UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter ended June 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
___________ to ____________
Commission File Number 0-23478
____________________________________
TurboChef Technologies, Inc.
(Exact name of Registrant as specified in its Charter)
DELAWARE 48-1100390
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
10500 Metric Drive, Suite 128 75243
Dallas, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 379-6000
_________________________
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 [ ]
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practicable date.
Number of Shares Outstanding
Title of Each Class at August 10, 2001
------------------- ------------------
Common Stock, $0.01 Par Value 16,368,606
TURBOCHEF TECHNOLOGIES, INC.
TABLE OF CONTENTS
Form 10-Q Item Page
-------------- ----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2001 (unaudited) and
December 31, 2000............................................. 3
Unaudited Interim Condensed Statements of Operations for the
three and six months ended June 30, 2001 and 2000............. 4
Unaudited Interim Condensed Statements of Cash Flows for the
three and six months ended June 30, 2001 and 2000............. 5
Notes to the Interim Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 14
Part II. Other Information
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 5. Other Information............................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures.................................................... 17
2
TurboChef Technologies, Inc
Condensed Balance Sheets
(Amounts in Thousands, Except Share Data)
June 30, 2001 June 30, December 31,
Proforma 2001 2000
-------- ---- ----
(Unaudited (Unaudited)
Assets Note 3)
------
Current assets:
Cash and cash equivalents $ 1,602 $ 1,602 $ 1,417
Accounts receivable net of allowance for doubtful accounts of $70
and $86 at June 30, 2001 and December 31, 2000, respectively 1,621 1,621 2,154
Inventory 1,110 1,110 1,023
Prepaid expenses 26 26 306
-------- -------- --------
Total current assets 4,359 4,359 4,900
-------- -------- --------
Property and equipment, net 482 482 602
Other assets 177 177 220
-------- -------- --------
Total assets $ 5,018 $ 5,018 $ 5,722
======== ======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,631 $ 1,631 $ 2,811
Accrued expenses 379 379 352
Accrued upgrade and warranty costs 930 930 891
-------- -------- --------
Total current liabilities 2,940 2,940 4,054
Convertible debt - 620 -
-------- -------- --------
Total liabilities 2,940 3,560 4,054
Commitments and contingencies
Stockholders' equity:
Preferred stock, $100 par value. Authorized 5,000,000 shares.
51,000 and 21,000 issued at June 30, 2001 and
December 31, 2000, respectively 4,530 3,720 2,100
Common stock, $.01 par value. Authorized 50,000,000 shares.
Issued 16,353,423 shares. 164 164 157
Additional paid-in capital 37,321 37,321 35,878
Accumulated deficit (37,178) (36,988) (33,742)
Notes receivable for stock issuances (2,308) (2,308) (2,274)
Treasury stock - at cost 32,130 shares (451) (451) (451)
-------- -------- --------
Total stockholders' equity 2,078 1,458 1,668
-------- -------- --------
Total liabilities and stockholders' equity $ 5,018 $ 5,018 $ 5,722
======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Operations
(Amounts in Thousands, Except Share Data)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Product sales $ 778 $ 142 $ 1,259 $ 524
Research and development fees - 350 - 2,200
Royalties - 10 - 15
----------- ----------- ----------- -----------
Total revenues 778 502 1,259 2,739
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 372 446 669 1,016
Research and development expenses 281 1,159 689 2,623
Selling, general and administrative expenses 1,412 2,226 2,841 4,385
----------- ----------- ----------- -----------
Total costs and expenses 2,065 3,831 4,199 8,024
----------- ----------- ----------- -----------
Operating loss (1,287) (3,329) (2,940) (5,285)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 21 20 62 49
Interest expense - (180) - (312)
Dividend income - 52 - 104
Amortization of purchased put option premium - (162) - (324)
Other income (expense) 39 (23) 12 7
----------- ----------- ----------- -----------
60 (293) 74 (476)
----------- ----------- ----------- -----------
Net loss $ (1,227) $ (3,622) $ (2,866) $ (5,761)
=========== =========== =========== ===========
Preferred stock dividends (36) - (43) -
Beneficial conversion of Series B preferred stock (380) - (380) -
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (1,643) $ (3,622) $ (3,289) $ (5,761)
=========== =========== =========== ===========
Loss per common share - basic and diluted $(0.10) $(0.23) $(0.21) $(0.37)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic and diluted 15,858,918 15,728,423 15,794,031 15,474,613
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
TurboChef Technologies, Inc.
