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 March 31, 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 April 30, 2000: 5,775,413 shares.
<PAGE>
FRISBY TECHNOLOGIES, INC.
INDEX
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PAGE NO.
Part I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2000 (unaudited) and
December 31, 1999 3
Consolidated Statements of Operations - Three Month Period Ended
March 31, 2000 (unaudited) and March 31, 1999
(unaudited) 4
Consolidated Statement of Stockholders' Equity - Three Month Period
Ended March 31, 2000 (unaudited) 5
Consolidated Statements of Cash Flows - Three Month Period Ended
March 31, 2000 (unaudited) and March 31, 1999 (unaudited) 6
Notes to Consolidated Financial Statements - March 31, 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
Frisby Technologies, Inc.
Consolidated Balance Sheets
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March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $225,113 $1,171,579
Accounts receivable, less allowance for doubtful accounts 2,540,584 1,849,436
Inventory 1,799,064 1,097,049
Prepaid and other current assets 600,992 559,820
--------------------- -------------------
Total current assets 5,165,753 4,677,884
Property and equipment, net 950,186 604,921
Intangible assets, less accumulated amortization 2,760,915 2,838,603
Other assets 76,404 298,439
--------------------- -------------------
Total assets $8,953,258 $8,419,847
===================== ===================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,715,311 $1,622,280
Note payable - short term 942,000 549,981
Accrued expenses and other current liabilities 546,043 239,999
License fees payable 168,523 282,565
Deferred license revenue 0 26,254
--------------------- -------------------
Total current liabilities 4,371,877 2,721,079
Accrued license agreement costs 113,000 120,250
Other liability 1,300,000 1,300,000
--------------------- -------------------
Total liabilities 5,784,877 4,141,329
Minority interest 104,057
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
5,775,413 and 5,748,113shares issued and outstanding, respectively 5,775 5,748
Additional paid-in capital 15,006,511 14,888,201
Accumulated deficit (11,947,962) (10,615,431)
--------------------- -------------------
Total stockholders' equity 3,064,324 4,278,518
--------------------- -------------------
Total liabilities and stockholders' equity $ 8,953,258 $ 8,419,847
===================== ===================
See accompanying notes.
</TABLE>
<PAGE>
Frisby Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
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Three month period ended
March 31,
-----------------------------------------------
2000 1999
------------------- --------------------
Revenues:
Product sales $ 2,405,980 $ 830,420
Research and development projects 21,000 101,375
Licenses and royalties 36,250 95,031
------------------- --------------------
Total revenues 2,463,230 1,026,826
------------------- --------------------
Cost of sales:
Product sales 1,817,028 657,200
Research and development projects --- 81,935
Licenses and royalties 156,042 106,457
------------------- --------------------
Total cost of sales 1,973,070 845,592
------------------- --------------------
Gross profit 490,160 181,234
Selling and marketing expense 866,712 748,000
General and administrative expense 985,760 915,956
------------------- --------------------
Loss from operations (1,362,312) (1,482,722)
Interest (expense)/income (16,496) 75,229
Minority interest 46,274 ---
Provision for income taxes --- ---
------------------- --------------------
Net loss $ (1,332,534) $ (1,407,493)
=================== ====================
Net loss per common share - basic and diluted $ (.23) (.27)
=================== ====================
</TABLE>
See accompanying notes.
<PAGE>
Frisby Technologies, Inc.
Consolidated Statement of Stockholder's Equity
(Unaudited)
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Additional Accumu-
Common Stock Paid-In lated
Shares Amount Capital Deficit Total
Balance at
December 31, 1999 5,748,113 $ 5,748 $14,888,201 $ (10,615,431) $4,278,518
Net Loss --- --- --- (1,332,531) (1,332,531)
Exercise of
Employee Stock
Options 27,300 27 118,310 --- 118,337
Balance at ________ _____ __________ ____________ _________
March 31, 2000 5,775,413 $5,775 $15,006,511 $(11,947,962) 3,064,324
========= ====== =========== ============= ==========
</TABLE>
See accompanying notes.
