE RATE ON CASH (60,509) 27,640
-------------------------------
(DECREASE)/INCREASE IN CASH FOR THE PERIOD (4,283,269) 1,195,351
CASH AND EQUIVALENTS, beginning of period 4,689,307 9,838,998
-------------------------------
CASH AND EQUIVALENTS, end of period $ 406,038 $ 11,034,349
-------------------------------
</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>
NINE MONTHS ENDED
SUPPLEMENTAL SCHEDULES OF NON-CASH, INVESTING AND FEBRUARY 28
FINANCING ACTIVITIES
1998 1997
<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 $3,884,114 $ --
---------- -----------
Valuation of Deferred loan Costs arising in conjunction with debt $ 394,882 $ --
---------- -----------
</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 nine months ended
February 28, 1998 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. FINANCING AND CAPITAL TRANSACTIONS
Clearwater Fund IV, LLC-Debt transactions:
On January 16, 1998 the Company negotiated an extension of its $7
million secured note owed to Clearwater Fund IV, LLC ("Clearwater"),
which was due to mature on January 15, 1998. Under the terms of the
renegotiated loan agreement, which was amended and restated on January
30, 1998 the due date of the note was extended to April 15, 1998 and
was subject to additional extension in the event that certain principal
reductions were made. Additional terms included the obligation to make
certain mandatory prepayments of principal in conjunction with
contemplated financing transactions for the Company's laser products,
and in the event that certain other financial transactions occurred
prior to the scheduled maturity of the note. Clearwater has waived the
mandatory principal prepayment requirements through April 13, 1998 and,
accordingly, no principal reductions have occurred during the quarter
or during the period from March 1, 1998 through April 13 1998.
Under the amended Clearwater loan agreement, the Company obtained a
$2.5 million revolving credit line from Clearwater. The line is
secured by all of the assets of the Company and is personally
guaranteed by Thomas L. Mehl and Ann Marie Mehl. (Both the security
and the guarantees are identical in all material respects with the
security and guarantees under the terms of the $7 million secured
note.) The proceeds of the line were used for general working capital
purposes. The revolving secured line of credit bears interest at the
rate of 15% per annum, the same rate as the $7 million secured note.
On April 13, 1998, the Company renegotiated its $7 million secured
note, which was to mature on April 15, 1998, and its $2.5 million
revolving credit line with Clearwater Fund IV, LLC. Under the amended
terms, the entire $7 million secured note, $1.5 million of the
revolving credit line and any accrued and unpaid interest plus accrued
and unpaid dividends on the Company's preferred stock held by
Clearwater (see below) through April 13, 1998, was aggregated into a
new principal amount of $9,168,061. The interest rate on the loan has
been reduced from 15% per annum to
8
<PAGE> 9
10% per annum, payable monthly in arrears. The maturity date was
extended to September 1, 2001. There are no scheduled principal
payments due until June 1, 1999, but the Company is required to make
certain mandatory prepayments which are virtually identical to the
mandatory prepayments stipulated under the January 30, 1998 agreement
except that, the percentage of proceeds from financings of the
Company's existing laser products inventory is increased from 10% to
15% and the Company is required to remit 20% of the quarterly gross
profit of its consumer products division. Beginning on June 1, 1999,
the Company is obligated to make quarterly principal payments equal to
the lesser of $1 million or the remaining unpaid principal amount until
the note is retired. Any mandatory prepayments made under the agreement
will be credited against the next scheduled principal payment due.
A $1 million secured revolving credit line will remain in place. This
line will also bear interest at the rate of 10% per annum, payable
monthly in arrears and has a maturity date of June 1, 2001. As of the
date of this filing, the entire $1 million available under the terms of
the revolving loan agreement has been drawn. Accordingly, the Company
does not have any working capital funds currently available under this
agreement.
