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Saturday, July 22, 2006

Epolin (EPLN) Q1 results

I like this company. It's simple. Their communications with shareholders are direct and clear. They've demonstrated a responsiveness to the owners/shareholders. Margins are excellent. Returns are excellent. They recognized a clear need to improve marketing, they made the needed changes, and the results are great. While the company isn't particularly cheap, I still own the stock because I believe they will perform well far into the future.

10-Q for the quarter ending May 31, 2006.
12 million shares on July 1, 2006. 421K options outstanding (only 160K exercisable), weighted ave strike of 42 cents. 418K options available for future grants.
Assume 12.7 million shares totally diluted.

31K options exercised. They repurchased 5K shares at 91 cents (too high, in my opinion).

Don't really need a lot of notes here. The 10-Q is straight forward and easy to scan.

When I looked at the 10-K here, I covered Q4 results. Q4 revenue was $1.07 million. Q1 was $1.09, not much more. The newer areas were strong. Overseas sales were stagnant but US sales increased $337K over Q1 of the prior year. So overseas sales dropped from last year since total revenues increased slightly less than that.

In Q4, SG&A was 45% of sales. In Q1 it is down to 27.1% (prior year Q1 was 31.1%). Absolute dollar SG&A increased due to officer salaries, benefits, commissions (but commission has been restructured and reduced somewhat).

Gross margin is up due to higher revenues despite a 1% increase in material costs. Operating margin is 32.8% and net margin is 20.6%. Excellent.

Taxes are way up ($143K vs $75K) due to sales and expenses.

Cash flow from operations are expected to fund the business going forward for the next year+.

The accountants did a review (which is less stringent than an audit, but still useful). No qualifications.

Balance Sheet:
Cash is up to $1.7 million.
AR increased to $631K from $450K.
Inventories are down slightly.
Gross building and improvements increased by $62K over last year's Q1. Gross lab equipment increased by $50K. Gross office equipment increased by $15K. PP&E is depreciated by about half.
Accrued expenses are up to $322K from $74K. Tax liability increased as well.
Current ratio is insanely high: more than 6.
Net cash is $960K (7.6 cents per totally diluted share).

Income Statement:
(mostly covered above)
My estimate of net income is $264K (I back out stock based compensation expense because I account for it via totally diluted share count), or 2.08 cents per totally diluted share.

Cash flows:
Operating cash flow is more than double net income due to taxes still payable, stock based compensation expense, AR decrease from Dec 31, etc. partly offset by inventory increase and deferred compensation agreement obligation (expense jumped from $52K to $272K).

Capex was $23K (depreciation was $14K).

$239K dividends paid. The stock options and repurchase I already mentioned above (very small impact).

Regulatory compliance costs were $3.8K (vs 7.2K prior year's Q1).
Advertising costs were $4.5K (vs $5.7K prior year's Q1).

No big commitments in future years.

Customer concentration: 41% of sales go to three customers. 30% go to two customers. This is down from 44% and 39%.

R&D went up slightly.

The new CEO gets 10% of any increase in net income for the year ending Feb 28, 2006. The board will determine future bonuses.

US revenue: $816K (vs $479K last year)
Asia revenue: $216K (vs $235K last year)
Europe revenue: $57K (vs $81K last year)

I'd say the stock is clearly worth more than $1.05. I'm thinking revenues will slowly increase faster than inflation and my estimate of the value is along the lines of $1.30 or so.

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