QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS
SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
Commission File Number: 001-14005
FRISBY TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1411534
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3195 Centre Park Blvd.
Winston-Salem, NC 27107
(Address of Principal Executive Offices and Zip Code)
336-784-7754
(Registrant's telephone number, including area code)
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 ________
Number of shares outstanding of the issuer's Common Stock, par value $.001 per
share, as of July 31, 2000: 6,575,588 shares.
<PAGE>
FRISBY TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
Part I Financial Information
Item 1. Financial Statements
<S> <C>
Balance Sheets - June 30, 2000 (unaudited) and
December 31, 1999 3
Statements of Operations - Three Month and Six Month Periods Ended
June 30, 2000 (unaudited) and June 30, 1999
(unaudited) 4
Statement of Stockholders' Equity - Six Month Period
Ended June 30, 2000 (unaudited) 5
Statements of Cash Flows - Six Month Period Ended
June 30, 2000 (unaudited) and June 30, 1999 (unaudited) 6
Notes to Financial Statements - June 30, 2000 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II Other Information 12
Signatures 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Frisby Technologies, Inc.
Balance Sheets
June 30, 2000 December 31, 1999
------------- -----------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,099,698 $ 1,171,579
Accounts receivable, less allowance for doubtful accounts 1,055,757 1,849,436
Inventory 2,141,916 1,097,049
Prepaid and other current assets 476,614 559,820
------------ ------------
Total current assets 6,773,985 4,677,884
Property and equipment, net 874,799 604,921
Intangible assets, less accumulated amortization 2,727,273 2,838,603
Other assets 76,093 298,439
------------ ------------
Total assets $ 10,452,150 $ 8,419,847
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,230,675 $ 1,622,280
Note payable - short term 1,388,900 549,981
Accrued expenses and other current liabilities 381,400 239,999
License fees payable 205,135 282,565
Deferred license revenues -- 26,254
------------ ------------
Total current liabilities 3,206,110 2,721,079
Accrued license agreement costs 105,750 120,250
Other liability 1,300,000 1,300,000
------------ ------------
Total liabilities 4,611,860 4,141,329
Minority interest 138,430 --
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
6,575,588 and 5,775,413 shares issued and outstanding, respectively 6,576 5,748
Additional paid-in capital 18,760,851 14,888,201
Accumulated deficit (13,065,567) (10,615,431)
------------ ------------
Total stockholders' equity 5,701,860 4,278,518
------------ ------------
Total liabilities and stockholders' equity $ 10,452,150 $ 8,419,847
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Frisby Technologies, Inc.
Statements of Operations
(Unaudited)
<TABLE>
Three month period ended Six month period ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Product sales $ 2,719,207 $ 1,668,526 $ 5,125,187 $ 2,498,946
Research and development projects 42,967 44,875 63,967 146,250
Licenses and royalties 100,845 162,249 137,095 257,280
----------- ----------- ----------- -----------
Total revenues 2,863,019 1,875,650 5,326,249 2,902,476
Cost of sales:
Product sales 2,125,893 1,272,039 4,014,163 1,929,240
Research and development projects 18,000 86,907 18,000 168,842
Licenses and royalties 118,685 130,800 203,485 237,257
----------- ----------- ----------- -----------
Total cost of sales 2,262,578 1,489,746 4,235,648 2,335,339
----------- ----------- ----------- -----------
Gross profit 600,441 385,904 1,090,601 567,137
Selling and marketing expense 1,020,988 748,185 1,887,700 1,496,185
General and administrative expense 619,490 976,184 1,605,250 1,892,140
----------- ----------- ----------- -----------
Loss from operations (1,040,037) (1,338,465) (2,402,349) (2,821,187)
Interest (expense)/ income (43,192) 57,336 (59,688) 132,565
Minority Interest 11,901 -- (34,373) --
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,117,602) $(1,281,129) $(2,450,136) $(2,688,622)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (.17) $ (.22) $ (.40) $ (.50)
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Frisby Technologies, Inc.