Clearwater Fund IV, LLC-Equity transactions:
In conjunction with the renegotiation of the Clearwater secured loan,
the Company agreed to exchange all 12,231 shares of $1,000 stated value
Series E, 5 % cumulative preferred stock for 12,231 shares of $1,000
stated value Series G, 5% Cumulative Convertible Preferred Stock
("Series G").
Each share of Series G stock is convertible into common stock of the
Company at 80% of the average bid 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 $1.00. The Company is in the process
of filing a registration statement covering the public sale of the
shares of common stock receivable upon conversion of the Series G
stock. Clearwater has agreed not to sell or transfer any such shares
on or before June 30, 1998. The conversion price of 12,231 of the
Series G 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 February 1998, the conversion discount
applying to these shares was 30.7% or 69.3% of the average bid market
price for the five trading days prior to conversion. Dividends are paid
quarterly in arrears ($152,888 per quarter) beginning February 28,
1998. The implied dividend from the discount attributable to the
conversion rights contained within the Series G stock and represented
in these financial statements as a loss to common stock holders for the
period is $3,884,114.
The Company has agreed to exchange the Series G stock into a new 5%
Cumulative Convertible Preferred Stock, Series H ("Series H") which
will have all the same terms and conditions as the Series G stock,
including registration rights, except that the escalating discount
feature, as described in the preceding paragraph, has been stopped and
the discount percentage has been fixed as of February 28, 1998, which
was 69.3%.
Thomas L. and Anne Marie Mehl and Dr. Nardo Zaias
In connection with the January 16, 1998 extension of the secured note
due to Clearwater, Thomas L. and Anne Marie Mehl (jointly) and Dr.
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 was effective immediately and the contribution by Mr. and
Mrs. Mehl is to be effective upon the release of the pledge of their
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 two(2) million
shares of Common Stock at $5 per share. This option
9
<PAGE> 10
is exercisable on or after January 16, 2000 and expires on January 16,
2003. Mr. and Mrs. Mehl will receive an option with the same terms upon
the effectiveness of their 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 Mr. Mehl and Dr. 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 Dr. 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.
Series F Preferred Stock:
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
("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 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. As of February
28, 1998, 880 shares of Series F were converted into 1,411,528 common
shares.
10
<PAGE> 11
3 RECENT EVENTS
The intended acquisition of Converting Laboratories, Inc. ("CLI"),
reported previously, is currently under negotiation. 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 final decision during 1998. The
Company has advanced a total of $1,023,718 to CLI, of which $210,284
has been advanced in the nine months to February 28, 1998. The whole
amount has been reserved pending final judgment on the acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company has continued to accumulate loses and utilize its cash
resources while developing its laser hair removal and consumer products
businesses. The loss for the three months and nine months to February
28, 1998 was $5,249,860 and $14,184,497, respectively. The Company's
revenues for the nine months to February 28, 1998 have increased by 21%
to $2,922,541 from $2,420,027 for the same period in 1997. The increase
was due to the Company's share of laser hair removal revenue generated
by the Company's licensed customers of $703,651 for the nine month
period ended February 28, 1998. This amount was negligible in the same
1997 period since the Company did not implement this program until it
received FDA clearance to market the Chromos 694 ruby laser for hair
removal. However the losses have increased from $7,415,917 to
$14,184,497. The Company's overall gross margin has fallen in relation
to the comparative period from 34% to negative 19%. This results from
the high initial direct costs associated with installation of lasers,
training customers in the use of the laser and marketing, and
maintenance of hair depilation lasers under the Company's agreement
with end uses of lasers, as well as a charge for raw material inventory
obsolescence. Had the charge of approximately $905,000 not been taken
during the quarter, gross margin for the nine months ended February 28,
1998 would have been 12%. However, the principal contributory factor to
the increase in losses is the rise in operating expenses from
$7,359,473 to $13,072,348.