<PAGE>
13
Frisby Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three month period ended
March 31,
-------------------------------------------
2000 1999
---- ----
Operating activities
Net loss $ (1,332,534) $ (1,407,493)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense 41,289 37,471
Non cash consulting expense -- 70,000
Amortization of intangibles 77,688 51,300
Changes in assets and liabilities
Accounts receivable (691,148) 37,448
Inventory (702,015) 38,797
Other current assets (21,172) 156,463
Other non-current assets 222,035 99,522
Accounts payable 1,093,031 (238,243)
Accrued expenses and other current liabilities 306,044 (243,759)
Licenses fees payable (114,042) (43,650)
Deferred license revenues (26,254) --
Other liabilities 96,807 3,751
------------------- -------------------
Net cash used in operating activities (1,050,271) (1,438,393)
------------------- -------------------
Investing activities
Purchases of property and equipment (386,551) (265,276)
Purchase of intangible assets -- (400,000)
Purchase of business, net of cash acquired -- (103,852)
------------------- -------------------
Net cash used in investing activities (386,551) (769,128)
------------------- -------------------
Financing activities
Proceeds from advances on line of credit 942,000 --
Proceeds from exercise of stock options 118,337 --
Repayment on line of credit (549,981) --
Payment of financing costs (20,000) --
------------------- -------------------
Net cash provided by financing activities 490,356 --
------------------- -------------------
Net (decrease) in cash and cash equivalents (946,466) (2,207,521)
Cash and cash equivalents - beginning of period 1,171,579 6,516,138
------------------- -------------------
Cash and cash equivalents -end of period $ 225,113 $ 4,308,617
=================== ===================
Supplemental Information:
Interest Paid $ 12,227 --
</TABLE>
See accompanying notes
<PAGE>
Frisby Technologies, Inc.
Notes to Consolidated Financial Statements
March 31, 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. and its
subsidiaries (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-month periods ended March 31, 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 month
periods ended March 31, 2000 and 1999 were 5,752,663 and 5,120,613 respectively,
representing the weighted-average common shares outstanding for the period. The
number of shares used in the calculation of net loss per share on a basic and
diluted basis is the same.
3. Stockholder's Equity
On April 14, 2000 the Company received a firm commitment letter from an
investor group for $4 million of a potential aggregate equity transaction in the
Company of up to $7.5 million. The proposed transaction includes both the
Company's common stock and warrants and has been approved by the Company's Board
of Directors. The Company anticipates that the first closing on this transaction
will occur on or before May 31, 2000.
4. Joint Venture
During the first quarter 2000, the Company signed a definitive agreement
with Schoeller Textil AG for the establishment of Schoeller Frisby Technologies
GmbH, a joint venture 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 initial equity and debt
contribution to this joint venture will not exceed $1 million.
The Company recorded minority interest expense, which reflects the portion of
the earnings of Schoeller Frisby Technologies GmbH which 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 month period ended March 31, 2000 compared
with the three month period ended March 31, 1999
Revenues. The Company generates revenue from four primary sources: (i)
sales of its Thermasorb(R) and ComforTemp(R)DCC(TM) 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 March 31, 2000 increased by $1,436,404 to $2,463,230 from
$1,026,826 for the three months ended March 31, 1999.
The majority of this increase was generated by increased product sales of
$1,575,560 to $2,405,980 from $830,420 for the three months ended March 31,
1999. This product sales increase reflects the inclusion of Schoeller Frisby
Technologies GmbH for approximately $1,000,000, as well as increased sales to
existing and new customers.
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 March 31, 2000 increased by $1,127,478 to
$1,973,070 from $845,592 for the three months ended March 31, 1999.
The majority of this increase was generated by increased product sales of
$1,159,828 to $1,817,028 from $657,200 for the three months ended March 31,
1999. This increase corresponds to the product sales increase above.
Additionally, cost of sales related to license fees and royalties for the three
months ended March 31, 2000 increased by $49,585 to $156,042 from $106,457 for
the three months ended March 31, 1999 due to higher guaranteed annual minimum
royalty payments to licensor in 2000.
Selling and marketing expense. Selling and marketing expenses for the three
months ended March 31, 2000 increased by $118,712 to $866,712 from $748,000 for
the three months ended March 31, 1999. This increase results from the Company's
increased marketing and advertising activity in order to build brand name
recognition of its ComforTemp(R) products and trademarks. These activities
included the advertising placements and tradeshow participation. Additionally,
selling expense related to Schoeller Frisby Technologies GmbH contributed to
this increase.
General and administrative expense. General and administrative expenses for
the three months ended March 31, 2000 increased by $69,204 to $985,160 from
$915,956 for the three months ended March 31, 1999. The increase primarily
reflects the inclusion of Schoeller Frisby Technologies GmbH.