Unaudited Interim Condensed Statements of Cash Flows
(Amounts in Thousands)
Six Months Ended June 30,
---------------------------------
2001 2000
------- -------
Cash flows from operating activities:
Net loss $(2,866) $(5,761)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 170 158
Amortization of premium on purchased put option - 324
Non-cash interest on notes receivable from employees and directors (34) (4)
Non-cash compensation expense (111) 328
Changes in operating assets and liabilities:
Accounts receivable 533 367
Inventories (87) (45)
Prepaid expenses and other assets 309 209
Accounts payable (1,180) (459)
Accrued expenses (13) (406)
Accrued interest - 312
-------------- --------------
Net cash used in operating activities (3,279) (4,977)
-------------- --------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (36) (188)
-------------- --------------
Net cash used in investing activities (36) (188)
-------------- --------------
Cash flows from financing activities:
Borrowings under long-term debt - 3,733
Proceeds for the sale of preferred stock 2,000 -
Issuance of convertible note 1,000 -
Proceeds for the sale of common stock 500 -
Notes receivable from employees - (1,526)
Proceeds from the exercise of stock options - 1,553
-------------- --------------
Net cash provided by financing activities 3,500 3,760
-------------- --------------
Net increase (decrease) in cash and cash equivalents 185 (1,405)
Cash and cash equivalents at beginning of period 1,417 1,928
-------------- --------------
Cash and cash equivalents at end of period $ 1,602 $ 523
============== ==============
The accompanying notes are an integral part of these financial statements.
5
TURBOCHEF TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
June 30, 2001
1) Basis of Presentation
---------------------
TurboChef Technologies, Inc. ("the Company") was incorporated on April 3,
1991. The Company, a technology company, is primarily engaged in design,
manufacturing and licensing its proprietary rapid cook technologies. The
TurboChef rapid cook system employs proprietary hardware and software
technologies to "cook-to-order" a variety of food products at faster speeds and
to quality standards comparable, and in many instances superior to, other
conventional commercial and residential ovens currently available. The Company's
technologies are a combination of high speed forced air that cooks food from the
outside in, by browning the food and sealing in its natural juices, and with
microwave energy that cooks the food from the inside out. Management believes
that the Company operates in one primary business segment.
The financial statements of the Company for the three and six months ended
June 30, 2001 and 2000, included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and have not been
audited by independent public accountants. In the opinion of management, all
adjustments (which consisted only of normal recurring accruals) necessary to
present fairly the financial position and results of operations and cash flows
for all periods presented have been made. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted from these statements unless
significant changes have taken place since the end of the most recent fiscal
year. The December 31, 2000 balance sheet was derived from audited financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ending December 31, 2000, but does not include all disclosures required
by GAAP. It is suggested that these financial statements be read in conjunction
with the financial statements and notes included in the aforementioned Form 10-
K. The results of operations for the three and six months ended June 30, 2001
are not necessarily indicative of the results to be expected for the full year.
Certain amounts in prior periods financial statements have been
reclassified to conform to current year presentation.
Basic net loss per common share is based on 15,858,918 and 15,728,423
weighted average shares outstanding for the three months ended June 30, 2001 and
2000, respectively. For the six months ended June 30, 2001 and 2000 basic net
loss per common share is based on 15,794,031 and 15,474,613 weighted average
shares outstanding, respectively. For the three and six months ended June 30,
2001 and 2000, the Company did not report any incremental shares of potentially
dilutive stock, as their effect was anti-dilutive.