The increase in losses has resulted from the relatively high selling,
general, administration costs, including legal costs associated with
defending 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 ($3,557,535), Depreciation and
amortization ($2,175,970) Marketing & Selling ($1,450,123), Legal &
Professional ($1,488,177), Travel ($743,637). Payroll costs were high
due to the increased staffing associated with the design, production,
distribution and service of hair removal lasers. Depreciation and
amortization expense were high due to the increased production of
hair removal lasers and the ongoing costs associated with maintaining
the Company's intellectual property rights during the nine month
period ended February 28, 1998. The Company's attendance at various
trade shows throughout the world in order to introduce the Chromos 694
ruby laser for hair removal to potential customers caused marketing
and selling expenses to rise. The Company has continued its litigation
actions against Laser Industries Limited, Palomar Medical
Technologies, Inc. and Spectron Laser Systems. These ongoing legal
disputes have been the principal reasons for the Company incurring
high legal and professional costs. The Company has identified savings
in operating overhead, including but not limited to, personnel
reductions in the corporate headquarters, and at the manufacturing
facility in Wales, closing of the administrative offices in Puerto
Rico, the elimination of certain consulting arrangements, and
renegotiation of trade payables and other corporate contractual
commitments. Further, the Company anticipates that Legal &
Professional costs will be reduced as litigation matters come to
resolution. Marketing & Selling and Travel costs are likely to
increase as a result of the planned continued development of the
business and the recently announced expansion of the sales staff and
sales representatives.
Research and Development expenses for the nine months ended February
29, 1998 of $905,023 have decreased from $1,484,013 compared to the
previous period. This reduction was primarily due to a shortage of
available funds for research and development activities. Management has
focused its efforts and resources on the enhancement and continued
advancement of existing technologies or those technologies that do not
require a significant amount of capital to reach commercialization.
11
<PAGE> 12
Laser Hair Removal
The Company's laser hair removal division generated 47% of the
Company's revenue during the nine months ended February 28, 1998 versus
a negotiable amount in the same 1997 period. The change in corporate
philosophy from exclusively placing lasers in revenue sharing
arrangements, to sell laser hair removal units, in addition to offering
a revenue share program, has had an immediate effect on revenue as
these laser sales of $669,443 represented 23% of revenue. Revenue
arising from the Company's share of laser hair removal revenue
generated by the Company's licensed customers was $703,651 or 24% of
total revenue.
Revenue generated by laser hair removal is below the Company's
expectation. However, an improvement has been seen over the most recent
quarter as evidenced by the fact that laser share revenue for the
quarter ended February 28, 1998 totaled $369,468 versus revenue
generated of $334,183 for the six month period ended November 30, 1997.
As at April 14, 1998, the Company has placed 132 lasers, which includes
75 in North America. Although the change in the number of placements
from the prior quarters has not changed significantly (130 total
placements with 69 in North America), the revenue potential of the
placement has improved based on location and most recent performance.
Management has conducted a review of the current revenue sharing sites
and has identified several sites which have not proven to be profitable
or viable from the Company's perspective. Lasers have been recovered
from some of these sites and others will be recovered from
non-productive sites over the next few months. It is the Company's
expectation that some of these recovered lasers will be sold, some
leased, and some will be placed in higher revenue sharing situations.
In an attempt to realize the full potential of these revenue share
contracts, both for the Company and for its revenue sharing partners,
the Company has implemented a marketing support program designed to
assist customers in advertising, publicity and customer leads to
generate clients for their laser hair removal practice. While there can
be no assurance that the use of the marketing support program will
result in greatly enhanced revenues for our revenue sharing customers,
the Company anticipates that this program will lead to increased
revenue generation.
Consumer Products
Revenues from Consumer products were $1,353,387, at a gross margin of
36%. The division made a loss $234,312 compared to a profit of $301,807
for the comparative period in 1997. The division's profitability was
negatively impacted from the phasing out of its Finally Free Ultra from
its principal market in Japan, a reserve against inventory for
discontinued products, and an increase in initial marketing expenses
associated with the division receiving for clearance to market the
Finally Free Ultra in the United States. 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. The Company
anticipates that a new product, the hair removal patch, will begin to
be sold at retail store locations in June, 1998. This accessory to the
Finally Free product is expected to result in increased sales of the
Company's products throughout 1998 and future years. While there can
be no assurance that the product will be a success, the initial level
of interest is encouraging.