Statement of Stockholders' Equity
Six Month Period Ended June 30, 2000
(Unaudited)
<TABLE>
Additional Accumu-
Common Stock Paid-In lated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at
<S> <C> <C> <C> <C> <C>
December 31, 1999 5,748,113 $ 5,748 $ 14,888,201 $(10,615,431) $ 4,278,518
Net loss -- -- -- (2,450,136) (2,450,136)
Exercise of employee
stock options 27,475 28 119,001 -- 119,029
Sale of common stock and
warrants, net of $245,551 of
related costs and expenses 800,000 800 3,753,649 -- 3,754,449
------------ ------------ ------------ ----------- ------------
Balance at
June 30, 2000 6,575,588 $ 6,576 $ 18,760,851 $(13,065,567) $ 5,701,860
============ ============ ============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Frisby Technologies, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six month period ended
June 30,
-------------------------------------------
2000 1999
---- ----
Operating activities
<S> <C> <C>
Net loss $(2,450,136) $(2,688,622)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 105,958 84,937
Non cash consulting expense -- 70,000
Amortization of intangibles 160,194 102,600
Changes in assets and liabilities, prior to effect of acquisition:
Accounts receivable 793,679 (595,159)
Inventory (1,044,867) (91,714)
Other current assets 83,206 246,565
Other non-current assets 222,346 99,522
Accounts payable (391,605) 139,961
Accrued expenses and other current liabilities 141,401 (230,892)
Licenses fees payable (91,930) 67,957
Other liabilities 112,176 (17,498)
----------- -----------
Net cash used in operating activities (2,359,578) (2,812,343)
----------- -----------
Investing activities
Purchases of property and equipment (375,836) (375,550)
Investment in joint venture (48,864) (400,000)
Purchase of business, net of cash acquired -- (103,864)
----------- -----------
Net cash used in investing activities (424,700) (879,414)
----------- -----------
Financing activities
Repayment of line of credit (549,981) --
Proceeds from exercise of stock options 119,029 --
Net proceeds from private placement 3,754,449 --
Net proceeds from advances on line of credit 1,388,900 --
----------- -----------
Net cash provided by financing activities 4,712,397 --
----------- -----------
Net increase(decrease) in cash and cash equivalents 1,928,119 (3,691,757)
Cash and cash equivalents - beginning of period 1,171,579 6,516,138
----------- -----------
Cash and cash equivalents -end of period $ 3,099,698 $ 2,824,381
=========== ===========
Supplemental Information:
Interest paid $ 59,688 --
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements
June 30, 2000 (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
shown. The results of operations for such periods are not necessarily indicative
of the results expected for the full fiscal year or for any future period. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying financial statements should be read in conjunction with
the audited financial statements of Frisby Technologies, Inc. (the "Company")
for the year ended December 31, 1999 and the notes thereto contained in the
Company's Annual Report on Form 10-KSB, filed with the Securities and Exchange
Commission on April 14, 2000, as amended.
2. Summary of Significant Accounting Policies
Net Loss Per Share
Net loss per share for the three and six month periods ended June 30, 2000
and 1999 are based on the weighted average number of common shares outstanding
during the period in accordance with the Statement of Financial Accounting
Standard ("SFAS") No. 128 "Earnings Per Share."
Shares used in the computation of net loss per share for the three and six
month periods ended June 30, 2000 were 6,051,044 and 5,902,754 respectively.
Shares used in the computation of net loss per share for the three and six month
periods ended June 30, 1999 were 5,708,113 and 5,414,363 respectively. The
number of shares used in the calculation of net loss per share on a basic and
diluted basis is the same. The calculation of diluted net loss per share
excludes shares of common stock issuable upon the exercise of stock options and
warrants, as the effect of such exercises would be antidilutive.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with the
current period presentation.