2) Liquidity
---------
Although the Company has historically incurred significant losses, the
Company expects to generate future cash flows from the direct sale of its
commercial cooking systems, royalties from the sale of its commercial cooking
systems, license fees for the non-exclusive licensing of its technologies,
6
research and development fees for product development and, as necessary and
available, raising capital through future equity or debt financing. In March
2001, the Company raised $2,000,000 through the sale of its 8% convertible
preferred stock and in April 2001 raised an additional $1,000,000 through the
issuance of a convertible note payable. An additional $500,000 was raised in
June 2001 through the sale of its common stock. (See Note 3)
In the first quarter of 2001, both the Company and Maytag filed claims
against each other under the arbitration provision of certain agreements between
the Company and Maytag. (See Part II, Item 1. "Legal Proceeding"). These events
make it unlikely that Maytag will fund additional research and development for
residential products incorporating the Company's rapid cook technologies.
The Company anticipates that it will need to obtain additional sources of
funding in order to continue its ongoing operations as currently conducted.
Management believes that through sales of its commercial cooking systems,
minimum royalties, technology transfer fees and the possibility of raising
capital through debt and equity financing, the Company will have adequate
funding for its continued operations and research and development efforts
throughout 2001. However, no assurances can be made that the Company will
actually obtain the necessary funding to finance its operations. A failure to
obtain additional funding would have significant adverse effects on the Company.
All of the above factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3) Long-Term Contracts and Equity Transactions
-------------------------------------------
Since entering into a Strategic Alliance and related agreements with Maytag
Corporation ("Maytag") in September 1997, the Company has received approximately
$10.5 million in connection with product development and technology transfer
fees (approximately 27%, 50% and 57% of total revenues for 2000, 1999 and 1998,
respectively). During the first quarter of 2001, Maytag took action, which the
Company believes resulted in termination of the Commercial Cooking Appliance
Project Agreement ("CCAP") and associated License Agreement between the Company
and Maytag. As a result of these actions, both Maytag and the Company have filed
claims against each other under the arbitration provision of these agreements.
One of the Company's claims is that, as a result of its termination of the
agreement, Maytag is required to pay to the Company the remaining balance of
minimum royalties that are due under the License Agreement of $5.25 million.
Although the Company believes that it will prevail on its claims, the outcome of
the arbitration proceeding is uncertain. The termination of the Maytag
agreements has had a material adverse affect on the Company's financial position
and results of operations. In addition, Maytag's actions will delay the
Company's ability to realize economic value from its rapid cook technologies.
The Company has now established a manufacturing venture with Shandong Xiaoya
Group in China to replace Maytag as its manufacturer. The Shandong Xiaoya Group
is expected to be producing the "C" model commercial cooking system in the third
quarter of 2001. In addition, on May 10, 2001 the Company signed an agreement
with Maytag Corporation whereby all rights Maytag had to sell commercial
products in North America based on TurboChef's rapid cook technologies were
returned to the Company. Both parties have agreed to an orderly transition where
TurboChef will have access to Maytag's nationwide sales and service networks.
The Company intends in the future to seek non-exclusive distribution
arrangements with multiple parties in an effort to lessen its reliance on any
one single market partner.
7
In March 2001, the Company raised $2,000,000 through the sale of its 8%
Series B convertible preferred stock. The dividend on the preferred stock is
payable, at the Company's option, in either cash or shares of its common stock.
The preferred stock is convertible to common stock at $1.00 per common share
(representing the closing sale price of the common stock on the date of
funding). In connection with this transaction, the Company also issued to the
investor warrants to purchase an additional 1,000,000 shares of common stock at
$1.20 per share. The warrants were valued at $380,000 and are exercisable in
three equal annual installments, commencing one year from the date of issuance
and expire in 2011.