FINANCIAL CONDITION
The Company has continued to use its cash resources as it builds its
laser hair removal and consumer products divisions. During the nine
month period to February 28, 1998 cash used by operating activities was
$15,783,632. This cash demand was partially met by the Clearwater loans
of $9,050,372 and the proceeds from the Series F preferred stock of
$1,500,000. As of February 28, 1998, there was $449,628 available under
the Clearwater $2.5 million revolver, otherwise the Company has
utilized the majority of its available cash resources. Cash at the end
of the period was $406,038. Over the nine month period to February 28,
1998, the Company has been consuming cash at an average rate of nearly
$1.75 million per month, however, as a result of the reductions in
operating overhead costs mentioned above, the Company expects to
reduce the rate of cash consumption. The Company has suffered a severe
cash shortage in the period to February 28, 1998. The cash shortage
has had a material effect on the way the
12
<PAGE> 13
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 come 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.
In December 1997, the Company entered into a financing arrangement with
a commercial finance company. Under the terms of 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 the 18 or 36 month contracts.
The lasers will become the property of the finance company for the term
of the agreement. The Company has assigned its rights to the minimum
monthly guaranteed amount to the finance company. The company has no
recourse to the finance company in the event that the customer defaults
on his payment obligations. The Company has the right to repurchase the
laser at the end of the term of the agreement for $10.
In an attempt avoid an excessive reliance on one particular source of
capital, the Company has entered into financing arrangements with two
other publicly traded finance companies on terms similar to those
disclosed above. Funds from transactions under these financing
arrangements are an important source of the Company's plans to generate
funds internally.
As at February 28, 1998, the Company had outstanding accounts payable
and accrued expenses of $5,664,655 which represents a reduction of
$886,606 from $6,551,261 at November 30, 1997. The Company currently
plans to generate working capital primarily through the laser revenue
sharing program, laser financing programs, and from the sales of
consumer products. If those sources of revenue fail to generate
sufficient working capital, the Company's ability to continue
operations will be in serious jeopardy, as other sources of revenue are
not currently sufficient to generate the cash required to settle
outstanding account payable balances. While the Company believes that
these sources of working capital will be adequate to provide for
continuing operations, there can be no assurance that the Company will
have adequate working capital to continue operations.
The Company's consolidated condensed statement of cash flows for the
nine months to February 28, 1998 shows disposal of plant & equipment of
$1,291,216. This item generated no cash inflow, but is, rather merely
reflective of 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.
In addition to abandoning the cash intensive practice of building laser
exclusive for placement in revenue sharing arrangements, the Company
has undertaken other measures designed to reduce the cash usage of the
business. The Company has reduced, and continues to reduce, the cash
needs for operations by reducing its fixed operating expenses. The
Company does not anticipate that operations will be materially
adversely affected by these reductions.
The Company's finished goods, work in progress and raw materials
inventory at February 28, 1998 of $4,631,469 relating to its laser
products. The Company expects that its decision to conduct laser sales
and leasing activities, rather than relying exclusively on revenue
sharing arrangements for working capital, will not only increase
revenues but also result in increased cash for working capital
purposes.
13
<PAGE> 14
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) Generate additional laser share revenue through the implementation
of the new marketing program;
2) Place lasers under the Laser Service Agreement with end users and
release working capital from various financing companies;
3) Successfully market and sell its consumer products in the United
States and abroad.
No assurance can be given that the Company will succeed in 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. No assurances can be
given that the Company will able to successfully defend its
intellectual property.