3. Shareholders' Equity
On May 31, 2000 the Company completed a private placement equity
transaction with an investor group for $4 million and is curretnly seeking
additional financing. This transaction was a unit (the "Unit") consisting of one
share of Frisby common stock on the Nasdaq SmallCap Market and one five-year
warrant to buy a share of common stock at an exercise price of $7.00 per share.
The purchase price of this offering was $5.00 per Unit.
4. Joint Venture
During the first quarter of 2000, the Company established Schoeller Frisby
Technologies, GmbH, a joint venture with Schoeller Textil AG to expand the
European distribution of the Company's products. The Company owns 51% of the
outstanding shares of the common stock of the joint venture and, accordingly,
consolidates the joint venture. The joint venture began operations in January
2000.
The Company recorded minority interest expense, which reflects the portion
of the earnings of Schoeller Frisby Technologies GmbH that are applicable to
Schoeller Textil AG's minority interest. The minority interest amount on the
balance sheet represents the share of the net assets of Schoeller Frisby
Technologies GmbH associated with the minority partner's interest in those
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations for the three and six month periods ended June 30, 2000
compared with the three and six month periods ended June 30, 1999
Revenues. The Company generates revenue from four primary sources: (i)
sales of its Thermasorb(R), ComforTemp(R)DCC(TM) insulating and cooling foams,
fabrics, leathers and gels, and Schoeller-ComforTemp(R) foam/fabric products for
use in its strategic partners' products; (ii) sales of SteeleVest and Extreme
Comfort end use products (iii) license fees and royalties from the use of
Thermasorb(R) and ComforTemp(R) trademarks by strategic partners in end-user
products, as well as other fees earned in connection with its agreements with
strategic partners; and (iv) revenue from research and development contracts
related to the United States Government and from private companies. Total
revenues for the three months ended June 30, 2000 increased by $987,369 to
$2,863,019 from $1,875,650 for the three months ended June 30, 1999. Total
revenues for the six month period ended June 30, 2000 increased by $2,423,773 to
$5,326,249 from $2,902,476 for the six month period ended June 30, 1999.
The majority of this second quarter increase was generated by increased
product sales of $1,050,681 to $2,719,207 from $1,668,526 for the three months
ended June 30, 1999. For the six month period ended June 30, 2000 product sales
increased by $2,626,241 to $5,125,187 from $2,498,946 for the six month period
ended June 30, 1999. These product sales increases reflect the inclusion of
Schoeller Frisby Technologies GmbH sales, primarily in Europe, of approximately
$1,100,000 and $2,100,000 for the three and six month periods, respectively, as
well as increased sales to existing and new customers in the United States and
Asia.
Cost of sales. The Company's cost of sales consists of: (i) direct and
indirect costs incurred in connection with product sales; (ii) royalty payments
required to be made in accordance with the technology licensing agreements;
(iii) the amortization expense associated with the transaction with the inventor
to lower the royalty rates and (iv) direct and indirect costs incurred in
connection with revenue from research and development contracts. Total cost of
sales for the three months ended June 30, 2000 increased by $772,832 to
$2,262,578 from $1,489,746 for the three months ended June 30, 1999. Total costs
for the six month period ended June 30, 2000 increased by $1,900,309 to
$4,235,648 from $2,335,339 for the six month period ended June 30, 1999.
The majority of this second quarter increase was generated by increased cost of
product sales of $853,854 to $2,125,893 from $1,272,039 for the three months
ended June 30, 1999. The cost of product sales for the six month period ended
June 30, 2000 increased by $2,084,923 to $4,014,163 from $1,929,240 for the six
month period ended June 30, 1999. These increases correspond to the product
sales increase above.
Selling and marketing expense. Selling and marketing expenses for the three
months ended June 30, 2000 increased by $272,803 to $1,020,988 from $748,185 for
the three months ended June 30, 1999. For the six month period ended June 30,
2000 selling and marketing expenses increased by $391,515 to $1,887,700 from
$1,496,185 for the six month period ended June 30, 1999. This increase results
from the Company's increased marketing and advertising activity, both in the
United States and Europe, in order to build brand name recognition of its
ComforTemp(R) products and trademarks. These activities included the advertising
placements and tradeshow participation. The expense of the European activities
were borne by Schoeller Frisby Technologies GmbH.