In April 2001, the Company raised $1,000,000 through the issuance of an 8%
Non-Negotiable Promissory Note ("Note"), convertible into common stock due April
20, 2003. A discount on the note of $190,000 was recorded to reflect the
beneficial conversion feature within the note. Upon the approval of the
stockholders of the Company, the entire outstanding principal amount of the Note
will automatically be converted into $1.00 par value convertible preferred stock
(the "Convertible Preferred Stock") of the Company without any further action
necessary on the part of the Company or the holder of the Note. In addition,
the Company issued warrants to the holder of the note to purchase that number of
shares of its common stock equal to fifty percent of the number of shares of its
common stock that will be issued upon conversion of the Convertible Preferred
Stock. These warrants are valued at $190,000. The warrants have a term of 10
years at an exercise price equal to 120% of the closing sale price of the common
stock on the date of the Note. Each share of Convertible Preferred Stock issued
will (i) have a liquidation value of $100 per share, (ii) be entitled to a
dividend of $8.00 per share, payable semi-annually in cash or in shares of the
common stock at the then fair market value (iii) be convertible into shares of
common stock at a conversion price equal to $1.26, which was equal to the
closing sale price of the Common Stock on the date of the Note, and (iv) contain
anti-dilution provisions identical to those provided for in the Company's Series
B Convertible Preferred Stock. The Company's stockholders at its annual
stockholders meeting on August 7, 2001 approved the conversion of the Note into
convertible preferred stock. A proforma balance sheet is added to reflect the
conversion of the $620,000 of debt as if it occurred at June 30, 2001. The
unamortized discount of $190,000 is charged to interest expense, on a proforma
basis, as reflected in the accumulated deficit on the proforma balance sheet.
In June 2001, the Company raised $500,000 through the sale of 625,000
shares of its $.01 per share par value common stock. In connection with this
transaction, the Company issued to the investor warrants to purchase an
additional 312,500 shares of common stock at $1.00 per share. The warrants are
exercisable in three equal annual installments, commencing one year from the
date of issuance and expire in 2011. These warrants are valued at $158,000.
4) Authoritative Pronouncements
----------------------------
In June 2001, the Financial Accounting Standards Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify
8
reporting units for the purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized intangible
assets, and cease amortization of intangible assets with an indefinite useful
life. SFAS 142 require that an intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS 142.
Which is required to be applied in fiscal years beginning after December 15,
2001 to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS 142 requires the
Company to complete a transitional goodwill impairment test six months from the
date of adoption. The Company is also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142.
As of June 30, 2001, the net carrying amount of other intangible assets is
$167,000. Amortization expense during the six-month period ended June 30, 2001
was $14,000. Currently, the Company is assessing, but has not yet determined,
how the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.
5) Subsequent Events
-----------------
In April 2001, the Nasdaq notified the Company that the Company was not in
compliance with the $4,000,000 minimum tangible asset requirement for continued
listing of its common stock on the Nasdaq National Market at December 31, 2000.
The Company applied for and, on July 12, 2001, received approval to transfer
from the Nasdaq National Market Listing to the Nasdaq SmallCap Market Listing.
Item 2: Management Discussion and Analysis of Financial Condition and Results
---------------------------------------------------------------------
of Operations
-------------
Forward-Looking Statements
Certain statements contained in this section and elsewhere in this Form 10-
Q constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements and
the Company's future financial performance will be subject to a number of known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to,
competitive factors and pricing pressures, shifts in market demand, the
performance and needs of the segments of the foodservice industry served by the
Company, the costs of product development, uncertainty regarding the Company's
ability to successfully complete development of and market new products,
possible product obsolescence, dependence on third-party manufacturers and
suppliers, customer concentration, uncertainties with respect to customer
preferences, possible economic downturns in the markets served by the Company
which could adversely affect consumer spending, regulatory changes or
developments, changes in tariffs or currency exchange rates that could impact
the Company's ability to market and produce products overseas, the Company's
ability to maintain the listing of its common stock on Nasdaq and other risks
detailed in the Company's other filings made with the Securities and Exchange
Commission. The words "believe", "expect", "anticipate", "may", "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date they were made.
9
General
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained elsewhere in this report.