Although the use of lasers is currently considered the most effective
for long term hair removal, the Company can not make any assurances
that a technological innovation by a competitor will render its
products obsolete.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has, as previously disclosed, filed a lawsuit in March 1997
against Palomar Medical Technologies, Inc. ("Palomar"), certain Palomar
subsidiaries and a New Jersey dermatologist. The suit alleges patent
infringement of the laser hair removal technology licensed by the
Company's subsidiary from Dr. Nardo Zaias and unfair competition. The
Company seeks monetary damages and injunctive relief to restrain
Palomar from marketing its laser hair removal products in the United
States. On February 18, 1998, the defendants filed a motion for summary
judgment on their behalf in connection with the litigation. On March
20, 1998 the Company filed its response and opposition to the motion
for summary judgment. No date has been set for the court to hear the
motion.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 30, 1998, the Company exchanged all 12,231 outstanding
shares of 5% Cumulative Convertible Preferred Stock, Series E, for an
equivalent number of shares of 5% Cumulative Convertible Preferred
Stock, Series G ("Series G Preferred Stock"). As of April 14, 1998,
the Company agreed to exchange all shares of Series G Preferred Stock
for an equivalent number of shares of 5% Cumulative Convertible
Preferred Stock, Series H (the "Series H Preferred Stock"). See Note
2 to the Financial Statements which is incorporated by reference
herein.
ITEM 5. OTHER INFORMATION
Revised Employment Agreements
- -----------------------------
In connection with recent management changes, the Company has entered
into Employment Agreements with certain of its executive officers and
revised the employment agreement with Thomas L. Mehl, Sr.
The Company entered into an Executive Employment Agreement with Jack W.
Forrest executed as of February 20, 1998 whereby the Company agreed to
employ Mr. Forrest as Chief Executive Officer until May 31, 1999 at an
annual salary of $200,000. In addition, the Company granted to Mr.
Forrest a stock option to purchase 500,000 shares of stock at $1.00 per
share. The option vested as to 200,000 shares as of the date of the
Agreement, and the remaining 300,000 shares vest upon the first to
occur of the following: (1) termination of employment other than for
cause, (2) the Company's common stock having a closing bid price of
$3.00 for more than five consecutive days, (3) the date of expiration
of the agreement, (4) the acquisition of more than 25% of the voting
stock of the Company (on a fully diluted basis) by a person or group
(other than Clearwater Fund IV, LLC and its affiliates ("Clearwater")),
or (5) the acquisition by Clearwater of 50% or more of the Company's
voting stock (the occurrence of any of the foregoing being a "Vesting
Event"). The option may be exercised for a period of five years after
vesting.
The Company entered into an Executive Employment Agreement with David
E. Fowler as of February 24, 1998 whereby the Company agreed to employ
Mr. Fowler as President until May 31, 1999 at an annual salary of
$185,000. In addition, the Company granted Mr. Fowler a stock option to
purchase 650,000 shares of stock at $1.00 per share. The option vested
as to 300,000 shares as of the date of the Agreement, and the remaining
350,000 shares vest upon a Vesting Event. The option may be exercised
for a period of five years after vesting.
The Company entered into an Executive Employment Agreement with Gerard
P. Melia as of February 16, 1998 whereby the Company agreed to employ
Mr. Melia as Vice President-Finance and Chief Financial Officer until
May 31, 1999 at an annual salary of $185,000. In addition, the Company
granted Mr. Melia a stock to option to purchase 250,000 shares of stock
at $1.00 per share. The option vested as to 100,000 shares as of the
date of the Agreement, and the remaining 150,000 shares vest upon a
Vesting Event. The option may be exercised for a period of five years
after vesting.
The Company entered into an Executive Employment Agreement with Dennis
R. Jones as of January 19, 1998 whereby the Company agreed to employ
Mr. Jones as President of Mehl Group Marketing, Inc., a wholly-owned
subsidiary of the Company, until June 19, 1999 at an annual salary of
$185,000. In addition, the Company granted to Mr. Jones a five year
stock option to purchase 500,000 shares of stock at $1.00 per share.