General and administrative expense. General and administrative expenses for
the three months ended June 30, 2000 decreased by $356,694 to $619,490 from
$976,184 for the three months ended June 30, 1999. Additionally, for the six
month period ended June 30, 2000 these expenses decreased by $286,890 to
$1,605,250 compared to $1,892,140 for the six month period ended June 30, 1999.
These decreases primarily reflect management's cost-cutting initiatives in the
non-sales related functions.
Minority interest. Minority interest represents Schoeller Textil AG's 49%
interest in the net loss of Schoeller Frisby Technologies GmbH.
Interest expense/income. Interest expense for the three and six months
ended June 30, 2000 arises from the advances made against the line of credit in
the first and second quarter of 2000. The interest income in the prior year
reflects the higher cash and investment balances, due to receipts of proceeds
from the Initial Public Offering ("IPO") in April 1998.
Net loss. As a result of the foregoing, the net loss for the three months
ended June 30, 2000 decreased to $1,117,602 from $1,281,129 for the three months
ended June 30, 1999. Additionally, the net loss for the six month period ended
June 30, 2000 decreased by $238,486 to $2,450,136 from $2,688,622 for the six
month period ended June 30, 1999.
Liquidity and Capital Resources
From its inception through June 30, 2000, the Company has incurred
cumulative losses of approximately $13,100,000. The Company has financed its
operations to date through research and development contracts relating to United
States government programs, bank borrowings and issuance of common stock and
convertible preferred stock.
At June 30, 2000, the Company had working capital of $3,568,000 including
cash of $3,100,000 accounts receivable of $1,056,000 and inventory of
$2,142,000, offset by accounts payable of $1,231,000, note payable short-term of
$1,389,000 and accrued expenses and other current liabilities of $381,000.
Cash used by operating activities was $2,360,000 and $2,812,000 for the six
months ended June 30, 2000 and 1999, respectively. The principal factor
contributing to the cash used in operating activities for the six months ended
June 30, 2000 and 1999 was the net loss for each of the respective periods. Cash
used by investing activities was $424,700 and $879,000 for the six months ended
June 30, 2000 and 1999, respectively. The principal investing activity for 2000
was the purchase of office and testing equipment for the new headquarters. The
principal investing activities for 1999 were the purchase of fixed assets and an
installment payment on the purchase of intellectual property of $400,000. Cash
provided by financing activities was $4,712,000 for the six months ended June
30, 2000. The principal financing activities for the six months ended June 30,
2000 were the net advance on the line of credit of $839,000 and the private
placement of $3,754,000.
The Company has incurred cumulative losses since its inception and,
therefore, has not been subject to significant federal income taxes. Through
June 30, 2000, the Company has generated net operating loss carryforwards in
excess of $13,000,000 that may be available to reduce future taxable income and
future tax liabilities. These carryforwards expire in years through 2019. The
Tax Reform Act of 1986 provides for an annual limitation on the use of net
operating loss carryforwards (following certain ownership changes) that could
significantly limit the Company's ability to utilize these carryforwards. As a
result of the IPO, the Company's ability to utilize the aforementioned
carryforwards as of the IPO date will be limited on an annual basis.
Additionally, because the United States tax laws limit the time during which
these carryforwards may be applied against future taxes, the Company may not be
able to take full advantage of these attributes for federal tax purposes.
On May 31, 2000 the Company completed a private placement equity
transaction with an investor group for $4 million and is currently seeking
additional financing.