The Company, a technology company, is engaged primarily in the design,
licensing and manufacturing of its proprietary rapid cook technologies. The
TurboChef rapid cook system employs proprietary hardware and software
technologies to "cook-to-order" a variety of food products at faster speeds and
to quality standards comparable, and in many instances superior to, other
conventional commercial and residential ovens currently available. The Company's
technologies are a combination of high speed forced air that cooks food from the
outside in, by browning the food and sealing in its natural juices, and with
microwave energy that cooks the food from the inside out. Management believes
that the Company operates in one primary business segment.
The Company's commercial products and technologies are in use by
foodservice operators around the world. The latest version of the Company's
commercial product, the C-3 commercial counter top, was recognized as the best
innovative new product at the Hotelympia international foodservice show in
London in February 2000. More recently, in January 2001, the Company received
two prestigious awards at the Horecava 2001 trade show in Amsterdam. Horecava is
Europe's premier food service trade show and is attended by over 50,000 people
and 600 exhibitors associated with the European food service industry. The
judges selected the TurboChef oven as the winner in the equipment category, as
well as being selected as the winner of the gold medal award for innovation for
the entire show. The C-3 is currently available for sale in North American,
continental Europe and the United Kingdom and cooks approximately 7 to 8 times
faster than most commercially available cooking systems.
The Company intends to continue to pursue business growth through
implementation of the following strategies: (i) selling and marketing its model
"C" oven, which is manufactured in China, worldwide to restaurants, hotels,
convenience stores and other foodservice operators (ii) licensing its next
generation technology for residential ovens to partners that have the capability
to commercialize it from its current proof of concept state and (iii) broadening
the "C" model platform beyond the single phase electric unit to include a three
phase electric and a gas fueled version. The Company's future liquidity will
depend upon, among other things, the successful implementation of these
initiatives.
In May 2001 Maytag agreed to return all of its rights it had to sell
commercial products based on TurboChef's rapid cook technologies, in North
America, to the Company. As a result, TurboChef has received access to Maytag's
North American sales and service networks. In addition to North America, the
Company intends to continue its direct marketing efforts for commercial rapid
cook systems worldwide by seeking additional distributors and dealers in
strategic foreign markets to distribute the Company's C-3 rapid cook systems.
Several distributors are now authorized to sell commercial ovens that use
the Company's patented technology. Electrolux owns the non-exclusive right to
sell these ovens throughout the world, excluding North America and the United
Kingdom. The Company maintains its own sales force in the United Kingdom and
North America. In China, the Shandong Xiaoya Group is authorized to sell
commercial ovens that it manufactures. Discussions are underway with other
distributors in other territories to increase the number of organizations
authorized to sell commercial ovens that use TurboChef's patented technology,
but no assurance can be given that any such discussions will result in an
agreement.
10
Results of Operations for the Three Months Ended June 30, 2001 Compared to the
Three Months Ended June 30, 2000
Revenues for the quarter ended June 30, 2001 were $778,000, compared to
revenues of $502,000 for the quarter ended June 30, 2000. This increase is
primarily attributable to the increase in C-3 rapid cook system sales of
$636,000, which was the result of the Company's direct marketing effort to
increase its distributor and dealer network in Europe and sales in its new North
American market. This increase in product sales were offset by a decrease in
research and development revenue of $350,000, in connection with the Maytag
commercial License Agreement, which ended in the second quarter of 2000.
Cost of sales for the quarter ended June 30, 2001 were $372,000, a decrease
of $74,000 compared to $446,000 for cost of sales in the quarter ended June 30,
2000. The decrease is principally due to an accrued warranty charge in the
second quarter of 2000 of $300,000, which was offset by the increase in cost of
sales associated with the increase in C-3 product sales in the current quarter.
The warranty charge was in connection with a three-year upgrade and service
agreement covering the Company's first generation D series ovens. No additional
accruals were necessary in the second quarter of 2001.
Gross profit/(loss) on product sales for the quarter ended June 30, 2001
increased $710,000 to $406,000, when compared to gross profit/(loss) on product
sales of ($304,000) during the quarter ended June 30, 2000. This increase is
due primarily to an increase in direct C-3 product sales and the decrease in
accrued warranty costs during the second quarter of 2000.