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 months ended March
31, 2000 arises from the advances made against the line of credit in the first
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 months ended
March 31, 2000 decreased to $1,332,534 from $1,407,493 for the three months
ended March 31, 1999.
Liquidity and Capital Resources
From its inception through March 31, 2000, the Company has incurred
cumulative losses of approximately $11,947,962. 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 March 31, 2000, the Company had working capital of $794,115 including
cash of $225,113, accounts receivable of $2,540,584 and inventory of $1,799,064,
offset by accounts payable of $2,715,311, note payable short-term of $942,000
and accrued expenses and other current liabilities of $546,043.
Cash used by operating activities was $1,050,000 and $1,438,000 for the
three months ended March 31, 2000 and 1999, respectively. The principal factor
contributing to the cash used in operating activities for the three months ended
March 31, 2000 and 1999 was the net loss for each of the respective periods.
Cash used by investing activities was $387,000 and $769,000 for the three ended
March 31, 2000 and 1999, respectively. The principal investing activity for 2000
was the purchase of property and equipment for the new headquarters. The
principal investing activities for 1999 were the purchase of fixed assets of
$265,000 and an installment payment on the purchase of intellectual property of
$400,000. Cash provided by financing activities was $490,000 for the three
months ended March 31, 2000. The principal financing activity for the three
months ended March 31, 2000 was the net advance on the Line of Credit of
$392,000 .
The Company has incurred cumulative losses since its inception and,
therefore, has not been subject to significant federal income taxes. Through
March 31, 2000, the Company has generated net operating loss carryforwards in
excess of $11,900,000 that may be available to reduce future available 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.
As of March 31, 2000, the Company has a $2,000,000 Line of Credit with a
bank. This line is maintained for working capital purposes at least until an
equity or debt investment is secured. 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 March 31, 2000, the balance on the
Line of Credit was $942,000.
On April 14, 2000, the Company received a firm commitment letter from an
investor group for $4 million of a potential aggregate equity transaction in the
Company of up to $7.5 million. The proposed transaction includes both the
Company's common stock and warrants and has been approved by the Company's Board
of Directors. The Company anticipates that this transaction will close on or
before May 31, 2000.
The Company has signed a definitive agreement with Schoeller Textil AG for
the establishment of Schoeller Frisby Technologies GmbH, a joint venture to
expand the European distribution of the Company's products. The initial equity
and debt contribution to this joint venture will not exceed $1 million. The
joint venture began operations in January 2000.
Based on the Company's current operating plan, the Company believes that
the cash available as a result of the committed portion of the 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.
Year 2000
During 1999, Frisby successfully completed its comprehensive program to
address the Year 2000 issue. As expected, the Company did not experience any
material adverse effects on its business, products, and results of operations or
financial condition as a result of the Year 2000 issue. Frisby will continue to
monitor its own operations, and the operations of third parties that are
critical to Frisby's operations, for potential Year 2000-related problems.
However, the Company does not anticipate that it will discover any future Year
2000 issues that will have a material effect on its business products, results
of operations or financial condition.
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 Frisby Technologies' products and markets, the
development of alternative technologies by third parties, Year 2000 issues
affecting the Company and its customers and suppliers, and the uncertainty of
market acceptance and demand for the Company's products in the future.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
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.
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.
<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: May 15, 2000
FRISBY TECHNOLOGIES, INC.
By:/s/ Gregory S. Frisby
------------------------
Gregory S. Frisby
President and Chief Executive Officer
By:/s/ Stephen P. Villa
-----------------------
Stephen P. Villa
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001051904
<NAME> Frisby Technologies, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 225,113
<SECURITIES> 0
<RECEIVABLES> 2,600,584
<ALLOWANCES> 60,000
<INVENTORY> 1,799,064
<CURRENT-ASSETS> 5,165,753
<PP&E> 1,473,661
<DEPRECIATION> 523,475
<TOTAL-ASSETS> 8,953,258
<CURRENT-LIABILITIES> 4,371,877
<BONDS> 0
0
0
<COMMON> 5,775
<OTHER-SE> 3,058,549
<TOTAL-LIABILITY-AND-EQUITY> 8,953,258
<SALES> 2,405,980
<TOTAL-REVENUES> 2,463,230
<CGS> 1,817,028
<TOTAL-COSTS> 1,973,070
<OTHER-EXPENSES> 1,852,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,496
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</TABLE>