The option vested as to 200,000 shares as of the date of the Agreement,
and the remaining 300,000 shares vest as to 5,000 shares upon each
laser placement which occurs after January 18, 1998. For purposes of
the agreement, a laser placement is defined as the sale of a laser,
placement of a laser in a revenue sharing program or the conversion of
an existing laser placement to a suitable financing.
15
<PAGE> 16
On March 31, 1998, the Company and Thomas L. Mehl, Sr. agreed to amend
the terms of Mr. Mehl's Employment Agreement dated January 16, 1998
after Mr. Mehl disclosed to the Company that he was facing serious
health challenges. As revised, the agreement provides that Mr. Mehl
will not serve as Chairman of the Board of Directors of the Company but
will continue to serve as a director of the Company. The Company agreed
to continue to employ Mr. Mehl until June 5, 2000. Mr. Mehl's annual
salary is $150,000 per year through June 5, 1999 and $50,000 per year
from June 16, 1999 through June 5, 2000. If Mr. Mehl dies before June
15, 1999, the Company will pay to his estate the amount of Mr. Mehl's
salary through June 15, 1999. If Mr. Mehl dies after June 15, 1999 but
before June 5, 2000, the Company will pay to his estate the amount of
Mr. Mehl's salary through June 5, 2000. For salary payments after June
15, 1999, the amount owed to Mr. Mehl will be offset by any royalties
owed to Mr. Mehl by the Company or any of its subsidiaries. The
Company and Mr. Mehl agreed to negotiate a similar provision to fix a
date prior to June 16, 1999 so that after such fixed date, all salary
payments would be reduced by royalties paid to Mr. Mehl.
In connection with the revised terms of Mr. Mehl's employment, Mr. Mehl
agreed to revise the terms of his licensing agreement with Mehl
Technologies, Inc. ("MTI") under which Mr. Mehl granted in December
1995 an exclusive license under three patents for consumer hair
depilation devices owned by Mr. Mehl. Mr. Mehl agreed to expand the
scope of the license to cover improvements and any new consumer hair
depilation inventions developed by Mr. Mehl arising out of the licensed
technology, and also to cover a hand-held radio frequency hair
depilation device developed by Mr. Mehl.
In addition, Clearwater, the Company's principal lender, agreed that it
would release 2,000,000 shares of the Common Stock owned by Mr. Mehl
and his spouse which were previously pledged by Mr. and Mrs. Mehl as
collateral for term and revolving loans owed to Clearwater by the
Company. The released shares will be subject to a lock-up arrangement
so that Mr. and Mrs. Mehl may not sell or transfer any released shares
before the earlier of: (1) repayment of all principal and interest owed
by the Company to Clearwater, and (2) June 15, 1999. After the lock-up
expires, and if the loan to Clearwater has not been paid off in full,
the released shares may be sold subject to a monthly volume limitation
equal to the average of the daily trading volume of the Company's
Common Stock in the month prior to the sale. The volume restriction
expires once the Company pays off the term and revolving loans owed to
Clearwater in full.
POTENTIAL DELISTING FROM THE NASDAQ SMALLCAP MARKET
The Company has received a letter dated March 9, 1998 from the Nasdaq
Stock Market, Inc. ("Nasdaq") stating that the Company's Common Stock
has failed to maintain a closing bid price of $1.00 or more for 30
consecutive trading days. To be eligible for continued listing on the
Nasdaq SmallCap Market, the Common Stock must maintain a minimum bid
price of $1.00. Nasdaq has informed the Company that it has a grace
period of 90 days from March 9, 1998 to regain compliance with the
minimum bid price requirement. If on 10 consecutive trading days during
this 90-day period, the Common Stock's closing bid price is at or above
$1.00, the Common Stock will meet the listing requirement. If the
Common Stock does not meet the minimum bid price requirement in this
period, Nasdaq has informed the Company that the Company's Common Stock
will be subject to delisting from the Nasdaq SmallCap Market effective
on June 10, 1998.