Research and development expenses for the quarter ended June 30, 2001
decreased $878,000, to $281,000, as compared to $1,159,000 for the quarter
ended June 30, 2000. The decrease in research and development expense
principally relates a reduction in payroll & related expenses of $180,000 and
prototyping expenses of $577,000. These expenses were eliminated due to the
substantial completion of the Company's "C" series commercial counter top
cooking platform and related components.
Selling, general and administrative expenses for the quarter ended June 30,
2001 decreased $814,000, to $1,412,000 from comparable expenses of $2,226,000
for the quarter ended June 30, 2000. This decrease is due primarily to a
decrease in salaries and benefits of $342,000 and a decrease of $588,000 in
other administrative cost as a result of cost reductions implemented in the
first quarter of 2001.
Other income (expense) was $60,000 for the quarter ended June 30, 2001,
compared to ($293,000) for the quarter ended June 30, 2000. The $353,000
decrease in other expenses is primarily due to accrued interest charges and the
amortization of the premium on a purchased put option purchased to hedge against
market value fluctuations of the Company's Maytag common stock, which was sold
in the fourth quarter of 2000.
Results of Operations for the Six Months Ended June 30, 2001 Compared to the Six
Months Ended June 30, 2000
Revenues for the six months ended June 30, 2001 were $1,259,000, compared
to revenues of $2,739,000 for the six months ended June 30, 2000. This decrease
is primarily attributable to the receipt of $2,200,000 in research and
development revenues received primarily from Maytag in accordance with
11
the commercial License Agreement. Research and development revenues under this
agreement ended in the second quarter of 2000.
Cost of sales for the six months ended June 30, 2001 were $669,000, a
decrease of $347,000 compared to $1,016,000 for cost of sales for the six months
ended June 30, 2000. The decrease is principally due to an accrued warranty
charge of $600,000 in 2000, which was offset by an increase in product cost of
sales in 2001 because of an increase in product sales. The warranty charge is
associated with a three-year upgrade and service agreement covering the
Company's first generation D series ovens. No additional accruals were necessary
in 2001.
Gross profit/(loss) on product sales for the six months ended June 30, 2001
increased $1,082,000 to $590,000, when compared to gross profit/(loss) on
product sales of ($492,000) during the six months ended June 30, 2000. This
increase is due primarily to an increase in direct sales and the decrease in
accrued warranty costs during for the first six months of 2001.
Research and development expenses for the six months ended June 30, 2001
decreased $1,934,000, to $689,000, as compared to $2,623,000 for the six months
ended June 30, 2000. The decrease in research and development expense
principally relates a reduction in payroll & related expenses of $315,000 and
prototyping expenses of $1,570,000. These expenses were eliminated due to the
completion of the Company's "C" series commercial counter top cooking platform
and related components.
Selling, general and administrative expenses for the six months ended June
30, 2001 decreased $1,544,000, to $2,841,000 from comparable expenses of
$4,385,000 for the six months ended June 30, 2000. This decrease is due
primarily to a decrease in salaries and benefits of $615,000 and a decrease of
$929,000 associated with other administrative cost reductions implemented in the
first quarter of 2001.
Other income (expense) was $74,000 for the six months ended June 30, 2001,
compared to ($476,000) for the quarter ended June 30, 2000. The $550,000
decrease in other expenses is primarily due to accrued interest charges and the
amortization of the premium on a purchased put option purchased to hedge against
market value fluctuations of the Company's Maytag common stock, which was sold
in the fourth quarter of 2000.
Liquidity and Capital Resources
The Company's capital requirements in connection with its product and
technology development and marketing efforts have been and will continue to be
significant. In addition, capital is required to operate and expand the
Company's operations. Since its inception, the Company has incurred operating
losses and has been substantially dependent on loans and capital contributions
from its principal stockholders, private placements of its securities and the
proceeds from stock offerings.
Over the past several years, the Company has primarily funded its capital
needs with monies received from Maytag, sales of securities and revenues
generated from operations. Since October 1997, Maytag has paid the Company an
aggregate of $10.5 million for technology transfer initiatives. As noted above,
the Company's relationship with Maytag has terminated.
