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Tuesday, February 21, 2006

Epolin Inc. (EPLN) Q3 Results

Q3 SEC filing
Covers the period ending Nov 30, 2005
11.8 million shares (unchanged)

Revenues for 3 months increased 37.4% (to $966K)
Revenues for 9 months increased 31.1% (to $2.63 million)
The increase was primarily due to increased sales in Asia, especially Japan, Korea, and Taiwan. Also increased orders for the newer inks and coatings. During Q1 there were more orders from regular customers of older products. New technical service has allowed them to sell traditional dye products to customers who might not have known how to best use the products. New customers.

Traditional dyes were flat from 2002 through 2005.

3 Month Results
Gross margins: 71.6% (vs 62.5% prior year)
Net margins: 25.8% (vs 15.6% prior year)
Taxes: $145K (vs $103K)

9 Month Results
Gross margins: 63.5% (vs 64.8%) due to increased material and overhead costs
Net margins: 19.2% (vs 20.5%)
Taxes: $301K (vs $288K)

SG&A increased due to officer salary increases and employee benefit increases and higher commission expenses.

The 2.5K sq ft of office space is now being leased out to a new non-related party. The rent dropped from $36K to $18K.

Marketing costs have gone up, as expected and with clearly good results. They did pay a dividend in August 2005 of 2 cents after stopping dividends to pay for the expanded effort.

During the 9 months, the new products (security inks, new visible and infrared dyes and forward integration of the dyes into formulated pellets) had revenue increases of $496K over the prior year and are now 34% of revenues (up from 21%).

There are causes for a potential slowdown in the traditional markets: consolidation, moving offshore where eye protection is not as valued.

Greg Amato has been in the company since Nov 2004, VP of sales and marketing since Jan 2005 [and is now CEO].

Herve A. Meillat, 49, was appointed to the board of directors. He was with Bacou-Dalloz Group, manufacturing and selling personal protection equipment. Sr. VP of eye and face business unit from 2001 to 2004, president of Dalloz Safety Inc from 1996 to 2001, COO of Christian Dalloz in France from 1989 to 1995 which was founded by Dalloz in 1957 and was an injection-molded plastic parts company. By 1989, they were mostly a protective eyewear business. The 1999 report shows Meillat in charge of Sun Protection in 1999 and also in charge of improving the efficiency of manufacturing and moving the group onto the Internet, but this link connects the two together. Bacou-Dalloz Group now has a business called Lase-R Shield, Inc which sells laser eyewear.

I get the sense that this new director is good, but not a real star in the business, which makes sense, given that Epolin is a very small company.

No off-balance sheet arrangements. No material legal proceedings.

June 2005: company granted 50K stock options to each of 4 directors (200K options total). Strike price of 54 cents.

The Q3 results are audited by Weismann Associates.

Share Count
11.8 million shares on Nov 30, 2005.
522K options from the 1998 stock option plan outstanding (all far in the money)
200K options from employee agreement
258 options for future grants
12.78 million totally diluted shares.

Balance Sheet:
cash is up slightly.
AR is up quite a bit.
inventories are down slightly.
Current ratio is roughly the same.
Capex related items are up in all categories except leasehold improvements. Roughly $200K increase in PP&E (gross).
Equity increased by over $330K.

Income Statement:
(mostly covered above)

3 months:
net income / total assets would annualize to 25%, which is extremely good.
net income / equity would annualize to 33%, which is amazing
net income per totally diluted share: 1.94 cents for 3 months (annualizes to 7.79 cents)

9 months:
net income / total assets would annualize to 17%, still extremely good.
net income per totally diluted share: 3.96 cents for 9 months (annualizes to 5.28 cents)

Cash Flow Statement:
Cash flow from ops: $484K (vs $506K net income)
Capex: $153K
Free cash flow: $331K
The only other significant cash flow are dividends paid of $236K

44.5% of AR is to a single customer
There's an allowance for doubful accounts in AR, but they don't state what it is
Some cash in banks is above the FDIC guarantee rate (again, they check the bank financials)
Depreciation schedules haven't changed
$17.6K in regulations costs for 9 months
Advertising costs actually decreased to $18.0K (from $18.6K)
Inventory mix is roughly the same: 59% finished goods, 34% work in progress, 7% raw materials

Customer concentration for 9 months: 42% of revenues from 4 customers (big improvement over the prior full year 50% from 3 customers). 28% from 2 customers (big improvement over 44%)

Again, sublease rent is $18K per year (down from $36K) with non-related party starting Sept 1, 2005 ending Halloween 2007.

9 months of 2006:
US: 71% of revenues (down from 84% in 2005 which is down from 90% in 2004)
Asia: 17% of revenues (up from 13% in 2005 and 6% in 2004)
Europe: 12% of revenues (up from 5% in 2005 and 4% in 2004)
This is all going very nicely.

Accrued expenses are still almost entirely the employment agreement.
Lease obligations are about the same.

R&D expenses increased to $325K (from 302K in prior year)

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