ITEM 6. 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
third quarter of 1998:
Current Report on Form 8-K (Items 6 and 9) dated December 22, 1997,
filed on December 23, 1997
Current Report on Form 8-K (Items 5 and 6) dated February 26, 1998,
filed on February 27, 1998
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities 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/ Jack W. Forrest
- -----------------------------------------
Jack W. Forrest
Chief Executive Officer DATE: April 14th, 1998
By: /s/ Gerard P. Melia
- ------------------------------------------
Gerard P. Melia
Chief Financial Officer DATE: April 14th, 1998
17
<PAGE> 18
EXHIBIT INDEX
-------------
Exhibits: Description
- -------- -----------
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule
99.2 Consolidated Statements of Changes in Stockholders Equity
<PAGE> 1
EXHIBIT 11
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted number of shares outstanding:
Primary 43,718,335 41,070,724 43,159,238 41,909,399
Fully diluted 43,718,335 41,070,724 43,159,238 41,909,399
Primary:
Net loss (14,184,497) (7,415,917) (5,249,860) (4,112,604)
Paid and cumulative undeclared
Preferred stock dividends (458,663) (339,566) (152,888) (103,741)
Implied dividend equal to intrinsic value of
preferred stock conversion feature (3,884,114) -- (2,696,904) --
Net loss applicable to common stock (18,527,274) (7,755,483) (8,099,652) (4,216,345)
Net loss per share $ (0.42) $ (0.19) $ (0.19) $ (0.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 406,038
<SECURITIES> 0
<RECEIVABLES> 855,163
<ALLOWANCES> 366,502
<INVENTORY> 5,294,580
<CURRENT-ASSETS> 7,637,145
<PP&E> 7,318,714
<DEPRECIATION> 2,206,159
<TOTAL-ASSETS> 17,000,043
<CURRENT-LIABILITIES> 6,493,619
<BONDS> 0
0
12,851,000
<COMMON> 478,798
<OTHER-SE> (10,918,147)
<TOTAL-LIABILITY-AND-EQUITY> 17,000,043
<SALES> (2,022,830)
<TOTAL-REVENUES> 2,922,541
<CGS> 3,473,787
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,072,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 611,844
<INCOME-PRETAX> (14,152,840)
<INCOME-TAX> 31,657
<INCOME-CONTINUING> (14,184,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,184,497)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
<PAGE> 1
MEHL BIOPHILE INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION> Preferred Stock
Series C Series D Series E Series F
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
--------------------- ------------------- ------------------- --------------------
<S> <C> <C> <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
Series F issued 1,500 $1,500,000
Conversion into Series G (12,231) (12,231,000)
Conversion into common stock
Balance as at February 28, ------------------------------------------------------------------------------------------------------
1998 - $ -- -- $ -- -- $ -- 1,500 $1,500,000
</TABLE>
<TABLE>
<Caption
Series G
Shares Dollars
---------------------
<S> <C> <C>
Balance as at May 31, 1997
Conversion into Series E
Series F issued
Conversion into Series G 12,231 $12,231.000
Conversion into common stock
Balance as at February 28, ---------------------------
1998 12,231 $12,231.000
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Treasury Stock Translation
Shares Dollars Paid in Capital Deficit Shares Dollars Adjustment
--------------------- --------------- ----------- ------------------- -----------
<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)
Dividends on Preferred Shares (458,663)
Cost of Warrants Issued 394,882.00
Recontribution of Shares 4,000,000
Conversion of Series F 1,411,528 14,115 865,885.00
Implied Dividend equal to
intrinsic value of the
conversion feature 3,884,114.00 (3,884,114.00)
Net Loss for the period
Translation Adjustment (61,332.00)
Balance as at February 28, ------------------------------------------------------------------------------------------------------
1998 47,879,788 $478,796 $ 30,312,093 $ (26,982,982) 6,474,959 $959,599 $ (62,761)
</TABLE>