Although the Company has historically incurred significant losses, the
Company expects to
12
generate future cash flows from the direct sale of its commercial cooking
systems, royalties from the sale of its commercial cooking systems, license fees
for the non-exclusive licensing of its technologies, research and development
fees for product development and, as necessary and available, raising capital
through future equity or debt financing. The Company anticipates that it will
need to obtain additional sources of funding in order to continue its ongoing
operations as currently conducted. Management believes that through sales of its
commercial cooking systems, technology transfer fees and the possibility of
raising capital through debt and equity financing, the Company will have
adequate funding for its continued operations and research and development
efforts. However, no assurances can be made that the Company will actually
obtain the necessary funding to finance its operations. The Company's financial
statements have been prepared assuming that the Company will continue as a going
concern. All of the above factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
At June 30, 2001, the Company had working capital of $1,419,000 as compared
to working capital of $846,000 at December 31, 2000. The $573,000 working
capital increase from December 31, 2000 resulted primarily from the use of cash
to fund operating losses of $2,866,000 during the first six months of 2001,
offset by the equity and debt financing of $3.5 million during this same period.
Cash used in operating activities was $3,279,000 for the six months ended
June 30, 2001, as compared to cash used in operating activities of $4,977,000
for the six months ended June 30, 2000. The net loss of $2,866,000 for the
first six months of 2001 included $25,000 of non-cash charges (depreciation,
amortization, non-cash interest and non-cash compensation expenses), compared to
$806,000 for the first six months of 2000. Net cash used in operating
activities in the first six months of 2001 was negatively impacted by a
$1,180,000 decrease in accounts payable. These operating cash requirements were
offset by a $533,000 decrease in accounts receivable and a $309,000 decrease in
prepaid expenses and other assets.
Cash used in investing activities for the six months ended June 30, 2001
was $36,000 and resulted from the purchase of equipment and leasehold
improvements. The Company level of capital expenditures decreased approximately
$152,000 compared to the six months ended June 30, 2000, which was the result of
the Company's cost reduction program implemented in the first quarter of 2001.
As product sales increase, the Company's capital equipment requirements are
expected to increase from the current levels.
Cash provided by financing activities was $3,500,000 for the six months
ended June 30, 2001. The cash was raised from the sale of the Company's Series B
convertible preferred stock for $2 million, the issuance of a convertible note
payable for $1 million and the sale of its common stock for $500,000 in the
first six months of 2001.
At June 30, 2001, the Company had cash and cash equivalents of $1,602,000,
compared to cash and cash equivalents of $1,417,000 at December 31, 2000.
In March 2001, the Company raised $2,000,000 through the sale of its 8%
Series B convertible preferred stock. The dividend on the preferred stock is
payable, at the Company's option, in either cash or shares of common stock. The
preferred stock is convertible to common stock at $1.00 per common share
(representing the closing sale price of the common stock on the date of
funding). In connection with this transaction, the Company also issued to the
investor warrants to purchase an additional 1,000,000 shares of common stock at
$1.20 per share. These warrants are exercisable in three equal annual
installments,
13
commencing one year from the date of issuance and expire in 2011. These warrants
are valued at $380,000.
In April 2001 the Company raised $1,000,000 through the issuance of an 8%
Non-Negotiable Promissory Note ("Note") due April 20, 2003. Upon the approval
of the stockholders of the Company, the entire outstanding principal amount of
the Note shall automatically be converted into preferred stock (the "Convertible
Preferred Stock") of the Company without any further action necessary on the
part of the Company or the holder of the Note. In addition, the Company issued
warrants to purchase shares of its common stock equal to fifty percent of the
number of shares of common stock that will be issued upon conversion. The
warrants have a term of 10 years at an exercise price equal to 120% of the
closing sale price of the Common Stock on the date of the Note. Each share of
Convertible Preferred Stock issued will (i) have a liquidation value of $100 per
share, (ii) be entitled to a dividend of $8.00 per share, payable semi-annually
in cash or in shares of the Common Stock at the then fair market value (iii) be
convertible into shares of Common Stock at a conversion price equal to the
closing sale price of the Common Stock on the date of the Note, and (iv) contain
anti-dilution provisions identical to those provided for in the Company's Series
B Convertible Preferred Stock. The Company's stockholders at its annual
stockholders meeting on August 7, 2001 approved the conversion of the Note to
Convertible Preferred Stock.