The Company has a $2,000,000 Line of Credit with a bank that expires
September 30, 2000. This line is principally maintained for working capital
purposes. The Line is a committed facility, which is secured by substantially
all of the Company's assets, and bears interest at the bank's prime rate plus
200 basis points. At June 30, 2000, the entire credit facility was either
borrowed against or used as collateral for outstanding Letters of Credit with
suppliers. On August 14, 2000, the Company received a letter from the bank
indicating that it will extend the existing line of credit facility to December
31, 2000 on essentially the same terms and conditions as described in the
Company's most recent 10-KSB filing. The Company expects to be able to obtain a
credit facility of this type in fiscal 2001, although no assurance can be given
that the Company will be able to obtain such facility.
The Company established Schoeller Frisby Technologies GmbH, a joint venture
with Schoeller Textil AG to expand the European distribution of the Company's
products. The Company believes that the initial equity and debt contribution to
this joint venture will not exceed $1 million. As of August 14, 2000, the
Company has funded approximately $200,000 of initial capital contributions and
organizational costs.
Based on the Company's current operating plan, the Company believes that
the cash available as a result of the committed portion of the Line of Credit
and other equity financing activity mentioned above will be sufficient to
satisfy its operational and capital requirements through December 2000. Such
belief is based upon certain assumptions, and there can be no assurance that
such assumptions are correct. In the event that the Company's plans change, or
its available cash, cash flow from operations and available line of credit are
insufficient to fund operations due to unanticipated delays, problems, expenses
or otherwise, the Company would be required to seek additional financing sooner
than anticipated. Further, depending on the Company's progress in marketing its
product line, gaining acceptance of its thermal management technology and its
other products and services among the business community or the identification
of strategic acquisition or licensing opportunities, the Company may determine
that it is advisable to raise additional capital sooner than was anticipated.
Inflation
The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.
Foreign Currency
The functional currency of the Schoeller Frisby Technologies GmbH is the
Swiss Franc.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-QSB,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's Prospectus filed April 1, 1998, or in
the Company's other Securities and Exchange Commission filings, could affect the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company in this Quarterly Report on Form 10-QSB.
Those statements are subject to numerous risks and uncertainties that could
cause actual results, performance and achievements to differ materially from
those described or implied in the forward-looking statements, and reported
results should not be considered an indication of future performance. Those
potential risks and uncertainties include without limitation the uncertainty of
the economic environment for the remainder of this year, the need for further
development of certain of Frisby Technologies' products and markets, the
development of alternative technologies or legal challenges to the Company's
existing technologies by third parties and the uncertainty of market acceptance
and demand for the company's products in the future.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
The Company is presently involved in a legal dispute pertaining to its
exclusive worldwide license rights for attaching its foam to fabric under
agreements with Outlast Technologies. Frisby filed an arbitration claim on April
25, 2000. The Company believes that the matter will be resolved in arbitration
in accordance with the terms of the license agreement. The Company remains fully
confident its position will prevail and no adverse reaction from the arbitration
will effect the Company. Attendant to this arbitration is a subsequent patent
infringement complaint filed in U.S. Federal Court by Outlast that likewise the
Company believes has no merit in fact and will not materially impact the
Company's near or mid term performance.
Item 2. Changes in Securities and Use of Proceeds
On May 31, 2000 the Company completed a private placement equity
transaction with an investor group for $4 million and is currently seeking
additional financing. This transaction was a unit (the "Unit") consisting of one
share of Frisby common stock on the Nasdaq SmallCap Market and one five-year
warrant to buy a share of common stock at an exercise price of $7.00 per share.
The purchase price of this offering was $5.00 per Unit.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See the Form 8-K, dated April 25, 2000, regarding the establishment of Schoeller
Frisby Technologies GmbH.
See the Form 8-K, dated June 15, 2000, regarding the $4 million private
placement equity transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on April 25, 2000
regarding the establishment of Schoeller Frisby Technologies
GmbH.
The Company filed a report on Form 8-K on June 15, 2000 regarding
the $4 million private placement equity transaction.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2000
FRISBY TECHNOLOGIES, INC.
By: /s/ Gregory S. Frisby
----------------------
Gregory S. Frisby
Chief Executive Officer
By: /s/ Stephen P. Villa
--------------------
Stephen P. Villa
Chief Financial Officer