In June 2001, the Company raised $500,000 through the sale of 625,000
shares of its $.01 per share par value common stock. In connection with this
transaction, the Company issued to the investor warrants to purchase an
additional 312,500 shares of common stock at $1.00 per share. The warrants are
exercisable in three equal annual installments, commencing one year from the
date of issuance and expire in 2011. These warrants are valued at $158,000.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
In the fourth quarter of 2000, the Company sold its investment in Maytag
common stock and paid the outstanding principal and interest due on the AIG
credit facility. The purchased put option, which was an integral part of the AIG
credit facility was terminated at the same time. As of June 30, 2001, the
Company does not have any assets or liabilities that have the potential for
market risk that would affect the operating results or cash flow of the Company
and is not engaged in any hedging activity.
14
Part II. Other Information
Item 1: Legal Proceedings
-----------------
During the first quarter of 2001, the Company and Maytag filed Notice,
Claim of Arbitration, as provided for under the Commercial Cooking Appliance
Project Agreement ("CCAP") and related commercial License Agreement. Maytag
claims that the Company has breached the CCAP and related commercial License
Agreement and is seeking to recover damages of approximately $4.2 million. One
of the Company's claims is that, as result of its termination of the commercial
License Agreement, Maytag is required to pay to the Company the remaining
balance of minimum royalties that are due of $5.25 million. The Company expects
the arbitration to be complete prior to the end of fiscal 2001. Although the
Company believes that it will prevail on its claims, the outcome of the
arbitration proceeding is uncertain. In any event, even if the Company was to
receive the balance of the royalties it claims are owed to it, the termination
of the Maytag agreements has had a material adverse affect on the Company's
financial position and results of operations. Since the outcome of the
arbitration proceeding is uncertain, no adjustments have been made to the
Company's financial statements. There have been no material developments with
respect to this arbitration during the Quarter ended June 30, 2001.
Item 2: Changes in Securities and Use of Proceeds.
------------------------------------------
In April 2001 the Company raised $1,000,000 through the issuance of an 8%
Non-Negotiable Promissory Note due April 20, 2003. A discount on the note of
$228,000 was recorded to reflect the beneficial conversion feature within the
note. Upon the approval of the stockholders of the Company, the entire
outstanding principal amount of the Note shall automatically be converted into
preferred stock of the Company without any further action necessary on the part
of the Company or the holder of the Note. In addition, the Company will issue
warrants to purchase shares of its common stock equal to fifty percent of the
number of shares of common stock that could be issued upon conversion. The
warrants shall have a term of 10 years at an exercise price equal to 120% of the
closing sale price of the Common Stock on the date of the Note. These warrants
are valued at $228,000.
In June 2001, the Company raised $500,000 through the sale of 625,000
shares of its $.01 per share par value common stock. In connection with this
transaction, the Company issued to the investor warrants to purchase an
additional 312,500 shares of common stock at $1.00 per share. The warrants are
exercisable in three equal annual installments, commencing one year from the
date of issuance and expire in 2011. These warrants were valued at $158,000.
These two issuance's was made pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.
Item 3: Defaults Upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
15
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 8% Promissory Note dated April 20, 2001
10.2 Securities Purchase Agreement dated June 12, 2001
10.3 Warrant Certificate dated June 12, 2001
(b) Reports on Form 8-K
None
16
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.
TURBOCHEF TECHNOLOGIES, INC.
By: /s/ Jeffrey B. Bogatin
-----------------------------------
Jeffrey B. Bogatin
Chairman of the Board and
Interim Chief Executive Officer
(Duly Authorized Officer and
Principal Financial Officer)
Dated August 14, 2001
17